Court distinguishes between "void" and "voidable" transactions under Companies Act, 1956, protects bona fide interests of creditors.
In a significant judgment delivered on May 4, 2026, the Bombay High Court, presided over by Justice Arif S. Doctor, validated a property sale transaction despite it being executed after a winding-up petition was filed against Milestone Interactive Pvt. Ltd. The case, involving M.M. Styles Private Limited, raised crucial questions about the interpretation of Section 536(2) of the Companies Act, 1956, which governs transactions entered by a company during pendency of winding-up proceedings.
The court ruled that transactions entered after the presentation of a winding-up petition are "voidable" rather than automatically "void," provided they are bona fide and in the interest of the company and its creditors. This judgment reaffirms the judicial stance that company courts possess the authority to validate transactions that are necessary to maintain the company’s operations and discharge its debts.
In this case, M.M. Styles Private Limited purchased the property from Milestone Interactive Pvt. Ltd. for Rs. 27 crores on September 9, 2016, before the winding-up order was finalized. The court found that the applicant did not have knowledge of the winding-up petition at the time of the transaction, exercised due diligence, and ensured the sale price exceeded market value. Furthermore, proceeds from the sale were used to discharge debts owed to Fullerton India Credit Company Ltd., a secured creditor, and other creditors, affirming the transaction's bona fide nature.
Justice Doctor emphasized that while the applicant acted in good faith, the ex-directors of Milestone Interactive Pvt. Ltd. knowingly dealt with the company's property amidst winding-up proceedings, indicating a lack of bona fides. The court left it open for statutory authorities to proceed against the ex-directors for any statutory dues recovery.
This judgment highlights the court's balanced approach, avoiding extreme positions where every disposition is either void or permissible. It underscores the court’s enabling power to confirm transactions that benefit the company and its creditors, thus protecting genuine and bona fide business interests during liquidation proceedings.
Bottom line:-
Transactions entered into by a company after the presentation of a winding-up petition are voidable, not automatically void. Bona fide transactions made in the interest of the company and its creditors can be validated under Section 536(2) of the Companies Act, 1956.
Statutory provision(s): Section 536(2) of the Companies Act, 1956.
M.M. Styles Private Limited, (Bombay) : Law Finder Doc id # 2895455
