The appellants challenged the order of the Company Law Board (CLB) that directed the transfer of 40,530 equity shares of Rs. 100 each from respondent no. 2 (SICOM) to respondent no. 1 (Environmental Engineers Inc.), claiming the transaction was void under Section 536(2) of the Companies Act, 1956, as the winding-up process of the company had already begun. The High Court set aside the CLB's order, declaring the share transfer void due to the lack of approval from the Company Court and failure to prove that the transaction was in the company's best interest.
1. Introduction
The appellants, Maharashtra Antibiotics and Pharmaceuticals Ltd. (MAPL) and Hindustan Antibiotics Limited (HAL), challenged the CLB's decision directing the transfer of shares held by SICOM to Environmental Engineers Inc.
2. Share Transfer Petition
Respondent no. 1 approached the CLB seeking the transfer of 40,530 shares in its name, which were held by respondent no. 2. This was sought under Section 111A of the Companies Act, 1956.
3. Shareholding Structure
MAPL is a joint venture between HAL, the Government of Maharashtra, and IDBI Bank. HAL held 59%, SICOM 33%, and IDBI 8% of the shares in MAPL.
4. BIFR's Winding-Up Order
BIFR had recommended winding up MAPL under the Sick Industrial Companies Act (SICA), 1985. Respondent no. 1 purchased shares after this order, raising questions of validity.
5. Arguments of the Appellants
The appellants argued that under Section 536(2) of the Companies Act, any share transfer post-commencement of winding-up without the court’s approval is void.
6-8. Appellant’s Contention on Winding-Up
The appellants contended that the winding-up had already commenced in 2000 based on BIFR's recommendation. The Company Law Board, however, validated the share transfer, stating Section 536(2) was not applicable until a formal winding-up order was passed.
9-14. Case Law and Judicial Precedents
The appellants referred to cases, including NGEF Ltd. vs. Chandra Developers (P) Ltd. and Rishab Agro Industries Ltd. vs. P.N.B. Capital Services Ltd., to support their claim that winding-up proceedings commence from the date of BIFR's recommendation, not the actual court order.
15-18. Rigorous Application of Section 536(2)
The court agreed that any disposition of property or transfer of shares post-winding-up proceedings initiation is void unless otherwise approved by the Company Court, which was not done in this case.
19-22. Respondent’s Argument on Validation
Respondent no. 1 argued that the transaction should not automatically be void, as the winding-up order had not yet been passed. They cited judgments to suggest such transactions could still be validated.
23-24. Court’s Finding on CLB’s Error
The court found that the CLB erred by not considering whether the share transfer was in the company’s best interest. Validation of such transactions requires justification, which was absent in this case.
25-28. Judicial Precedents on Validation
The court emphasized that validation of a transaction must ensure it is beneficial to the company and must be carried out in the ordinary course of business. In this case, it was neither pleaded nor proven that the transfer was in MAPL's best interest.
29-30. Final Decision
The court allowed the appeal, quashed the CLB’s order, and declared the share transfer void as it did not meet the required legal conditions.
The winding-up process commences with the recommendation of BIFR, and any subsequent share transfers or disposition of company property must receive the court’s approval. A transaction without this approval is void under Section 536(2), unless proven to be in the best interest of the company, which was not demonstrated in this case.
Company Law, Winding-Up, Transfer of Shares, Sick Industrial Companies
Section 536(2), BIFR, Companies Act, Validation of Transaction, SICA
Case Title: Maharashtra Antibiotics and Pharmaceuticals Ltd. & Anr Versus Environmental Engineers Inc. And Anr.
Citation: 2024 LawText (BOM) (10) 45
Case Number: Company Appeal No. 4 of 2007
Date of Decision: 2024-10-04
