Idbi Trusteeship Services Limited v. Reliance Asset Reconstruction Company Ltd.

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION INTERIM APPLICATION NO. 769 OF 2024 IN COMPANY PETITION NO. 129 OF 2016 IDBI Trusteeship Services Limited ...Applicant V/s.

Reliance Asset Reconstruction Company Limited

...Respondent

Mr. Ieshan Sinha with Ms. Dhruvi Mehta i/b Wadia Ghandy & Co. for Applicant.

Mr. Rushabh Sheth for Official Liquidator.

Mr. Chandan Kumar, Official Liquidator with Mr. Anil Bhagure, Assistant Official Liquidator present.

CORAM

:ABHAY AHUJA, J.

DATE : 20th SEPTEMBER, 2024 P.C. :

1.

This Interim Application has been filed by the Trustee of venture capital fund known as India Infrastructure Fund ("Fund") seeking approval for transfer of its shares in Hanjer Biotech Energies Private Limited ("the Company"), presently in liquidation to Jyot Sandip Shukla, an Indian resident.

2.

Pursuant to the orders of this Court, the Respondent-Official Liquidator had filed his reply dated 13th March, 2024. A rejoinder dated 3rd April, 2024 on behalf of the Applicant has also been filed. Nikita Gadgil 1/16

3.

Since the prayers sought in this Application sought approval to transfer shares in the Company in liquidation to another resident, while the company is in liquidation without any consideration, as the Applicant had to wind up the fund and liquidate its assets as per the Trust Deed and the SEBI (Venture Capital Funds) Regulations 1996 ("VC Regulations"), this Court had appointed Mr. Satish Shah, learned Counsel of this Court to act as Amicus to assist in Court in the matter. 4.

Mr. Shah, learned Counsel of this Court has as recorded in order dated 30th August, 2024, assisted this Court with his valuable insights supported by the judgments in the cases of H. L. Seth Vs. Wearwell Cycle Co.(India) Ltd. (In Liquidation) of the Appeal Bench1 as well as of the Company Judge.2 5.

Having heard the learned Amicus and having also considered the submissions by the learned Counsel in the matter, this Court is of the view that the Application be allowed and deems it appropriate to set out the reasons for allowing the Application. (1988) 64 Company Cases 497 46(1992) Delhi Law Times 599 Nikita Gadgil 2/16

6.

As noted above, the Applicant is Trustee of the Fund set up as an irrevocable determinant trust under the Indian Trusts Act, 1882. The Fund was earlier established by IDBI Investment Advisors Limited under an Indenture of Trust dated 4th March, 2008 and registered with Securities & Exchange Board of India ("SEBI") as a domestic venture capital fund under the VC Regulations.

7.

It has been submitted that the Trust Deed in Clause 12 provides that the Fund would be dissolved after 12 years from the Final Closing but will be extended by a maximum period of three years, through extensions of one year at a time. That the Final Closing occurred on 8th June, 2009 and the same came to be recorded in the First Amendment Deed to the Indenture of Trust dated 10th June, 2009. 8.

In furtherance of its objectives, the Fund acting through its then investment manager, IDFC Alternatives Ltd., acquired shares in the Company under a Share Subscription Agreement dated 15th May, 2009 with the Company.

9.

The Applicant originally held 24 Cr. Series A Fully Compulsorily Convertible Cumulative Preference ("Series A FCCCP') shares of Rs. Nikita Gadgil 3/16

10/- each and10 lacs fully paid-up equity shares of Rs. 10/- each in the Company against which it invested a cumulative amount of Rs. 250 Crores. The Series A FCCCP shares of Rs. 10/- each were converted into 25,13,514 fully paid-up equity shares of Rs. 10/- each on 10th February, 2012. Between 30th January, 2012 and 23rd January, 2013, the Applicant sold 3,02,112 fully paid-up equity shares of Rs. 10/- to the Company and Nuzhat Furniturewala for an aggregate consideration of Rs.53,25,00,000/-. The Applicant currently holds 32,11,402 equity shares on a fully diluted basis, constituting 23.76% of the Company's shareholding.

10.

At the time of initial investment, the Fund, through its then investment manager also entered into a Shareholders Agreement dated 15th May, 2009, with the Company and its promoters. The Company amended its Articles of Association to incorporate the relevant terms of the Shareholders Agreement and the Share Subscription Agreement. 11.

Pursuant to its rights under the Share Holders Agreement, the Fund appointed two of its nominees to the Company's Board of Directors as non-executive directors on 9th June, 2009. The said nominees eventually resigned in 2012-2013 after disputes arose between the Fund and the Company and its Promoters. Nikita Gadgil 4/16

12.

In 2011, the Fund / its nominees statedly observing certain financial irregularities, non-compliance of statutory duties and default on payment of tax dues by the Company, the nominee directors engaged in correspondence with the Company highlighting the concerns and seeking explanation.

13.

It is submitted that since there were evasive replies and failure to rectify the irregularities, dispute between the Fund and the Promoters of the Company arose and Company Petition No.114 of 2013 came to be filed before the Company Law Board ("CLB") under Sections 397 and 398 of the Companies Act for operation and mismanagement. 14.

On 1st July, 2018, the investment management business of the then investment manager of the Fund was acquired by Global Infrastructure Partners India LLP, who is the current investment manager of the Fund.

15.

By an order dated 19th April, 2018, this Court passed an order directing to winding up of the Company and appointed the Official Liquidator, High Court, Bombay as the Liquidator for the Company. Nikita Gadgil 5/16

16.

It is submitted that although there are Criminal proceedings pending and misfeasance proceedings are proposed by the Official Liquidator against the erstwhile nominees of the Fund, the said proceedings have no relevance to this Application and have only been stated to avoid any allegations or suppression, although the Applicant believes that since the nominee directors were not responsible for the day to day operations of the Company, the said proceedings as far as the said nominees are concerned are misconceived and not maintainable.

17.

Mr. Sinha, learned Counsel for the Applicant submits that since the Fund was set up for a period of 12 years, extendable for a further period of 3 years of one year each, and the Fund has already availed of two out of three extensions to its term and the current extension to the term of the Fund was to end on 7th June, 2023 as advised by the advisory board and approved by the investors, the investment manager of the Fund is desirous fo winding up the Fund. 18.

It is submitted that the Fund has exited all its investments other than the Company in liquidation and does not expect to make any recovery from the sale of its investment in the Company (in Nikita Gadgil 6/16

liquidation) as the value of the Company has been written down to zero in the books of accounts of the Fund.

19.

Mr. Sinha submits that in view of the aforesaid, it is expedient for the Fund to be wound up and its assets liquidated as per the Trust Deed and the VC Regulations, and to this end, the Applicant is adopting the necessary steps for the liquidation as required by law. That the Applicant is proposing to transfer its shareholding in the Company to one Mr. Jyot Sandip Shukla, an Indian Resident, residing at A304, Satva Flat, Near Krishna Township, Nr Kunal Char Rasta, Gotri, Vadodara, Gujarat 390023.

20.

That since the Company is under liquidation, the Applicant has been constrained to approach this Court seeking its approval/sanction, to the proposed transfer.

21.

It is submitted that the current extension to the Fund's term is coming to an end under the Trust Deed. Given that the Company is in liquidation, the Applicant will require this Court's approval/sanction, under Section 536(2) of the Companies Act for disposal/transfer of the shares held by the Applicant in the Company (in liquidation). Nikita Gadgil 7/16

22.

In view of the aforesaid, the Applicant prays that this Hon'ble Court approve the proposed transfer of the shares in Hanjer Biotech Energies Private Limited held by the Applicant in trust for the Fund known as "India Infrastructure Fund" in favour of Jyot Sandip Shukla. 23.

Mr. Sinha further submits that the shares held by the Applicants are fully paid up and the Applicants cannot be made to contribute towards the assets of the company. It is, therefore, submitted that the Official Liquidator cannot make a call on the Applicant to contribute towards the debts/ liabilities of the Company. 24.

It is submitted that consequently, the proposed transfer of shares by the Applicant, which is expedient in the circumstances above, will cause no prejudice to the Company or its creditors or to the liquidation proceedings where as serious prejudice will be caused to the Applicant if the present application is not allowed. That the balance of convenience is therefore in favour of the Applicant. 25.

Mr. Sheth, learned Counsel appears for the Official Liquidator and submits to the orders of this Court.

Nikita Gadgil 8/16

26.

In the case of H. L. Seth Vs. Wearwell Cycle Co.(India) Ltd. (In Liquidation) (supra), the Single Judge of the Delhi High Court has observed that it could not be disputed that as between transferor and transferees of the shares executed after the commencement of winding up was valid, whether it was executed in performance of a contract made before or after that time. The following paragraphs of the said decision are usefully quoted as under:- ".

It could not be disputed that as between transferor and transferee, a transfer of shares executed after the commencement of winding up was valid, whether it was executed in performance of a contract made before or after that time. A somewhat different note was, however, struck in Sullivan v. Henderson. The court therein was examining the provisions of section 227 of the English Companies Act, 1948, which is akin to sub-section (2) of section 536 of the Act. It observed at pages 50-51 as under:

"It may thus be said that the plaintiff is seeking specific perform- ance of a contract which statute has declared to be void unless the court (that is, the Companies Court) otherwise orders. Without canvas- sing the question of whether a judge of the Chancery Division, when not sitting for the purpose of exercising the court's company, winding-up jurisdiction, could make an order under the section, or whether this is a fit case for such an order, counsel for the plaintiff contended that Re Onward Building Society showed that, the word 'void' in the section merely meant void quoad the company and not void as between vendor and purchaser. He accepted, however, that even on this footing there may be grave reasons why no order for specific performance should be made in such a case. If before any question of a windingup has arisen, V contracts to sell shares in a company to P, and then, after a winding-up order has been made, V sues P for specific performance, I think that any court would be most reluctant to force upon P, who had agreed to take a fully Nikita Gadgil 9/16

effective transfer of the shares, a transfer that, although valid as between him and the vendor, would be void as against the company. Counsel for the plaintiff was not able to contend for any contrary view; and in my judgment it would require remarkable circumstances to support making a decree in such a case. The plainly is not such a case, and in my judgment the claim for specific performance must fail.''

27.

In the very same decision, the Delhi High Court has also considered the question whether a direction is to be issued to the Official Liquidator to register the transfer of shares in question. It has been observed that since it had not been pointed out whether transfer of such shares would be against the interest of the Company and that there has not bee any opposition by the Official Liquidator to such a transfer of shares being registered and that he himself sought directions and requested for the same, since upon the winding up of the Company, there would be no board of directors to consider he same, the provisions requiring the board to do that at the time of winding up would be inapplicable.

Quoting Gower from his book "Principles of Modern Company Law", 4th edition, the Delhi High Court has described the status of the Official Liquidator as under:- ".The exact legal status of the liquidator is difficult to define. The closest analogy seems to be that of directors, whose functions he assumes on appointment, and like them he is probably best described as a fiduciary agent of the company. Again, like directors, he is often described as a trustee, but this appears to be equally inaccurate in his case.

mentioned, the property of the company does not vest in him; the company continues in existence and when he makes a contract, he does so on behalf of the company. Unlike the receiver for debenture-holders, the liquidator is, therefore, not normally personally liable on his contracts.

On the other hand, the liquidator has special statutory duties imposed on him and is in a tiduciary relationship not only to the company but also to the creditors as a body, though not to individual creditors."

According to the learned author, perhaps the most important rule of all is the basic principle of company liquidation, namely, that on winding up, the board of directors "becomes functus officio and its powers are assumed by the liquidator."

28.

The Single Judge of the Delhi High Court has accordingly observed that the Court has full discretion in the matter of transfer of shares where the Company is being wound up and that the exercise of discretion of the Court would be controlled only by general principles of justice and fairness. That the Companies Act does not prescribed any principles for the Court to register the transfer of shares in the case of a Company in winding up, however, the Delhi High Court was of the view that the principles as contained in Section 108 of the Companies Act, 1956 regarding execution of the instrument of transfer and payment of stamp duty in general should be applied. Nikita Gadgil 11/16

29.

The Delhi High Court accordingly directed the Official Liquidator to register the transfer of shares in the terms of the instrument of transfer and to substitute the names as per the transfer deeds on record in the place of the members of the Company.

30.

The said decision of the Single Judge was upheld by the Division Bench of the Delhi High Court and in paragraph 28, the Division Bench held as under:- "28.

So, we hold that the Court has the jurisdiction under Section 536 (2) to validate the transfer of shares which had taken place in the present case after the winding-up order as the winding-up process is still continuing and the Company has not yet been dissolved.''

31.

The Division Bench of the Delhi High Court also cited decision in the case of re: Overend Gurney and Co. 1867 (4) LR (Equity Cases) 189 under the English Companies Act,1862, where it was held construing Section 35 of the said Act, that if any transfer of shares takes place during the winding up under the supervision of the Court, the Court has power to register the names of transferees in the register of the Company. Paragraphs 32 and 34 to 37 of the said decision are also usefully quoted as under:- "32. A question which arose was whether the plaintiff continues to be member of the company and liable as a Nikita Gadgil 12/16

contributory despite the transaction between the plaintiff and defendant? Blackburn, J. while deciding the question opined as follows:

"I can quite understand that if there has been no default in the company the Court would not exercise its power to put an insolvent transferee on the register but why should they not order the rectification of the register by putting the solvent vendee upon it."

Lush, J. opined that in view of Section 98 of the Court can rectify the register if the Court had approved the transaction. It has been clearly held by Blackburn, J. in the opening of his judgment that he saw no reason why transfer of shares should not be registered after winding up order has been made. We may also refer to re: Overend Gurney and Co. 1867 (4) LR (Equity Cases) 189. It was held while construing Section 35 of the English Companies Act, 1862. that if any transfer of shares takes place during the winding up under the supervision of the Court, the Court has power to register the names of the transferees in the register of the company.

34. The Company Judge in our view could, invoking the jurisdiction Section 536 (2), Section 155 and Section 446 of the Companies Act, come to the conclusion that the transaction was valid, genuine and bonafide and could direct the Official Liquidator to make necessary amendments in the registers. It is true that under Rule 154 and Form 35(1) of the Company Court Rules, 1959, the status of creditor is to be recognised as it existed on the date of winding-up order but by substituting one creditor with the other creditor does not mean change in the status of the creditors as it existed on the date of winding-up order.

35. There is no provision in the Companies Act by virtue of which the transfer of credits is declared as void. So, the transaction of transfer of credits entered into between the parties is not hit by any provisions of law and could be duly given effect to by the Company Judge. The interim orders earlier made in the case by which the respondent was not to have any voting rights in the meetings of the creditors and the appellant and the respondent have later been asked to exercise parallel voting rights in the meetings of the members Nikita Gadgil 13/16

were obviously subject to the final disposal of the present petition. It was so made clear even in the order of B.N. Kirpal, J. dated April 10, 1986.

36. A contention was raised that the Company Judge should not have passed the impugned order and should have decided the question of transfer of shares while considering and taking the decision on the schemes which are pending before him for the revival of the Company. We do not agree. It is true that initial agreement dated November 28, 1984, contemplated the transfer of shares and transfer of credits after the scheme was to be sanctioned by the Company Judge but later on the parties had given a go by to the said agreement and had gone ahead with the completion of the transaction of transfer of shares and transfer of credits inasmuch as the appellant obtained the full consideration and handed over the share-scrips and the other documents to the transferees and gave undertaking to get them transferred in the names of the transferees in the books of the Company after obtaining the orders of the Company Judge.

37. One of the respondents being Non-Resident Indian was required to obtain permission of the Reserve Bank of India before shares in his name could be registered and the Company Judge has given a direction in this connection that shares in his name would be registered only after he had obtained necessary permission. We do not find anything wrong in Company Judge making such a direction....." 32.

Although, it is observed from the reply filed on behalf of the Official Liquidator that the Official Liquidator has opposed the said transfer submitting that the said transfer is not permissible in law, the same in view of the aforesaid decisions and the position of law elucidated as above would not be tenable. The pendency of the criminal proceeding or the misfeasance proceedings filed by the Official Nikita Gadgil 14/16

Liquidator as stated in its reply or the claims raised by the various Creditors against the Company in liquidation as submitted by the Official Liquidator pursuant to the invitation of claims of workmen / Creditors of the Company, in my view would not have any bearing on the said transfer.

33.

Keeping in mind the aforesaid principles and considering the fact that the SEBI has already directed the Applicant to wind up the Fund and that no prejudice would be caused to the Creditors or to the workmen, this Court is of the view that the Application be allowed in terms of the prayer Clause (a), which reads thus:- ''a. This Hon'ble Court approves the transfer/proposed transfer of the shares in Hanjer Biotech Energies Private Limited held/formerly held by the Applicant in trust for the fund known as 'India Infrastructure Fund' in favour of Jyot Sandip Shukla, an Indian Resident holding AAdhar No.894344189243 and residing at A304, Satva Flat, Nr Krishna Township, Nr Kunal Char Rasta, Gotri, Vadodara, Gujarat 390023.'' 34.

The Official Liquidator is directed to register the shares held by the Applicant in the Company in liquidation after due verification, to Jyot Sandip Shukla on the basis of the instrument of transfer, subject to payment of stamp duty and register the same in the Register of the Members of the Company (in liquidation) within a period of four weeks from the date of uploading of this order.

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35.

The Interim Application accordingly stands allowed and disposed as above.

36.

This Court appreciates the assistance of Mr. Satish Shah, learned counsel of this Court as Amicus Curiae.

(ABHAY AHUJA, J) Digitally signed by NIKITA YOGESH GADGIL Date:

2024.10.07 16:10:52 +0530 NIKITA YOGESH GADGIL Nikita Gadgil 16/16