Case Note & Summary
The Bombay High Court allowed an interim application filed by the applicant seeking a declaration that the sale agreement dated 5th September 2007 was not affected by Section 536(2) of the Companies Act, 1956, and for ratification of the sale. The background facts involve a company (Respondent No.1) that was wound up by order dated 26th July 2010. The applicant had purchased leasehold rights and structures on land from the company by a registered sale agreement dated 5th September 2007 for a consideration of Rs.1,25,00,000/-, which was fully paid. The applicant claimed it had no knowledge of the winding up petition filed on 25th August 2003 or the admission order dated 4th February 2005 until 2011 when the Official Liquidator sought to take possession. The applicant had also invested substantial sums in the property and mortgaged it to a bank. The court noted that under Section 536(2), any disposition of property after the commencement of winding up is void unless the court orders otherwise. The winding up order relates back to the date of presentation of the petition under Section 441. However, the court has discretion to validate such dispositions if they are made bona fide and for the benefit of the company. The court found that the applicant was a bona fide purchaser for value without notice of the winding up proceedings, had paid the full consideration, and had made substantial investments. The court also noted that the company's secured creditor, Bank of Baroda, had issued a no dues certificate in 2007, and the applicant had settled the dues of the petitioning creditor. The court held that it was a fit case to exercise discretion under Section 536(2) and ratified the sale agreement, declaring it valid and binding. The court directed the Official Liquidator not to disturb the applicant's possession and to execute necessary documents to transfer the property in favour of the applicant.
Headnote
A) Company Law - Winding Up - Section 536(2) Companies Act, 1956 - Disposition of Property After Commencement of Winding Up - The court considered whether a sale agreement executed after the date of presentation of the winding up petition but before the winding up order is void under Section 536(2). The court held that such dispositions are not void ab initio but voidable, and the court has discretion to validate them if made bona fide and for the benefit of the company. (Paras 1-20) B) Company Law - Winding Up - Section 441 Companies Act, 1956 - Doctrine of Relation Back - The court examined the principle that a winding up order relates back to the date of presentation of the petition. However, the court held that this doctrine does not automatically invalidate transactions entered into during the pendency of the petition if the court exercises its discretion to ratify them under Section 536(2). (Paras 15-18) C) Company Law - Bona Fide Purchaser - Ratification of Sale - The court considered the position of a purchaser who acted in good faith, paid full consideration, and had no notice of the winding up petition. The court held that such a purchaser is entitled to protection and the court may ratify the sale to avoid injustice. (Paras 10-14)
Issue of Consideration
Whether the sale agreement dated 5th September 2007 entered into by the company in liquidation is void under Section 536(2) of the Companies Act, 1956, and whether the court should ratify the sale in favour of the applicant who was a bona fide purchaser for value without notice of the winding up petition.
Final Decision
The court allowed the interim application, declared that the sale agreement dated 5th September 2007 is not affected by Section 536(2) of the Companies Act, 1956, and ratified the sale. The court directed the Official Liquidator not to disturb the applicant's possession and to execute necessary documents to transfer the property in favour of the applicant.
Law Points
- Section 536(2) Companies Act
- 1956
- Section 441 Companies Act
- Doctrine of Relation Back
- Bona Fide Purchaser for Value Without Notice
- Ratification of Sale by Court
