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Mohan R. Lavi

Mohan R. Lavi on the need to relook the taboo on fraudulent preferences

THE manner in which a harmless provision in the Companies Act, 1956 can come in the way of a genuine business transaction was brought to the fore recently in the TamilNadu Newsprint and Papers Ltd vs Express Publication (Madurai) Ltd (2003 44 SCL 345 Madras) case.

The section in argument before the Madras High Court was 531 of the Companies Act, 1956, which postulates that "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 it 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 to be a fraudulent preference of its creditors and be invalid accordingly."

The history of the case was that TamilNadu Newsprint and Papers Ltd (TNPL) sold huge quantities newsprint to Express Publication (Madurai) Ltd (EPL). EPL owed Rs 25 crore to the applicant. In spite of repeated reminders, the amount could not be realised as the cheques issued by EPL kept getting dishonoured. The much-feared Section 138 of the Negotiable Instruments Act was resorted to. And, statutory notice under Section 434 of the Companies Act was also issued.

In the reply to this notice, EPL admitted the liability. With the assistance of a decree from the court, a schedule for repayment was drawn up. The finances of EPL precipitated a violation of the agreement during its pendency. Finally, TNPL decided that there would be no way out, save seeking the winding up of EPL on December 18, 2000. However, on September 7, 2000, TNPL and EPL had entered into an agreement to settle this dispute by assigning the property of EPL in Hyderabad — the sale consideration of which was fixed at Rs 21.10 crores. The Madras High Court on January 9, 2001, however, directed maintenance of status quo in respect of the said property.

TNPL decided to ask the same court to vacate the order of status quo and to get the conveyance of the property in its name.

The legal counsel appearing for TNPL argued that no-objection for the transfer of the property under Section 269 UL(1) of the Income-Tax Act, 1961 had also been obtained. Also, EPL had cleared more than half of the debt it owed to TNPL and, by permitting the sale of the property at Hyderabad, the balance could also be realised.

The respondent's argument was that the company's petition for winding up was presented on December 18, 2000, and the agreement for sale was dated September 7, 2000, hence, the rationale envisaged in Section 531 of the Companies Act would come into play.

The Madras High Court, deciding on whether the agreement for sale entered into was mala fide or bona fide, was of the opinion that it is well settled law that the order of winding up dates back to the date of presentation of the petition for winding up.

Since the present agreement for sale was executed within six months from the date of presentation of the winding up procedure, the fiction of Section 531 came into play.

And if the order of status quo were lifted, the doctrine of fraudulent preference would be applicable. So saying, the court dismissed the appeal of the company seeking lifting of the status quo order, and conveying the property in the name of TNPL. However, it did not prevent TNPL to take such action, as it deems fit, against EPL before the appropriate forum.

The above case is a good reason to examine the necessity of having sections such as 531 on the statute book.

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