United Commercial Bank vs State of Jammu and Kashmir and Others

Goyal, J.—This order will dispose of the following issue which was treated as a preliminary issue being purely one of law :

Whether the suit is not maintainable as no leave has been obtained u/s 446 of the Companies Act ? OPR

Voluntary liquidation of respondent No. 2 (hereinafter called " the company") took place on November 8, 1974. The present suit was filed on June 16, 1975, without obtaining any leave u/s 446 of the Companies Act. The application for permission to continue the suit under the said section was moved in this court on March 8, 1976. Instead of granting the leave, the suit was transferred to this court, vide orders dated August 1, 1980, and the petition for leave was dismissed on the agreement of the parties. This order necessarily implies that the post facto permission to institute the suit was duly granted as otherwise the petition would not have been dismissed because of the transfer of the suit to this court. A similar view was taken by B.R. Tuli J. in Punjab National Bank v. Punjab Finance Pvt. Ltd. [1973] 43 Comp Cas 350 (P& H). The question still remains as to whether the post facto sanction could be granted and the suit filed prior thereto would be deemed to be a validly instituted suit. On this matter, there is a lot of conflict between the various High Courts prior to the enforcement of the present Companies Act, but the same was settled by the Supreme Court in Bansidhar Shankarlal v. Mohd. Ibrahim [1971] 41 Comp Cas 21 (SC) wherein it was held that the suit or proceeding without leave of the court may be regarded as ineffective until the leave is obtained. But once the leave is obtained, proceedings will be deemed to be instituted on the date of the grant of the leave. Under the present Act of 1956, some change has been made in the phraseology and the wording of section 446(1) as compared to the provisions contained in Section 171 of the earlier Act. On the basis of the changed phraseology of Sub-section (I) of Section 446, the Division Bench of the Bombay High Court in Eastern Steamship P. Ltd. v. Pucto P. Ltd. [1971] 41 Comp Cas 43 (Bom) held that with regard to the suits against a company in liquidation, leave to continue a suit or to proceed with it could only be granted before the suit is commenced and no leave can be granted to continue it or to proceed with it if it is commenced after the date of the winding up order. This decision was followed by Palaniswami J. of the Madras High Court in Shankar Service Station v. Associated Industrial and Engineering Corporation Ltd. [1974] 44 Comp Cas 488 (Mad). However, I am of the view that there is no substantial and material change in the phraseology of the provisions contained in Sub-section (1) of Section 446 of the Companies Act as compared with the provisions contained in Section 171 of the previous Act. But, in view of the Division Bench decision of the Bombay High Court in Eastern Steamship P. Ltd.''s case [1971] 41 Comp Cas 43 (Bom), and the importance of the question involved, I feel that this matter would better be settled by an authoritative pronouncement by a Division Bench. This case may, therefore, be put up before my Lord the Chief Justice for referring the question stated above to a larger Bench.

JUDGMENT

Goyal, J.

The Hindustan Forest Co., a private limited concern, went into voluntary liquidation on November 8, 1974. The present suit was filed by the United Commercial Bank against the said company and other persons on June 16, 1975, in the High Court of Jammu and Kashmir and was transferred to the file of this court by the order of the company judge dated August 1, 1980. A preliminary objection as to the maintainability of the suit was raised in the written statement on the ground that no leave had been obtained prior to its institution. Vide order dated November 9, 1984, sitting singly, I held that the order passed on August 1, 1980, impliedly granted post facto permission to the institution of the suit. The question still remains, as to whether post facto permission could be granted and be effective for the continuation of the suit instituted prior thereto. As there was a conflict on this question between the two Division Bench judgments of the Bombay and Madras High Courts, I referred the case to a larger Bench. This is how we are seized of this matter.

The requirement of the leave of the court to institute or continue any proceeding or suit against the company in liquidation and its grant is provided for in Section 446 of the Companies Act, 1956. A similar provision was contained in Section 171 of the Companies Act, 1913. Under that provision, the question of the grant of post facto sanction came up before the Supreme Court in Bansidhar Shankarlal v. Mohd. Ibrahim [1971] 41 Comp Cas 21 and it was ruled (headnote) :

"Alternatively, assuming that sanction u/s 179 did not dispense with the leave u/s 171, that there was nothing in the Act which made leave u/s 171 a condition precedent to the institution of a proceeding in execution of a decree against the company. Failure to obtain leave before institution of the proceeding did not entail dismissal of the proceeding; the suit or proceeding instituted without leave of the court would be ineffective until leave was obtained, but once leave was obtained, the proceeding would be deemed instituted on the date of granting leave."

While re-enacting the provisions of Section 171 as contained in Section 446 of the Companies Act, 1956, the Legislature made some changes in its phraseology and on its basis, a Division Bench of the Bombay High Court in Eastern Steamship P. Ltd. v. Pucto P. Ltd. [1971] 41 Comp Cas 43 took the view that leave to continue a suit or to proceed with it could only be granted before the suit is commenced and not thereafter, if it is commenced after the date of the winding-up order. A contrary view was taken by the Gujarat High Court in Star Engineering Works Ltd. v. Official Liquidator of the Krishnakumar Mills Co. Ltd. (In liquidation) [1977] 47 Comp Cas 30 and the Madras High Court in State Bank of India Vs. Official Liquidator, Straps (India) Private Ltd., . To correctly appreciate the ratio of the two conflicting views, the provisions of both sections, i.e., Section 171 of the 1913 Act and Section 446 of the present Act, have to be noticed which read as under :

Section 171 :

" 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."

Section 446(1) :

" 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."

From a comparison of the two provisions, it is apparent that the change made in the phraseology is that in the latter section the words "or if pending at the date of the winding up order " have been added, between the words " shall be proceeded with or commenced against the company ", The addition of the said words has only made the intent of the Legislature more explicit and in no way affected the basic structure of the provision. The words " no suit or other legal proceeding shall be proceeded with" obviously refer to the proceedings which are pending on the date of the winding up order. If the proceedings are not pending on that date, no question of proceeding with them after the passing of the winding up order would arise. The above-noted addition made in the phraseology of the provision is, therefore, of explanatory nature only. The Bombay High Court in Eastern Steamship Private Ltd. Vs. Pucto Private Ltd. and Another, for its view relied on the wording of Section 17 and Section 28(2) of the Provincial Insolvency Act, 1920, and the decisions on the interpretation of that provision. The decision of the Supreme Court in Bansidhar Shankarlal Vs. Mohd. Ibrahim and Another, had not been rendered till then.

The Madras High Court in State Bank of India''s case [1979] 49 Comp Cas 514 while interpreting the provisions of Section 446, relying on the said Supreme Court decision, observed as under (headnote):

" The difference brought about in the language of Section 446 of the Companies Act, 1956, is only a drafting change and has not effected any change in the legal position gathered by the Supreme Court from the language of the corresponding Section 171 of the Indian Companies Act, 1913, and the change in the language of Section 446 of the present Act is only by way of amplification, clarification or elaboration of the provision contained in Section 171 of the former Act rather than alteration or amendment thereof or departure therefrom. Consequently, obtaining leave of the court to proceed with a suit against a company in liquidation is not a condition precedent for instituting the suit and even though a suit had been instituted against a company in liquidation without obtaining leave, such leave can be applied for and obtained even subsequently. However, the suit will be effective only from the date such leave was granted."

Similar opinion was expressed earlier by the Gujarat High Court relying on the same Supreme Court decision in the following terms (headnote of 47 Comp Cas 30:

" Failure to obtain leave of the company court before institution of a proceeding against a company in liquidation would not entail dismissal of the proceeding; the suit or proceeding instituted without leave of the court would be ineffective until leave was obtained, but once leave was obtained the proceeding would be deemed instituted on the date of granting leave."

Respectfully agreeing with the same, we are of the view that the rule laid down by the Supreme Court in Bansidhar Shankarlal''s case [1971] 41 Comp Cas 21 still holds the field and the change made in the phraseology of the present section is of no consequence so far as the competency of the court to grant post facto sanction to continue with the suit instituted after the winding up order is concerned and the suit shall be deemed to have been validly instituted from the date requisite sanction is granted. The case may now be listed before the learned single judge on October 25, 1985, for further trial.