Deutsche Bank vs S.P. Kala and another

H.W. Dhabe, J.—This is a company appeal against the judgment of the learned single judge (See Deutsche Bank v. S. P. Kala, Official Liquidator of Sea Transportation Pvt. Ltd. [1991] 67 Comp Cas 474 who has granted leave to the appellant to file a suit against the instant company under liquidation before the company court but has denied the relief claimed by the appellant that he should be allowed to file a suit against the company in the High Court of Bombay on its original side. The contention, therefore, raised in this appeal is that the appellant be allowed to file the suit in the High Court of Bombay on its original side because the said court alone, according to the appellant, has jurisdiction to decide the claim against the third party, viz., the guarantor in the instant case, who is, incidentally, the ex-managing director of the company under the liquidation.

A few facts relevant for considering the contention raised on behalf of the appellant are that the company under liquidation had borrowed from the appellant-bank several amounts of money which, on the date of the application, totalled to Rs. 21,07,251.57 plus interest of Rs. 11,66,178.74. The said loans taken by the company under liquidation from the appellant-bank were guaranteed by Debrata Das, a resident of Bombay and also the ex-director of the company. Since the said guarantor was a resident of Bombay, the appellant-bank intended to file a civil suit in Bombay against the company and the said guarantor. The appellant, therefore, filed an application u/s 446 of the Companies Act seeking leave of the company court to file a civil suit against the company and the said guarantor in the High Court of Bombay on its original side. The said application is registered as Company Application in Liquidation Proceedings No. 8 of 1989 in Company Petition No. 1-S of 1987.

The appellant raised a contention before the learned company judge in the said application that, since a third person, viz., a guarantor, was also a defendant in a suit which the appellant wanted to file against the company, the company court here would not have power and jurisdiction to decide such a suit u/s 446(2) of the Companies Act. He had also urged before the learned company judge that a party of the cause of action had arisen in Bombay and one of the defendants also was a resident of Bombay, and, therefore, such a suit could be filed in the court at Bombay having jurisdiction to try such a suit. The learned company judge negatived both these contentions. He, however, granted leave to the appellant to file a suit before the company court in Goa, i.e., the learned company judge who is assigned the work at the Panaji Bench before whom the winding-up proceedings of the instant company under liquidation would also be continued. Feeling aggrieved, the appellant has preferred the instant company appeal against the aforesaid order of the learned company judge declining him leave to file a suit at Bombay.

The principal question that arises for consideration in this company appeal is about the construction of section 446(2)(a) of the Companies Act. Learned counsel for the appellant has urged before us that, under sub-section (2) of section 446 of the Companies Act read with clause (a) thereof, the company court has jurisdiction to entertain and dispose of a suit or a proceeding which is by or against the company only. The submission is that where the company is only one of the defendants in a suit where there are other defendants also against whom the relief is claimed by the plaintiff, such a suit cannot be entertained or disposed of by the company court.

It is not necessary for us to consider the larger question whether, in each and every suit where in addition to the company there are other defendants, such a suit can be entertained or disposed of by the company court. In the instant case, it is not in dispute that the company is the principal debtor because it is the company which had taken loan from the appellant-bank. The other defendant against whom relief is sought is a guarantor. When specifically asked, learned counsel for the appellant has made it clear to us that the relief is sought and the decree is claimed both against the company and the guarantor. In such a case where the company is the principle debtor and the decree is claimed in the suit against it, the question is whether such a suit can be entertained or disposed of by the company court.

Construing section 446(2) of the Companies Act it may be seen that, in its present form, it was substituted by the Companies (Amendment) Act, 1960, with a view to subserve the object of the winding up of a company. The winding up a company by a court is to facilitate the protection and realisation of its assets with a view to ensure an equitable distribution thereof among those entitled and to prevent the administration from being embarrassed by a general scramble among the creditors and others. Consequently, once the court has taken the assets of a company under its control or has passed an order for its being wound up, it will not be proper to allow proceedings to be started or continued against the company and embarrass the administration of its affairs. The present section is intended to safeguard the assets of a company in winding-up against wasteful or expensive litigation in regard to matters capable of being determined expeditiously and cheaply by the winding-up court itself.

The Supreme Court has, in para 7 of its judgment in the case of Sudarshan Chits (India) Ltd. v. G. Sukumaran Pillai [1985] 58 Comp Cas 633, considered the historical evolution of section 446(2) as well as its present setting and the same in reproduced below for its proper scope and understanding (pp 637, 638) :

"Before we advert to the question of construction of section 446(2)(b), it would be advantageous to notice the historical evolution of the provision as well as its present setting. Section 171 of the Indian Companies Act, 1913, the predecessor of section 446(1), did not contain any provision similar or identical to that of section 446(2). Section 171 provided only for stay of suits and proceedings pending at the commencement of winding-up proceeding, and embargo against the commencement of any suit or other legal proceedings against the company except by the leave of the court. This provision with a little modification is re-enacted in section 446(1). There was no specific provision conferring jurisdiction on the court winding up a company analogous to the one conferred by section 446(2). Sub-section (2) was introduced to enlarge the jurisdiction of the court winding up the company so as the facilitate the disposal of winding-up proceedings. The provision so enacted probably did not meet with the requirement with the result that the committee appointed for examining comprehensive amendments to the Companies Act in its report recommended that ''a suit by or against a company in winding up should, notwithstanding any provision in law for the time being, be instituted in the court in which the winding up proceedings are pending'' (see para 207 of the Company Law Committee Report). To give effect to these recommendations, sub-section (2) was suitably amended to bring it to its present form by the Companies (Amendment) Act, 1960. The Committee noticed that on a winding up order being made and the official liquidator being appointed a liquidator of the company, he has to take into his custody the company property as required by section 456. Section 457 confers power on him to institute or defend any suit, prosecution, or other legal proceedings, civil or criminal, in the name and on behalf of the company. Power is conferred upon him to sell the properties, both movable and immovable of the company, and to realise the assets of the company and this was to be done for the purpose of distributing the assets of the company amongst the claimants. Now, at a stage when a winding-up order is made, the company may well have subsisting claims and to realise these claims, the liquidator will have to file suits. To avoid this eventuality and to keep all incidental proceedings in winding-up before the court which is winding up the company, its jurisdiction was enlarged to entertain a petition, amongst others, for recovering the claims of the company. In the absence of a provision like section 446(2) under the repealed Indian Companies Act, 1913, the official liquidator, in order to realise and recover the claims and subsisting debts owed to the company, had the unenviable fate of filing suits. These suits, as is not unknown, dragged on through the trial court and courts of appeal resulting not only in multiplicity of proceedings but in holding up the progress of the winding up proceedings. To save the company, which is ordered to be wound up, from this prolix and expensive litigation and to accelerate the disposal of winding up proceedings, Parliament devised a cheap and summary remedy by conferring jurisdiction on the court winding up the company to entertain petitions in respect of claims for and against the company. This was the object behind enacting sections 446(2) and, therefore, it must receive such construction at the hands of the court as would advance the object and at any rate not thwart it."

Keeping the above object of section 446(2) in mind, we have to construe section 446(2) of the Companies Act. Sub-section (1) of section 446 provides that, after the winding-up order is made or the official liquidator is appointed as a provisional liquidator, no suit or a legal proceeding can be commenced or, if pending on the date of the winding up order, can be continued against the company except by the leave of the company court and subjected to such conditions as it may impose. If the suit or any proceeding is already pending in the court other that the company court in which the winding up proceedings are pending, sub-section (3) confers a discretion upon the company court to get the said suit or the proceedings transferred to it for being disposed of by it. It is in the context of sub-sections (1) and (3) of section 446 that sub-section (2) thereof assumes relevance. Sub-section (2) of section 446 confers jurisdiction upon the company court to entertain and dispose of (a) any suit; and (b) any claim made by or against the company.

Laying emphasis upon the expression by or against the company occurring in clauses (a) and (b) of sub-section (2) and also in sub-section (3) of section 446 of the Companies Act, the submission on behalf of the appellant is that the provisions of sub-sections (2) and (3) of section 446 are applicable to a suit where either the company is the plaintiff or where the company alone is the defendant since, according to learned counsel appearing for the appellant, there are no words to the effect showing that the suit against the company and other defendants can also be entertained and disposed of by the learned company judge. To test his submission, we invited his attention to the scheme of section 446(1) of the Companies Act and asked him whether a suit which is filed against the company along with other defendants in the court having jurisdiction to try the same requires leave of the company court for its continuance. Learned Counsel for the appellant does not dispute that leave of the company court is necessary to proceed with such a suit where there are defendants in the suit other than the company under liquidation. In fact, the judgment of the Mysore High Court in G. S. Setty and Sons v. Yellamma Cotton, Woollen and Silk Mills Co. [1970] 40 Comp Cas 10 shows that, relying upon the observations in the judgment of the Madras High Court in the case of Purushottam and Co. v. Subhodhaya Publications Ltd. [1955] 25 Comp Cas 49, it has held that when there are defendants in a suit other than the company in liquidation whose rights are affected, leave should be normally granted to proceed with the suit subject to the condition that the decree, if any, obtained should not be enforced against the company under liquidation without leave of the company court. It is clear from the above judgments that the suits where there are defendants other than the company under liquidation are contemplated u/s 446(1) of the Companies Act.

If the suit that is already filed against the company along with other defendants, where particularly the company under liquidation is the principal defendant is under the control of the company court in the sense that, for filing of the suit or when the suit is already filed, for proceeding with it leave of the company court is necessary which can be granted subject to the terms or conditions which it may impose, it is difficult to see why such a suit where there are defendant other than the company under liquidation is not contemplated under sub-sections (2) and (3) of section 446 of the Companies Act, particular when the company under liquidation is a principal defendant in such a suit and the plaintiff insist upon execution of its decree against the company under liquidation also. In out view, therefore, in appropriate cases, in its discretion, the company court can itself entertain and dispose of a suit in which there are defendants other than the company under liquidation.

It may be seen that, when, in such a suit, an order or a decree is passed by the company judge against the company under liquidation as well as the other defendants who are parties to the suits, it is open to the company court to pass appropriate orders to enable the plaintiff to execute the decree against the other defendants. It has to be seen that, as provided in section 634 of the Companies Act, any order made by the court under the Companies Act can be enforced in the same manners as a decree made by the court in a suit pending therein. The order or the decree passed by the learned company judge in a suit which he has entertained and disposed of can, as per his discretion, be executed against the other defendants. We do not, therefore, find any force in the submission made on behalf of the appellant that, in a suit where the company under liquidation is the principal defendant in the sense that it is the principal debtor, the suit cannot be entertained and disposed of by the company court only because the guarantor is also an additional defendant in the suit. If such a suit can be entertained and disposed of by the company court, then it has fill powers to pass the decree against the guarantor also which can be enforced against him u/s 634 of the Companies Act.

Learned counsel for the appellant has then relied upon the judgment of this court in the case of Balkrishna Mahadeo Vartak v. Indian Association Chemical Industries Ltd. [1958] 28 Comp Cas 179 in which it is held that leave to file suits should also be granted where the issue is one that cannot be decided in the winding-up proceedings. On the basis of the above judgment, it is urged that the question of liability of the guarantor cannot be decided in winding-up proceedings, and, therefore, the company judge, in the instant case, would not have jurisdiction to dispose of the same. There is no merit in the above submission because what the learned counsel company judge is deciding is a suit which he has entertained and which he is empowered to entertain u/s 446(2) of the Companies Act. It is a different case when the issue is such which can be exclusively decided by a special court or tribunal constituted for a particular purpose such as a rent court under the Rent Act, etc. The question of liability of a guarantor is a question which any court of general jurisdiction can decide. Moreover, the above judgment is rendered prior to the amendment of section 446(2) of the Companies Act when, for the first time, the provision was introduced enabling the company court to entertain and dispose of the suit which is by or against the company. The above contention raised or behalf of the appellant must, therefore, fail.

Learned counsel for the appellant has relied upon the decision of the Mysore High Court in the case cited supra as also the decision of the Madras High Court cited supra in support of his submission that in a suit where there are other defendant in addition to the company under liquidation, the provision of sub-section (2) of section 446 of the Companies Act are not applicable. No such proposition is considered in the said cases which are u/s 446(1) of the Companies Act. Perusal of the said cases shows that the learned company judge in the said cases had refused to grant leave to the plaintiffs in the said suits to file the suits in the courts having jurisdiction to try the same. In appeal, reversing the said orders, the above High Courts have held that where the company is a necessary party to the suits and where there are other defendants, courts should generally grant leave to file or to continue such suits subject to the condition that the decree in such suit may not be enforced against such company.

In the result, the instant appeal fails and is dismissed. However, in the circumstances, there will be no order as to costs.