Indian Link Chains Mfrs. Ltd. v. The Official Liquidator

14. In conclusion, Mr. Khan submitted that the Applicants, in collusion with Atulya Mafatlal and Ravindra Palkar, had misappropriated a valuable asset of 4 2012 SCC OnLine 1294 Navinon to the detriment of creditors and workmen. He submitted that a case for ratification had been made out, and the Deed must be declared void, and possession consequently be handed over to the Official Liquidator.

SUBMISSIONS ON BEHALF OF THE APPLICANTS

15. Mr. Shah, Learned Counsel appearing on behalf of the Applicants, in the captioned Interim Application, essentially submitted that the Interim Application be allowed since: (A) the Applicants were bona fide purchasers for value without notice of the order of winding up; alternatively, (B) the said transfer was from the ostensible owner, and thus the Applicants were entitled to the benefit of Section 41 of the Transfer of Properties Act, 1882, and Section 19(b) of the Specific Relief Act, 1963. He submitted that in the event the Court was not inclined to ratify the said transfer, then (C) the Applicants were entitled to be restituted for the amounts spent by them in terms of Section 33 of the Specific Relief Act.

16. Mr. Shah submitted that at the time when the Deed of Assignment was entered into, the Applicants were entirely unaware of the fact that a winding-up order had been passed against Navinon. He pointed out that though the winding-up order was passed in the year 2005, there was no indication that the said property was in the possession of the Official Liquidator or that the said property did not belong to Navinon. In support of his contention he submitted that (i) there were no security guards deployed to safeguard the said property nor was there any signage or notice displayed at the said property to indicate that the same was in the possession of the liquidator or that Navinon was in liquidation; (ii) that the said property came to be transferred to the name of Navinon only on 5th April 2019 until which time it stood in the name of Indian Dyestuff, i.e. Navinon’s former name; (iii) no response was received by the Applicants to the public notice issued by them on 16th November 2017; (iv) CIDCO continued to accept payments made by the Applicants towards service charges and water charges; (v) CIDCO also issued an NOC for assignment in favour of the Applicants; (vi) on 29th April 2022, MIDC granted the Applicants' permission for demolition of the existing building; (vii) on 14th July 2022, MIDC, i.e., who was the original owner of the said property, approved the sanctioned plans; and (viii) on 22nd April 2024, the Applicants were issued an occupation certificate by MIDC.

17. Mr. Shah submitted that it was only on 13th January 2023, when the Official Liquidator visited the said property, that the Applicants became aware of the winding-up order. He therefore contended that the Applicants were bona fide purchasers for value and thus could not be divested of the rights validly acquired under the Deed of Assignment. In support of this contention, he relied upon the decision of the Hon’ble Supreme Court in the case of Crystal Developers v. Asha Lata Ghosh[5] and pointed out that transferees who act in good faith, for valuable consideration, and without notice of any infirmity in title, are entitled to equitable protection. He submitted that the Applicants fell squarely within this category of purchasers, having entered into the Deed of Assignment after conducting due diligence and without any knowledge of the winding-up proceedings.

18. Mr. Shah then placed reliance upon the decision of this Court in S.P. Khanna v. S.N. Ghosh[6] to contend that where a transaction is shown to be bona fide, for fair and adequate consideration, and demonstrably in the interest of the company against which a winding-up order has been passed, the Court may exercise its discretionary jurisdiction under Section 536(2) of the Companies Act to validate such a transaction, even if it was entered into after the commencement of winding-up proceedings. He submitted that the ratio of S.P. Khanna recognises that the power under Section 536(2) is fundamentally equitable in nature and is intended to prevent injustice, particularly where the transferee has acted honestly and the transaction does not prejudice the company or its creditors. Mr. Shah submitted that the present case squarely falls within the ratio of the judgement in the case of S.P. Khanna since, the Applicants had acted in good faith and had paid an amount exceeding the market value of the property, thereby conferring a clear benefit on the company in liquidation. He submitted that the discretion of this Court under Section 536(2) is not confined only to the matters mentioned in Sunita Vasudeo Warke v. Official Liquidator, Laxman Yeshwant Prabhudesai v. NRC Ltd., or Sarigam Containers Pvt. Ltd. v. Magatul Industries Ltd., were only illustrative in nature.

19. Mr. Shah then, in the alternative, submitted that the transfer in favour of the Applicants was effected by Ravindra Palkar who, on the face of the record, appeared to possess full authority to deal with the property and thus an ostensible owner. In support of this contention he placed reliance upon (i) the Board Resolution of Navinon dated 14th February 2005; (ii) the Power of Attorney dated 17th February 2005 executed in favour of both Manohar Sankhe and Ravindra Palkar; and (iii) the registered Power of Attorney dated 26th September 2017, by which Manohar Sankhe delegated his powers exclusively to Ravindra Palkar. He submitted that the Applicants having exercised due diligence, acted in good faith and having paid a consideration of Rupees One crore which, was utilised for the benefit of Navinon were entitled to invoke the protection afforded by Section 41 of the Transfer of Properties Act, 1882. In support of his contention he placed reliance upon the decision of the Hon’ble Supreme Court in Duni Chand v. Vikram Singh & Ors.7, to point out that a transferee who acts in good faith, after exercising due diligence, is protected when the transferor is the ostensible owner. Mr. Shah submitted that the Applicants in the present case satisfied each of these requirements and were thus entitled to such protection.

20. Mr. Shah then submitted that, in the event this Court was not inclined to ratify the Deed of Assignment, then Applicants would have to be restituted to the position they occupied prior to its execution. He submitted that, in such an eventuality, the Official Liquidator would have to reimburse the Applicants not only with the entire consideration amount paid under the Deed of Assignment but also all amounts expended by the Applicants towards arrears, statutory dues, and other liabilities relating to the subject land. In support of this submission, he placed reliance upon the decision of this Court in Nimesh K. Thakkar & Ors. v.

Official Liquidator & Ors.8, to point out that this Court had recognised that a bona fide transferee was entitled to restitution of amounts paid in furtherance of a transaction that is subsequently avoided, particularly where the company in liquidation or its creditors have benefited from such payments. He submitted that since the Applicants had paid valuable consideration and discharged substantial liabilities of Navinon, the Applicants were entitled to be restituted for all the amounts spent in the event the transfer was held to be invalid.

21. Mr. Shah also placed reliance upon the judgment of the Hon’ble Supreme Court in Kuju Collieries Ltd. v. Jharkhand Mines Ltd.9, to point out that when an agreement is void, no rights can flow from it and any person who has received an advantage under such a void agreement is bound, under the principles of restitution, to restore that advantage or compensate the person from whom it was received. He submitted that the underlying rationale of Kuju Collieries is that even where a transaction is void and incapable of enforcement, equity mandates that the party who has benefited cannot retain such benefit to the detriment of the other party. Applying this principle to the present case, Mr. Shah submitted that if the Deed of Assignment was held to be void, the Applicants would nonetheless be entitled to a full restitution of all amounts paid and expended by them, whether by way of consideration or discharge of statutory dues of Navinon since Navinon and its creditors had derived benefit from those payments.

22. Mr. Shah then placed reliance upon the decision of this Court in Helbon Engineers Pvt. Ltd. v. Ferral Anant Machinery Manufacturers Pvt. Ltd. & Anr.10 to point out that this Court has, in appropriate circumstances, has exercised its discretionary jurisdiction under Section 536(2) to validate a transfer of a company’s property executed after the commencement of winding-up. He submitted that in Helbon Engineers, this Court had recognised that the object of Section 536(2) was not to invalidate all post-commencement transactions mechanically but to prevent prejudice to the company and its creditors. He pointed out in the case of Helbon Engineers the Court found that the impugned transfer had been effected bona fide, for fair value, and in a manner that did not jeopardise the interests of the company in liquidation and that the transferee therein and accordingly ratified the transfer notwithstanding that it took place after the winding-up order. Mr. Shah submitted that the ratio of Helbon Engineers clearly illustrates that Section 536(2) vests the Court with a wide equitable discretion to protect genuine and beneficial transactions, and that the power is intended to be exercised to prevent injustice rather than to penalise bona fide parties. He therefore submitted that the present case, being one where the Applicants had acted in good faith and paid valuable consideration which was utilised for the benefit of Navinon and its creditors, fell squarely within the same equitable principles recognised in Helbon Engineers and would therefore warrant similar validation.

SUBMISSIONS ON BEHALF OF THE OFFICIAL LIQUIDATOR IN REJOINDER

23. Mr. Khan submitted that the Applicants contention that the Deed of Assignment was a bona fide transfer was plainly unstateable since the Deed itself inter alia recorded, that that the subject land was neither included in nor subject to any liquidation proceedings and further that the Applicants had accepted the assignment of the leasehold rights strictly on an “as is, where is” basis. He thus submitted that the question of the Applicants now contending that they were unaware of any liquidation proceedings or claiming any equities did not arise.

24. Mr. Khan did not dispute that the power of ratification under Section 536(2) of the Companies Act was discretionary in nature. He clarified, however, that the very object of conferring such discretion on the Company Court was limited and to be exercised only to prevent the business and affairs of a company from coming to a complete standstill upon the presentation of a winding-up petition. Section 536(2), he submitted, was intended to protect bona fide commercial transactions necessary for the continued functioning of the company and not to validate transfers that may otherwise prejudice the body of creditors or undermine the winding-up process. Mr. Khan also did not dispute that the parameters laid down by this Court in the decisions of Sunita Vasudeo Warke and Laxman Yeshwant Prabhudesai were illustrative and not exhaustive but submitted that the same underscored an important principle, i.e., that the discretion under Section 536(2) must be exercised with the utmost caution and circumspection and only in cases where the equities overwhelmingly justify such validation. He submitted that the facts of the present case being gross would not satisfy these considerations, either on the touchstone of bona fides or on the requirement of demonstrating that the impugned transaction was in the interest of the company or its creditors. He therefore submitted that, on the facts of the present matter, this Court ought not to invoke its discretionary power under Section 536(2) to ratify the transaction in question.

25. Mr. Khan submitted that the Applicants’ reliance on Section 41 of the Transfer of Property Act, 1882, was also entirely misconceived. He pointed out that the Interim Application did not contain a single averment with respect to Section 41, nor were any of the foundational facts necessary for invoking Section 41 of the Transfer of Property Act, 1882, set out in the Interim Application. Mr. Khan placed reliance upon the decision of Hon’ble Supreme Court in the case of Duni Chand, to point out that the Hon’ble Supreme Court had held that for Section 41 to apply, the transferee must specifically plead and prove that the transferee had taken reasonable care to ascertain the transferor’s authority to transfer the property in question. He submitted that Section 41 operates only where the real owner consents to such transfer and thus creates an estoppel. In the facts of the present case, he pointed out that the Official Liquidator was merely a statutory custodian of the said property and not the owner. He submitted that it was well settled that waiver or acquiescence requires a positive act that would reasonably mislead a third party. Mr. Khan placed reliance upon the decision in the case of Superintendent of Taxes, Dhubri v. Onkarmal Nathmal Trust11 to point out that estoppel cannot be inferred against a statutory authority.

26. Mr. Khan, then in dealing with the judgements relied upon by Mr. Shah, submitted that the Applicants’ reliance on each of those decisions was wholly misplaced and that none of them had any application to the facts of the present case. He pointed out that the decision in Nimesh K. Thakkar categorically holds that persons entering into transactions with a company after the commencement of winding-up proceedings stand on the same footing as ordinary creditors and are not entitled to any priority over other creditors, nor can they claim restitution but are required to lodge any claim with the Official Liquidator. Similarly, the decision in Crystal Developers would be of no assistance to the Applicants, as it was rendered in the context of revocation of probate and bears no relevance to proceedings under Section 536(2) of the Companies Act. Mr. Khan then also pointed out that the decision in the case of S.P. Khanna, merely reiterates the broad equitable considerations that may apply to bona fide transactions entered into after a winding-up order is passed and does not, in any manner dilute, qualify, or override the specific statutory mandate under Section 536(2), which declares that any disposition of the company’s property made after the commencement of winding-up proceedings is void.

27. Mr. Khan then also distinguished the decision of this Court in the case of Helbon Engineering Pvt. Ltd. by pointing out that, unlike the present case, in the case of Helbon Engineering Pvt. Ltd. there were no creditors or employees who had any outstanding claims against the company in question. He submitted that the outstanding claims against Navinon were well in excess of the consideration which was stated to have been paid by the Applicants in the present case. He also pointed out that the decision in the case of Kuju Collieries was also equally misplaced. He submitted that while the general principle that benefits received under a void agreement must be restored was not in dispute, he contended that this principle had no application in the present context since the Companies Act was a self-contained and special statute that prescribed a specific mechanism for prioritising and adjudicating all claims made against a company in liquidation. He thus submitted that the general principles for restitution cannot be invoked to bypass or dilute the statutory scheme embodied in the Companies Act.

FINDINGS AND REASONS

28. After hearing Learned Counsel for the parties and the caselaw which have been relied upon, I am satisfied that the question of ratifying the Deed of Assignment does not arise, for the following reasons:

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.

Engineers Pvt. Ltd. is misplaced. The decision in S.P. Khanna does not dilute the mandatory nature of Section 536(2) nor expand the scope of the Court’s discretion. It merely recognises that validation may be granted in exceptional cases where the transaction is demonstrably beneficial to the company in question. As already noted in paragraph (26) above, such is not the case here. Especially the decision in the case of Helbon Engineers Pvt. Ltd. would not apply to the present case, since in the said case, the Court had exercised the power u/s. 536(2) since the company in liquidation had no outstanding creditors or workmen’s dues, the impugned transfer was bona fide and did not prejudice the company, its stakeholders, or the winding-up process and, infact, facilitated the company’s affairs without jeopardising liquidation.

29. For all these reasons, 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.

30. 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.

31. Accordingly, the OLR is liable to be allowed, and the Interim Application seeking ratification of the impugned Deed of Assignment is liable to be dismissed.

32. In view of the foregoing discussion and for the reasons recorded hereinabove, the following order is passed:

(i) The Official Liquidator’s Report dated 15 February 2023 is allowed in terms of prayer clauses (a) and (b) which read thus: “a) In view of para (12), above, whether this Hon’ble Court may be pleased to declare the purported transfer of the immovale property of the company (In Liqn) situated at House bearing no.13, Tarapur Industrial Area, Boisar Taluka, District Palghar to Mr. Zulfikar Khoja and Mr. Nilesh I Ponda by way of Deed of Assignment dated 16/05/2019 as void. b) In view of para (13) above, whether this Hon'ble Court may be pleased to direct Mr. Zulfikar Khoja & Mr. Naresh I Ponda to stop the construction work on the above mentioned property of the company (In Liqn.), to vacate and handover the peaceful possession of the property of the company (In Liqn.) occupied by them within 7 days to the Official Liquidator, High Court, Bombay.”

(ii) Interim Application (L) No. 26905 of 2024 is dismissed.

(iii) The Applicants are at liberty to lodge their claim, if any, before the Official Liquidator in accordance with law. Any such claim shall be adjudicated by the Official Liquidator strictly in terms of the priorities and statutory scheme contained in Sections 529, 529A, and 530 of the Companies Act, 1956. Nothing in this order shall be construed as an expression of opinion on the merits of such a claim.

(iv) In the facts and circumstances of the case, there shall be no order as to costs.

(v) All pending applications, if any, stand disposed of.

33. At this stage, Ms. Sneha Phene, learned counsel for the Applicants, sought a stay of this order. The request was opposed by Mr. Khan, who submitted that the operation of this order not be stayed since the same may imperil the said property, as the Applicants could then deal with the same. He, however, submitted that insofar as handing over possession of the property in question was concerned, the Applicants may hand over possession after a period of four weeks. Hence, there shall be a stay in terms of prayer clause (b) for a period of four weeks from the date on which a copy of this order is uploaded. (ARIF S. DOCTOR, J.)