Harihar
Nath & Ors Vs. State Bank Of India & Ors [2006] Insc 177 (4 April 2006)
Arun
Kumar & R. V. Raveendran Raveendran, J.
This
appeal directed against the order dated 1.9.1997 of the Patna High Court in LPA
No.259/1996, relates to the applicability of Article 137 of Limitation Act,
1963 to a petition under Section 446(1) of the Companies Act, 1956, seeking
leave of the Company Court to proceed with a pending suit.
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Nalanda Ceramic
& Industries Ltd. (second respondent herein, referred to as 'the Company')
was a company incorporated under the Companies Act, 1956 (for short 'the Act').
Appellant Nos.1 to 3 were its Directors. The Company had obtained certain
credit facilities from the State Bank of India (first respondent herein and referred to as 'the Bank').
The
loans were secured by mortgage of the assets of the Company. The repayment of
the amounts advanced to the Company was guaranteed by the appellants. On
28.11.1988, the Bank filed a suit (Title Mortgage Suit No.150/1988 on the file
of the Special Subordinate Judge, Ranchi) against the Company (defendant No.1),
the appellants (defendants 2 to 4), and four others namely, State of Bihar,
Bihar State Financial Corporation, I.F.C.I. and IDBI (defendant Nos.5 to 8). In
the said suit, the Bank sought a decree for Rs.5,95,98,258.31 against
defendants 1 to 4 (the company and the appellants) with interest thereon and
several ancillary and consequential reliefs.
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Even prior to
the said suit, other creditors had filed petitions for winding up of the
Company, in Company Petition Nos.1/79, 2/79 and 4/79 on the file of the Patna
High Court, alleging that it was unable to pay its debts. During the pendency
of the said company petitions, a notification dated 16.4.1984 was issued under
the Bihar Relief Undertakings (Special Provisions) Act, 1982, declaring the
Company as a relief undertaking, thereby preventing further progress of the
petitions for winding-up. As the company became sick, a reference was also made
to the Board for Industrial & Financial Reconstruction which directed an
inquiry under Section 16 of the Sick Industrial Companies (Special Provisions)
Act, 1985 (for short 'SIC Act'). In view of the said reference, the first
appellant (second defendant in the suit), filed an application on 16.9.1989 in
the Bank's suit under Section 22 of the SIC Act, for stay of further
proceedings in the suit.
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The Bank
resisted the said application, inter alia, on the ground that Section 22 of SIC
Act had the effect of staying only proceedings in the nature of winding-up and
execution and did not come in the way of progress of any suit for recovery of
money due by the Company by enforcing the security.
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When matters
stood thus, an order for winding up the company was passed by the High Court on
24.10.1989. When the said order came to its knowledge, the Bank filed a further
objection to the application under Section 22 of the SIC Act, contending that
Section 22 of the SIC Act will not apply in view of the order for winding up.
The Bank also submitted that having regard to Section 446(1) of the Act, it
required the leave of the court only to proceed against the company, but there
was no bar for proceeding against the other defendants. The Bank, therefore,
prayed for dismissal of the application for stay (filed by appellant No.1 herein)
and further prayed that while the proceedings as against the first defendant
company may be kept in abeyance, the suit may be proceeded with against the
other defendants.
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The trial court
disposed of the application by an order dated 9.3.1990. It rejected the
application filed by second defendant (appellant No.1 herein) for staying the
suit under Section 22 of the SIC Act. It, however, held that the suit against
all the defendants will have to be stayed in view of the order of winding up.
It was of the view that the liability to pay the amount due was on the
principal-debtor, namely, the Company, and that the guarantors would be liable
only if the Company defaulted; and that, therefore, if the proceedings against
the Company had to be stayed, it had also to be kept in abeyance against all
defendants till the Bank obtained an appropriate direction from the High Court.
The Bank challenged the said order in CRP No.388/1990 before the High Court.
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When the Company Court was informed that an inquiry under
Section 16 of the SIC Act had been directed by the BIFR, it passed an order on
16.7.1990, staying the operation of the order of winding up dated 24.10.1989.
The said stay order dated 16.7.1990 was vacated subsequently by the Company Court on 16.12.1994 and the winding up
order was revived.
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The Bank
withdrew its revision petition (CRP No.388/1990) on 4.4.1995. Thereafter, on
11.8.1995, the Bank filed an application under Section 446(1) of the Act,
seeking leave of the Company
Court to proceed with
its suit. The said application was resisted by the appellants herein, inter alia,
on the ground that the application seeking leave was barred under Article 137
of the Limitation Act, 1963. The appellants contended that the application
ought to have been filed within 3 years from the date of winding up, that is,
on or before 24.10.1992 and the application filed on 11.8.1995 was barred by
limitation.
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The Company Court by order dated 17.9.1996 granted
leave to proceed with the suit. The Company Court was of the view that though
Article 137 of the Limitation Act was applicable to an application under
Section 446(1) of the Act, the provision relating to limitation should be
construed liberally and the period could be extended in exercise of judicial
discretion even suo moto. It condoned the delay in filing the application for
leave, being satisfied that there were sufficient causes for the delay, first
being the stay of winding up between 16.7.1990 and 16.12.1994 (in view of the
inquiry under Section 16 of the SIC Act) and the second being the prosecution
of the revision petition (CRP No.388/1990) from 1990 till its withdrawal on
4.4.1995. The grant of leave was, however, made subject to the condition that
even if a decree was granted in the suit, jointly and severally against various
defendants, the Bank should proceed to get the decree satisfied from other
defendants, and if the decree was not fully satisfied, then the matter may be
brought to its notice for proceeding against the Company for realization of
residuary decretal dues. Feeling aggrieved by the said order granting leave,
the appellants herein filed LPA No.259 of 1996. A Division Bench of the High
Court dismissed the appeal by order dated 1.9.1997. The said order is
challenged in this appeal by special leave.
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Learned counsel for the appellants
urged the following contentions :
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An application
for grant of leave under Section 446(1) of the Act was governed by Article 137
of the Limitation Act, 1963. Therefore, the application by the Bank seeking
leave to proceed with the suit ought to have been filed within 3 years from the
date when the right to apply accrued. The right to apply accrued on 24.10.1989
when the order of winding up was passed.
Therefore,
the last date for filing an application seeking leave was 24.10.1992 and the
application filed on 11.8.1995 was barred by limitation.
The Company Court erred in condoning the delay by
exercising power under Section 5 of the Limitation Act, 1963 suo moto, in the
absence of an application seeking condonation of delay.
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Even if leave
was to be granted, there was no justification for directing that the decretal
amount should be recovered from the guarantors and only if there was any
deficit, it should be recovered from the company.
Contention
(i) :
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Sub-section (1) of Section 446 as it
stood to the relevant point of time provided that 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. Sub-section (2) of the said section provided that the court
which is winding up the company shall, notwithstanding anything contained in
any other law for the time being in force, have jurisdiction to entertain, or
dispose of –
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any suit or
proceeding by or against the company;
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any claim made
by or against the company;
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any application
made under Section 391 by or in respect of the company;
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any question of
priorities or any other question whatsoever, whether of law or fact, which may
relate to or arise in course of the winding up of the company. The claims
against a company made directly to the winding up Court under Section 446(2)(b)
of the Act, present no difficulty. Section 3(2)(a)(iii) of Limitation Act, 1963
provides that in the case of a claim against a company which is being wound up,
for the purposes of the Limitation Act, a suit is instituted when the claimant
first sends in his claim to the official liquidator. The period of limitation
would be, of course, as prescribed in the Schedule for the appropriate suit or
proceedings.
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Sub-section (1) of section 446 of
the Act contemplated two categories of applications for leave being filed
before the Company
Court. They are :
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Applications
seeking leave to file a suit or commence a legal proeeding against the company,
after an order for its winding up has been made.
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Applications
seeking leave to proceed with a pending suit or legal proceeding against a company,
filed or initiated before the order for winding up of such company.
Neither
the Companies Act, 1956 nor the rules thereunder prescribe any period of
limitation for applications under Section 446(1) of the Act. Article 137 of
Limitation Act, 1963, prescribes a three year period of limitation in regard to
any application for which no period of limitation is provided.
The
issue whether Article 137 will apply only to application filed under the Code
of Civil Procedure or to applications filed under any Act, was settled in Kerala
State Electricity Board vs. T. P. Kunhaliumma [AIR 1977 SC 282]. This Court held
:
"Any
other application" under Article 137 would be a petition or any
application under any Act. But it has to be an application to a court The
conclusion we reach is that Article 137 of the 1963 Limitation Act will apply
to any petition or application filed under any Act to a civil court. With
respect we differ from the view taken by the two Judge Bench of this Court in Athani
Municipal Council case (AIR 1969 SC 1335) and hold that Article 137 of the 1963
Limitation Act is not confined to applications contemplated by or under the
Code of Civil Procedure." The said view was reiterated in Additional
Special Land Acquisition Officer v. Thakoredas (AIR 1994 SC 2227). But the
question is whether Article 137 would apply to an application under section
446(1) of the Act.
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Insofar as the first category of
applications under Section 446(1) of the Act, there is no question of any
period of limitation. The period of limitation is to be calculated, not with
regard to the application seeking leave to file a suit or proceeding, but in
regard to the suit/proceeding itself. An illustration may clarify. If the proposed
suit is to enforce payment of money secured by a mortgage by the company, the
period of limitation for such suit is 12 years. Surely an application seeking
leave to file such suit, cannot be rejected by applying Article 137 on the
ground three years have elapsed from the date of the order of winding up, even
though the 12 years period for filing the suit has not expired. So long as the
suit is within time as on the date of filing the application for leave, the
application will be entertained. While computing the period of limitation for
the suit/proceeding, the time spent in obtaining leave to file the
suit/proceeding will have to be excluded by applying the principle underlying
Section 15(2) of Limitation Act, 1963. Section 15(2) of Limitation Act provides
that in computing the period of limitation for any suit of which notice has
been given, or for which the previous consent or sanction of the government or
any other authority is required, in accordance with the requirements of any law
for the time being in force, the period of such notice or, as the case maybe,
the time required for obtaining such consent or sanction shall be excluded. We
may note that the Company
Court may not examine
the question of limitation for the suit or proceeding, leaving it to be dealt
with by the court where such suit/proceeding is to be initiated.
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This Court in Bansidhar Sankarlal
vs. Md. Ibrahim [AIR 1971 SC 1292] indirectly affirmed the position that the
limitation is to be considered only with reference to the suit or proceedings,
while considering the position of suit/proceeding initiated after an order of
winding up, without obtaining leave of the Company Court. This Court held thus
:
"..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 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, proceeding will be deemed to be
instituted on the date of granting leave." (emphasis supplied)
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When there is no period of
limitation for an application under the first category of cases under Section
446(1) of the Act, it is inconceivable and illogical to apply the period of
limitation prescribed under Article 137, to an application seeking leave
falling under the second category.
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The object of Section 446 of the Act
is not to cancel, nullify or abate any claim against the company. Its object is
to save the company which has been ordered to be wound up, from unnecessary
litigation and from multiplicity of proceedings and protect the assets for
equitable distribution among its creditors and shareholders. This object is
achieved by compelling the creditors and others to come to the court which is
winding up the company and prove their claims in the winding up. For this
purpose, all suits and proceedings pending against the company are also stayed
subject to the discretion of the winding up court to allow such suits and
proceedings to proceed. When a winding up order is passed, the effect is that
all the affairs pertaining to the company in liquidation, including all
suits/proceedings by or against the company, come within the control and
supervision of the winding up court. The winding up court has to decide whether
it will let the suit/proceeding to continue in the court where it is pending,
or it will itself adjudicate the suit/proceeding. Thus, under Section 446(1),
the winding up court only decides about the forum where the suit has to be
tried and disposed of. The Limitation Act which prescribes the periods within
which a party can approach a court seeking remedies for various causes of
action, is not attracted to such applications under Section 446(1) of the Act.
However, as elaborate arguments were advanced on this issue, we will deal with
it in some more detail.
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An application seeking leave to
proceed, in respect of a pending suit or proceeding (filed before the order of
winding up) is not an application for enforcement of any claim or right.
It
does not seek any 'relief' or 'remedy' with reference to any claim or right or
obligation or liability. It is an application which is interlocutory in nature.
An interlocutory application is not subject to any period of limitation, unless
otherwise specifically provided by law. We are conscious of the fact that an
application under Section 446(1) seeking leave to proceed with the suit/proceeding,
is not filed as an 'interlocutory application' in the suit/proceeding before
the court where such suit/proceeding is pending. But an interlocutory
application is nothing but an application in the course of an action. It is a
request made to a court, for its interference, in a matter arising in the
progress of a proceeding. Therefore, in a broad sense, the application under
section 446(1) filed before the company court seeking leave to proceed with a
pending suit or proceeding, is an 'interlocutory application' with reference to
the pending suit/proceeding. Article 137 is intended to apply to applications
for enforcement of a claim or adjudication of a right or liability in a court.
An application for leave to proceed with a pending suit or proceeding not being
such an application for any relief, will not attract Article 137.
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It is now well settled that if any
winding up order is passed, during the pendency of a suit against the company,
and if the suit is continued without obtaining leave, in spite of that bar
contained in section 446(1), the decree passed is only voidable at the instance
of the liquidator, and not void ab initio.
In
fact, where such decree has been passed against the company and others, the
only person who can avoid the decree on the ground of non-compliance with
section 446(1) of the Act, is the official liquidator of the company and not
the other defendants. A suit/proceeding filed against a company, prior to the
order of its winding up, does not come to an end on the passing of an order of
winding up. The order of winding up merely stays further proceedings in the
suit/proceeding. The suit/proceeding becomes dormant. Various alternatives are
possible when a suit gets so stayed. The plaintiff in the suit can move an
application under section 446(1) of the Act, and when leave is granted, proceed
with the suit. If the leave is refused, the suit may be transferred to the
company court for being tried and disposed of under section 446 (2) (a) of the
Act. The plaintiff may also file an application for transfer of the suit to the
Company Court for disposal under Section 446(2)(a).
Alternatively,
the plaintiff may get the suit dismissed with liberty to make a claim under
section 446(2)(b) of the Act. Even if the suit is proceeded with, without
obtaining leave of the Company
Court, either not
being aware of the order of winding up or ignoring the provisions of section
446(1), the resultant decree will not be void, but only be voidable at the
instance and option of the official liquidator of the company. It is also
possible that the court passing the winding up order may at any time, on the
application either of the liquidator or of any creditor or contributory, make
an order staying the winding up either altogether or for a limited time on such
terms and conditions as the court deems fit, under section 466 of the Act.
When
the winding up is so stayed, a suit against the company (filed before the
winding up order) which stood stayed under section 446(1) could be proceeded
with, even though leave had not been obtained to proceed with the suit. We have
referred to these alternative possibilities to show that having regard to the
nature of an application under Section 446(1) of the Act, it does not attract
Article 137.
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We may next examine the position by
even assuming that Article 137 applied to an application under section 446(1)
for leave to proceed with a pending suit. Article 137 is a residuary provision
applicable to all applications and petitions filed in a court, for which no
period of limitation is prescribed.
It
prescribes a limitation of three years and the period of limitation begins to
run when the "right to apply accrues". To understand the meaning of
the words "right to apply accrues", we may refer to the wording of
Article 137 and a few other Articles in the Schedule to the Limitation Act :
Article
No. Description of suit Period of Limitation Time from which period begins to
run 137 Any other application for which no period of limitation is provided
elsewhere in this division.
3
years When the right to apply accrues.
113
Any suit for which no period of limitation is provided elsewhere in this
Schedule.
3
years When the right to sue accrues.
58 To
obtain any other declaration.
3
years When the right to sue first accrues.
104 To
establish a periodically recurring right.
3
years When the plaintiff is first refused the enjoyment of the right.
Article
58 provides that the time will begin to run when the "right to sue first
accrues". Article 104 provides that time will begin to run when 'the
plaintiff is first refused' the enjoyment of the right. On the other hand,
Article 137 uses the words when the "right to apply accrues" and is
similar to Article 113.
A
suit, which is filed prior to the order of winding up and pending on the date
of winding up, gets stayed when an order of winding up is passed. An order of
winding up does not create any 'right' to file an application under Section
446(1) of the Act. Nor does any right 'accrue' to a plaintiff/petitioner in a
suit/proceeding to file an application under Section 446(1), when an order of
winding up is passed. On the other hand, passing of an order of winding up
casts a duty or obligation on the person who has sued the company to obtain the
leave of the court to proceed with his suit for proceeding. The right to apply
for leave accrues, not because of the order of winding up, but because the
suit/proceeding is stayed. The right to apply for grant of leave under Section
446 (1) accrues every moment the suit remains stayed. Consequently, it follows
that as long as the suit/proceeding (filed before the order of winding up)
remains stayed, an application for leave can be filed. Therefore, the
application filed on 11.8.1995 was in time and not barred by limitation, even
if Article 137 is applied.
Re
: Contention (ii)
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Learned counsel for the appellant
submitted that there was no justification for the court to direct that the decretal
amount should be recovered from the guarantors first and only if there was any
deficit, it should be recovered from the company in liquidation. Learned
counsel for the Bank and the Official Liquidator fairly conceded that there was
no reason or justification for imposing such a condition, having regard to the
legal position that the liability of the principal-debtor and guarantors is
joint or several. There is no question of directing the amount to be first
recovered from the guarantors. The creditor has the option of recovering the
amount in the mannfer he deems fit. Though the company court has the power
while granting leave, to impose conditions, such conditions can be imposed only
for good and valid reasons. The terms imposed cannot affect the rights of third
parties nor impose an obligation contrary to law. Therefore, the condition imposed
while granting leave is deleted.
Conclusion
:
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In the present case, the suit was
against the company as well as its Directors being guarantors in their personal
capacity.
The
suit could have in any case proceeded against the guarantors. It was stayed by
the trial court apparently under Section 446(1) even though there was no such
prayer to that effect. The only prayer before the Court at the instance of
first defendant in the suit for stay of suit under Section 22 of SIC Act which
was not granted. The object of appellants in filing an application for stay was
to drag on the suit. They have succeeded in their effort to stall the suit for
more than 16 years on a virtually non-existent ground. The trial court will,
therefore, have to proceed with the suit with all expedition.
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In view of the above, subject to the
deletion of the condition imposed by company court while granting leave, this
appeal is dismissed upholding the grant of leave. Parties to bear their
respective costs.
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