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Judgment
Palaniswamy, J.—These two applications raise a common question of law. The question is whether, u/s 446 of the Companies Act, 1956,
leave to proceed with a proceeding against a company in liquidation can be granted, even though the proceeding was instituted after the passing of
the winding-up order. Messrs. Associated Industrial and Engineering Corporation Ltd. has been in C.P. No. 2 of 1970 ordered on April 3, 1970,
to be wound up. Messrs. Shankar Service Station, a partnership concern doing business at Ranipet, Bellary District, Mysore State, claiming to
have supplied petrol, oil, etc., to that company to the value of Rs. 9,946, instituted O.S. No. 86 of 1970 on the file of the Principal District
Munsiff, Hospet, on April 18, 1970, without obtaining leave of this court to institute that suit. On coming to know of the order of winding-up, the
plaintiff-firm has taken out Application No. 238 of 1970, praying for leave to continue the said suit or in the alternative to transfer that suit to the
file of this court for disposal.
Messrs. Gannon Dunkerley and Company Ltd. has been in C.P. No. 83 of 1968 ordered by this court to be wound up by order dated March
14, 1969. One Ekambaram, an employee of that company, has filed Claim Petition No. 344 of 1969 on the file of the Labour Court, Madras, u/s
33-C(2) of the Industrial Disputes Act, 1947, praying for an award for Rs. 3,311 said to be due to him by way of salary, etc. Before instituting
that claim petition, he did not obtain the leave of this court. On coming to know about the winding-up order, he has filed Company Application
No. 404 of 1970 praying that leave may be granted to continue the said claim petition.
The official liquidator opposes these applications contending that as the aforesaid proceedings were instituted after the respective company was
ordered to be wound up and as the leave of this court was not obtained before the commencement of those proceedings, leave cannot be granted
to proceed with those proceedings. A similar question arose before me in C.P. No. 23 of 1958, in which a private limited company had been
ordered to be wound up. Claiming the company''s assets as an item of joint family property, some members of a Hindu joint family instituted a
partition suit, impleading, among others, the official liquidator as a defendant, but without obtaining the leave of the court. On the objection taken
by the official liquidator that the suit was not competent, inasmuch as the leave of the court was not obtained, the plaintiffs in that partition suit
moved this court for leave to continue the suit. On a consideration of Section 446 and the authorities, I held that the suit instituted without obtaining
the prior leave of the court was incompetent and leave could not be granted to enable the continuation of the suit. That decision is reported in Sri
Murugan Oil Industries Private Ltd., In re [1970] 40 Comp. Cas. 77 (Mad). After I rendered that judgment, the Supreme Court in Bansidhar
Shankarlal Vs. Mohd. Ibrahim and Another, . had to consider a case arising under the Companies Act of 1913, in which the provision regarding
taking leave of the court before institution of proceedings against a company in liquidation was enacted in Section 171. In that case, leave was
granted to continue an execution petition filed against a company in liquidation after the liquidation order. The party aggrieved by that grant of leave
failed in first appeal and second appeal and the High Court of Calcutta refused to certify the appeal under Article 133 of the Constitution, after
dismissing the second appeal filed by the said aggrieved person. That person filed two petitions before the Supreme Court, one against the order
dismissing his second appeal and the other against the order of the High Court refusing to certify. The Supreme Court dismissed the petition against
the order of the High Court in second appeal but granted special leave against the order of the High Court refusing to certify the case. In dealing
with that case, the Supreme Court incidentally considered the question whether leave could be granted u/s 171 of the Companies Act, 1913, so as
to validate the institution of the proceeding without taking the prior leave of the court. Construing Section 171 of the old Act, the Supreme Court
held that there was nothing in that section to make the leave a condition precedent to the institution of a proceeding and that failure to obtain leave
before institution of the proceeding would not entail the dismissal of the proceeding. In view of this decision it was contended on behalf of the
applicants in these cases before me that my decision already referred to would require reconsideration. It is in these circumstances that these
applications have come up for consideration before me.
For a proper understanding of the decision of the Supreme Court in relation to Section 446 of the Companies Act, 1956, it is necessary to have
a comparative study of Section 171 of the 1913 Act, to which that decision relates, and Section 446 of the 1956 Act. Section 171 of the 1913
Act was modelled on Section 231 of the English Companies Act, 1948. For easy reference the following table would be useful:
1956 Act. 1913 Act. English Act of 1948.
Suits Stayed on 171 . Suits stayed on 231. Actions stayed on
winding order.- (I) When a winding-up order. - When a winding-up order. - When a
winding up order has been made winding-up order has been made winding-up order has been
or the official liquidator has been (or a provisional liquidator has made or a provisional liquidator
appointed as provisional been appointed) no suit or other has been appointed, no action or
liquidator, no suit or other legal legal proceeding shall be proceeding shall be proceeded
proceeding shall be commenced, proceeded with or commenced with or commenced against the
or if pending at the date of the against the company except by company except by leave of the
winding-up order, shall be leave of the court, and subject court and subject to such terms
proceeded with, against the to such terms as the court may as the court may impose.
company, except by leave of the impose.
court and subject to such terms
as the court may impose...
Section 171 of the 1913 Act has been construed in two ways. The Calcutta High Court in Harnarain Misra v. Kanhaiyalal Lohawala, [1940] 10
Comp. Cas. 146 (Cal.) and the Andhra Pradesh High Court in Godavari Sugars and Refineries Ltd. v. Kambhampati Gopalakrishnamurthy,
[1960] 30 Comp. Cas. 104 (A.P.) took the view that the leave of the court which has ordered winding up of a company is a condition precedent
to the institution of proceedings against the company in liquidation and that proceedings instituted without obtaining the leave of the court in the first
instance must be dismissed. The Allahabad High Court in People''s Industrial Bank, Ltd. Vs. Ram Chander Shukul and Others, took a contrary
view and held that leave was not a condition precedent. A Full Bench of the Lahore High Court in Nazir Ahmad v. Offi. Liq., People''s Bank of
Northern India, [1943] 13 Comp. Cas. 1 (Lah.) overruling a Bench decision of that court in People''s Bank of Northern India (In liquidation) v.
Fatehchand & Co. Ltd. (In liquidation), [1936] 6 Comp. Cas. 48 (Lah.) took a similar view and observed that, since the words used in Section
171 were borrowed from English law, where those words had recognised a particular legal meaning, it should be assumed that the same meaning
was assigned to those words in the Indian Companies Act, 1913, and that a suit instituted against a company in liquidation without obtaining prior
leave u/s 171 should not be dismissed on that ground alone. The Full Bench held that limitation should be calculated in the same way as if the suit
had been originally instituted with leave.
In Suresh Chandra Khasnabish v. Bank of Calcutta Ltd., [1951] 21 Comp. Cas. 110 (Cal.) a Bench of the Calcutta High Court, dissenting
from its earlier view taken by a single judge in Harnarain Misra v. Kanhaiyalal Lohawala and following the aforesaid Full Bench decision of the
Lahore High Court, held that u/s 171 of the 1913 Act the court had jurisdiction to grant leave to proceed with the suit or other legal proceeding
against a company in liquidation even though such leave was not obtained before the commencement of such suit or proceeding. But in that case
the leave was asked for by a secured creditor in respect of money due to him. The same view was followed by that High Court in Roopnarain
Ramchandra Private Ltd. Vs. Brahmapootra Tea Co. (India) Ltd. and Another, .
In Balaji Patekar v. Official Liquidator, [1967] 2 Comp. L.J. 262 (All.) the suit was instituted against a company in liquidation and others
without obtaining the prior leave of the court u/s 446 of the 1956 Act. On the objection taken by the official liquidator, the plaintiffs applied for
leave. But, by then, limitation for instituting a suit had run out. A single judge of the Allahabad High Court dismissed that application holding that,
inasmuch as the suit had become barred by time on the date of the application, leave could not be granted. But, at the same time, the learned judge
observed that though a literal interpretation of Section 446 would bar the suit against the firm since the requisite leave had not been obtained prior
to its commencement, there was abundant authority for the proposition that leave could be obtained even after the institution of the suit. He came
to that view by observing that a suit instituted without leave remained dormant and could come into life only when the leave of court was sought for
and given and therefore leave must be sought for at a time when the suit was still within time and that otherwise it would be that leave would be
granted to commence a time-barred suit which it could not do.
Section 171 of the 1913 Act does not make a distinction between a proceeding commenced before the winding-up order and a proceeding
commenced after the winding-up order. In respect of both categories of proceedings that section says that it shall not be commenced or
proceeded with except by leave of the court. The language used in Section 171 is capable of the inference that there are two stages at which the
party could ask for the leave of the court after a company is ordered to be wound up. He may before commencing the proceeding seek the leave
of the court for the purpose of commencement of the proceeding. If leave is granted in such a case, there would be compliance with Section 171.
But if the proceeding is commenced without obtaining the leave of the court in the first instance, is he without a remedy for the purpose of
proceeding with the proceeding ? If he wants to proceed with that proceeding, he can ask for the leave of the court and there is no bar to grant
such leave, having regard to the language used in Section 171. That section does not say that the proceeding should have been pending to apply
for leave to proceed with the proceeding. Though the commencement without prior leave would be in violation of Section 171, the continuance of
such proceeding with the leave of the court would be in compliance of that section.
As already pointed out, in the case before the Supreme Court in Bansidhar Shankarlal v. Mohd. Ibrahim, leave to continue the execution
proceeding was granted by the company judge, even though prior to the institution of the execution proceeding the concerned company had been
ordered to be wound up. The validity of the grant of such leave was confirmed in the first appeal and second appeal. The Supreme Court rejected
the application filed against that order, but granted leave against the order of the High Court refusing to certify the case. In considering that
application, Shah J., as he then was, speaking for the court, observed at page 25 :
......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 that 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
the proceeding will be deemed instituted on the date granting leave.
His Lordship made this observation with reference to the language employed in Section 171 of the 1913 Act. In that case, the conflicting
decisions of the High Courts referred to above were brought to the notice of his Lordship and having regard to the language of Section 171 the
learned judge observed that both on principle and on the authorities he could not agree with the view that leave was a condition precedent to the
institution of a proceeding. In that connection, the counsel for the appellant submitted that the court was not concerned in that appeal with the
correctness of one or the other of the two conflicting views and that what the court had to consider was only regarding the correctness of the view
of the Calcutta High Court refusing to grant the certificate. In rejecting this contention, the learned judge observed at page 26 :
In our judgment, it would be a futile exercise if we come to the conclusion that the view taken by the High Court on the merits of the case is true,
still to certify the case for appeal. The proposed appeal only involves the question about the maintainability of the execution proceeding
commenced by the plaintiff and against the company in liquidation without leave of the High Court which has ordered the company to be wound
up. We entertain no doubt that the High Court was right in the view it has taken on the merits and the contentions raised.
In view of this clear pronouncement it should be taken that u/s 171 of the 1913 Act leave of the court is not a condition precedent to the
institution of a proceeding and that even if a proceeding is commenced against a company in liquidation without obtaining the leave of the court in
the first instance, leave can be granted to proceed with the proceeding.
The question is whether the aforesaid principle should be applied even to Section 446 of the 1956 Act. In enacting this section, the legislature
has made a substantial change in the law contained in Section 171 of the 1913 Act. The difference in the language of Section 446 and that of
Section 171 calls for careful examination. In Section 171 of the 1913 Act, the word ""commenced"" occurred after the expression "" proceeded
with"". But in Section 446 of the 1956 Act that word precedes the expression "" or if pending at the date of the winding up order "" and thereafter
occurs the expression ""shall be proceeded with"". It is not merely a case of interchanging the places of the words ""commenced "" and ""proceeded
with as occupied by them in Section 171 of the 1913 Act. After making this change, the legislature has also added the expression "" or pending at
the date of the winding-up order "" after the word ""commenced "". Thus, in effecting this change, the legislature has clearly comprehended two
situations. The first is commencement of a suit or other legal proceeding and the second is proceeding with a suit or other legal proceeding if such
suit or proceeding was pending at the date of the winding-up order. In the latter case, the proceeding must be a proceeding pending at the date of
the winding-up order. Only in such a case, the leave of the court for further proceeding with the proceeding would arise. But in the case of a
proceeding to be commenced, there is no question of a proceeding being proceeded with. If a proceeding is commenced without the leave of the
court and subsequent to the commencement, leave is asked for the continuation of that proceeding, it would not be a proceeding pending at the
date of the winding-up order within the meaning of Section 446 of the 1956 Act, and obviously no leave can be granted u/s 446 for that purpose.
This conclusion is irresistible, having regard to the use of the expression ""pending at the date of the winding-up order "". It should be presumed that
the legislature deliberately introduced these words in enacting Section 446 even though Section 171 was in the statute book for several decades.
Construing the plain language adopted by the legislature, it follows that if a proceeding is commenced without obtaining the leave of the court
previously, no leave could be grated for proceeding with that proceeding, as it was not a proceeding pending at the date of the winding-up order.
If it were to be held that even if a proceeding is instituted without the leave of the court, it could be permitted to be proceeded with by granting
leave, then the expression "" if pending at the date of the winding-up order "" would be without any meaning and rendered purposeless. That could
not have been the intention of the legislature in making this change in the law. The obvious intention of the legislature is that leave could be granted
to commence a proceeding only if leave is sought for before the commencement of the proceeding and that leave could be granted to proceed with
a proceeding only if the proceeding was pending at the date of the winding-up order. That is the only rational way of interpreting the language
employed in Section 446.
Mr. Harikrishnan, appearing for the applicant in Company Application No. 328 of 1970, contended that though the change effected in Section
446 may give room for that interpretation, the decision of the Supreme Court seems to lay down the principle that even though a proceeding or a
suit is instituted without the leave of the court, still leave can be granted so as to make it effective at least from the date of the grant of leave. I am
unable to accept this contention. What their Lordships were concerned with was the interpretation of Section 171 of the 1913 Act and there was
no need or occasion for their Lordships to consider the change made in Section 446 of the 1956 Act. I have already pointed out that the language
employed in Section 171 of the 1913 Act is capable of two interpretations, and their Lordships have already pointed out that the language does
not warrant the inference that leave is a condition precedent to the institution of a proceeding. The decision has to be understood only in the light of
the language of Section 171 which arose for consideration and, therefore, I am unable to accept the argument that the same principle should be
applied in interpreting Section 446 of the 1956 Act also. On a plain reading of Section 446 of the 1956 Act, it follows that for commencing a
proceeding against a company in liquidation, leave is a condition precedent and that if a proceeding is commenced against such a company without
obtaining prior leave of the court, no leave can be granted for proceeding with that proceeding, as the leave to proceed with a proceeding can be
granted only if the proceeding was pending on the date of the winding-up order. In the face of the plain language, there is no scope to apply the
theory that, by the grant of leave, the proceeding can be deemed to be commenced on the date of grant of leave. A similar view has been taken by
the Bombay High Court in Eastern Steamship Private Ltd. Vs. Pucto Private Ltd. and Another, . As I have already pointed out in Sri Murugan Oil
Industries Private Ltd., In re, the object of Section 446 is to safeguard the assets of the company in winding up against the wasteful or expensive
litigation in regard to matters capable of being determined expeditiously and cheaply by the winding-up court itself with a view to ensure equitable
distribution of the assets among those entitled thereto and also to prevent the administration from being embarrassed by a scramble among the
creditors and others having rights against the company. It may be that an innocent creditor, not knowing the winding-up order, may institute a
proceeding without obtaining the leave of the court beforehand. On coming to know the winding-up order, he cannot, having regard to the
language of Section 446, ask for leave to proceed with the proceeding, however honestly and bona fide he might have commenced the
proceeding.
The claims of these two applicants are money claims which are provable in liquidation proceedings. They were said to be in time on the date of
commencement of the winding-up proceeding of the respective companies. Therefore, even on considerations of equity, the applicants have no
case to urge. There is no need to transfer to this court the suit filed by the applicant in Application No. 328 of 1970. In the result, both the
applications fail and are dismissed and, in the circumstances, without costs.