Disposition of company property after commencement of winding up denied validation where transactions were not bona fide or necessary to preserve business.

Dispositions of company property after commencement of winding up are void unless the court validates transactions that are bona fide in the ordinary course of the company's current trade or are necessary to preserve the business as a going concern; applying that principle, the court examined timing (advances made after presentation of the winding up petition and after appointment of a provisional liquidator), the admitted well founded petition, the asserted purposes (wages and supplier payments), the seasonal and accounting context, and unsatisfactory proof from the lender's agent, and found the advances were neither bona fide current trade transactions nor necessary to preserve the factory; outcome: validation refused and application dismissed.

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Issues: Whether the charge/security created on 24-26 April 1952 in favour of Andhra Bank over stocks of sugar and gunnies, made after the presentation of the winding up petition and after appointment of a provisional liquidator, should be validated by the Court under Section 227(2) of the Companies Act.

Analysis: The Court applied the principle that dispositions of company property after the commencement of winding up are void unless the Court in exercise of its discretion validates transactions that are bona fide and entered into in the ordinary course of the company's current trade or are necessary to preserve the business as a going concern. The Court examined the timing (advances made after petition and after appointment of a provisional liquidator), the admitted position that the petition was well founded and the company could not oppose winding up, the purpose for which the advances were said to be made (payment of wages and payments to sugar-cane suppliers), the seasonal context which showed the crushing season was over, the company accounts indicating available funds, and the unsatisfactory testimony of the bank's agent as to purpose and enquiries made. Applying the test whether the Court would have sanctioned the transaction if asked at the time, the Court found that the advances were not for bona fide current trade needs nor for preserving the factory as a going concern.

Conclusion: The Court refused to validate the charge/security; the application by Andhra Bank under Section 227(2) is dismissed.

Ratio Decidendi: A disposition of company property after commencement of winding up will not be validated unless it is a bona fide transaction in the ordinary course of current trade or is shown to be necessary to preserve the business as a going concern; where the winding up petition is well founded and the disposition is not so justified, the court will refuse validation.

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