K. Vadivelu and Others vs The Official Liquidator, Madras

This application taken out by the plaintiffs in C. S. No. 230 of 1965 on the file of this court raises of important question of law under S. 446 of

the Companies Act, 1956. The applicants are the sons of one Kolandayyappa Gounder, who is the second defendant in the suit. The first

defendant Muthuswami Gounder is the father of Kolandayappa Gounder. The said two defendants started a business called Sri Murugan Oil

Industries Private Ltd., Karur, and incurred loss. Some creditors of the company took out C. P. 23 of 1958 alleging that the company was

insolvent and should be wound up. Overruling the objections on behalf of the company this court directed the winding up.

Against that order the company preferred O. S. A. 62 of 1959. The appellate court dismissed the appeal confirming the order of winding up. The

applicants, subsequent to the winding up order instituted O. S. No. 228 of 1964 on the file of the Subordinate Judge, Tiruchirapalli, impleading

their father and grandfather and some alienees of their family properties and creditors as defendants along with the Official Liquidator, and prayed

for partition of their joint family properties. They questioned several acts of their father and grandfather contending that those acts were not binding

on them. As per the order of this court and numbered as C. S. 230 of 1965. One of the objections raised on behalf of the Official Liquidator is

that the suit is incompetent inasmuch as the leave of this court had not been obtained before the institution, as required under S. 446 of the

Companies Act.

To get over that objection, the applicants have taken out this application praying for grant of leave with retrospective effect to enable them to

prosecute the suit. Objections are raised on behalf of the Official Liquidator to the effect that the commencement of the suit itself was barred under

S. 446 and that leave cannot be granted with retrospective effect to cure the fatal and fundamental defect that existed at the very inception of the

commencement of the proceeding. There appears to be no direct decision of this court on this question.

Section 446(1) reads thus:

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.

This section does not impose a total prohibition against proceedings either being taken or continued against the company in liquidation. The object

underlying this section is to safeguard the assets of the 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, 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 right against

the company. Palmer in Company Precedents, Part II, 17th Edn., at page 302 observes:

When a winding up order is made the court, acting by its officer--the Official Receiver--lays its hand upon the assets and says, no creditor or

claimant must touch these assets or take proceedings by way of action, execution or attachment pending the distribution by the court in due course

of administration. This protection is indispensable equally in winding up and in bankruptcy to prevent a scramble for the assets, but it is not always

enough. An even-handed justice requires that the court should have power to intervene at an early stage for the protection of the assets, and this

power is given by this section"".

The question is whether obtaining leave of the court before the commencement of the suit or other legal proceedings is a condition precedent for

such commencement. It is contended on behalf of the applicants that though initially the absence of leave may be defective that defect can be cured

by the court granting leave with retrospective effect, and that the object of the Legislature in requiring that leave should be obtained before the

commencement of the suit or other legal proceeding is only to put the Official Liquidator on notice of such intended proceeding. Authorities are not

uniform on this question. In People''s Industrial Bank, Ltd. Vs. Ram Chander Shukul and Others, the suit was commenced after the winding up

order had been made, but without obtaining leave of the court, Leave was granted during the pendency of the suit under S. 171 of the Companies

Act 1913 corresponding to S. 446 of the present Act 1956. The liquidator neither contested nor appealed against the order granting leave. The

court held that in these circumstances the leave cannot be said to be a nullity and the suit is not liable to be dismissed on the ground that leave had

not been obtained before the institution of the suit.

In Roopnarain Ramchandra Private Ltd. Vs. Brahmapootra Tea Co. (India) Ltd. and Another, , the winding up order of the company was

passed during the pendency of the suit against the company. Leave of the court was not obtained to continue the suit. The suit ended in an ex parte

decree. The question considered was whether the court had valid seisin of the matter at the inception and lost its jurisdiction to deal with the matter

and to pass a decree merely on account of the passing of the winding up order. Ray J. held that the absence of leave to continue the suit would not

deprive the court of jurisdiction to pass a decree and the existence of the jurisdiction does not depend upon such leave. No doubt, there is an

observation of the learned Judge to the effect that in appropriate cases leave can be given even retrospective if circumstances of the case justify. In

Smt. Bhagwati Devi Bubna and Others Vs. Dhanraj Mills Private Ltd. and Others, , a winding up order was passed against a company pending a

suit against it. Leave of the court was not obtained to continue the suit, and a decree was passed. It was held that the decree was not void but was

only voidable at the instance of the Official Liquidator. In coming to that conclusion. the court referred to S. 537 of the Act, which inter alia

declares void any attachment, distress or execution put in force, without leave of the court, against the estate or effects of the company, after the

commencement of the winding up. Inasmuch as that section expressly provides that such a proceeding would be void and inasmuch as there is no

express provision saying that any proceeding commenced or continued without the leave of the court as required under S. 446 is void, the learned

Judges held that the decree passed in the absence of leave would only be voidable but not void.

In Varkey Thomas v. Catholic Bank of India Ltd., 1965 1 Com LJ 309, the learned Judge Raman Nayar J. held that obtaining leave under S.

446 before the institution of the proceeding is not a condition precedent and that it would be open to the court to grant leave subsequent to the

commencement. The learned Judge preferred to follow the view taken in People''s Industrial Bank, Ltd. Vs. Ram Chander Shukul and Others, ,

Nazir Ahmad v. Peoples Bank of North India, AIR 1942 Lah 289, Krishna Pillai v. Travancore National and Quilon Bank Ltd., 1943 TLR 458

and Sureshchandra v. Bank of Calcutta, (1950) 54 CWN 832 in preference to the contrary view taken in Peoples Bank Lahore v. Fatehchand

AIR 1936 Lah 401, Re Steel Construction Ltd., (1936) 40 CWN 312 and Harnarain Misra Vs. Kanhaiyalal Lohawalla and Another, . The

learned Judge has further observed that the word ''commenced'' occurring in S. 446 of the Companies Act must, in relation to the words ''suit or

other legal proceeding'', be understood in the English sense as meaning the issue of process by the court rather than the presentation of the plaint or

other paper by which a legal proceeding is instituted.

In Ammukutti v. Manavikraman, ILR (1920) Mad 793 = AIR 1920 Mad 709, the question considered was whether a suit instituted against a

Receiver appointed by the court without obtaining the leave of the court was maintainable and whether leave could be granted subsequent to the

institution. A Bench of this court held that the omission does not affect the jurisdiction of the court but is only an illegality which could be effectively

cured by the plaintiff obtaining the sanction during the pendency of the litigation. That decision, on which reliance was placed on behalf of the

plaintiffs is not relevant because, as observed by the learned Judges themselves the sanction contemplated therein is not a condition precedent

imposed by any statutory law like the sanction mentioned in S. 92, C. P. Code or S. 17 of the Presidency Towns Insolvency Act, but is a sanction

imposed by the common law to enforce due respect towards courts of justice. In that view, the learned Judges held that the failure to obtain the

prior leave of the court to sue the receiver would not affect the jurisdiction of the court.

What is barred under S. 446 of the Companies Act is, among other things, the commencement of a suit or other legal proceeding against a

company in liquidation without the leave of the court. An almost similar expression is found in S. 17 of the Presidency Towns Insolvency Act and

S. 28(2) of the Provincial Insolvency Act, imposing a ban on creditors, to whom the insolvent is indebted, from commencing any suit or other legal

proceeding against the property of the insolvent in respect of the debt except with the leave of the insolvency court. The expression occurring in S.

17 of the Presidency Towns Insolvency Act was construed by the Bombay High Court in re Dwarakadas Tejbhandas, ILR 40 Bom 235 = AIR

1915 Bom 134. as meaning that the obtaining of the leave of the court is a condition precedent for the institution of the suit and that leave cannot

be granted after the suit is filed. Following this decision of the Bombay High Court, a Bench of this court consisting of Odgers and Curgenven, JJ.,

in Cuddappa Ghouse Khan Vs. Bala Subba Rowther, , construed an identical expression occurring in S. 28(2) of the Provincial Insolvency Act

and held that the leave is a condition precedent for the institution of the suit and cannot be granted after the institution so as to take effect

retrospectively.

I am unable to share the view of Raman Nayar, J. in 1965 1 Com LJ 309, that the word ""commenced"" occurring in S. 446 of the Act should be

understood as meaning the issue of process by the court rather than the presentation of the plaint. S. 26 and Order IV. Rule 1 of CPC lay down as

to how a suit shall be instituted. According to those provisions, a suit shall be instituted by presenting a plaint to the court. That means the moment

the plaint is presented, the suit should be deemed to be instituted. Institution does not depend upon the issue of process. Under S. 52 of the

Transfer of Property Act, during the pendency of a suit relating to any right in an Immovable property, the property cannot be transferred or

otherwise dealt with so as to affect the rights of the party to the proceedings. This is what is called lis pendens. The explanation to that section

enacts that the pendency of a suit or proceeding shall be deemed to commence from the date of the presentation of the plaint or institution of the

proceeding in a court of competent jurisdiction. Commencement of the proceeding does not depend upon the issue of process so as to attract the

bar of lis. The words ""commence"" and ""institution"" appear to be synonymous. In Ponnusami Chettiar Vs. Kaliaperumal Naicker, , it was held that a

suit commences with the presentation of the plaint. The same view was taken by a Bench of the Lahore High Court in AIR 1936 Lah 401. The

word ''commenced'' occurring in S. 446 of the Companies Act has to be understood in the light of the expression ''shall be proceeded with''

occurring in the same section. The expression ''shall be proceeded with'' is intended to cover the case of those suits or other legal proceedings

which were pending at the time of the liquidation proceedings. In respect of these proceedings, the Legislature has enacted that they should not be

proceeded with until the leave of the court is obtained, and such proceedings shall remain pending till such leave is granted. But as regards new suit

or proceeding to be instituted, the Legislature has used the word ""commenced"" and it has enacted that such commencement shall not be made until

the leave of the court is granted. To hold that ''commencement'' would take place only after the issue of process would mean that if a plaint is

presented, it could be taken on file and kept till the issue of process. To hold that such presentation and taking on file is not barred under S. 446

would virtually render the provision nugatory.

Section 17 of the Presidency Towns Insolvency Act and S. 28(2) of the Provincial Insolvency Act are restricted in their application only to suits

or other legal proceedings which may be instituted by a creditor against the property of the insolvent in respect of a debt. But Section 446 of the

Companies Act is wide in its terms and is not restricted to any category of suits or any class of plaintiffs. It is wide enough to cover all suits and

other legal proceedings whoever may be the plaintiff. Though the Bench decision in Cuddappa Ghouse Khan Vs. Bala Subba Rowther, is

regarding the scope of S. 28(2) of the Provincial Insolvency Act. I respectfully feel that the ratio decidendi of the decision is equally applicable to a

consideration of the question regarding the scope of S. 446 of the Companies Act also. The words used in both the enactments are almost similar

except for the difference that in the former Act the matter is put in the active voice while in the latter it is in passive voice. But the object underlying

the two provisions is similar. Whereas in the former Act the object is to avoid embarrassment and difficulty in the administering the properties of

the company in liquidation by the Official Liquidator. I do not find any ground to distinguish the Bench decision to support the contention urged on

behalf of the plaintiff that the court has jurisdiction to grant leave with retrospective effect.

In the instant case, there is no difficulty for the plaintiffs to seek the leave of the court and institute a fresh suit, as there is no question of

limitation. Moreover, the applicants are not strangers to the parties to the liquidation proceedings. They are the sons and grandsons of the directors

of the company and it is idle on their part to contend that they were not aware of the winding up proceedings when they instituted the suit for

partition.

For all the foregoing reasons. I am of the view that leave of this court cannot be granted with retrospective effect to enable the applicants to

prosecute C. S. No. 230 of 1965 which they have instituted without obtaining the leave of the court. The application is accordingly dismissed with

costs of the Official Liquidator.

Application dismissed.