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Gowra Subraya Setty and Sons Vs. Yellamma Cotton Woollen and Silk Mills Co. Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKarnataka High Court
Decided On
Judge
Reported in[1970]40CompCas466(Kar)
ActsIndian Companies Act, 1913 - Sections 171; Indian Companies (Amendment) Act, 1956 - Sections 446
AppellantGowra Subraya Setty and Sons
RespondentYellamma Cotton Woollen and Silk Mills Co. Ltd. and anr.
Appellant AdvocateA. Jagannatha Shetty, Adv.
Respondent AdvocateParty in person
Excerpt:
.....land development purposes because a bore-well would go to increase the utility of agricultural land by ensuring round the year irrigation. the instrument in question would therefore fall within scope of complete remission granted to instrument of mortgage under government notification dated 23.3.1979 and hence not liable to stamp duty under article 36 of schedule i of the act. - 7. an order granting or refusing leave to proceed with the suit or other proceedings against a company in liquidation being a discretionary order, if the discretion has been exercised in accordance with well recognised principles and not arbitrarily, such an order will not be interfered with in appeal. 282 (4) air1955mad449 .in cases where the company is a necessary party to the action but there are other..........then the appellant filed company application no. 154 of 1968 under section 446 before the learned company judge for leave to proceed with o.s.no. 30 of 1967. in the affidavit filed in support of the application it was stated that the plaintiff has claimed a decree against the 2nd defendant for the suit amount on the basis of his guarantee and the suit against the said defendant cannot be proceed with in the absence of the company in liquidation and therefore leave should be granted to proceed with the suit in the interests of justice. 5. the official liquidator filed a counter-affidavit opposing the application on the ground, inter alia, that the applicant having submitted the suit claim in the liquidation proceedings would be bound by the decision of the official liquidator and this.....
Judgment:

1. The judgment of the court was deliver by GOVINDA BHAT J. - This appeal under section 483 of the Companies ACt 1956 (hereinafter called the 'act'), is directed against the order of Pai J. dated the 4th Day of November, 1968, made in Company Application No. 154 of 1968 in Company Petition No. 4 of 1967, refusing leave to the applicant before him who is the appellant before us under section 446 of the Act to prosecute and continue O.S.No. 30 of 1967, on the file of the Court of the Subordinate Judge, Adoni, Kurnool District, Andhra Pradesh, in which the respondents are the defendants.

2. The matter arises in this way: The appellant a firm of merchants dealing in yarn with the place of business in Adoni, had dealings with the Yellamma Cotton, Woollen & Silk Mills Co. Ltd., Davanagere. They were advancing money to the company towards or on account of yarn to be supplied to them. As a result of the said transactions, the company is said to have become indebted to other appellant in a sum of about Rs. 18,000. The 2nd respondent before us, the managing director of the company, guaranteed the payment of the said amount. After exchange of notices, the appellant instituted on 6th September, 1967, Original Suit No. 30 of 1967 in the Court of the Subordinate Judge, Adoni, against the company and the 2nd respondent for the following reliefs:

(1) for a decree for the sum of Rs. 18,329.90 with future interest and costs against the first defendant-company; and

(2)For a decree personally against the second defendant for the said amounts with future interest and costs.

3. The company, on a petition presented to this court by a creditor on June 6, 1967, was ordered to be wound up by order dated October 5, 1967, made in Company Petition No. 4 of 1967. The official liquidator attached to this court was appointed as the official liquidator of the company.

4. On an application being made by the official liquidator, this court fixed the date by which the creditors of the company are to file their profits of debts or claims against the company and in response to the general notice issued to the creditors in this behalf, the appellant filed a claim for a sum of Rs. 19,714.98 as due to them from the company in liquidation. On October 18, 1967, a memo is stated to have been filed before the Court of the Subordinate judge, Adoni, stating that an order for winding up of the company (defendant No. 1 in the suit) had been made by this court in Company petition no. 4 of 1967 and the properties of the company have vested in the Official Liquidator, Mysore, with effect from October 5, 1967. The suit was consequently stayed under section 446. Then the appellant filed Company Application No. 154 of 1968 under section 446 before the learned company judge for leave to proceed with O.S.No. 30 of 1967. In the affidavit filed in support of the application it was stated that the plaintiff has claimed a decree against the 2nd defendant for the suit amount on the basis of his guarantee and the suit against the said defendant cannot be proceed with in the absence of the company in liquidation and therefore leave should be granted to proceed with the suit in the interests of justice.

5. The official liquidator filed a counter-affidavit opposing the application on the ground, inter alia, that the applicant having submitted the suit claim in the liquidation proceedings would be bound by the decision of the official liquidator and this court as to the validity or extent of the claim and therefore cannot be permitted to proceed with the suit in the court of the Subordinate Judge, Adoni, in respect of the same subject-matter. The official liquidator further submitted that there are no assets realisable except for some items of furniture and the uncalled capital, as the land buildings and machinery of the company are in the custody of a secured creditor in terms of an English mortgage created by the company and that there are no funds available in his hands to appear and defend the suit at Adoni as the same would involve heavy expenditure. The 2nd respondent also filed a counter-affidavit opposing the application.

6. The learned company judge, after hearing the parties before him, refused the leave prayed for. Aggrieved by the said order the applicant has preferred the above appeal.

7. An order granting or refusing leave to proceed with the suit or other proceedings against a company in liquidation being a discretionary order, if the discretion has been exercised in accordance with well recognised principles and not arbitrarily, such an order will not be interfered with in appeal.

8. The object of the winding up provisions of the Act is to put all unsecured creditors upon an equality and to pay them pari passu. To accomplish this it was indispensable that proceedings against the company by way of suit, execution attachment or other process should be suspended otherwise, the winding-up would resolve itself into a scramble for the assets, Section 442 gives the court jurisdiction after presentation of a winding-up petition and before a winding-up order has been made to stay or restrain the proceedings against the company, and by section 446 on a winding-up order being made, proceedings are automatically stayed and cannot be proceeded with without leave of the court. In this way, creditors and others are compelled to come in and prove their claims in the winding-up, and a rateable and just distribution of the company's assets is effected.

9. Section 446 of the Act corresponds to section 171 of the Indian Companies Act, 1913. There are similar provisions in the Companies ACt of United Kingdom . section 231 of the Companies ACt, 1948 (11 & 12 Geo. 6, c. 38) corresponds to section 446 of the Act. In the earlier English Acts there were similar provisions. The courts in England grant leave allowing proceedings to continue against a company in liquidation where the company is a necessary party to an action against it and other persons. In Halsbury's Laws of England (third edition), volume 6, page 698, paragraph 1389, the law on the subject is stated thus:

'When proceedings to continue. - Proceedings will be allowed to continue where they are to enforce a mortgage or security upon the company's property, unless the liquidator offers to give all that the mortgage can obtain by his proceedings, or an order in the winding-up has has already given him that relief. Proceedings will also be allowed to continue where the company is a necessary party to an action against it and other persons; or where an action is the most convenient method of trying a question; or where a shareholders has commenced proceedings for recession and rectification of the register before the winding- up; or where the claim for specific performance, or for recovery of possession. Parties to proceedings which are continued by leave are not relieved from cross-examination in the winding -up as to the matters in dispute.'

10. In McEwen v. London, Bombay and Mediterranean Bank Ltd. 1 the plaintiff having commenced a suit against the banking company and another person, subsequently to which an order for winding up the company was made, and Stuart V.C. having refused the plaintiff leave to proceed with the suit, the Court of Appeal in the Chancery Discharged Stuart V.C.'s order, being of opinion that section 87 of the Companies Act, 1862, was not intended to prevent the prosecution of such a suit to which the company in liquidation was a necessary party. The report of the said decision reads:

'Lord Justice Turner said that it could never have been the intention of the Act to prevent the prosecution against third parties of suits to which a company in liquidation was a necessary defendant. He thought, however, that it would be right that the plaintiff should give an undertaking not to enforce against the company any decree which he might thereafter obtain without the leave of the court......'

11. In In re Marine Investment Company Ltd. 2 the Lord Vice- Chancellor said that he would give the order prayed for in the form prescribed in McEwen's case1. In In re Rio Grand do Sul Steamship Company 3 the Court of Appeal held that the order giving leave4 to proceed in the admiralty court was a proper order, the mortgagees not being parties to the winding-up.

12. The above principles governing grant of leave to continue proceedings were followed by Ramaswamy J. of the Madras High Court in the matter of Subhodhaya Publications Ltd. 4

13. Summarising the principles on which leave is granted in a action, Ramaswamy J. stated that :

(1) [1986] 15 L.T. 495

(2) [1986] 18 L.T. 535

(3) [1877] 5 Ch. D. 282

(4) : AIR1955Mad449 .

'In cases where the company is a necessary party to the action but there are other defendants as well, the courts generally grant leave and that the courts usually insist, however, upon an undertaking by the plaintiff that he will not enforce against the company any judgment which he may obtain without the leave of the court.'

14. In Balkrishna Mahadeo Vartak v. Indian Association Chemical Industries Ltd. 1, Chainani J., as he then was, stated that :

'Leave to file a suit should ordinarily be granted, where the question at issue is one which cannot be gone into and decided in the winding up proceedings.'

15. The learned company judge has refused leave to proceed with the suit on two grounds, viz. :

(1) leave under section 446 being necessary only to proceed against the company, as the applicant has filed a claim for the suit amount with an affidavit of proof in the winding-up proceedings, there is no need for him to proceed with the suit for the purpose of recovering the money from the company ; and

(2) the only purpose of the applicant in continuing the suit being to secured a personal decree against the managing director (respondent No. 2) as the guarantor which cannot be got from out of the funds of the company, the power under section 446 cannot be rightly exercised for assisting such a result.

16. We have referred to the counter-affidavit of the official liquidator in which it was submitted that there are no assets realisable for payment to the unsecured creditors. The case of the appellant in the suit is that the 2nd respondent as guarantor is personally liable for the suit claim and on the basis of the averments made in the plaint, the company is a necessary party to the suit, where the plaintiff has claimed a decree against the 2nd defendant. The question at issue in the suit between the plaintiff and the 2nd defendant cannot be gone into and decided in the winding-up proceedings. The suit against the 2nd defendant cannot be proceeded with in the absence of the company. The power of the court to grant leave under section 446 is intended to be exercised in such circumstances and was never intended to prevent the prosecution against third parties of suits to which the company in liquidation was a necessary defendant. In our judgment, the discretion vested in the learned comp any judge has not been exercised in accordance with settled judicial principles governing the grant of such leave and, therefore, calls for interference in appeal.

17. For the reasons stated above, we allow the appeal, set aside the order made by the learned company judge and make an order granting the leave prayed for upon an undertaking by the appellant that he will not enforce against the company any decree which he may obtain without the leave of the court. In the circumstances of the case, we direct the parties to bear their


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