Dispositions Without Due Diligence During Winding-Up Are Void—No Shelter for Purchasers Who Chose Not to See: Telangana High Court

In a crucial decision shaping the contours of bonafide purchaser claims and protections under Section 536(2) and Section 537(1)(b) of the Companies Act, 1956, the Telangana High Court on 18 August 2025 refused to validate a sale deed executed in favour of M/s McLanahan India Private Limited, holding that the transaction occurred during the pendency of winding-up proceedings and lacked the safeguards expected of a bona fide commercial acquisition.

Justice K. Lakshman held: “The applicant is not a bona fide purchaser, and the said sale dated 03.01.2018 is in violation of the procedure laid down under Section 536(2) and 537(1)(b) of the Act.”

Rejecting the company’s plea to be declared rightful owner of a factory property purchased from M/s GE Godavari Engineering Industries Ltd., the Court emphasized that transactions executed after the presentation of a winding-up petition but before the winding-up order are void, unless specifically validated by the Court. Here, no such validation had been sought prior, and the Court declined to exercise discretion retrospectively.

"Ignorance of Winding-Up Proceedings Cannot Be a Shield—Court Says McLanahan Failed Basic Due Diligence"

The applicant had claimed that the sale of the subject property—1.25 acres in Survey No. 655 at Peddapur village—was bona fide and without knowledge of the winding-up petition filed in 2015. However, the Court found this claim factually and legally untenable.

“The applicant was in possession of the subject property as a lessee from 01.08.2015 and had entered into a second lease agreement on 01.08.2016. The winding-up petition had already been filed on 20.11.2015,” the Court noted.

It held that continued possession and multiple lease renewals, followed by execution of an MOU for sale, reflected either knowledge or willful blindness, neither of which satisfied the burden to prove bona fides.

“You Promised Public Notice—You Failed to Deliver It”: Court Points to Suppressed Safeguards in MOU

McLanahan’s own Memorandum of Understanding (MOU) dated 25.01.2017 included a clause stating it could issue public notices in leading newspapers to invite objections before executing the sale deed. This clause was cited as a crucial safeguard meant to alert third parties and flag potential legal entanglements.

But the company failed to produce any evidence of such notices. The Court noted: “Vide order dated 01.07.2022, this Court directed the Applicant to produce the newspapers in which the Applicant had carried out advertisement... It has not filed the said newspapers.”

The Court concluded this omission undermined the applicant’s claim of acting with transparency and care.

“Sale Price Too Convenient to Be True”: Court Unconvinced by Applicant’s Claim of Fair Valuation

The transaction in question involved the purchase of land, EOT cranes, compressors, pipelines and transformers for a total consideration of ₹4 crores, while a valuation from 2016 had already pegged the property at ₹3.99 crores. The Court expressed skepticism over how the valuation had remained stagnant in two years, especially given appreciation trends.

Justice Lakshman observed: “There is no explanation as to why the property was sold for a paltry sum despite the 2016 valuation being ₹3.99 crores.”

Further, the Court found it dubious that the applicant had later agreed to sell the same property to M/s Bajaj Heavy Engineering Ltd. in October 2019 for ₹2.5 crores—a significant undervaluation that raised suspicions of sham resale or distress disposal to avoid scrutiny.

“Law Demands Clarity, Not Collusion”: Court Rejects Defense Based on Bank’s NOC

McLanahan had also leaned heavily on the fact that State Bank of India, which held a mortgage charge over the property, had issued a No Objection Certificate (NOC) prior to registration of the sale. But the Court clarified that bank approval cannot override statutory safeguards applicable during winding-up.

“The NOC was issued on 24.05.2017, but the 2nd respondent was not even a party to the MOU. The stamps used were dated 2016–2017, and from different Sub-Registrar Offices. No satisfactory explanation was given for these irregularities,” the Court stated.

It rejected the argument that the bank’s silence or cooperation validated the transaction, particularly when no leave of the Company Court had been obtained, as required under Sections 536(2) and 537(1)(b).

“Court’s Discretion Under Section 536(2) Is Not Automatic—Bona Fides Must Be Proven, Not Claimed”

While Section 536(2) allows the Company Court to validate transactions post-petition, the judgment reaffirmed that this discretion is not to be exercised lightly or mechanically. Citing the Supreme Court’s ruling in Pankaj Mehra v. State of Maharashtra, the Court held: “The Court must weigh all surrounding circumstances and only validate those transactions that are clearly in the interest of the company and its creditors. Mere absence of knowledge is not enough.”

In this case, the Court found suppression by the seller, lack of publication, collusion with the mortgagee, and implausible resale narratives, all combining to negate bona fides.

Transaction Declared Void — Application Dismissed

Justice K. Lakshman concluded with a decisive pronouncement: “The applicant is not entitled for any relief, much less the relief sought in the present application. Therefore, this application is liable to be dismissed and is accordingly dismissed.”

Date of Judgment: 18 August 2025