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IDBI Bank Limited Through DGM (Legal) v. The Official Liquidator, Office of the Official Liquidator of Companies and Anr.

Special Leave Petition (Civil) · 2019 INSC 1156Decided 17 Oct 2019
Special Leave Petition (Civil) No. 33825 of 2009
Justice Mohan M. Shantanagoudar · Justice Ajay Rastogi

Background

A company, Kothari Orient Finance Limited (KOFL), defaulted on a working capital loan from the bank's predecessor and agreed to sell its office property to the bank to settle the dues, handing over possession after receiving an advance payment. Before the sale deed could be executed, depositors who had been defaulted by KOFL filed company petitions seeking its winding up, and a Company Judge found KOFL's liabilities exceeded its assets, leading to admission of the winding-up petition and appointment of an administrator/liquidator. The bank's application to have the sale deed executed in its favour was dismissed by the Company Judge and later by the High Court's Division Bench on the ground that the sale agreement amounted to a "fraudulent preference" favouring the bank over other creditors, and the Division Bench also revived the winding-up proceedings that had been discharged in the interim. The bank challenged both rulings before the Supreme Court.

Decision Breakdown

The Supreme Court dismissed both of the bank's petitions, upholding the High Court's outcome, though it corrected some of the High Court's reasoning along the way. It disagreed with the Division Bench's finding that the transaction was a "fraudulent preference" under Section 531 of the Companies Act, noting the Division Bench had wrongly ignored the six-month statutory time limit for such a finding and wrongly held an agreement to sell could not qualify as a "transfer" (the Court clarified Section 531 covers any act relating to property, not just formal transfers). However, the Court held the bank's application still failed independently because KOFL's sale had not complied with Section 293(1) of the Companies Act (requiring board/shareholder approval for disposal of substantially the whole undertaking), and it upheld reviving the winding-up proceedings given the unresolved status of the company's affairs. The Court clarified that even if the Section 293 defect were later cured, any future sale deed execution would remain subject to the outcome of the winding-up proceedings.

Lesson Learnt

A company cannot dispose of its substantial assets through a private sale agreement without complying with statutory corporate-approval requirements, and such a sale cannot be enforced against the backdrop of unresolved winding-up proceedings: a buyer's claim to a company's property must yield to the collective interests of all creditors once insolvency proceedings are underway.

Official source (sci.gov.in)View Judgment (PDF)

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