S.R. Muthuswami Gounder and Others vs Official Liquidator

Palaniswamy, J.—This application taken out by the plaintiffs in C. S. No. 230 of 1965 on the file of this court raises an important question of

law u/s 446 of the Companies Act, 1956. The applicants are the sons of one Kolandaya''ppa 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. No. 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. No. 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 As per the order of this court that suit was withdrawn to this court and numbered as C.S. No. 230 of 1965.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 u/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 u/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

rights against the company. Palmer in Company Precedents, Part II, 17th edition, 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. v. Ram Chander Shukul 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 u/s 171 of the Companies Act, 1913,

corresponding to Section 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 Ramachandra Private Lid. v. Brahmapootra Tea Co. 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 retrospectively if circumstances of the case justify. In Bhagwati Devi

Bubna v. Dhanraj Mills 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 Section 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 u/s 446 is void, the learned judges held that the decree passed in the absence

of have would only be voidable but not void.

In Varkey Thomas v. Catholic Bank of India Ltd, the learned judge, Raman Nayar J., held that obtaining leave u/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. v. Ram Chander Shukul, Nazir Ahmed v. People''s Bank of Northern

India Ltd, Krishna Pillai v. Travancore National and Quilon Bank Ltd. and Suresh Chandra v. Bank of Calcutta in preference to the contrary view

taken in People''s Bank of Northern India Ltd. v. Fatehchand & Co. Ltd., In re Steel Construction Ltd. and Harnarain Misra v. Kanhaiyalal

Lohawalla. The learned judge has further observed that the word "" commenced "" occurring in Section 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 Ammukutty v. Manavikraman 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 Section 92 of the CPC or Section 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 u/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 Section 17 of the Presidency Towns Insolvency Act and

Section 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 Section 17 of the Presidency Towns Insolvency Act was construed by the Bombay High Court in In re Dwarkadas Tejbandas 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 Ghouse Khan v. Bala Subba

Rowther, construed an identical expression occurring in Section 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 Verkey Thomas v. Catholic Bank of India Ltd. that the word "" commenced "", occurring in

Section 446 of the Act, should be understood as meaning the issue of process by the court rather than the presentation of the plaint. Section 26

and Order IV, rule 1, of the Code of Civil Procedure, 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. u/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

Ponnuswami v. Kaliaperumal 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 People''s Bank of Northern India Ltd. v. Fatehchand & Co. Ltd. The word "" commenced "" occurring in Section 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 u/s 446 would virtually render the provision nugatory.

Section 17 of the Presidency Towns Insolvency Act and Section 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 Ghouse Khan v. Bala Subba Rowther is regarding the

scope of Section 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 Section 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 administration of the

estate of the insolvent by the official receiver, in the latter Act the object is to avoid embarrassment and difficulty in 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.