Eastern Automobile Syndicate Ltd. vs Rajendra Kumar Singh

V.R. Nevaskar, J.—A preliminary objection is raised in this appeal on behalf of the respondent that since a winding-up order has been made with respect to the appellant-Company, since the filing of the present appeal in a winding-up proceeding for compulsory winding up, it cannot be continued without the leave of the winding-up Court by reason of provisions of Section 171 of the Indian Companies Act, 1913, which applies to the present case.

The facts leading up to the present appeal necessary for consideration of this objection may be briefly stated: --Respondent filed the suit out of which this appeal arises against the appellant-Company and its Managing Director Thakur Ranjeetsingh for the recovery of Rs. 15,469.8-3 on the basis of a loan-agreement in respect of a sum of Rs. 26,000/ on terms and conditions mentioned therein. The agreement, it was alleged, was executed by Thakur Ranjeetsingh as the Managing Director of the Company. Thakur Ranjeetsingh had personally guaranteed the repayment of this loan as per terms of the agreement. After giving credit for the amounts received towards this plaintiff filed the suit for the balance with interest. The defendant-company and Thakur Ranjeetsingh both contested the suit denying borrowing of Rs, 26,000/-; pleading want of consideration for the agreement sued upon and repayment of Rs. 12,000 more. The defence was over-ruled and the suit was decreed This appeal is directed against that decree, The Company as well as Thakur Ranjeetsingh preferred appeal on 29-9-1953. While the appeal was pending winding-up order was passed.

The question which arises for consideration is whether in view of the aforesaid circumstances Section 171 of the Indian Companies Act, 1913, is a bar to the continuance of this appeal in the absence of a leave from the winding-up Court.

Section 171 of the Indian Companies Act, 1913, is as follows:--

When a winding-up order has been made or a provisional liquidator has been appointed, no suit or other legal proceeding shall be proceeded with or commenced against the Company except by leave of the Court, and subject to such terms as the Court may impose.

In order to understand the true significance of this provision it will be necessary to examine the policy of law in making this provision.

The object of winding-up through or under the Supervision of the winding, up Court is to see that there is proper realisation of the assets of the Company from those who are liable to the Company and their fair and equitable distribution amongst those who are entitled to the same. The policy of law in enacting Sections 169, 171 and 232 of the Act is to protect the assets of the Company for equitable distribution amongst those entitled and to prevent the administration being embarrassed by a general acramble of creditors.

Bearing in mind this policy if we examine the wording of the Section it appears to me that leave is necessary in respect of a suit or proceeding against the Company. The material time with reference to which the question of leave is to be considered is the date of winding-up order. It is with reference to this date that we have to see whether a suit or proceeding is commenced or proceeded with against the Company. If the proceeding is against the Company naturally the person attempting to commence or to proceed with that suit or proceeding would be interested in commencing or pursuing the same. It is he who will therefore be required to approach the winding-up Court for leave. As far as I can see the provision is not intended for preventing the Company from carrying on any protective proceeding without obtaining leave from the Court No case has been cited before me which requires a Company to approach a winding-up Court to enable it to commence or continue a suit or proceeding against others including its debtors nor a case, in which a Company desiring to avoid the effect of an adverse decision against it. Leave in all cases has to be obtained by a party ranged on the side opposite to the Company and the object of seeking leave is to enable that party to obtain a decision adversely affecting the assets of the Company.

In the present case no doubt at the commencement of the suit the action was against the Company. But when the winding up order came to be passed there was no proceeding against the Company of the sort requiring the opposite party to approach the winding-up Court for leave in order to obtain a fresh decision for adversely affecting the assets of the Company. There was already a decision in favour of the opposite party, and it was the Company which was interested in prosecuting a protective proceeding to relieve itself from the effect of an adverse decision.

To such a proceeding no leave, in my opinion, is necessary.

Counsel for both parties have referred to the decisions reported in AIR 1918 Lah 181 (F. B.) Rawat Raj Kumar Singh and Others Vs. Benaras Bank Ltd. (In Liquidation) and Others, Raj Kumar Singh vs. Benares Bank, which appear to take somewhat opposite views. Both these decisions appear to take the cue from the decision of the House of Lords in England in a case reported in (1901) 85 L T. 141 Humber and Co. vs. John Griffiths Cycle Co.

In order to appreciate the view taken in the two Indian decisions it will be useful to examine the implications of the aforesaid English case.

The facts of that case were that an action was brought by John Griffiths Cycle Company against Humber and Company. The plaintiff-Company was unsuccessful in that action. Plaintiff appealed and while that appeal was pending a winding-up order was passed against the plaintiff. The appeal was continued by it and it was successful therein. The opposite party Humber and Company now appealed and the question arose whether leave was necessary. The argument on the side of the appellant was that no leave was necessary as the proceeding was merely defensive while it was argued on behalf of the other side that leave would be necessary in as much as when the appeal was preferred it was a proceeding against the Company. Lord Davey in his speech said:--

The respondents, that is to say the Company, ''Now'' object that the present appellants cannot proceed with their appeal without the leave of the Court in Ireland. I am of opinion that the objection cannot be maintained. It was the respondents who themselves proceeded with the action after the winding-up order, by prosecuting their appeal in the Court of Appeal, and when once an action by the Company itself has been proceeded with, there is no necessity for the defendants in the action to obtain leave for any defensive proceeding on their part.

This decision was understood in the Full Bench decision of the Lahore High Court in Kishensingh''s case A. I. R. 1918 Lah 181 to lay down that when an action is commenced by the Company itself then no leave would be necessary for enabling the opposite party to prosecute an appeal or revision while it was held by Braund J., in the decision in Rawat Raj Kumar Singh and Others Vs. Benaras Bank Ltd. (In Liquidation) and Others, Raj Kumar: Singh vs. Benares Bank, that the aforesaid decision of the House of Lords cannot be understood to decide in general terms that wherever there is an appeal from a suit in which the company itself was the plaintiff that appeal may be proceeded with or commenced without the leave of the Court in spite of a winding-up order.

In the Lahore case the facts were that a suit was commenced by the Company prior to winding-up order. The Company was successful and the opposite party wanted to prefer appeal against that decision By this time winding up order was passed. Question was whether leave for prosecuting the appeal was necessary. It was held that no leave was necessary because it was a protective proceeding. In the Allahabad case the facts were that in August 1939 the Company obtained a decree in a suit filed by it against the defendant. On 3-12-1939 the defendant preferred appeal against the Company as this respondent. In March 1940 the Company was ordered to be wound up. In these circumstances it was held that leave to prosecute the appeal would be necessary as the appeal was a proceeding against the Company. The decision in the aforesaid House of Lords Case seems to suggest that it is the date of winding-up order that is material. If at the time of that order there is a proceeding against the Company pending or to be commenced leave would be necessary. But if a proceeding is to be continued or commenced by the Company no leave would be necessary. No leave further will be necessary if a proceeding pending on the date of the order by the Company is continued and the Company was successful and the opposite party desires thereafter to take a protective proceeding. The word ''action'' used by Lord Davey in his speech includes an appeal as will be clear from the following observations made in the contest of frets of that case: --

It were the respondents who themselves proceeded with the action after the winding-up order by prosecuting their appeal.

But whatever be the correct view it is unnecessary to consider the matter further for the purpose of the present case because in the first place the conflict exists in cases where the initial action is by the company and in the second place in this case at the date of winding-up order it was a proceeding by the Company and not against it. The fact that to begin with it was a proceeding against the Company is not material because as I have already discussed above the question of leave u/s 171 of the Indian Companies Act has a reference to leave to be obtained not by the Company but by the opposite side from the winding up Court and thereby to induce it to allow the matter litigated in the ordinary way.

For these reasons no leave in this case is necessary for prosecuting the present appeal.

The appeal shall therefore be set down for hearing.

T.C. Shrivastava, J.

I agree.

JUDGMENT (Dated 11-9-58)

V.R. Nevaskar, J.

This is an appeal against the decree passed against the defendant No. 1 Company and its Managing Directors Thakur Ranjitsingh defendant No. 2 for the recovery of Rs. 15,469-8-3 on the basis of a loan agreement in respect of a sum of Rs 26,000 dated 14-12-49 executed on behalf of the company by defendant No. 2 who personally guaranteed the repayment of the said loan, The loan carried interest at 4% p.a. which was payable every year and the loan amount was payable by stated instalments. The properties mentioned in the agreement belonging to the company were pledged as security. The defendants failed to carry out the terms regarding repayment and when called upon to pay they did not do so. The only amount that was repaid by them was Rs. 12,000 from 1-2-1950 up to 1-6-1951. The plaintiff therefore claimed Rs. 14,000/- as principle and Rs. 1,455-8-3 as interest together with notice and bank charges amounting to Rs, 14/- in all amounting to Rs. 15,469-83. The suit was filed on 29-1-1952.

The defendants by their written statement dated 2-4-1952 admitted the execution of the document in suit called by them as ''Chithi'' but contended that no loan was borrowed by defendant No. I through and under the guarantee of defendant No, 2. The transaction which culminated in the execution of the suit document was stated by them to be that plaintiff''s brother Narendra kumar singh was the Chairman of the Board of Directors of defendant company and had with him 333 shares of the company standing in his name of the face value of Rs. 33,000. He transferred these 333 shares to the name of defendant No. 2. The transfer was approved by the resolution of the Board of Directors Towards this transaction defendant No. 2 paid Rs. 7,300 in cash and nothing further was done. These facts were fully known to plaintiff and he was also apprised of the same. The repayment of Rs. 12,000/- by defendant No. 1 in plaintiffs name was admitted but it was asserted that this was towards the dues of his brother Narendra kumar singh. It was also averred that the Dewas Senior Bank, had the first charge upon the goods pledged. In their special pleadings it was contended that the document in suit was nominal and was intended for plaintiff''s brother and the plaintiff was at the time of the transaction a minor. The plaintiff for these reasons was not entitled to sue. In the end defendant pleaded in the alternative for grant of instalments.

21 After the framing of the issues the following issues were directed to be treated as preliminary:--

1 [c] In case the ''Chithi'' in suit had been executed under circumstances mentioned in para 2 of the written statement is the ''Chithi'' without consideration ?

2 [a] Are the defendants not entitled to raise the objection regarding nominal character of the ''Chithi'' in the sense that it was meant for plaintiff''s brother ?

The learned Judge found in favour of the plaintiff on both these issues. He held that even on assumption that the ''Chithi'' had been executed for the price of shares transferred to defendant No 2 it could not be said to be without consideration nor could it be held that as the consideration moved from plaintiff''s brother the plaintiff could not sue on it particularly when the defendants agreed to make the payment to the plaintiff at the desire of plaintiff''s brother and particularly when plaintiff''s said brother, in this action, acted as plaintiff''s agent for recovering the dues. The learned Judge held that consideration of the other issues was unnecessary in the view that he had taken upon these two issues particularly when both the parties accepted the fact that the Bank was the first charge-holder. The suit was accordingly decreed.

In this appeal which was tiled by both the defendants jointly the right of defendant No. 2 to saddle defendant No. 1 with the liability in question was challenged and it was further contended that, in case defendant No. 1 could not rightly be saddled with the said liability, the liability of defendant No. 2 under the guarantee also falls to the ground. It was also contended that the shares of plaintiff''s brother could not have been validly acquired by the company and that for that reason the company was not bound to pay for the price thereof.

At the hearing Mr. Chitale the learned counsel for the plaintiff relied upon the provisions of section 54 A of the Indian Companies Act 1913 in support of his contention that the transaction of sale of 333 shares of Narendra singh was void and inoperative in law. This was according to the learned counsel in substance a purchase by the company of its own shares or at any rate it amounted to lending financial assistance by the company for the purchase of its shares by its Director Thakur Ranjitsingh.

In my opinion last mentioned contention had not been raised on behalf of the defendants at the trial and involves as it does questions of fact ought not to be allowed to be raised for the first time in appeal. But even if allowed to be raised it has no force. I shall deal with both the contentions separately.

As regards the first contention at the trial the defendants sought to defend the case jointly on the ground that no consideration in the form of any loan moved from the plaintiff and that for that reason plaintiff could not have sued on the Chithi which had been executed in respect of price of shares transferred by his brother defendant No. 2. The case now sought to be pressed involves at least to a certain extent conflict of interest and positions of the company and Thakur Ranjitsingh inas. much as in one of the grounds taken it is contended that Thakur Ranjitsingh had no power to saddle the company with the liability in suit. This ground however was not pressed at the hearing.

As regards the second contention based upon Section 54 A of the Companies Act that too, even if allowed to be raised, has no merit.

Section 51 A of the Indian Companies Act is as follows: --

(1) No company limited by shares shall have power to buy its own shares or the shares of a public company of which it is a subsidiary company unless the consequent reduction of capital is effected and sanctioned in the manner provided by Sections 55 to 66.

(2) No company limited by shares other than a private company not being a subsidiary company of a public company shall give, whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase made or to be made by any person of any shares in the company:

Provided that nothing in this section shall be taken to prohibit, where the lending of money is part of the ordinary business of a company, the lending of money by the company in the ordinary course Of its business.

(3) If a company acts in contravention of this section the company and every officer of the company who is knowingly and wilfully in default be liable to a fine not exceeding one thousand rupees.

(4) Nothing in this section shall affect the right of a company to redeem any shares issued u/s 105-B.

29, Mr. Chitale first tried to base his argument upon clause (2) of the section. It was however pointed out by Mr. Dhanda for the plaintiff respondent that the company in question is a private limited company and not a public company or a private company which is a subsidiary of a public company. Mr. Chitale conceded that he is not in a position to contradict Mr. Dhanda on this point. But even assuming that he wanted to do so that would clearly involve a question of fact and in the absence of a specific plea being taken upon that point at the trial the defendants could not successfully press this point in appeal. If the company be a private limited company then the prohibition contained in the second subsection is inapplicable.

Even in those cases in which it applies there is a proviso which makes an exception in the case of lending companies. There is nothing on record to indicate whether lending is or is not one of the objects of the company.

As regards sub-Section (1) upon which Mr. Chitale relied for his contention that the transaction in question was in substance a purchase by the company of its own shares, the provision cannot be resorted to by the appellants in view of the clear case set up by them in the written statement contrary to this.

In para 2 of the written statement the defendants clearly put forward the purchase of 333 shares from Narendra kumar singh by defendant No. 2 and not by the company itself. It is on this case that they fought at the trial. They cannot now, on thus being unsuccessful in the case set up, be allowed to turn round and put forward a different case which too involved questions of fact. Moreover the resolution of the company dated 15-12-49 which the defendants relied upon clearly mentioned purchase by Thakur Ranjitsingh and not by the company. How could then be any reduction in the share-capital of the company and how a question regarding want of sanction by the Court can arise ?

In this view of the matter it is unnecessary to consider further contention raised by Mr. Dhanda regarding the true effect of transgression of the provisions contained in section 54 A which, according to him, is that the company is exposed to the risk of penalty as provided in the section but the security given is not in alidated. Mr. Dhanda in this connection had cited cases reported in (1946) AELR. I , para 519, Victor Battery Co., Ltd. vs. Curry''s Ltd. and Others, and (1936) AELR 597 Spink (Bournemouth Ltd. Vs. Douglas Oliver Spink.

On the whole the appeal does not deserve to succeed. It is accordingly dismissed with costs.

T.C. Shrivastava, J.

I agree.