Transactions During Winding-Up Can Be Validated If Beneficial To Creditors: Bombay High Court

The Bombay High Court on 4 May held that transactions entered into during pendency of winding-up proceedings ought to be validated if they benefit the company or its creditors. The Court accordingly rejected the Official Liquidator's plea seeking to declare void a Rs. 27 crore sale of Milestone Interactive Pvt. Ltd.'s property in favour of M.M. Styles Private Limited.

Justice Arif S. Doctor validated the transaction executed on 9 September 2016 during pendency of the winding-up proceedings, holding that the sale was bona fide, above market value and undertaken in the interest of creditors. He held:

“It is also equally well settled that the Court must avoid extreme positions where every disposition is void or every disposition is permissible. Therefore, if it is found that the transaction was for the benefit of and in the interests of the company or for keeping the company going or keeping things going generally or in the interest of the creditors of the company, such transactions ought to be validated.”

The dispute arose from a winding-up petition filed against Milestone Interactive on 27 April 2015. During pendency of the proceedings, the company entered into an agreement to sell its Andheri property to M.M. Styles for Rs. 27 crore.

M.M. Styles argued that it had conducted due diligence, had no knowledge of the winding-up proceedings and that around Rs. 17 crore from the sale consideration was directly used to clear dues of secured creditor Fullerton India Credit Company Ltd.

The High Court accepted the Official Liquidator's contention that although the purchaser may not have known about the winding-up proceedings, the company's ex-directors were aware of them since statutory notices and public notice of admission had already been issued before the transaction. It observed:

“However, I find merit in the contention of the Official Liquidator that while the Applicant might not have known about the presentation of the winding-up Petition, the ex-directors of the company certainly did, since the record shows that the statutory notice was duly served, as also in view of the public notice of admission. Despite this, the ex-directors of the Company proceeded to deal with the property of the Company.”

The Court nevertheless held that the transaction was bona fide and beneficial to creditors, particularly since a substantial part of the consideration was used to discharge secured debt.

Accordingly, it validated the sale under Section 536(2) of the Companies Act, 1956 and dismissed the Official Liquidator's report.