Companies Act Case Law Harihar Nath & Ors Vs State Bank of India & Ors

CASE NO.:
Appeal (civil) 5072 of 1998

PETITIONER:
Harihar Nath & Ors

RESPONDENT:
State Bank of India & Ors

DATE OF JUDGMENT: 04/04/2006

BENCH:
Arun Kumar & R. V. Raveendran

JUDGMENT:
J U D G M E N T

 

RAVEENDRAN, J.

 

This appeal directed against the order dated 1.9.1997 of
the Patna High Court in LPA No.259/1996, relates to the
applicability of Article 137 of Limitation Act, 1963 to a petition
under Section 446(1) of the Companies Act, 1956, seeking
leave of the Company Court to proceed with a pending suit.

2. Nalanda Ceramic & Industries Ltd. (second respondent
herein, referred to as ‘the Company’) was a company
incorporated under the Companies Act, 1956 (for short ‘the
Act’). Appellant Nos.1 to 3 were its Directors. The Company
had obtained certain credit facilities from the State Bank of
India (first respondent herein and referred to as ‘the Bank’).
The loans were secured by mortgage of the assets of the
Company. The repayment of the amounts advanced to the
Company was guaranteed by the appellants. On 28.11.1988, the
Bank filed a suit (Title Mortgage Suit No.150/1988 on the file
of the Special Subordinate Judge, Ranchi) against the Company
(defendant No.1), the appellants (defendants 2 to 4), and four
others namely, State of Bihar, Bihar State Financial
Corporation, I.F.C.I. and IDBI (defendant Nos.5 to 8). In the
said suit, the Bank sought a decree for Rs.5,95,98,258.31
against defendants 1 to 4 (the company and the appellants) with
interest thereon and several ancillary and consequential reliefs.

3. Even prior to the said suit, other creditors had filed
petitions for winding up of the Company, in Company Petition
Nos.1/79, 2/79 and 4/79 on the file of the Patna High Court,
alleging that it was unable to pay its debts. During the pendency
of the said company petitions, a notification dated 16.4.1984
was issued under the Bihar Relief Undertakings (Special
Provisions) Act, 1982, declaring the Company as a relief
undertaking, thereby preventing further progress of the
petitions for winding-up. As the company became sick, a
reference was also made to the Board for Industrial & Financial
Reconstruction which directed an inquiry under Section 16 of
the Sick Industrial Companies (Special Provisions) Act, 1985
(for short ‘SIC Act’). In view of the said reference, the first
appellant (second defendant in the suit), filed an application on
16.9.1989 in the Bank’s suit under Section 22 of the SIC Act,
for stay of further proceedings in the suit.

4. The Bank resisted the said application, inter alia, on the
ground that Section 22 of SIC Act had the effect of staying only
proceedings in the nature of winding-up and execution and did
not come in the way of progress of any suit for recovery of
money due by the Company by enforcing the security.

5. When matters stood thus, an order for winding up the
company was passed by the High Court on 24.10.1989. When
the said order came to its knowledge, the Bank filed a further
objection to the application under Section 22 of the SIC Act,
contending that Section 22 of the SIC Act will not apply in
view of the order for winding up. The Bank also submitted that
having regard to Section 446(1) of the Act, it required the leave
of the court only to proceed against the company, but there was
no bar for proceeding against the other defendants. The Bank,
therefore, prayed for dismissal of the application for stay (filed
by appellant No.1 herein) and further prayed that while the
proceedings as against the first defendant company may be kept
in abeyance, the suit may be proceeded with against the other
defendants.

6. The trial court disposed of the application by an order
dated 9.3.1990. It rejected the application filed by second
defendant (appellant No.1 herein) for staying the suit under
Section 22 of the SIC Act. It, however, held that the suit against
all the defendants will have to be stayed in view of the order of
winding up. It was of the view that the liability to pay the
amount due was on the principal-debtor, namely, the Company,
and that the guarantors would be liable only if the Company
defaulted; and that, therefore, if the proceedings against the
Company had to be stayed, it had also to be kept in abeyance
against all defendants till the Bank obtained an appropriate
direction from the High Court. The Bank challenged the said
order in CRP No.388/1990 before the High Court.

7. When the Company Court was informed that an inquiry
under Section 16 of the SIC Act had been directed by the BIFR,
it passed an order on 16.7.1990, staying the operation of the
order of winding up dated 24.10.1989. The said stay order dated
16.7.1990 was vacated subsequently by the Company Court on
16.12.1994 and the winding up order was revived.

8. The Bank withdrew its revision petition (CRP
No.388/1990) on 4.4.1995. Thereafter, on 11.8.1995, the Bank
filed an application under Section 446(1) of the Act, seeking
leave of the Company Court to proceed with its suit. The said
application was resisted by the appellants herein, inter alia, on
the ground that the application seeking leave was barred under
Article 137 of the Limitation Act, 1963. The appellants
contended that the application ought to have been filed within 3
years from the date of winding up, that is, on or before
24.10.1992 and the application filed on 11.8.1995 was barred
by limitation.

9. The Company Court by order dated 17.9.1996 granted
leave to proceed with the suit. The Company Court was of the
view that though Article 137 of the Limitation Act was
applicable to an application under Section 446(1) of the Act,
the provision relating to limitation should be construed liberally
and the period could be extended in exercise of judicial
discretion even suo moto. It condoned the delay in filing the
application for leave, being satisfied that there were sufficient
causes for the delay, first being the stay of winding up between
16.7.1990 and 16.12.1994 (in view of the inquiry under Section
16 of the SIC Act) and the second being the prosecution of the
revision petition (CRP No.388/1990) from 1990 till its
withdrawal on 4.4.1995. The grant of leave was, however, made
subject to the condition that even if a decree was granted in the
suit, jointly and severally against various defendants, the Bank
should proceed to get the decree satisfied from other
defendants, and if the decree was not fully satisfied, then the
matter may be brought to its notice for proceeding against the
Company for realization of residuary decretal dues. Feeling
aggrieved by the said order granting leave, the appellants herein
filed LPA No.259 of 1996. A Division Bench of the High Court
dismissed the appeal by order dated 1.9.1997. The said order is
challenged in this appeal by special leave.

10. Learned counsel for the appellants urged the following
contentions :
(i) An application for grant of leave under Section
446(1) of the Act was governed by Article 137 of
the Limitation Act, 1963. Therefore, the
application by the Bank seeking leave to proceed
with the suit ought to have been filed within 3
years from the date when the right to apply
accrued. The right to apply accrued on 24.10.1989
when the order of winding up was passed.
Therefore, the last date for filing an application
seeking leave was 24.10.1992 and the application
filed on 11.8.1995 was barred by limitation.

The Company Court erred in condoning the delay
by exercising power under Section 5 of the
Limitation Act, 1963 suo moto, in the absence of
an application seeking condonation of delay.

(ii) Even if leave was to be granted, there was no
justification for directing that the decretal amount
should be recovered from the guarantors and only
if there was any deficit, it should be recovered
from the company.

Contention (i) :
11. Sub-section (1) of Section 446 as it stood to the relevant
point of time provided that 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. Sub-section (2) of the said section provided that the
court which is winding up the company shall, notwithstanding
anything contained 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 company; (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. The claims against a company made directly to
the winding up Court under Section 446(2)(b) of the Act,
present no difficulty. Section 3(2)(a)(iii) of Limitation Act,
1963 provides that in the case of a claim against a company
which is being wound up, for the purposes of the Limitation
Act, a suit is instituted when the claimant first sends in his
claim to the official liquidator. The period of limitation would
be, of course, as prescribed in the Schedule for the appropriate
suit or proceedings.

12. Sub-section (1) of section 446 of the Act contemplated
two categories of applications for leave being filed before the
Company Court. They are :

(i) Applications seeking leave to file a suit or commence a
legal proeeding against the company, after an order for
its winding up has been made.

(ii) Applications seeking leave to proceed with a pending
suit or legal proceeding against a company, filed or
initiated before the order for winding up of such
company.

Neither the Companies Act, 1956 nor the rules
thereunder prescribe any period of limitation for applications
under Section 446(1) of the Act. Article 137 of Limitation Act,
1963, prescribes a three year period of limitation in regard to
any application for which no period of limitation is provided.
The issue whether Article 137 will apply only to application
filed under the Code of Civil Procedure or to applications filed
under any Act, was settled in Kerala State Electricity Board vs.
T. P. Kunhaliumma [AIR 1977 SC 282]. This Court held :

“Any other application” under Article 137 would be a
petition or any application under any Act. But it has to be
an application to a court The conclusion we reach is
that Article 137 of the 1963 Limitation Act will apply to
any petition or application filed under any Act to a civil
court. With respect we differ from the view taken by the
two Judge Bench of this Court in Athani Municipal Council
case (AIR 1969 SC 1335) and hold that Article 137 of the
1963 Limitation Act is not confined to applications
contemplated by or under the Code of Civil Procedure.”
The said view was reiterated in Additional Special Land
Acquisition Officer v. Thakoredas (AIR 1994 SC 2227). But the
question is whether Article 137 would apply to an application
under section 446(1) of the Act.

13. Insofar as the first category of applications under Section
446(1) of the Act, there is no question of any period of
limitation. The period of limitation is to be calculated, not with
regard to the application seeking leave to file a suit or
proceeding, but in regard to the suit/proceeding itself. An
illustration may clarify. If the proposed suit is to enforce
payment of money secured by a mortgage by the company, the
period of limitation for such suit is 12 years. Surely an
application seeking leave to file such suit, cannot be rejected by
applying Article 137 on the ground three years have elapsed
from the date of the order of winding up, even though the 12
years period for filing the suit has not expired. So long as the
suit is within time as on the date of filing the application for
leave, the application will be entertained. While computing the
period of limitation for the suit/proceeding, the time spent in
obtaining leave to file the suit/proceeding will have to be
excluded by applying the principle underlying Section 15(2) of
Limitation Act, 1963. Section 15(2) of Limitation Act provides
that in computing the period of limitation for any suit of which
notice has been given, or for which the previous consent or
sanction of the government or any other authority is required, in
accordance with the requirements of any law for the time being
in force, the period of such notice or, as the case maybe, the
time required for obtaining such consent or sanction shall be
excluded. We may note that the Company Court may not
examine the question of limitation for the suit or proceeding,
leaving it to be dealt with by the court where such
suit/proceeding is to be initiated.

14. This Court in Bansidhar Sankarlal vs. Md. Ibrahim [AIR
1971 SC 1292] indirectly affirmed the position that the
limitation is to be considered only with reference to the suit or
proceedings, while considering the position of suit/proceeding
initiated after an order of winding up, without obtaining leave
of the Company Court. This Court held thus :

“..we do not think that there is anything in the Act
which makes the leave a condition precedent to the
institution of a proceeding in execution of a decree against
the company and failure to obtain leave before institution
of the proceeding entails dismissal of the proceeding. The
suit or proceeding instituted without leave of the court may,
in our judgment, be regarded as ineffective until leave is
obtained, but once leave is obtained, proceeding will be
deemed to be instituted on the date of granting leave.”
(emphasis supplied)

15. When there is no period of limitation for an application
under the first category of cases under Section 446(1) of the
Act, it is inconceivable and illogical to apply the period of
limitation prescribed under Article 137, to an application
seeking leave falling under the second category.

16. The object of Section 446 of the Act is not to cancel,
nullify or abate any claim against the company. Its object is to
save the company which has been ordered to be wound up,
from unnecessary litigation and from multiplicity of
proceedings and protect the assets for equitable distribution
among its creditors and shareholders. This object is achieved by
compelling the creditors and others to come to the court which
is winding up the company and prove their claims in the
winding up. For this purpose, all suits and proceedings pending
against the company are also stayed subject to the discretion of
the winding up court to allow such suits and proceedings to
proceed. When a winding up order is passed, the effect is that
all the affairs pertaining to the company in liquidation,
including all suits/proceedings by or against the company, come
within the control and supervision of the winding up court. The
winding up court has to decide whether it will let the
suit/proceeding to continue in the court where it is pending, or
it will itself adjudicate the suit/proceeding. Thus, under Section
446(1), the winding up court only decides about the forum
where the suit has to be tried and disposed of. The Limitation
Act which prescribes the periods within which a party can
approach a court seeking remedies for various causes of action,
is not attracted to such applications under Section 446(1) of the
Act. However, as elaborate arguments were advanced on this
issue, we will deal with it in some more detail.

17. An application seeking leave to proceed, in respect of a
pending suit or proceeding (filed before the order of winding
up) is not an application for enforcement of any claim or right.
It does not seek any ‘relief’ or ‘remedy’ with reference to any
claim or right or obligation or liability. It is an application
which is interlocutory in nature. An interlocutory application is
not subject to any period of limitation, unless otherwise
specifically provided by law. We are conscious of the fact that
an application under Section 446(1) seeking leave to proceed
with the suit/proceeding, is not filed as an ‘interlocutory
application’ in the suit/proceeding before the court where such
suit/proceeding is pending. But an interlocutory application is
nothing but an application in the course of an action. It is a
request made to a court, for its interference, in a matter arising
in the progress of a proceeding. Therefore, in a broad sense, the
application under section 446(1) filed before the company court
seeking leave to proceed with a pending suit or proceeding, is
an ‘interlocutory application’ with reference to the pending
suit/proceeding. Article 137 is intended to apply to applications
for enforcement of a claim or adjudication of a right or liability
in a court. An application for leave to proceed with a pending
suit or proceeding not being such an application for any relief,
will not attract Article 137.

18. It is now well settled that if any winding up order is
passed, during the pendency of a suit against the company, and
if the suit is continued without obtaining leave, in spite of that
bar contained in section 446(1), the decree passed is only
voidable at the instance of the liquidator, and not void ab initio.
In fact, where such decree has been passed against the
company and others, the only person who can avoid the decree
on the ground of non-compliance with section 446(1) of the
Act, is the official liquidator of the company and not the other
defendants. A suit/proceeding filed against a company, prior to
the order of its winding up, does not come to an end on the
passing of an order of winding up. The order of winding up
merely stays further proceedings in the suit/proceeding. The
suit/proceeding becomes dormant. Various alternatives are
possible when a suit gets so stayed. The plaintiff in the suit can
move an application under section 446(1) of the Act, and when
leave is granted, proceed with the suit. If the leave is refused,
the suit may be transferred to the company court for being tried
and disposed of under section 446 (2) (a) of the Act. The
plaintiff may also file an application for transfer of the suit to
the Company Court for disposal under Section 446(2)(a).
Alternatively, the plaintiff may get the suit dismissed with
liberty to make a claim under section 446(2)(b) of the Act. Even
if the suit is proceeded with, without obtaining leave of the
Company Court, either not being aware of the order of winding
up or ignoring the provisions of section 446(1), the resultant
decree will not be void, but only be voidable at the instance
and option of the official liquidator of the company. It is also
possible that the court passing the winding up order may at any
time, on the application either of the liquidator or of any
creditor or contributory, make an order staying the winding up
either altogether or for a limited time on such terms and
conditions as the court deems fit, under section 466 of the Act.
When the winding up is so stayed, a suit against the company
(filed before the winding up order) which stood stayed under
section 446(1) could be proceeded with, even though leave had
not been obtained to proceed with the suit. We have referred to
these alternative possibilities to show that having regard to the
nature of an application under Section 446(1) of the Act, it does
not attract Article 137.

19. We may next examine the position by even assuming
that Article 137 applied to an application under section 446(1)
for leave to proceed with a pending suit. Article 137 is a
residuary provision applicable to all applications and petitions
filed in a court, for which no period of limitation is prescribed.
It prescribes a limitation of three years and the period of
limitation begins to run when the “right to apply accrues”. To
understand the meaning of the words “right to apply accrues”,
we may refer to the wording of Article 137 and a few other
Articles in the Schedule to the Limitation Act :

Article
No.
Description of suit
Period of
Limitation
Time from which
period begins to
run

137
Any other application for which no
period of limitation is provided
elsewhere in this division.

3 years
When the right to
apply accrues.
113
Any suit for which no period of
limitation is provided elsewhere in
this Schedule.
3 years
When the right to
sue accrues.
58
To obtain any other declaration.
3 years
When the right to
sue first accrues.
104
To establish a periodically recurring
right.
3 years
When the plaintiff
is first refused the
enjoyment of the
right.

 

Article 58 provides that the time will begin to run when the
“right to sue first accrues”. Article 104 provides that time will
begin to run when ‘the plaintiff is first refused’ the enjoyment
of the right. On the other hand, Article 137 uses the words
when the “right to apply accrues” and is similar to Article 113.
A suit, which is filed prior to the order of winding up and
pending on the date of winding up, gets stayed when an order of
winding up is passed. An order of winding up does not create
any ‘right’ to file an application under Section 446(1) of the
Act. Nor does any right ‘accrue’ to a plaintiff/petitioner in a
suit/proceeding to file an application under Section 446(1),
when an order of winding up is passed. On the other hand,
passing of an order of winding up casts a duty or obligation on
the person who has sued the company to obtain the leave of the
court to proceed with his suit for proceeding. The right to apply
for leave accrues, not because of the order of winding up, but
because the suit/proceeding is stayed. The right to apply for
grant of leave under Section 446 (1) accrues every moment the
suit remains stayed. Consequently, it follows that as long as the
suit/proceeding (filed before the order of winding up) remains
stayed, an application for leave can be filed. Therefore, the
application filed on 11.8.1995 was in time and not barred by
limitation, even if Article 137 is applied.

Re : Contention (ii)
20. Learned counsel for the appellant submitted that there
was no justification for the court to direct that the decretal
amount should be recovered from the guarantors first and only
if there was any deficit, it should be recovered from the
company in liquidation. Learned counsel for the Bank and the
Official Liquidator fairly conceded that there was no reason or
justification for imposing such a condition, having regard to the
legal position that the liability of the principal-debtor and
guarantors is joint or several. There is no question of directing
the amount to be first recovered from the guarantors. The
creditor has the option of recovering the amount in the mannfer
he deems fit. Though the company court has the power while
granting leave, to impose conditions, such conditions can be
imposed only for good and valid reasons. The terms imposed
cannot affect the rights of third parties nor impose an obligation
contrary to law. Therefore, the condition imposed while
granting leave is deleted.

Conclusion :

21. In the present case, the suit was against the company as
well as its Directors being guarantors in their personal capacity.
The suit could have in any case proceeded against the
guarantors. It was stayed by the trial court apparently under
Section 446(1) even though there was no such prayer to that
effect. The only prayer before the Court at the instance of first
defendant in the suit for stay of suit under Section 22 of SIC
Act which was not granted. The object of appellants in filing an
application for stay was to drag on the suit. They have
succeeded in their effort to stall the suit for more than 16 years
on a virtually non-existent ground. The trial court will,
therefore, have to proceed with the suit with all expedition.

22. In view of the above, subject to the deletion of the
condition imposed by company court while granting leave, this
appeal is dismissed upholding the grant of leave. Parties to bear
their respective costs.

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