Delhi High Court Dismisses Ex-Management’s Challenge to Share Transfers: Affirms Bona Fide Purchasers’ Right to Register Shares and Receive Accretions Despite Liquidation Restrictions

Court’s Decision

The appeals filed by the ex-management of CRBCML were dismissed as non-maintainable. The court upheld the applicants’ right to register the shares of Reliance Industries Limited (RIL) purchased in 1997 in their names. The court directed the Official Liquidator (OL) to:

1. Transfer the shares to the applicants within seven days.
2. Provide the applicants all accretions (dividends, bonuses, etc.) earned on the shares from 1997 onwards.

Facts

1. Background:
   • The applicants had purchased shares of RIL in April 1997 through stockbrokers on the Delhi Stock Exchange (DSE) and duly paid for them.
   • The Reserve Bank of India (RBI) issued a directive on April 9, 1997, barring CRBCML from selling, transferring, or otherwise dealing with its assets. This directive, however, was not in the public domain at the time.
   • The Company Court, in a winding-up petition against CRBCML, froze the company’s assets on May 22, 1997, and appointed a Provisional Liquidator.
2. Applicant’s Grievance:
   • When the applicants sought to transfer the shares in their names, KARVY (RIL’s share transfer agent) refused, citing the RBI directive and the Company Court’s order.
   • The applicants claimed they purchased the shares in good faith without knowledge of these restrictions.
3. Legal Actions:
   • The applicants approached the court to clarify their entitlement to have the shares registered in their names.

Issues

1. Could the ex-management of CRBCML challenge the registration of shares purchased in the open market?
2. Were the applicants entitled to have the shares registered in their names despite the restrictions imposed during liquidation?

Arguments by the Parties

Petitioner’s (Ex-Management) Arguments

• Jurisdiction: The ex-management argued that the transactions violated Sections 531 and 536 of the Companies Act, which deal with fraudulent preferences and the avoidance of transfers made during liquidation.
• Proof of Payment: They contended that the applicants failed to provide adequate proof of payment for the shares.
• Asset Protection: They claimed that the shares were company assets and could not be transferred without proper authorization.

Respondent’s (Applicants) Arguments

• Bona Fide Purchase: The applicants demonstrated that the shares were acquired in bona fide transactions through registered stockbrokers before the RBI directive and Company Court order were publicly known.
• Evidence of Ownership: They provided evidence, including:
  • Contract notes from brokers.
  • Bank statements showing payment for the shares.
  • Share transfer forms and certificates matching the share numbers initially held by CRBCML.
• Legal Precedent: The applicants relied on earlier court rulings (Co. App. 176/1998 and others) where similar transactions were upheld as valid.

Legal Analysis

Applicability of Sections 531 and 536

1. Section 531: This section invalidates transfers made during the “twilight period” (six months before the initiation of liquidation) if deemed fraudulent preferences. However, it allows bona fide transactions made in the ordinary course of business.
2. Section 536(2): Protects bona fide transactions during the winding-up process if they serve the company’s benefit.

Court’s Observations

• The court held that the applicants’ transactions were bona fide and conducted in the ordinary course of business.
• There was no evidence of fraud or collusion between the applicants and the ex-management.
• The transactions occurred prior to the public notification of the RBI directive and the Company Court order, making them legally valid.

Precedent Analysis

• The court referred to Co. App. 176/1998, where it was ruled that share transfers completed before restrictive orders could not be invalidated.
• It also relied on Standard Chartered Bank v. Custodian, which upheld the principle of allowing accretions on legitimately transferred shares.

Locus Standi of Ex-Management

• The court emphasized that post-liquidation, the ex-management loses control over company assets, which are managed by the Official Liquidator.
• The ex-management’s role is limited to assisting the liquidation process and does not extend to disputing bona fide transactions conducted prior to liquidation.

Court’s Reasoning

1. Bona Fide Nature of Transactions:
   • The applicants provided credible evidence of their transactions, including contract notes, bank statements, and transfer deeds.
   • The court observed that the transactions occurred before the restrictive orders, safeguarding them under Sections 531 and 536 of the Companies Act.
2. Jurisdiction of Company Court:
   • The Company Court cannot entertain objections from the ex-management regarding transactions with bona fide purchasers unless fraud or collusion is proven.
3. Delay in Raising Objections:
   • The Official Liquidator, despite being aware of the transactions for over 18 years, did not initiate any legal action to challenge the validity of the share transfers.

Conclusion

• The court dismissed the appeals, holding that the ex-management had no legal standing to oppose the applicants’ claims.
• The Official Liquidator was directed to:
  • Register the shares in the applicants’ names within seven days.
  • Transfer all accretions earned on the shares from 1997 onward.

Implications

• Reaffirmation of Bona Fide Transactions: The judgment protects bona fide purchasers of shares from arbitrary objections during liquidation.
• Limited Role of Ex-Management: It emphasizes the ex-management’s residual role post-liquidation, limiting their ability to interfere in asset-related disputes.
• Clarity on Liquidation Law: The case serves as a precedent for balancing creditor protection and the rights of bona fide third parties in liquidation cases.

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