2025 (12) TMI 244 - HC - Companies Law

Deed of Assignment Void Under Section 536(2); Ostensible Ownership Plea Under Section 41 TPA Rejected

Zulfikar Akbarali Khoja, Nilesh Indulal Ponda, Indian Link Chains Mfrs. Ltd. Versus The Official Liquidator, M/s. Navinon Ltd. (In Liquidation), Ravindra Kamlakar Palkar, CIDCO, Mumbai.

HC held that the Deed of Assignment executed nearly eighteen years after commencement of winding up was void under Section 536(2) of the Companies Act and ... Validity of a Deed of Assignment executed almost eighteen years after the commencement of winding up - HELD THAT:- In the present case the Applicants have neither pleaded nor demonstrated that the transaction in question was in the ordinary course of business or was in any manner beneficial to Navinon or its creditors. On the contrary, the material on record makes clear that the Deed of Assignment was executed eighteen years after the commencement of winding up and was wholly outside the ordinary course of business of Navion. Further, not a single rupee from the consideration which is stated to have been paid by the Applicants was received by Navinon. Thus, neither Navinon nor its creditors received any benefit from the said transaction. The Applicants’ reliance on Section 41 of the Transfer of Property Act, 1882, is entirely misconceived. To begin with, the Interim Application contains no pleadings setting out the foundational facts necessary to invoke Section 41. Moreover, Section 41 applies only where the real owner, by consent or conduct, enables another to hold himself out as the ostensible owner. In the present case, the Official Liquidator is not the real owner of the property but merely a statutory custodian of the company’s assets. Consequently, the doctrine of ostensible ownership has no application to these facts, all the more so when the Applicants have not even asserted such a case in their pleadings. The transaction embodied in the Deed of Assignment dated 16 May 2019 is void under Section 536(2) and is not a fit case for validation. The Applicants have neither established any statutory ground for ratification nor shown that the transaction promoted the interests of the Company or its creditors. The Applicants’ remedy, if any, lies in filing a claim before the Official Liquidator, which shall be adjudicated in accordance with law and the priorities prescribed under the Companies Act. The OLR is liable to be allowed, and the Interim Application seeking ratification of the impugned Deed of Assignment is liable to be dismissed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether the Deed of Assignment executed in 2019 conveying the company's immovable property, after commencement of winding up, is void under Section 536(2) of the Companies Act, 1956. (2) Whether, notwithstanding Section 536(2), the Court should exercise its discretionary power to validate (ratify) the Deed of Assignment. (3) Whether the Applicants can claim protection as bona fide purchasers for value without notice and/or under the doctrine of ostensible ownership in terms of Section 41 of the Transfer of Property Act, 1882 and Section 19(b) of the Specific Relief Act, 1963. (4) Whether the Applicants are entitled to restitution/refund of consideration and other payments allegedly made in relation to the property, despite the transaction being void, having regard to the scheme of the Companies Act for distribution of assets in winding up. (5) Consequential reliefs: cancellation of the Deed of Assignment, recovery of possession by the Official Liquidator, and rejection of the prayer for stay/validation. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1) & (2): Voidness of the Deed of Assignment under Section 536(2) and scope for validation Legal framework (as discussed) (a) Section 441(2) of the Companies Act, 1956 deems the commencement of winding up from the date of presentation of the winding-up petition. (b) Section 536(2) of the Companies Act provides that any disposition of the property of the company made after commencement of winding up is void unless the Court otherwise orders; the power to validate is discretionary and exceptional, to be exercised sparingly. (c) The Court relied on and applied the principles in prior decisions (including Sunita Vasudeo Warke, Laxman Yeshwant Prabhudesai, and Sarigam Containers) that: dispositions post-commencement are by default void; validation is an exception; and the transaction must be shown to be bona fide, in the ordinary course of business, or demonstrably beneficial to the company or its creditors, or at least not prejudicial. Interpretation and reasoning (d) The winding-up petition was presented on 3 November 2001; hence, under Section 441(2), winding up commenced on that date. The Deed of Assignment was executed on 16 May 2019, nearly 18 years after commencement of winding up. (e) The disposition thus squarely falls within Section 536(2) as a transfer made after the commencement of winding up, rendering it void unless validated by the Court. (f) The Court held that the discretion under Section 536(2) is to be exercised sparingly and only where the transferee clearly establishes that the transaction was bona fide, undertaken in the ordinary course of business, beneficial to the company or its creditors, or such that no prejudice would result from validation. Good faith of the transferee, delay or inaction of the Official Liquidator, or private dealings without the Liquidator's knowledge are not, by themselves, grounds to displace the statutory presumption of voidness. (g) The Applicants had neither pleaded nor proved that the transaction was in the ordinary course of the company's business, nor that it benefited the company or its creditors. On the contrary, the record showed that: * the transaction occurred long after commencement of winding up and outside the company's ordinary business; and * no portion of the stated consideration of Rs. 1 crore was received by the company in liquidation; the amounts were diverted to CIDCO, an individual decree-holder, alleged workers, and to the constituted attorney personally, leaving the company and its creditors without any benefit. (h) The Court found on the materials that the Deed was executed on the basis of powers of attorney that were legally ineffectual. The 2005 power of attorney was unregistered and incapable of authorising transfer of immovable property; the subsequent 2017 power of attorney, being derivative of the first, was equally invalid. The Deed of Assignment was executed on a false representation that the property was not subject to liquidation. The executing attorney had himself deposed that he would not have executed the Deed had he known of the winding-up order. (i) The Court characterised the transaction as patently fraudulent, lacking in bona fides, and a clear attempt to misappropriate a valuable asset of the company in liquidation, with no benefit to the company or its creditors. (j) On these facts, the Court held there was no basis to exercise discretion in favour of validation; rather, the circumstances militated against ratification. Conclusions (k) The Deed of Assignment executed on 16 May 2019 relates to a disposition made after the commencement of winding up and is void under Section 536(2) of the Companies Act, 1956. (l) The case is not fit for validation: the statutory grounds for exercising discretion under Section 536(2) are not satisfied, and the transaction is found to be fraudulent and prejudicial to the company and its creditors. Issue (3): Bona fide purchaser and ostensible ownership (Section 41 TPA / Section 19(b) Specific Relief Act) Legal framework (as discussed) (a) Section 41 of the Transfer of Property Act, 1882 protects a transferee who, after taking reasonable care, in good faith purchases from an ostensible owner with the consent (express or implied) of the real owner. (b) The Court considered the Applicants' reliance on the doctrine of ostensible ownership and Section 19(b) of the Specific Relief Act, 1963, in light of the statutory scheme of winding up and the role of the Official Liquidator. Interpretation and reasoning (c) The Interim Application contained no specific pleadings setting out the foundational facts required to attract Section 41 TPA, including particulars of reasonable care taken to ascertain the transferor's authority or the real owner's consent. (d) Section 41 requires that the real owner, by consent or conduct, enables another to appear as ostensible owner, thereby creating estoppel. In the present case, the Official Liquidator is not the 'real owner' of the property but a statutory custodian of the company's assets and affairs in liquidation. (e) On these premises, the doctrine of ostensible ownership was held inapplicable. There was no positive conduct by the real owner (the company in liquidation) or by the Official Liquidator capable of creating estoppel or enabling the transferor to be treated as ostensible owner for purposes of Section 41. (f) The Court further noted that the Applicants had accepted an 'as is, where is' transfer and that the Deed of Assignment itself recorded recitals negating any representation as to the property being free from liquidation proceedings, undermining any plea of protected bona fide purchase in equity. Conclusions (g) The Applicants are not entitled to protection as bona fide purchasers under Section 41 of the Transfer of Property Act, 1882 or Section 19(b) of the Specific Relief Act, 1963. (h) The plea of ostensible ownership and bona fide purchase without notice does not defeat the operation of Section 536(2) in the facts of this case. Issue (4): Entitlement to restitution/refund in light of the Companies Act scheme Legal framework (as discussed) (a) Sections 529, 529A and 530 of the Companies Act, 1956 form a complete statutory scheme for adjudicating and prioritising claims and distributions in liquidation. (b) The Court considered prior authority (including Nimesh K. Thakkar) that persons entering into transactions with a company after the commencement of winding up stand on the same footing as ordinary unsecured creditors and must route their claims through the liquidation process; they cannot claim priority or special restitution outside the statutory scheme. Interpretation and reasoning (c) The Court held that the plea for restitution based on general principles (including reliance on Kuju Collieries) cannot be accepted where a special statute (the Companies Act) provides a complete and self-contained mechanism for dealing with all claims against a company under liquidation. (d) General restitutionary principles cannot be invoked to override or bypass the priority regime and claim adjudication system under Sections 529, 529A and 530. To order direct restitution to the Applicants would amount to conferring a preferential status over other creditors, contrary to the Act. (e) As per Nimesh K. Thakkar, a person who deals with a company after commencement of winding up stands in the same position as an unsecured creditor, without entitlement to special equity or priority merely because a post-commencement transaction is later avoided. (f) Any payments allegedly made by the Applicants (towards consideration, statutory dues, or other liabilities) were made at their own risk and cannot constitute a basis for a judicial order of restitution outside the liquidation framework. Conclusions (g) The Applicants are not entitled to restitution or direct refund of consideration or other amounts outside the statutory scheme of the Companies Act. (h) The only remedy available to the Applicants is to lodge a claim with the Official Liquidator, to be adjudicated in accordance with law and in line with the priorities prescribed under Sections 529, 529A, and 530. Issue (5): Consequential orders on cancellation, possession, and interim relief Interpretation and reasoning (a) Having held the Deed of Assignment void under Section 536(2) and declined to exercise any discretion to validate it, the Court found that the Official Liquidator was entitled to recovery of the property for the benefit of the company in liquidation and its creditors. (b) The Applicants' Interim Application seeking ratification of the Deed of Assignment was rejected in light of the findings on voidness, fraud, lack of benefit to the company or creditors, and inapplicability of the protective doctrines invoked by the Applicants. (c) As regards the request for stay of the operative order, the Court balanced the concern that continued control by the Applicants could imperil the property with the practical requirement of enabling handover. The Court therefore granted a limited, time-bound stay only in respect of the direction to hand over possession, to facilitate orderly transfer. Conclusions (d) The Deed of Assignment dated 16 May 2019 is declared void; the Official Liquidator is entitled to possession of the property, and the Applicants are directed to vacate and hand over peaceful possession within the specified time. (e) The Interim Application seeking ratification/validation of the Deed of Assignment stands dismissed. (f) The Applicants are at liberty to lodge their claim, if any, before the Official Liquidator, to be adjudicated strictly in terms of the priorities and statutory scheme under the Companies Act, without any opinion expressed on the merits of such claim. (g) A limited stay of the possession direction is granted for four weeks from the date of uploading of the order; there is no wider stay of the declaration of voidness or other operative findings.