BNP Paribas v UB Holdings: The Karnataka High Court on s 536(2)

its recent judgment in BNP
Paribas v UB Holdings
, a
Division Bench of the Karnataka High Court has considered an important question
of insolvency law. The case has been widely reported in the press, of course, for
it set aside a sale of shares to Diageo and made some observations about
parallel transactions. But it is important to note that all of the High Court’s
comments on the merits of the sale are obiter
because it concluded that the application under section 536(2) of the Companies
Act, 1956, was not maintainable.

background to the case is well-known but it is convenient to briefly recapitulate.
In its capacity as the ultimate parent of Kingfisher Airlines Ltd, UB Holdings
had given corporate guarantees to a large number of companies with respect to contractual
payments due to them from Kingfisher for the sale of aircraft, maintenance and
other transactions related to the airline’s operation. Between 2010 and 2011, as
Kingfisher did not pay, these guarantees were invoked. When UB Holdings did not
pay either, the creditors filed several winding-up petitions in the Karnataka
High Court. These petitions were filed between March and November 2012. UB
Holdings entered appearance through counsel and began arguments opposing the
admission of the winding-up petitions. In April 2013, that is, before arguments
on the admission of the Petitions had concluded, UB Holdings filed an
application under section 536(2) of the 1956 Act for leave to sell about 13
lakh equity shares of a subsidiary, United Spirits Ltd [“USL”], to Diageo plc at a price of Rs. 1440 per share. This was in
pursuance of a share sale agreement dated 09.11.2012, that is, after some of the
winding-up petitions had been presented in the High Court. The Company judge
granted this application on certain terms. The creditors challenged that order
before the Division Bench and two issues arose: first, whether an application
under section 536(2) maintainable before a winding-up petition is passed, and
secondly, if it was, whether the Company judge erred in concluding that it was
appropriate to give leave for this sale.

Section 536(2) reads as follows:

the case of a winding up by or subject to the supervision of the Court, any
disposition of the property (including actionable claims) of the company, and
any transfer of shares in the company or alteration in the status of its
members, made after the commencement of the winding up, shall, unless the Court
otherwise orders, be void.

provision is of considerable vintage and has given rise to a large body of case
law in common law jurisdictions. It is ultimately traceable to section 153 of the
English Companies Act, 1862, and its immediate predecessor is found in section
of the English Companies Act, 1948, which, of course, became section 127
of the English Insolvency Act, 1986. The legislative history was considered at
great length by the Court of Appeal in the well-known case of Hollicourt
(Contracts) Ltd v Bank of Ireland
and its object was explained by Lord
Cairns LC in one of the earliest cases on the subject, Re Wiltshire Iron Co (1868) LR 3 Ch App 443 in these terms:

section is] a wholesome and necessary provision, to prevent, during the period
which must elapse before a Petition can be heard, the improper alienation and
dissipation of the property of a company in extremis. 

the many controversies it has spawned, perhaps the most well-known is the
liability in restitution of banks which pay out money (especially on an
overdraft, on which the Australian and English courts used to differ). Another
is a jurisdictional question and it is this that the Karnataka High Court
considered: at what stage does the court acquire jurisdiction to grant the
leave that section 536 contemplates a proposed disposition requires? Several
cases, including one of a Full Bench of the Rajasthan High Court (cited by
Kumar J), hold that the court may grant leave even before an order of winding-up
is made. But Kumar J held, after referring to section 443(2), that although the
court can grant leave before the order
is made, it cannot do so before the petition for winding up is admitted:

Before admission of the petition, the question of entertaining the application
filed by the Respondent and passing an interim order in favour of the Company
would not arise. Only if the Company Petition is admitted, then an occasion for
entertaining any such application may arise for consideration. Therefore, even
before admission he cannot take advantage of a pendency of a petition and seek [sic]
order from the Court under section 536(2) to validate a sale which he intends
effecting after the presentation of the petition. If the respondent is
confident that the petition presented is frivolous, it has no merit, he has to
contest the petition and get it dismissed, even before it is admitted, if
notice is given to him before the admission of the petition

respect, it is not clear, if the Court was content to follow the case law that
the jurisdiction exists before the order of
winding-up is made, why it does not exist after the winding-up petition is
presented but before it is admitted. No doubt it is conceivable to apply such a
rule but it is not obvious that the language of section 536(2) or indeed the provisions
of the Companies (Court) Rules to which Kumar J refers contemplates such a
result. This is a point of law that is likely to require further consideration,
perhaps even in this case, should it travel to the Supreme Court. But Kumar J,
it is submitted correctly, rejected the proposition that the court can invoke
its inherent power under Rule 9 to grant leave should it lack statutory
jurisdiction: clearly, as the learned judge points out, inherent power cannot
be exercised in contravention of statute. Kumar J also expressed the concern
that exercising jurisdiction prior to admission may make it difficult to stop
collusive petitions since creditors are not, at that stage, heard by the court
but, with respect, it is submitted that the possibility of collusion cannot
alter the meaning of statutory provisions: the possibility exists across the
spectrum of civil litigation and the courts deal with it on its own terms.

Court also made some important observations on the merits, which it proceeded
to consider although it decided in favour of the creditors on the jurisdiction
point. The Court rightly notes, at [77], that “any bona fide transaction carried out and completed in the ordinary
course of business
will be sanctioned
by the court under section 536(2)
”. However, it is respectfully submitted
that its observation at [78] is not correct:

expression ‘unless the court otherwise orders’ casts a duty on the judge
requiring that each case must be dealt with on its own facts and particular
circumstances, special regard being had to the question of good faith and
honest intention of the persons concerned and that the court is free to act
according to the judge’s opinion of what would be just and fair in each case

no one suggests that the court must permit an unjust or unfair disposition; but
it is important not to replace the principles found in the large body of case
law in this area (or for that matter in any other) with a case-by-case appeal
to ‘commonsense’ or ‘justice’. The cases on the point is, it is submitted, are
an accumulated body of ‘justice and fairness’ as to when a court normally
grants leave and when it does not, and those factors should be followed unless
there is good reason not to. Indeed, it may be that this is what the Court
meant since it subsequently observes ([95]) that the power under section 536(2)
is controlled by ‘general principles which apply to every kind of judicial

these principles, the Division Bench found that it would in any event have
refused leave to transfer the shares for a number of reasons that collectively demonstrated that it was not a bona
transaction. Perhaps the most important of these for subsequent cases
is the finding that the sale price of Rs. 1440 per share did not necessarily represent
market value even though the share price was lower on the day the contract was
concluded. The Court thought it significant that the shares might (in conjunction
with other transactions) allow Diageo to acquire a controlling interest and
that there was ‘no valuation by an approved valuer’ prior to contract.

About the author

V. Niranjan

1 comment

  • Though not made so explicit, the view Kumar J has taken is found to be logical and well founded, if regard be had to the ell settled proposition in law; that is to the effect, that any such rule framed under a statute (enactment) has to necessarily yield to the latter, not overwrite or override it.
    Remember at least one tax case (open to correction),in which the SC struct down a rule on that ground; so much so, the legislature had to amend by bringing in a new provision.

    To put it differently, perhaps, there may be scope for review by the deciding court itself, on the ground of the mentioned principle of interpretation; thereby try and avoid the hassle of dragging the matter on to the SC.

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