Madras Hc Order On Share Buy Void

A bona fide buyer of shares who bought them without knowing that the seller has become insolvent is protected by law and he will be the owner of the shares.

The Supreme Court ruled this last week in the Sankar Ram & Co vs Kasi Naicker case. The court said the contrary view held by the Madras High Court was wrong, while allowing the appeal.

The firm in this case purchased shares of a textile mill belonging to the debtor Naicker by depositing the amount in a bank to get the shares released in its favour with the consent of the debtor.

When the bank neither released the share certificates nor returned the money, it filed a petition demanding a declaration that the shares belonged to it.

The district court rejected his prayer holding that the debtor had filed an insolvency petition and therefore, any transaction by the insolvent after that would not bind the receiver, and the firm was not entitled to any relief. The high court approved of this view.

But the Supreme Court analysed Sections 28 and 55 of the Insolvency Act and found in favour of the buyer of the shares. It said Section 55 protected a transaction if they fulfilled two conditions;

it takes place before the date of the order of adjudication, and

the person with whom the transaction takes place has not at the time notice of the presentation of any insolvency petition.

Any transaction which takes place after the date of the order of adjudication does not get the protection of Section 55.

In the present case, the transfer in favour of the firm took place before the date of adjudication of the insolvency petition.

The firm had no knowledge at the time of the purchase of the shares as to the existence of the insolvency petition. The transfer of shares was for valuable consideration and was bona fide.

While allowing the appeal, the Supreme Court said: