GARWARE MARINE INDUSTRIES LTD. AND IN THE MATTER BETWEEN : HENKEL CHEMICAL (I) LTD. Vs. GARWARE NYLONS LTD. (IN LIQUIDATION).

JUDGEMENT

(1.) This application is for seeking validation under Section 536(2) of the Companies Act, 1956 ("the Act") of (i) a pledge agreement between the Applicant and the Company in liquidation, (ii) invocation of the pledge and (iii) transfer of shares belonging to the Company in liquidation.

(2.) Garware Nylons Limited is a Company in liquidation (hereinafter referred to as "the Company"). The Applicant was a purchaser of yarn from the Company before the winding up petition was presented. Since its inception in the year 1975, the Applicant has been purchasing yarn from the Company. On 8 October 1992, the present Company Petition was filed against the Company. Subsequent to the filing of this petition, a reference was filed by the Company before BIFR. The reference was registered as Case No.46 of 1993. As a result of the reference, the winding up proceedings could not proceed. The Company, however, continued to carry on its business during the pendency of the reference. During this period, the Company approached the Applicant seeking assistance for procurement of raw material. On 1 December 1994, an agreement was arrived at between the Applicant and the Company, in terms of which the Applicant agreed to supply raw material to the Company upto a certain quantity annually for its manufacturing purposes. The Company agreed to supply yarn to the Applicant at market rates less quantity based discounts as applicable. Between December 1994 and May 1995, the Applicant procured and supplied raw material, namely, caprolactum, worth about Rs. 2.43 crores to the Company. The Company, however, supplied nylon yarn worth only Rs. 1.56 crores to the Applicant. As a result of the mounting credit, the Company agreed to pledge 14,99,988 equity shares of Rs. 10 each held by the Company in Global Offshore Shipping Ltd. ('GOSL') as a security, against which the Company requested the Applicant to "continue supplying Caprolactum to us as you have been doing so". Under this agreement, there was a right of redemption in the Applicant in case of failure on the part of the Company to make payment of its dues. On 31 May 1995, this pledge agreement with a right of redemption was duly recorded in the Minutes of the Meeting of the Board of Directors. Following this, the Applicant also wrote to the GOSL confirming its lien on 14,99,988 equity shares of GOSL owned by the Company. GOSL, by its letter dated 9 April 1996, confirmed its having noted the Applicant's lien in respect of the subject shares. Between May 1995 and August 1996, the Applicant supplied raw materials and also made payments to some of the key contractors of the Company. Around August 1996, the Company stopped its operations and ceased its business. Thereafter, on 31 December 1996, upon reconciliation of the accounts, the Applicant called upon the Company to clear the outstanding dues of about Rs. 1.13 crores payable by the Company to the Applicant on account of supply of raw materials and payment to critical parties/contractors. The Company, by its letter dated 3 January 1997, requested the Applicant to further support the Company in its working capital requirements, against which it offered to transfer 2,21,420 shares of GOSL held by the Company to the Applicant, thereby seeking to reduce the out standings substantially. In pursuance of this offer, which was accepted by the Applicant, the Company, by a letter dated 14 January 1997, forwarded duly signed Transfer Deeds along with share certificates of 2,21,420 shares of GOSL. On 27 January 1997, these shares were duly transferred to the Applicant, such transfer having been recorded in the Register of Members of GOSL. Subsequent to this transfer, on 28 February 1997 the shares were sold by the Applicant. (Even this transfer is duly recorded). In spite of such transfer and considering the further critical payments by the Applicant on behalf of the Company, a sum of Rs. 93,47,725/- was still outstanding and payable by the Company to the Applicant. The Applicant, in the premises, called upon the Company to transfer the ownership of the pledged shares at their current market value to the Applicant.(The current value at that date was of Rs. 82,49,934/-.) On 17 May 1997, the Company confirmed the transfer of 14,99,998 equity shares of GOSL to the Applicant for a consideration of Rs. 82,49,934/-. (Even after this transfer, an amount of Rs. 10,97,791/- was till outstanding and owed by the Company to the Applicant.) Following this transfer, the Applicant wrote to the Share Department of GOSL about its acquisition of ownership of the pledged shares. Sometime thereafter, on 29 May 1997, BIFR addressed a communication to the Registrar of this Court recording an opinion that it was just and equitable and in larger public interest to wind up the Company. On 2 June 1997, the Company forwarded duly executed Transfer Deed along with 14 Share Certificates covering 14,99,988 equity shares of GOSL to the Applicant. Subsequently, on or about 5 September 1997, a Provisional Liquidator was appointed by this Court in the present Company Petition in respect of the Company. On 18 October 1997, the Applicant wrote to the Provisional Liquidator putting him to notice that the Applicant was enforcing its option to transfer the subject shares to its name. Thereafter, on 18 December 1998, this Court, pursuant to the BIFR recommendation, permitted the Company to be wound up and directed the Official Liquidator to take charge of the affairs, assets and property of the Company. The transfer of 14,99,988 shares was recorded in the minutes of the Meeting of the Board of Directors of GOSL on 31 January 2006. The explanation for this delay submitted by the Applicant is that the share certificates had been misplaced earlier, around the time of the resignation of its Company Secretary, in May 1997 and were found only in December 2005 and that, thereafter, they were revalidated and lodged with GOSL for registering the transfer. On 6 January 2014, the Official Liquidator submitted a report being OLR No.179 of 2012. The Official Liquidator's Report was on the footing that the subject transfer of shares was violative of Section 531A of the Act having taken place within six months prior to the commencement of the winding up. Thereupon, the present Company Application was taken out by the Applicant seeking validation of the Pledge Agreement as well as the subsequent invocation of the pledge and transfer of shares in favour of the Applicant.

(3.) On behalf of the Applicant it is submitted by Mr. Dwarkadas, learned Senior Counsel for the Applicant, that the subject transactions were entered into bona fide and in the ordinary and regular course of business and were in the interest of the Company so as to enable it to continue carrying on its business when its reference was pending before the BIFR. Learned Counsel relies upon the judgment of a learned Single Judge of this Court in Board of Industrial and Financial Reconstruction v. M/s. Hindustan Transmission Products Ltd., (2013) 176 CC 53 (Bom) in support of his submissions. (This judgment was confirmed in Appeal by a Division Bench of this Court in the case of Sunita Vasudeo Warke v. Official Liquidator, 2013(2) Mh.L.J. 777.) Learned Counsel further submits that the pledge, which was created bona fide and for the benefit of the Company, was validly invoked under Section 176 of the Contract Act, 1872 and the transfer of shares was made validly in pursuance of such invocation. Learned Counsel relies upon the cases of R Mathalone v. Bombay Life Assurance Co. Ltd., AIR 1953 SC 385 Dhani Ram and Sons v. Frontier Bank Ltd, AIR 1962 Punjab 321 (V 49 C 84) and Commissioner of Income Tax, Madurai v. M. Ramaswamy, Company Law Cases 1985 Vol. 57 page 7 in support of his submissions. On the other hand, it is submitted by Mr. J.P. Sen, learned Senior Counsel appearing for the Official Liquidator, that there are three separate transactions in the present case, namely, (i) pledge of 14,99,998 shares, (ii) transfer of 2,21,420 shares and (iii) transfer of 14,99,998 shares, effected on different dates and in that order. It is submitted that each of these transactions must satisfy the test of Section 536(2) of the Act. Secondly, it is submitted that there was no necessity for these transactions and no corresponding benefit to the Company and what these transactions have effectively done is converting an unsecured creditor (i.e. the Applicant) into a secured creditor in fraudulent preference. Learned Counsel further submits that an incomplete transaction cannot be completed subsequent to an order of winding up, since after a winding up order, all creditors of the Company in liquidation acquire a right to have the assets realised and distributed amongst them pari passu. Learned Counsel relies upon the judgment of the Division Bench in the case of Sunita Vasudeo Warke (supra).