Case Law Companies Act Offiicial Liquidator Vs Dharti Dhan Pvt Ltd

Case Law Companies Act

Offiicial Liquidator Vs Dharti Dhan Pvt Ltd





CITATION: 1977 AIR  740  1977 SCR  (2) 964 1977 SCC  (2) 166

ACT: Companies Act, 1956–Sections 442, 446–Power to stay proceedings,  whether  discretionary–Meaning  of  the  word “may” occurring in s. 442. Constitution  of India, 1950–Article  136–Appeal  by special leave–Interference by Supreme Court—Scope of.

HEADNOTE: The Company Judge in t.he Bombay High Court directed  on 3-1-1970  advertisement of the winding up petition fried  by the   Registrar  of  Companies  in Maharashtra  against  the respondent company, one of the debtors of the Golcha company to  the extent of Rs. 11,69,043/-.   The respondent  company appealed  against  the  decision of the  Company  Judge  and obtained an  order  dated  3rd February, 1970, from a  Divi- sion Bench staying the operation of the order of  advertise- ment of the winding up petition.  As the respondent  company defaulted  in  the  payment of two of  its  instalments,  as agreed  to  between the Golcha company  and  the  respondent company by agreements dated 25th June 1966 and 17th  January 1967,  the Official Liquidator of the Golcha company made  a claim under s. 446

(2) of the Companies Act for the  recovery of  a sum of Rs. 5 lac before the Company Judge of the  High Court of Rajasthan.  The respondent company after  obtaining an order of stay of the proceedings against it in the Bombay High Court made, another application under s. 442(b) of  the Companies  Act  in the Rajasthan High Court for  staying  of proceeding against it under s 446 (2) made by the  appellant on  the  ground that a compulsory winding  up  petition  was pending  against it in the Bombay High Court.   The  Company Judge rejected the application under s. 442(b) of the Act on 9-5-.1974.  But, the   Division Bench of the Rajasthan  High Court allowed the appeal against the stay order and  ordered a  conditional stay of proceedings u/s. 446 (2) of  the  Act against the respondent company. On appeal by special leave, the Court, HELD:

(1) The clear object of s. 442 is that claims in suits and proceedings pending elsewhere which have a bearing on  the company’s liabilities may be stayed only  until  the winding  up  order is made, because, after  the  winding  up order  has  been passed, s. 446 begins to operate so  as  to automatically transfer with certain exceptions,  proceedings against  the company being wound up to the court  exercising the jurisdiction to wind it up. [968 B-C] (2)  Sections 442 and 446 of the Act have to  be read together.  It is only where the object of the two  sections, when read together, is served by a stay order that the  stay order  could be justified.  That object is to  expeditiously decide  and  dispose  of pending claims in  the  winding  up proceedings.   A stay is not to be granted if the object  of applying  for it appears to be merely to delay  adjudication on  a  claim,  and, thereby, to defeat  justice.   In  other words, a stay order under s. 442 cannot be made mechanically or,  as  a matter of course, on showing fulfilment  of  some fixed and prescribed conditions.  It can only be made  judi- ciously  upon  an examination of the totality of  the  facts which vary from case to case,

It follows that the order  to be  passed  must be discretionary and the power to  pass  it must, therefore, be directory and not mandatory. [969 B-D] (3)  The word “may” used before stay u/s. 442 of the  Compa- nies  Act  really means “may” and not “must” or  “shall”  in such  a  context. In fact, it is not quite accurate  to  say that the word “may” by itself acquires the meaning of “must” or “shall” sometimes.  This word, however, always  signifies a conferment of that power. That power may, having regard to the context in which it occurs and the requirements  contem- plated for its exercise have annexed to it 965 an obligation which compels its exercise in a certain way on facts  and circumstances from which the obligation to  exer- cise  it  in  that way arises.  In other words,  it  is  the context which can attach the obligation to the power compel- ling its exercise in a certain way.  The context both  legal and  factual  may impart to the power  that  obligatoriness. [969 D-F]

(4) Thus, the question to be determined in  such  cases always is whether the power conferred by the use of the word “may” has annexed to it an obligation, that, on the  fulfil- ment of certain legally prescribed conditions to be shown by evidence, a particular kind of order must be made.  In  such a  case, it is always the purpose of the power which has  to be  examined in order to determine the scope of the  discre- tion  conferred upon the donee of the power.  If the  condi- tions  in which the power is to be exercised  in  particular cases are also specified by a statute, then, on the  fulfil- ment  of those conditions, the power conferred  becomes  an- nexed with a duty to exercise it in that manner. [969 F–970 G-H] Frederic  Guilder  Julius  v. The Right  Rev.  The      Lord Bishop  of Oxford: The Rev. Thomas Thelusson Carder  5  A.C. 214, quoted with approval. Bhaiya Punjalal Bhagwandin v. Dave Bhagwat prasad  Prab- huprasad [1963] 3 SCR 312: State of Uttar Pradesh v.  Jogen- dra Singh [1964] 2 SCR 197; Sardar Govindrao & Ors. v. State of M.P. [1965] 1 SCR 678; Shri A. C. Aggarwal, Sub Division- al Magistrate, Delhi & Anr. v. Smt.. Ram Kali etc. [1968]  1 SCR  205; Bashira v. State of U.P. [1969] 1 SCR 32 and  Pra- kash  Chand  Agarwal  & Ors. v. M/s.  Hindustan  Steel  Ltd. [1972] 1 SCR 405, applied.

(5) In s. 442 of the Companies Act the power to stay  a proceeding is not annexed with the obligation to necessarily stay  on  proof  of certain conditions  although  there  are conditions prescribed for the making of the application  for stay  and the period during which the power to stay can   be exercised.  The question whether it should, on the facts  of a  particular  case,  be exercised or not will  have  to  be examined and then decided by the court to which the applica- tion is made.  If the applicant can make out, on facts, that the objects of the power conferred by ss. 442 and 446 of the Act  can only be carried out by a stay order, it could  per- haps be urged that an obligation to do so becomes annexed to it  by proof of those facts.  That would be the position  in case the word “may” itself must be equated with “shall”, but because  judicial  power  has necessarily  to  be  exercised justly,  properly  and reasonably to enforce  the  principle that  rights created must be enforced. [971 B-D]

(6) In such cases, the only right which could be said to have been created is the right to get speedier  adjudication from  the  court where the winding up proceeding  is  taking place.   That  is the object of the  provisions.   On  facts disclosed, if it be found that the application has been made with  the object of delaying decisions on claims  made,  the application should be rejected outright. [971 D-E] (7)      In  the instant case the object of  the  respondent company  appears to be to obtain an indefinite stay of  pro- ceedings  against  it  in both High Courts.   This  being  a correct  inference, the stay application under s. 442(b)  of the Companies Act could not be a bona fide one, but an abuse of  the processes of the court. [966 F-G] (8)      It  is true that the Supreme Court does not,  as  a rule  interfere  with interlocutory orders.  The  powers  of interference  under  Art.  136 of the  Constitution  by  the Supreme Court are not confined to those in respect of  final orders,  although finality of an order is a test  which  the Supreme  Court generally applies in considering  whether  it should interfere under Art. 136 of the Constitution with it. [972 B-D]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 126 of 1976. (Appeal  by     Special leave from the  Judgment  and  Order dated the 11th October, 1974 of the Rajasthan High Court  in D.B. Special Appeal No. 111 of 1974) L.N. Sinha, Sol. Genl. and Suresh Sethi, for the appellant. C.K. Garg, S.S. Khanduja and C.L. Sahu, for respondent. 966 The Judgment of the Court was delivered by BEG, C.J.–The Official Liquidator attached to the High Court  of Rajasthan, in-charge of the liquidation of  Golcha Properties (Pvt.) Ltd., (hereinafter referred to as  ‘Golcha Company’),  has come up in appeal to this Court  by  special leave  against a judgment and order of a Division  Bench  of that  High Court, passed on a Special Appeal from the  judg- ment  and order of a single Judge of that Court.

On  peti- tions  presented on 4th July 1966 and 30th July 1966 by  the creditors  of  Golcha  Company, the High Court  had  made  a compulsory  winding up order on 10th May 1968; and, on  that very  date,  the appellant was appointed liquidator  of  the Golcha  company.  The Dharti Dhan (Pvt.) Ltd.,  (hereinafter referred  to  as the ‘Dhan Company’),  with  its  registered office at Bombay, was said to be one of the   debtors of the Golcha Company to  the extent of Rs. 11,69,043/together with interest  and commission which was said to be still  due  on 1st  August  1969.   Agreements dated  25.6.66  and  17.1.67 between the two companies regulated the method of  repayment by  annual  instalments of Rs. 2,50,000/- according  to  the appellant.  As the respondent, Dhan Company, is said to have defaulted in the payment of two of its instalments, a  claim under  section  446(2)  of the  Companies  Act  (hereinafter referred  to as ‘the Act’) for the recovery of a sum of  Rs. 5,00,000/-  was  made before the Company Judge of  the  High Court of Rajasthan by the appellant. On 20th September       1969,

the  Registrar  of  Companies in Maharashtra had to file a winding up petition against the respondent  Dhan  Company  in the Bombay  High  Court.   The Company Judge in the Bombay High Court on 3rd January, 1970, directed  advertisement  of the winding  up  petition.   The respondent Dhan Company appealed against the decision of the Company  Judge  and obtained an order, dated  3rd  February, 1970,  from  a Division Bench staying the operation  of  the order  for  advertisement of the winding  up  petition.   An appeal against that order is said be still  pending so .that a stay of those proceedings operates. After  obtaining  an order of stay of  the       proceedings against  it in the Bombay High Court, the Dhan Company  made an  application under s. 442(b) of the Act in the  Rajasthan High Court for stay of proceedings against it u/s. 446(2) on the ground that a compulsory winding up petition was pending against  it  in

the Bombay High Court. The  object  of  the respondent Dhan Company appeared to be to obtain an  indefi- nite stay of proceedings againsts it in both High Courts. If this is a correct inference, as it appears to us to be,  the stay application under s. 442(b) of the Companies Act  would not be a bona fide one.  It looks more like an abuse of  the process of the Court. It is, therefore, not surprising  that the  learned  Company  Judge: of the  Rajasthan  High  Court rejected  the  Dhan  Company’s  application under s.  442(b) of  the Act on 9th May 1974.  It is, however, somewhat  sur- prising that a Division Bench of that High Court should have allowed an appeal from the judgment of the Company Judge and ordered  stay  of  proceedings under s. 446(2)  of  the  Act against  the respondent Dhan Company, even though  this  was subjected to the 967 condition  that “the appellant Company  produces the  entire documentary  evidence inclusive of account-books,  vouchers, files  and other documents and papers in its  possession  or power relating to the claim in question,

as it may desire to produce  or the Official Liquidator desires to summon or  as the  learned Company Judge may direct in his discretion  and also produces a list of witnesses that the appellant company may desire to examine in its defence in respect of the claim in question along with an affidavit of what each witness  is likely  to  depose”.  Thus, the Division  Bench  had,  while making the stay order, attempted to safeguard the  interests of  the  Golcha  Company by making an order  which,  in  the opinion  of the Division Bench, would prevent valuable  evi- dence from being lost due to either the death or the  fading memory of a witness or other causes. Learned Solicitor-General, appearing for the  appellant, Official  Liquidator  of  the Golcha Company,  gave  up  the objection,  taken  in  the special leave  petition,  to  the maintainability  of an appeal to a Division Bench  from  the order  of  the  Company Judge in view of  the  provision  of section 483 of the Act, which lays down: “483.  Appeals  from any order  made  or decision given in the matter of the winding up of  a  company by the Court shall lie  to  the same  Court  to which, in the same  manner  in which  and  subject to  the  same  conditions under  which, appeals lie from any  order.  or decision of  the Court in  cases  within  its ordinary jurisdiction”. The Solicitor-General, however, submits that, on merits, the order of the learned Company Judge, dismissing the  applica- tion  of the Dhan Company for stay of proceedings  under  s. 442(b)

of the’ Act, deserves to be restored as  no  grounds for interference with the proper exercise of his  discretion by  the  learned Company Judge existed at  all.   We  highly appreciate the brevity of this submission, after the Solici- tor-General had, very rightly and properly,’ conceded   that he  could not urge that the Division Bench had not jurisdic- tion to hearthe appeal before it.  No effective answer could be  given   to  the  Solicitor-General’s submission  by  the learned counsel for the respondent.  We will, however,  deal with  the  strenuous  arguments advanced on  behalf  of  the respondent even if it be to disclose how untenable they are. Firstly,  learned counsel for the       respondent  contends that  the power to stay proceedings, contained in s.  442(b) of  the  Act, is bound to be exercised when  certain  condi- tions,  said  to be found in the case before  us,  are  ful- filled.  This  submission rests on a misapprehension of  the object of s. 44-2 which lays down: “442. At any time after the presentation of a winding up petition and before a  winding up  order has been made, the company,  or        any creditor or contributory, may–

(a) where any suit or proceeding against the company is pending in the Supreme Court or in any High Court, apply 968 to  the Court in which the suit or  proceeding is pending for a stay of proceedings  therein; and (b) where  any suit  or  proceeding  is pending  against  the  company  in  any  other court,   apply to the  Court having  jurisdic- tion  to wind  up the  company,  to  restrain further proceedings in the suit or proceeding; and the Court to which application is so made  may  stay or  restrain  the  proceedings accordingly on such terms as it thinks fit”. The clear object of the section is that claims in  suits in and proceeding pending elsewhere which have a bearing  on the  company’s  liabilities, may be stayed  only  until  the winding  up  order is made, because, after  the  winding  up order has been passed, section 446 begins to. operate so  as to. automatically transfer with certain exceptions  proceed- ings against the company being wound up to. the Court  exer- cising the. jurisdiction to wind it up.  Section 446 reads: “446.(1)  When  a winding up  order  has been made or the Official Liquidator has  been appointed  as provisional liquidator, no  suit or other legal proceeding shall be  commenced, or  if pending at the date of the winding  up order,  shall  be proceeded with  against  the company, except  by leave of  the  Court  and subject to such terms as the Court may impose.

(2) The Court which is winding  up  the company  shall, notwithstanding anything con- tained in any other law for the time being  in force,  have  jurisdiction  to  entertain,  or dispose of– (a)  any suit or proceeding by   or  against the company; (b) any claim made by or against the compa- ny (including claims by or against any of   its branches  in India); (c) any application made under section   391 by or in respect of the company; (d)  any  question  of   priorities  or  any other  question whatsoever, whether of law  or fact,  which may relate to or arise in  course of the winding up of the company; whether  such  suit  or  proceeding  has  been instituted or is instituted, or such claim  or question has arisen or arises or such applica- tion has been made or is made before or  after the  order for the winding up of the  company, or  before  or after the commencement  of   the Companies (Amendment) Act, 1960. 969 (3)  Any suit or proceeding by or  against the  company  which is pending  in  any  Court other than that in which the winding up of the company  is  proceeding may, notwithstanding anything        contained in any other law  for the time being in force, be transferred to and disposed of by that Court. (4)  Nothing in sub-section (1)  or  sub- section

(3) shall apply  to any proceeding  pending  in  appeal before the Supreme Court or a High Court”. Sections 442 and 446 of the Act have to be read  together. It  is only where the object of the two sections, when  read together,  is  served by a stay order that the  stay  order could be justified.  That object is  to expeditiously decide and  dispose of pending claims in the course of  winding  up proceedings.   A stay is not to be granted if the object  of applying for it appears to be, as it does in the case before us, merely to delay adjudication on a claim, and, thereby to defeat  justice.  In other words, a stay order, under   sec- tion   442,cannot be made mechanically, or, as a  matter  of course,  on showing fulfilment of some fixed and  prescribed conditions.  It can only be made judiciously upon an  exami- nation of the totality of the facts which very from case  to case.   It  follows  that the order to be  passed   must  be discretionary  and the power to pass it must, therefore,  be directory and not mandatory.

In other words  the word” used before “stay” in section 442 of the Act really means may and not “must” or “shall” in such a context. In fact it is quite accurate to say that the word “may” by itself, acquires  the meaning’ of “must” or “shall”  sometimes. This word however, always  signifies  a conferment of power.  That  power  may, having  regard  to the context in which it occurs,  and  the requirements contemplated for its exercise, have annexed  to it an obligation which compels its exercise in a certain way on  facts  and circumstances from which  the  obligation  to exercise  it in that way arises.  In other words, it is  the context which can attach the obligation to the power compel- ling its exercise in a certain way.  The context, both legal and factual, may impart to the power that obligatoriness. Thus,    the question to be determined in such cases  always is,whether the power conferred by the use of the word  “may” has, annexed to it, an obligation that, on the fulfilment of certain  legally prescribed conditions, to be shown by  evi- dence,  a  particular kind of order must be  made.

If  the statute  leaves no room for discretion the power has  to  be exercised in the manner indicated by the other legal  provi- sions which provide the legal context.  Even  then the facts must  establish that the legal conditions are fulfilled:   A power  is exercised even when the Court rejects an  applica- tion  to  exercise  it in the particular way  in  which  the applicant  desires it to be exercised.  Where the  power  is wide enough to cover both an acceptance and a refusal of  an application  for  its  exercise,  depending  upon facts,  it is directory or discretionary.  It is not the conferment  of a  power  which the word “may” indicates  that  annexes  any obligation to its exercise but the legal and factual context of it.

This, as we 970 understand it, was the principal laid down in the case cited before  us: Frederic. Guilder Julius v. The Right  Rev.  The Lord  Bishop  of Oxford; The Rev. Thomas Thellusson  Carter. (1) Dr. Julius,  in the case mentioned above, had  made  an application to the Bishop of Oxford against the Rector of  a parish,  asking the Bishop to issue a commission  under  the Church  Discipline Act to enquire against  certain  unautho- rised deviations from the ritual in a Church by the. Rector. The relevant statute merely conferred a power by laying down that “it shall be lawful” to issue a commission. The  Courts of Queens Bench and of Appeal in England had differed on the question whether a mandamus from the Court could  go  to the Bishop commanding him to. issue a commission for the purpose of  making  the enquiry.  The House of Lords held  that  the power to issue the commission was not coupled with a duty to exercise it in every case although there may be cases  where duties towards members of the public to exercise a power may also  be coupled with a duty to exercise it in a  particular way  on  fulfilment of certain  specified  conditions.   The statute  considered there had not  specified   those  condi- tions.  Hence, it was a bare power to issue or not to  issue the commission.  Lord Blackburn said: (at p. 241 ):

“I do not think the words ‘it shall  be lawful’  are in themselves ambiguous  at  all. They are apt words to express that a power  is given;  and  as, prima facie, the donee  of  a power  may  either  exercise it  or  leave  it unused,  it  is not inaccurate  to  say  that, prima  facie,  they are equivalent  to  saying that  the donee may do it; but if the  object for  which the power is conferred is  for the purpose  of enforcing a right, there may be  a duty cast on the donee of the power, to  exer- cise it for the benefit of those who have that right,  when required on their behalf. Where there is such a duty, it is not  inaccu- rate  to   say that the  words  conferring  the power  are  equivalent  to  saying  that the donee  must exercise it. It by no means  fol- lows   that  because there is a duty  cast  on the  donee  of a power to exercise  it,  that mandamus  lies to enforce it: that depends  on the nature of the duty and the position of the donee”. The principle laid down above has been followed consist- ently by this Court whenever it has been contended that  the word  “may”  carries with it the obligation  to  exercise  a power in a particular manner or direction.

In such a  case, it is always the purpose of the power which has to be  exam- ined  in  order  to determine the scope  of  the  discretion conferred upon the donee of the power.  If the conditions in which  the power is to be exercised in particular cases  are also specified by a statute then, on the fulfilment of those conditions, the power conferred becomes annexed with a  duty to  exercise  it in that manner.  This is the  principle  we deduce from the cases of this Court cited before us:  Bhaiya Punjalal Bhagwandin v. (1) 5 A.C. 214. 971 Dave Bhagwatprasad Prabhuprasad,(1)  State of Uttar  Pradesh v.  Jogendra Singh,(2) Sardar Govindrao & Ors. v.  State  of M.P.,(3))  Shri  A. C.Aggarwal.  Sub-Divisional  Magistrate, Delhi  & Anr, v. Smt. Ram Kali etc.,(4) Bashira v. State  of U.P.,(5) and Prakash  Chand Agarwal & Ors. v. M/s. Hindustan Steel Ltd.

(6) In the  statutory  provision  under  consideration  now before  us the power to stay a  proceeding is  not   annexed with the  obligation to necessarily stay on proof of certain conditions although there are conditions prescribed for  the making  of  the application for stay and the  period  during which  the  power to stay can be  exercised.   The  question whether  it should, on the facts of a particular  case,   be exercised or not ‘will have to be examined and then  decided by  the  Court  to which the application is  made.   If  the applicant  can make out, on facts, that the objects  of  the power  conferred by ss. 442 and 446 of the Act, can only  be carried out by a stay order, it could perhaps be urged  that an obligation to do so has become annexed to it by proof  of those facts.  That would be  the  position  not because  the word “may” itself must be equated with “shall”  but  because judicial  power  has  necessarily to  be  exercised  justly, properly,  and  reasonably  to enforce  the  principle  that fights created must be enforced. In      the  case before us, the only right which  could  be said  to  have  been created is the right  to  get  speedier adjudication from the Court where the winding up  proceeding is taking place.  That is the object of the provisions.   On facts disclosed in this case,

we find that the  application seems  to have been made with the object of  delaying  deci- sions  on  claims made.  In such a case, there could  be  no doubt that the application should  be rejected  outright  as the learned Company Judge did. Secondly, an attempt was made to urge that the power  to grant or not to grant or to grant a stay upon certain condi- tions,  assuming  the power to be discretionary,  is  to  be exercised by the Courts in which that discretion is  vested, this Court should not interfere with the exercise of discre- tion by the Division Bench to which an appeal from the order of  the Company  Judge lay.  The  effective answer  to  this contention  is that, where the  learned Company   Judge  had himself  exercised his discretion on a correct  appreciation of  the object of the provisions of ss. 442 and 446  of  the Act, even though he did not state the object or refer to all the facts, the Appellate Court should not have interfered by granting  a  conditional  stay   without  giving  sufficient reasons to over-ride the discretion  of the  learned Company Judge to refuse stay.  We think that a question of general (1) [19631 3 S.C.R. 312. (2) [1964] 2 S.C.R. 197. (3) [1965] 1 S.C.R. 678. (4) [1968] 1 S.C.R. 205. (5) [1969] 1 S.C.R. 32.

(6) [1972] 1 S.C.R. 405. 14–206SCI/77 972 principle arises in this case which has to be clarified   so that  an interference by this Court under Article 136 of the Constitution, in order to vindicate a correct principle  and to meet the ends of justice, is called for. Thirdly,  learned counsel for the  respondent  submitted that  the order under appeal before us is not final so  that we need not interfere under Art. 136 of the Constitution for this  reason.   It is true that, this Court does not,  as  a rule,  interfere  with   interlocutory  orders.  It  is  not necessary for us to embark on this occasion on a  discussion of  the meaning of a  “final” order.  That is   certainly  a question fraught with difficulties.  It is sufficient for us to observe that our powers of interference under Art. 136 of the  Constitution  are not confined to those in  respect  of final orders, although finality of an order is a test  which this  Court generally  applies  in  considering  whether  it should interfere under Art. 136 of the Constitution with it. We  think that we have indicated sufficiently why,   despite the  fact that an order staying proceedings under s.  442(b) of  the  Act may not, strictly speaking, be  final,  yet,  a question of general principle of wide application, as to the circumstances in which an apparently discretionary power may become  annexed with a duty to exercise it in  a  particular way,  having arisen here, we consider this to be a fit  case for interference under Article 136 of the Constitution. Consequently,  we  allow this appeal and set  aside      the judgment and order of the Division Bench and restore that of the  learned Company Judge.  The parties will bear their own costs. S.R.

Appeal allowed. 973

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