REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

SPECIAL LEAVE PETITION (CIVIL) NO. 33825 OF 2009

IDBI Bank Limited Through DGM (Legal)   .....Petitioner

Versus

The Official Liquidator, Office of the  Official Liquidator of Companies & Anr.  .....Respondents

WITH

SPECIAL LEAVE PETITION (CIVIL) NO. 5143 OF 2018

IDBI Bank Limited   .....Petitioner

Versus

Pradeep D. Kothari & Ors.                 …..Respondents

J U D G M E N T

MOHAN M. SHANTANAGOUDAR, J.  

1. The  instant  SLPs  have  been  preferred  by  IDBI  Bank

(erstwhile United Western Bank) (hereinafter  “the Petitioner”)

against  the  judgments  dated  17.08.2009  and  28.07.2017

passed by the High Court of Judicature at Madras in O.S.A. No.

284 of 2003 and O.S.A.  No.  396 of 2013 respectively,  which

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relate to  Company Petition (C.P.)  No.  179 of  2001.  Vide the

impugned judgments, the High Court dismissed an application

seeking the execution of a sale deed in favour of the Petitioner

by one Kothari Orient Finance Limited (hereinafter “KOFL”) and

also revived the winding up proceedings initiated against KOFL.

2. The  factual  background  to  the  instant  petitions  is  as

follows:  

2.1 On 20.03.1992, KOFL availed a working capital loan of Rs.

55 lakhs from the erstwhile United Western Bank (now taken

over by the Petitioner).  As on 31.03.1999, the amount owed

was  Rs.60.55  lakhs.  KOFL  defaulted  on  the  same.

Consequently,  it  proposed  a  one-time  settlement  to  the

Petitioner for repayment of its  dues. Towards this end, KOFL

offered to sell its property – Office Space Nos. 102 and 103, 1st

Floor, Prestige Point, admeasuring 2056.89 sq. ft. and situated

at  No.  33,  Haddows  Road,  Nungambakkam,  Chennai

[hereinafter “the subject property”].  

2.2 Pursuant to the same, KOFL and the Petitioner executed

an  agreement  to  sell  dated  17.02.2000  with  respect  to  the

subject  property  for  a  consideration  of  Rs.1.05  crores.

According to this agreement, the Petitioner paid Rs. 41 lakhs as

advance and the balance of Rs. 64 lakhs was to be paid at the

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time of the completion of the sale transaction. This was done in

pursuance of the authority vested with Mr. Pradeep D. Kothari

(Director of KOFL and Respondent No. 1 in SLP No. 5143/2018,

hereinafter  “Respondent  No.  1”)  by  the  resolution  dated

31.03.1999 passed by the Board of Directors of KOFL, giving

him  the  right  to  execute  agreement(s)  of  sale  for  the  said

property to improve the liquidity of the company.  

2.3 It is important to note that on 18.04.2000, in accordance

with  the  provisions  of  the  Income  Tax  Act,  1961,  a  ‘No

Objection Certificate’ was issued by the income tax authorities

for  the  sale  of  the  subject  property  for  a  consideration  of

Rs.1.05 crores. Later, vide letter dated 06.11.2000, possession

of the property was also handed over to the Petitioner by KOFL.

2.4 Issues surfaced when two company petitions were filed on

02.07.2001, being C.P.  No.  179 of 2001 and C.P.  No. 180 of

2001 by one Mr. S. Ramaiah (Respondent No. 3 in S.L.P. (Civil)

No.  33825/2009) and his  wife respectively.  Having deposited

monies  with  KOFL,  which  had  been  defaulted  upon,  they

preferred these company petitions under Section 433(e) and (f)

and Section 434 of the Companies Act, 1956 (hereinafter “the

1956 Act”) seeking the winding up of KOFL and the repayment

of their dues (hereinafter  “winding up petitions”). When these

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petitions  came  up  before  the  learned  Company  Judge  on

05.12.2001,  it  was  observed  that  the  liabilities  of  KOFL

(including  outstanding  secured  loans)  were  more  than  the

assets.  Consequently,  the  petitions  were  admitted  and

directions were issued for appointment of an Administrator and

a Provisional Liquidator for KOFL. In addition to this, directions

were also  issued for  publishing  the company petitions  in  an

English and Tamil daily, as well as in the Government Gazette.  

Genesis of S.L.P. (Civil) No. 33825 of 2009

2.5 In  April  2002,  the  Petitioner  filed  Company  Application

(C.A.)  No.  1208 of 2002 in the aforesaid winding up petition

being  C.P.  No.  179  of  2001,  seeking  a  direction  to  the

Administrator  to  execute  a  sale  deed  in  its  favour  for  the

subject property, as per Section 536(2) of the 1956 Act.  

2.6 Vide order dated 21.04.2003, the learned Company Judge

dismissed this application on the ground that the agreement to

sell  amounted  to  a  fraudulent  preference  in  favour  of  the

Petitioner,  as  it  ignored other  similarly  placed creditors.  The

appeal preferred by the Petitioner was numbered as O.S.A. No.

284 of 2003. On 17.08.2009, it was dismissed on the basis that

the agreement to sell suffered from legal infirmities and was a

fraudulent preference. This order passed by the Division Bench

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has been impugned in the instant S.L.P. filed by the Petitioner

before this Court.  

Interim Proceedings

2.7 In the interim, Mr. Pradeep D. Kothari (Respondent No. 1)

filed C.A. Nos. 2482-2485 of 2007, seeking permission to pay

amounts due to the unsecured creditors of KOFL out of his own

personal  funds.  By  order  dated  09.10.2007,  the  learned

Company  Judge  disposed  of  these  applications,  directing

Respondent  No.  1  to  deposit  Rs.  4.69  crores  with  the

Administrator towards full and final settlement of the dues of

the  unsecured  creditors  of  KOFL.  It  was  also  directed  that

remaining amount (if any) should be refunded back to him after

payment to the depositors.  

2.8 On 23.06.2009, based on a perusal of the interim and final

report filed by the Administrator, the learned Company Judge

noted that 6,464 out of the total 10,968 depositors (unsecured

creditors) of KOFL had been paid by the Administrator to the

extent of 20% and 30% of the funds had been brought in by the

Director. For the remaining 4,504 depositors, it was observed

that the entire claims of about Rs. 5.87 crores had been settled

by Respondent No. 1 privately. Since part of the amount due to

them was covered by recoveries made from debtors of KOFL,

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an amount  of  Rs.  1.95 crores  remained out  of  the  Rs.  4.69

crores  deposited  by  Respondent  No.  1.  Consequently,  this

amount  was directed  to  be refunded back to  him.  Vide  this

order,  the  learned  Company  Judge  also  discharged  the

Administrator  on  the  basis  that  his  primary  obligation  of

redemption of dues of unsecured creditors had been fulfilled.  

2.9 Against  this  backdrop,  the  original  Company  Petitions

came up for hearing before the Company Court on 21.06.2010.

Notice was issued to the petitioning creditor, S. Ramaiah, who

is arraigned as Respondent No. 3 herein.  

Genesis of S.L.P. (Civil) No. 5143 of 2018

2.10   On  03.03.2011,  the  Petitioner  filed  another  company

application,  C.A.  No.  734  of  2011  in  C.P.  No.  179  of  2001

seeking the discharge of the Official Liquidator, who was acting

as the Provisional Liquidator of KOFL (Respondent No. 2 in the

SLPs before us). This application was made on the ground that

there  were  no  other  claims  left  to  be  settled  against  the

company, and therefore, the services of the Official Liquidator

were  no  longer  required.  The  application  was  opposed  by

Respondent No. 1 on the ground that it would prejudice other

creditors of the company and was a  mala fide attempt by the

Petitioner to grab the subject property. Meanwhile, the Official

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Liquidator filed a report on 16.01.2013 seeking permission to

advertise and invite claims from unsettled creditors of KOFL, if

any.  

2.11   By order dated 04.10.2013, the learned Company Judge

allowed the application and discharged the liquidator in view of

the  fact  that  unsecured creditors  of  KOFL had been settled.

Further, given the lack of adequate advertising of the winding

up  petition,  and  the  unwillingness  of  any  other  creditor  or

contributory of KOFL to prosecute the petition in terms of Rule

101 of the Companies (Court) Rules, 1959 (hereinafter  “1959

Rules”), the original winding up petition, C.P. No. 179 of 2001,

was dismissed.  The Official  Liquidator  was directed to return

investments worth Rs. 1.27 crores which were lying with him,

back to KOFL after deducing administrative expenses incurred

by him.  

2.12   Soon after this  order,  one of  the secured creditors  of

KOFL, State Bank of India (hereinafter  “SBI”) approached the

Debts  Recovery  Tribunal,  Chennai  (hereinafter  “DRT”)  for

securing its interest and sought an injunction restraining the

Official Liquidator from refunding the sum of Rs. 1.27 crores to

KOFL.  By order  dated 13.12.2013,  the DRT ordered that  the

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said sum be attached once it is transferred to KOFL, so that the

banks can recover their dues from the company.  

2.13   In the interim, Respondent No. 1 filed an appeal against

the  order  of  the  Company  Court  dismissing  the  winding  up

petition. By order dated 28.07.2017, a Division Bench of the

High Court revived the winding up proceedings on the basis

that it would be unjust and inequitable to wind up the company

only for the reason that no other creditor or contributory was

willing to prosecute the winding up petition. Taking note of the

secured creditors of KOFL who had still not been satisfied and

had consequently approached the DRT, C.P. No. 179 of 2001

was revived and the Official Liquidator was directed to continue

the  winding  up  proceedings  under  the  supervision  of  the

Company Judge. This order of the Division Bench in O.S.A. No.

396 of 2013 has been impugned in the aforementioned S.L.P.

(Civil) No. 5143 of 2018 filed by the Petitioner before this Court.

3. In  view of  this  factual  background,  two issues arise for

consideration before this Court:

First, whether the winding up proceedings against KOFL

should be revived.  

Second,  in  the  event  that  the  proceedings  should  be

revived, can a sale deed be executed based on the agreement

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to  sell  dated  17.02.2000  entered  into  by  the  Petitioner  and

KOFL.

4. Learned Senior Counsel for the Petitioner argued that the

winding  up  petition  deserves  to  be  dismissed,  as  all  the

creditors of KOFL have now been satisfied in accordance with

the  orders  of  the  Company  Judge  and  there  are  no  other

proceedings  pending  against  KOFL  before  any  fora.  Further,

since  no  creditor  had  challenged  the  order  of  the  Company

Court dismissing the winding up proceedings, it was submitted

that  the  proceedings  do  not  merit  revival  at  this  stage.  As

regards the execution of a sale deed, learned Senior Counsel

refuted the finding that  the agreement to  sell  amounts to  a

fraudulent preference. Relying on the provisions of Section 531

of the 1956 Act, he argued that the agreement to sell cannot

be deemed as a fraudulent preference as the agreement to sell

was not  executed within the six-month period preceding the

filing of  the  winding up petition.  In  addition  to  this,  he  also

adverted to the lack of any fraudulent intention underlying the

transaction and drew support from the No Objection Certificate

issued by the Income Tax authorities to argue that the sale was

not undervalued. Lastly, it was submitted that Section 293(1) of

the 1956 Act is inapplicable to the present case, as the subject

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property does not form the whole or substantial whole of the

property owned by KOFL. Thus, he stated that the approval of

the Board of Directors vide resolution dated 31.03.1999 was

sufficient,  and  no  approval  from  the  general  meeting  was

required.  

5. Per contra, learned Counsel for Respondent No. 2 (Official

Liquidator)  submitted  that  the  winding  up  proceedings  were

correctly  revived,  as  there  are  several  secured  creditors  of

KOFL that have still not been satisfied. He also argued that the

subject property is the only property of KOFL and cannot be

transferred  without  the  approval  of  the  general  meeting  in

terms of Section 293(1) of the 1956 Act. With respect to the

agreement  to  sell,  it  was  submitted  that  it  is  a  fraudulent

preference in favour of the Petitioner. To substantiate this, he

relied on the provisions of the agreement which state that the

remaining consideration of Rs.64 lakhs would be paid only at

the  time  of  registration  of  the  property.  In  light  of  this,  he

submitted  that  the  adjustment  of  the  said  amount  was  not

contemplated in  the agreement and by doing so,  the clause

itself has been rendered redundant.  

6. We  have  considered  the  arguments  advanced  by  both

sides and perused the material on record. Since the issue of

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fraudulent preference hinges on the survival of the winding up

petition, we shall first proceed to examine whether the Division

Bench was correct in reviving the winding up proceedings.  

Revival of the winding up petition

7. From a bare perusal of the decision of the Division Bench,

it is evident that the requirements governing the advertisement

of winding up petitions under the 1959 Rules are crucial for the

determination of this issue. It would therefore be useful to note

the relevant rules, which are reproduced hereunder:

“R.96. Admission of petition and directions as to advertisement - Upon the filing of the petition, it shall  be  posted  before  the  Judge  in  Chambers  for admission of  the petition and fixing a date for  the hearing  thereof  and  for  directions  as  to  the advertisements to be published and the persons, if any,  upon  whom  copies  of  the  petition  are  to  be served. The Judge may, if he thinks fit, direct notice to be given to the company before giving directions as to the advertisement of the petition.

R.99: Advertisement of petition - Subject to any directions  of  the  Court,  the  petition  shall  be advertised  within  the  time  and  in  the  manner provided by rule 24 of these rules. The advertisement shall be in Form No. 48.

R.24: Advertisement of petition -  (1) Where any petition is required to be advertised, it shall,  unless  the  Judge  otherwise  orders,  or  these rules otherwise provide, be advertised not less than fourteen days before the date fixed for  hearing,  in one issue of the Official Gazette of the State or the Union Territory concerned, and in one issue each of a daily newspaper in the English language and a daily

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newspaper in the regional language circulating in the State or the Union Territory concerned, as may be fixed by the Judge.

R.101: Substitution of creditor or contributory for original petitioner - Where a petitioner – … (2) fails to advertise his petition  within the time prescribed by these rules or by order of  Court or such extended time as the Court may allow … (4) if appearing, does not apply for an order in terms of the prayer of his petition, or, where in the opinion of  the  Court  there  is  other  sufficient  cause  for  an order  being  made under  this  rule,  the  Court  may, upon such terms as it may think just, substitute as petitioner  any  creditor  or  contributory  who,  in  the opinion of the Court, would have a right to present a petition,  and  who  is  desirous  of  prosecuting  the petition.”

8. The  above  rules  find  mention  in  the  part  relating  to

winding up petitions under the 1959 Rules. They lay down the

procedure for instituting a winding up action. From a reading of

Rules 96, 99, and 24, it  is clear that the advertisement of a

winding  up  petition  is  mandatory.  In  the  event  that  the

petitioning  creditor  fails  to  advertise  the  petition  within  the

prescribed time, Rule 101 accords the Court with the discretion

to substitute such petitioning creditor with another creditor or

contributory, if the latter is capable and desirous of prosecuting

the winding up petition.  

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9. In  the  instant  case,  while  dealing  with  C.A.  No.  734  of

2011 in C.P. No. 179 of 2001 seeking discharge of the Official

Liquidator,  the  learned  Company  Judge  observed  that  the

mandatory  procedure  for  advertising  a  winding  petition,  as

stipulated under Rules 95, 96, 99, and 24 of the 1959 Rules had

not been complied with. While looking into the implications of

the failure to advertise, the learned Company Judge adverted to

Rule  101,  which  allows  for  substitution  of  the  petitioning

creditor. However, since it was found that no other creditor had

expressed the desire to prosecute the original petition, C.P. No.

179 of 2001 was dismissed. It was observed that such dismissal

would  not  prejudice  the  creditors  as  more  than  10,000

unsecured creditors  of KOFL had been settled in  the last 12

years after being given adequate notice, and even the secured

creditors would not be prejudiced, as they would still be free to

pursue their claims before the DRT.

10. As noted supra,  a Division Bench of the High Court set

aside the order of the Company Court in appeal. While it was

observed that the winding up petitions had not been advertised

by the petitioning creditor in accordance with the 1959 Rules, it

was held that it would be unjust and inequitable to wind up the

company only for this reason, as there were several secured

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creditors (including SBI)  who had still  not been satisfied and

had consequently approached the DRT. It  was observed that

before  dismissing  the  winding  up  petition,  all  the  secured

creditors to whom KOFL owed money, should have been called

by the Official  Liquidator  to  inquire  whether  they  wanted to

step into the shoes of the original petitioner. Taking a broad

interpretation  of  Rule  101,  the  Division  Bench held  that  the

Rule cannot be read as an absolute bar on the continuation of

winding up proceedings, where the petitioning creditor fails to

advertise the petition. Adverting to the inherent powers vested

with the Company Court under Rule 9 and given the absence of

a  specific  provision  mandating  that  the  advertisement  shall

only  be  published  by  the  petitioning  creditor,  the  Division

Bench observed that the Company Court has the discretion to

direct the provisional liquidator to publish the advertisement,

where the situation so demands. In view of this, C.P. No. 179 of

2001 was revived and the Official Liquidator was directed to

continue the winding up proceedings.  

11. Upon  examining  the  relevant  rules  and  the  decisions

rendered  by  the  learned  Company  Judge  and  the  Division

Bench,  we are inclined to agree with the view taken by the

latter.  

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11.1   By order dated 05.12.2001, the learned Company Judge

had  directed  the  publication  of  C.P.  No.  179  of  2001  in  an

English  and Tamil  daily  as  well  as  the Government  Gazette.

However, despite this order, no such advertisement was made.

To this extent, we agree with the Division Bench that there has

been  a  violation  of  the  advertisement  requirements  under

Rules  96,  99  and  24,  which  are  mandatory  in  nature  [see

National Conduits (P) Ltd. v. S.S. Arora, AIR 1968 SC 279;

Lt. Col. RK Saxena v. Imperial Forestry Corporation, 2001

CLC 1746].

11.2   Given this failure to advertise, the option of substitution

provided in Rule 101 becomes relevant. In this respect, both

the  Courts  below  have  found  that  no  other  creditor  or

contributory  expressed  willingness  to  prosecute  the  original

winding up petition. At the same time, as noted by the Division

Bench,  there are other unsatisfied secured creditors of KOFL

who were not given the option to step into the shoes of the

petitioning creditor in terms of Rule 101.  

11.3   Against this backdrop, the crucial question that arises for

our  consideration  is  whether  a  winding  up  petition  can  be

dismissed solely on the ground of lack of a prosecuting creditor

under Rule 101, or whether the Company Court has the power

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to direct the publication of an advertisement by the Liquidator

of  the  company,  especially  in  cases  where  other  unsatisfied

creditors  still  remain. For  answering  this  question,  it  is

important  to  bear  in  mind  that  winding  up  proceedings  are

proceedings in rem and have an impact on the rights of people,

in general. Thus, it is mandatory to advertise such proceedings,

so as to ensure that they receive the widest possible publicity

and  all  relevant  stakeholders  have  adequate  notice.  This

implies that in a situation where the petitioning creditor fails to

advertise  the  petition  and  no  other  creditor  or  contributory

comes forward to prosecute it, Rule 101 should not be read in a

manner that absolutely bars the continuation of a winding up

petition.  This  is  particularly  so  when  there  are  unsatisfied

creditors  who  should  have  been  given  an  opportunity  to

prosecute the petition, but were deprived of the same due to

the  failure  to  advertise.  Indeed,  Rule  101  is  only  limited  to

instances where the  petitioning creditor  fails to advertise the

petition. However, there is nothing in the language of Rules 24,

96,  or  99 to  indicate that  only  such  petitioning creditor  can

advertise  the  petition.  In  our  considered  opinion,  given  the

absence of a specific provision mandating that the petition only

be advertised by petitioning creditor, the Company Court has

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the discretion to direct the publishing of an advertisement to

secure the interest of other creditors.  In such situations,  the

winding  up  proceedings  cannot  be  dismissed,  as  it  would

frustrate  the  very  objective  of  securing  the  interest  of  all

creditors.  

11.4   In light of this discussion, we find that it would be unjust

to dismiss the winding up petition in the instant case solely on

the ground that there is no other person willing to substitute

the original creditor in terms of Rule 101. Here, due to the lack

of  adequate  advertisement  of  the  winding  up  petitions,  it

appears that the secured creditors of KOFL were constrained to

approach the DRT for recovery of their dues by filing O.A. Nos.

139  of  2001,  978  of  2000;  and  14  of  2002.  Further,  upon

learning  of  the  decision  of  the  Company  Judge  dated

04.10.2013  dismissing  the  winding  up  petition,  one  of  the

secured creditors (SBI) also approached the DRT to secure its

interest. Based on this, vide order dated 13.12.2013, the DRT

had  directed  that  the  amount  to  be  returned  to  KOFL  be

attached so that the banks have an opportunity to recover their

dues from KOFL. This clearly goes on to show that the secured

creditors of KOFL were relevant stakeholders who were affected

by the non-advertising of the winding up petition. They should

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have been called upon to indicate whether they would want to

step into the shoes of the petitioning creditors as per Rule 101.

11.5   Clearly, the submission of the learned Senior Counsel for

the  Petitioner  that  the  winding  up  petition  deserves  to  be

dismissed as all creditors of KOFL have been satisfied is belied

by  the  existence  of  the  proceedings  before  the  DRT.  The

records show that the settlement of dues has only been with

respect to the unsecured creditors of KOFL, which was carried

out pursuant to the orders issued by the Company Judge. This

is  supported  by  the  fact  that  the  advertisement  dated

24.08.2005  issued  by  KOFL  inviting  claims  from  recoveries

made by its Administrator, was only limited to the depositors or

unsecured creditors of the company.  

11.6   Therefore, given that the secured creditors of KOFL have

still  not been satisfied and are bound to be affected by any

order  dismissing  the  winding  up  proceeding,  we  uphold  the

decision of the Division Bench reviving C.P. No. 179 of 2001,

and direct the Company Court to issue appropriate directions to

the Official Liquidator for publishing the advertisement of the

proceedings in accordance with law.    

11.7   We hasten to add here that the other winding up petition,

C.P.  No.  180 of  2001 filed by the wife  of  Respondent  No.  3

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continues to remain on record, as the impugned proceedings

pertain to C.A. No. 734 of 2011, which was filed in C.P. No. 179

of  2001 only.  The impugned judgment  and decree does  not

contain  any direction qua C.P.  No.  180 of  2001,  which shall

therefore remain unaffected.  

12. In light of the finding that the revival of the winding up

petition by the Division Bench was correct, we will now turn to

examine whether the agreement to sell executed by KOFL in

favour  of  the Petitioner  amounts  to  a  fraudulent  preference,

and consequently, whether the Petitioner has a right to seek

the execution of a sale deed in its favour.

Execution of sale deed

13. Before delving into the merits  of  this issue,  it  would be

useful to refer to the relevant provisions of the 1956 Act:

“S.531: Fraudulent preference -  (1) Any transfer of property, movable or immovable, delivery of goods,  payment,  execution or other act relating  to  property  made,  taken  or  done  by  or against  a  company  within  six  months  before  the commencement of its winding up which, had it been made,  taken  or  done  by  or  against  an  individual within  three  months  before  the  presentation  of  an insolvency  petition  on  which  he  is  adjudged insolvent,  would  be  deemed  in  his  insolvency  a fraudulent  preference,  shall  in  the  event  of  the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly.

S.293: Restrictions on powers of Board -

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(1) The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not,  except with the consent of such public company or subsidiary in general meeting,- (a)  sell, lease or otherwise dispose of the whole, or substantially  the  whole,  of  the  undertaking  of  the company,  or  where  the  company  owns  more  than one undertaking,  of  the whole,  or  substantially  the whole, of any such undertaking”.

(emphasis supplied)

14. Section  531  is  a  provision  that  deals  with  the  effect  of

winding  up  of  a  company  on  its  antecedent  transactions.  It

provides that a transfer or any other act done in relation to the

property of a company within a period of six months before the

commencement of its winding up (hereinafter “twilight period”)

shall be deemed to be a fraudulent preference of its creditors

and accordingly be invalid. For the purpose of the present case,

Section 531 should  be read in  conjunction with  Section 293,

which stipulates that the sale of the whole, or substantially the

whole of the property of a public company requires the consent

of its general meeting.  

15. Here,  while dealing with Company Application (C.A.)  No.

1208  of  2002 filed  by  the  Petitioner  for  execution  of  a  sale

deed, the learned Company Judge dismissed the same on the

ground  that  the  agreement  to  sell  dated  17.02.2000  was  a

collusive  transaction  between  the  Petitioner  and  the

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management  of  KOFL.  It  was  observed  that  KOFL  was  in

financial distress even at the time that the agreement to sell

was  entered  into,  and  owed  over  Rs.5  crores  to  its  other

secured  creditors.  Given  the  existence  of  such  secured  and

other unsecured creditors, the transfer of the subject property

in favour of the Petitioner (which was found to be the prime

property  of  the  company)  was  held  to  be  a  fraudulent

preference. Further, it was observed that the Petitioner would

not have any priority over the general body of creditors merely

because possession of the property had been handed over to it.

It was also held that the Petitioner could not claim to be a bona

fide  purchaser  who  was  unaware  of  the  financial  crunch  of

KOFL, as it had access to the annual report of KOFL for the year

1999-2000,  which  revealed  the  company’s  poor  financial

condition.  

16. As noted supra, the Division Bench affirmed the order of

the  Company Court  in  appeal  on the basis  that  it  would  be

unjust  to  allow  the  sale  transaction,  especially  since  the

property in question was the only and prime immovable asset

of KOFL and was to meet the demands of several secured and

unsecured creditors. In light of this, it was held that the Board

resolution dated 31.03.1999 was insufficient and a resolution of

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the  general  meeting  of  KOFL approving  the  sale  transaction

was necessary, as required under Section 293(1). The Division

Bench further held that the Petitioner only had an agreement to

sell  in its  favour,  which did not accord it  with any rights by

itself. Moreover, since the agreement to sell provided that the

possession of the property be delivered to the vendee only at

the time of completion of the transaction (which would be the

time of registration of the sale deed), it was observed that the

transfer of possession on 06.11.2000 reflected the intention of

the management of KOFL to met out preferential treatment to

the Petitioner. Lastly, it was held that the Petitioner could not

claim  exclusion  from  Section  531  on  the  basis  that  the

agreement to sell had been entered into before the six-month

twilight period. This was done because the Division Bench read

Section  531  as  relating  to  “transfers” of  property  only,  and

accordingly held the agreement to sell in question is different

from a  “transfer”  which  only  occurs  through  a  sale  deed  in

terms of Section 54 of the Transfer of Property Act, 1882. Thus,

the Division Bench ruled that the Petitioner could not benefit

from Section 531, even though the agreement to sell had been

executed  almost  sixteen  months  before  the  winding  up

petitions were filed.  

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17. Upon  examining  the  relevant  rules  and  the  decisions

rendered  by  the  learned  Company  Judge  and  the  Division

Bench, we agree with the conclusion of the Division Bench that

C.A. No. 1208 of 2002 filed by the Petitioner for execution of a

sale deed in its favour is liable to be dismissed. This is primarily

because the requirements of Section 293(1) of the 1956 Act

have not been met.  

17.1   As stated supra, Section 293(1) requires the consent of

the  general  meeting  of  a  company  in  case  of  a  sale or

disposition of the whole or substantial whole of its property. It is

also well-settled that the  sale of an immovable property can

only be effectuated through a sale deed and an agreement to

sell  does  not  transfer  any  right,  title  or  interest  in  the

immovable property [see Suraj Lamp & Industries (P) Ltd.

(2) v. State of Haryana, (2012) 1 SCC 656; Bank of India v.

Abhay D. Narottam, (2005) 11 SCC 520]. Given that C.A. No.

1208 of 2002  seeks  execution of a sale deed  in favour of the

Petitioner based on a prior agreement to sell, the approval of

the general meeting of the company in terms of Section 293(1)

becomes  relevant.  Contrary  to  the  submission  made  by  the

learned  Senior  Counsel  for  the  Petitioner,  this  provision  is

applicable to the present case in view of the categorical finding

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by both the Courts below that the subject property is the only

immovable  property  of  KOFL.  Notably,  no  approval  from the

general meeting of KOFL has been obtained. There is only a

Board resolution dated 31.03.1999 permitting Respondent No.

1 to execute agreements of sale and other documents for the

purpose of selling the subject property. In the absence of the

requisite  approval  from  the  general  meeting,  the  instant

application for  execution of a sale deed  cannot be allowed as

doing  so  would  be  allowing  the  Petitioner  to  sidestep  the

mandatory requirements of  Section 293(1).  Therefore,  in  our

considered  opinion,  C.A.  No.  1208  of  2002  deserves  to  be

dismissed on this ground alone.

17.2   Be that as it may, in light of the contentions raised by

both the parties on whether the agreement to sell in question

amounts to a fraudulent preference, we consider it necessary

to  address  the  same.  We  differ  with  the  Division  Bench

inasmuch  as  the  said  agreement  cannot  be  termed  as  a

fraudulent  preference  under  Section  531.  Under  Indian

company law, Section 531 of the 1956 Act (now Section 328 of

the Companies Act, 2013) is the cornerstone provision that lays

down  the  requirements  for  a  transaction  to  amount  to  a

fraudulent preference. Framed along the lines of Section 320 of

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the English Companies Act of  1948,  it  provides that  any act

relating  to  the  property  of  a  company  may  qualify  as  a

fraudulent  preference  if  two  conditions  are  met.  First,  the

dominant motive in the mind of the company (as represented

by its directors or general body of shareholders) should be to

prefer a particular creditor [see Jayanthi Bai v. Popular Bank

Ltd.,  AIR  1966  Ker  296;  Official  Liquidator,  Victor  Chit

Fund (P.) Ltd. v. Kanhiya Lal & Ors., (1972) 42 ComCas 196

(Del)].  Second,  the  said  act  must  be  undertaken  during  the

period  of  six  months  preceding  the  filing  of  the  winding  up

petition of the company.  While the first requirement ensures

that the dominant intention to defraud creditors is  detected,

the second ensures that there is a level of commercial certainty

and  finality  of  transactions  for  those  interacting  with  the

company.   

17.3   In light of this, when we look to the facts of the instant

case, it appears that the Division Bench has entirely ignored

the second requirement under Section 531. Solely based on an

examination  of  factors  indicating  a  dominant  motive  of  the

management of KOFL to benefit the Petitioner, it went on to

hold  that  the  agreement  to  sell  constitutes  a  fraudulent

preference. In doing so, it has failed to appreciate that the said

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agreement was executed on 17.02.2000, while the winding up

petitions were filed on 02.07.2001, signifying that there was a

gap  of  over  sixteen  months  between  the  two  events,  as

opposed to the six-month period contemplated under Section

531.  Similarly,  it  failed to consider  that  even the transfer  of

possession  of  the  subject  property  occurred  on  06.11.2000,

which was also before the six-month period preceding the filing

of the winding up petition. Clearly then, the Division Bench has

erred in ignoring the time limit  stipulated under Section 531

and  holding  that  the  transaction  qualifies  as  a  fraudulent

preference. As noted supra, the same cannot be disregarded as

it  is  crucial  for  ensuring  commercial  certainty  for  parties

transacting with a company.  

17.4   Further,  we  differ  with  the  reasoning  of  the  Division

Bench that the Petitioner cannot avail benefit of Section 531 as

the agreement to sell does not amount to a “transfer”. A bare

reading of the provision shows that in addition to any transfer

of property, it covers “any other act relating to the property”.

These terms indicate that Section 531 is comprehensive and

includes  indirect  transactions  within  its  scope  [see Manik

Ratan Guin & Ors.  v.  Prokash Chandra Chattopadhyay,

(1953-54)  58  CWN  545  (Cal)].  Thus,  the  Petitioner  is  not

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precluded from benefiting from Section 531 on account of non-

fulfilment of the six-month condition.  

17.5   Therefore, it is evident that the agreement to sell dated

17.02.2000 cannot be termed as a fraudulent preference under

Section 531.   

18. At this juncture, we would re-emphasize that our finding

on fraudulent  preference does not affect  our  conclusion that

C.A. No. 1208 of 2002 is liable to be dismissed, as the non-

compliance with Section 293(1) cannot be ignored. However,

given  our  decision  in  support  of  revival  of  the  winding  up

proceedings, we observe that even if the infirmity with respect

to  Section  293  is  subsequently  removed  by  KOFL,  any

execution of a sale deed in favour of the Petitioner in the future

will be subject to the outcome of the winding up proceedings.  

19. In view of the foregoing discussion, we uphold the decision

of the Division Bench of the High Court of Judicature at Madras

dated  28.07.2017  in  O.S.A.  No.  396  of  2013,  reviving  the

winding up proceedings in C.P. No. 179 of 2001. SLP (Civil) No.

5143  of  2018  preferred  before  this  Court  is  dismissed

accordingly.  

As regards the impugned judgment of the Division Bench

dated 17.08.2009 in  O.S.A.  No.  284 of  2003,  we uphold the

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dismissal of C.A. No. 1208 of 2002 seeking the execution of a

sale deed in favour of the Petitioner. SLP (Civil) No. 33825 of

2009 preferred before this Court is dismissed accordingly.

…...……………………………………...J.       (MOHAN M. SHANTANAGOUDAR)

..…..….……………………………..….J.                       (AJAY RASTOGI)

NEW DELHI; OCTOBER 17, 2019

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