1956 (2) TMI 29 - HC - Companies Law

Validity of Assignments in Winding Up Proceedings: Court Upholds Decision

Syed Haidar Sahib Versus M. Jayaram Pillai

The High Court of Madras, in a judgment by Justice Krishnaswami Nayudu, upheld the lower courts' decision that an assignment executed after the ... Winding up – Avoidance of transfer, etc., after commencement of Issues:Validity of assignment under section 227(2) of the Indian Companies Act.Analysis:The judgment by the High Court of Madras, delivered by Justice Krishnaswami Nayudu, deals with the question of whether an assignment, forming the basis of a suit, is void under section 227(2) of the Indian Companies Act. The case involves subscribers in a chit conducted by Commercial Funds Ltd., where the first defendant was the successful bidder in an auction. The plaintiff, not bidding in any auction, was entitled to recover a sum from the Commercial Funds Ltd. The assignment in question was executed by the first defendant in favor of the plaintiff for a consideration of Rs. 650-14-0. At the time of the assignment, winding up proceedings of the company had been initiated and commenced by the Official Receiver, Chingleput. The lower courts held the transaction void due to the commencement of winding up proceedings before the assignment date, in line with the plain language of section 227(2) of the Act.The appellant contended, citing the decision in Tulsidas Jasraj v. Industrial Bank of Western India, that certain transactions could be excepted from the scope of section 227(2) of the Act. However, the court emphasized that paying a creditor by assigning an asset of the company, particularly after the commencement of winding up proceedings, cannot be considered a bona fide transaction in the ordinary course of business. The court highlighted that the exception mentioned in the cited case pertained to transactions necessary for running a business and conducted bona fide, not for transferring assets to prefer one creditor over another, which is against the Act. The court noted that the plaintiff could have sought the sanction of the company court for such a transaction, and in the absence of such approval, the lower courts' decision declaring the assignment void under section 227(2) was upheld.In conclusion, the High Court dismissed the second appeal with costs, emphasizing that the assignment in question was void under section 227(2) of the Indian Companies Act due to the initiation of winding up proceedings before the assignment date. The judgment underscores the importance of seeking proper approvals for transactions involving company assets, especially in the context of winding up proceedings, to avoid preferential treatment of creditors and ensure compliance with the law.