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Benares Cotton and Silk Mills Ltd. (In Liquidation) Vs. Sulbha Devi Gupta - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtAllahabad High Court
Decided On
Case NumberF.A.F.O. No. 67 of 1978
Judge
Reported in[1986]60CompCas639(All)
ActsIndian Companies Act, 1913 - Sections 168
AppellantBenares Cotton and Silk Mills Ltd. (In Liquidation)
RespondentSulbha Devi Gupta
Appellant AdvocateVinod Swaroop, Adv.
Respondent AdvocateSideshwari Prasad, Adv.
DispositionAppeal allowed
Excerpt:
.....the claim and submitted a report dated august 21, 1960. in the above report, he held that the claim was barred by time and also pointed out that the liquidator had a claim against the directors including the claimant, under section 235 of the companies act, and, as such, the claimant was not entitled to any payment until the claim of the official liquidator had been fully satisfied. he urged that the court has misconstrued and misunderstood the decision in the case of jwala prasad [1957] 27 comp cas 310 (all). the above decision clearly lays down that the claim may be made before the official liquidator and it should be within time at the date of the order of winding up. we are satisfied that the contention of the learned counsel is correct and the view taken by the learned district..........1977. he chose to rely on an earlier decision of this court, but in our view, the learned district judge completely misunderstood as to what was laid down in that case. we will now refer to the case of jwala prasad [1957] 27 comp cas 310 (all).13. jwala bank was originally a private bank. it was converted into a limited concern in the year 1938. at the time of conversion, an agreement was entered into between the jwala bank ltd. and sri jwala prasad. it was agreed that jwala prasad shall be the chairman of the board of directors of the jwala bank ltd. for 20 years certain with a salary of rs. 2,000 per month and a free furnished house. the bank functioned until april 12, 1948, when it was directed to stop its business by the government. an application for winding-up of the bank was moved.....
Judgment:

Banerji, J.

1. The first appeal from order has been filed under Section 483 of the Companies Act, 1956, against an order passed by the District Judge, Varanasi, dated Septembers, 1977, allowing claim of the respondent, Smt. Sultha Devi Gupta, for a sum of Rs. 1,17,948.49. Aggrieved by the above order, Benares Cotton and Silk Mills Ltd. (in liquidation) has filed this appeal through the official liquidator.

2. Smt. Sulbha Devi Gupta, hereinafter referred to as ' the claimant ', made a claim for a sum of Rs. 1,17,948.49 before the joint official liquidator. The latter investigated the claim and submitted a report dated August 21, 1960. In the above report, he held that the claim was barred by time and also pointed out that the liquidator had a claim against the directors including the claimant, under Section 235 of the Companies Act, and, as such, the claimant was not entitled to any payment until the claim of the official liquidator had been fully satisfied. The claimant being dissatisfied with the report of the liquidator filed an objection before the Dist. Judge. The official liquidator submitted a reply in the form of a written statement. Papers were filed by the claimant in support of the claim. The official liquidator submitted his supplementary report.

3. Learned District Judge framed two issues. On the first issue he held that the subject-matter of the claim was advanced as loan to the company. This necessitated enquiring into the other issue, viz., whether the claim was barred by limitation. The District Judge held that the claim was not barred by limitation. The court below relied on a Division Bench decision of our court in the case of Jwala Prasad v. Jwala Bank Ltd. [1957] 27 Comp Cas 310 (All) and a Division Bench decision of the Madras High Court in the case of S. Abdul Muthalibu v. K. M. Mohammed Abdul Khader [1962] 32 Comp Cas 1102 (Mad). It was observed by the court below in its judgment that, according to the decision in the case of Jwala Prasad v. Jwala Bank Ltd. [1957] 27 Comp Cas 310 (All), the date of the winding up would be treated as the date on which the application for winding up was made. On this basis, the court held that the advance was made on July 9, 1951, and the winding-up petition filed on May 13, 1954, was thus within three years and, as such, the claim was maintainable.

4. The District Judge, while allowing the claim of the respondent, also directed that the claim was allowed subject to the restriction ' that she will be entitled to get this amount of the claim provided she is not found guilty of misconduct in the affairs of the company which misconduct led to the winding up of the company in the proceeding pending in that regard.' Apart from the appeal, a cross-objection has been filed on behalf of the respondent. The appeal was argued by Mr. Jagdish Swarup, senior advocate, on behalf of the appellant, hereinafter referred to as ' the bank .'. Mr. Sidheshwari Prasad, who had filed the cross-objections on behalf of the respondent, appeared during the course of the hearing and stated that he has no instructions in the appeal and the cross-objections. We have heard the counsel.

5. Mr. Jagdish Swarup contended that the decision of the learned District Judge on issue No. 2 was patently erroneous. He urged that the court has misconstrued and misunderstood the decision in the case of Jwala Prasad [1957] 27 Comp Cas 310 (All). The above decision clearly lays down that the claim may be made before the official liquidator and it should be within time at the date of the order of winding up. This was the correct view in law and this had also been stated by a Division Bench of this court in the case of J.A. Dixit v. Official Liquidator, AIR 1963 All 284. Mr. Jagdish Swarup also referred to a passage from Buckley on the Companies Acts and a passage from Palmer's Company Law as also paragraph 1273 of the fourth edition of Halsbury's Laws of England. He also cited a decision in the case of Lahore Enamelling and Stamping Co. Ltd. v. A.K. Bhalla[1958] 28 Comp Cas 216 (Punj), which was followed by another single judge in the case of Simplex Mfg. Co. Ltd. v. Hindustan Tools Mfg. Co. Ltd. [1960] 30 Comp Cas 251 (Punj). Learned counsel contended that the view taken by the District Judge that the law laid down in these two decisions was not applicable was erroneous. Learned counsel further contended that although the decision in the case of Lahore Enamelling and Stamping Co. Ltd. [1958] 28 Comp Cas 216 (Punj) had been overruled in Ram Chand Puriv. Lahore Enamelling and Stamping Co. Ltd. [1960] 30 Comp Cas 515 (Punj), the view taken therein was based on a misconstruction of the decision in Jwala Prasad's case [1957] 27 Comp Cas 310 (All). Learned counsel also cited a decision of a single judge of the Calcutta High Court in Chandbali Steamer Service Co. Ltd., In re [1960] 30 Comp Cas 61 (Cal). To sum up, his argument was that the material date was the date of the winding-up order and not the date of the making of application for winding up. We are satisfied that the contention of the learned counsel is correct and the view taken by the learned District Judge is unsustainable in law and must be set aside. We proceed to give our reasons now.

6. In the present case, the winding-up petition was filed on May 13, 1954. The winding-up order was made on May 4, 1955. It is not disputed that the advance was given on July 9, 1951. In the normal course, a suit for recovery of the amount advanced as loan could be filed within three years from the date of the advancing of the loan. Thus, in the present case, the advance given on July 9, 1951, was recoverable by a suit up to July 9, 1954. It was clearly conceded by Mr. Jagdish Swarup that if the material date was the date of the making of the winding-up petition, i.e., -May 13, 1954, the claim would be within time, but if the material date was May 4, 1955, the claim was clearly barred by time, as the period of three years from July 9, 1951, ended on July 9, 1954. We would not consider the legal position, Halsbury's Laws of England, Fourth Edition, Volume 7, paragraph 1273, relates to statute-barred debts. It reads as follows :

'Time under the Limitation Act, 1939, ceases to run against a creditor on a winding-up order being made, and he is allowed to prove at any time before the company is dissolved, subject to the ordinary rule as to not interfering with dividends already paid. A proof in respect of claims statute-barred before the order is not allowed.'

7. Reference is made to a decision in In re General Rolling Stock Co, Ltd. Joint Stock Discount Co.'s case [1872] 7 Ch App 646. This case has been referred to by a Division Bench of our court in /. A. Dixit's case, AIR 1963 All 284, and in the case of Ckandbali Steamer Service Co. Ltd,, In re [1960] 30 Comp Cas 61 (Cal).

8. The precise question which came up for consideration in the case of J. A. Dixit, AIR 1963 All 284, was as to which was the starting point of limitation ; whether the date of the making of winding-up petition or the date when the winding up order was made. In that case, the learned company judge took the view that the date of making of the winding-up order was the point of time from which the limitation was to be computed. The learned company judge referred to the observations made by the Court of Appeal in Chancery in General Rolling Stock Co., In re [1872] 7 Ch App 646 and the observations made by the Calcutta High Court in the matter of Chandbali Steamer Service Co. Ltd. [1960] 30 Comp Cas 61 (Cal). The Division Bench referred to a passage from the judgment of Lord Justice James who held that the statute of limitation would be in abeyance in regard to the liabilities of a company from the date of the winding-up order. Their Lordships also referred to the decision of Mukharji J. in the case of Chand-bali Steamer Service Co. Ltd., In re [1960] 30 Comp Cas 61 (Cal). It was observed therein (at page 290 of AIR 1963 All)'.

'...that a claim which was already barred by limitation at the date of the winding-up order could not be entertained by the liquidator or the court but the claim that was not so barred at the date of the winding-up order but became barred after the date of the winding-up order could be entertained and admitted.

An argument was raised on behalf of the appellants that since the winding up order related back to the date of the presentation of the petition for winding up, limitation must be held to be suspended from that date. This argument was founded on what was provided for in Section 168 of the Indian Companies Act, 1913.'

9. Their Lordships rejected the argument by saying that ' Section 168 does not say that on the making of the order of winding up, it shall be deemed to relate back to the date of the presentation of the petition for winding up, as was the case under the Insolvency Act.'

10. Reference was also made to a decision of the Punjab High Court in the case of Lahore Enamelling and Stamping Co. Ltd. [1958] 28 Comp Cas 216 (Punj) to urge that the date of making of the winding-up petition was the material date. The Division Bench rejected the argument and observed (at p. 290 of AIR 1963 All) :

' We have, therefore, no hesitation in holding that any debts due from the company which were barred at the date of the making of the winding up order would be barred and not recoverable in liquidation proceedings.'

11. We are in complete agreement with the view expressed by the Division Bench. The above view holds the field as far as this court is concerned.

12. It is surprising that the attention of the learned District Judge was not drawn to this decision although the District Judge was deciding the matter in the year 1977. He chose to rely on an earlier decision of this court, but in our view, the learned District Judge completely misunderstood as to what was laid down in that case. We will now refer to the case of Jwala Prasad [1957] 27 Comp Cas 310 (All).

13. Jwala Bank was originally a private bank. It was converted into a limited concern in the year 1938. At the time of conversion, an agreement was entered into between the Jwala Bank Ltd. and Sri Jwala Prasad. It was agreed that Jwala Prasad shall be the chairman of the board of directors of the Jwala Bank Ltd. for 20 years certain with a salary of Rs. 2,000 per month and a free furnished house. The bank functioned until April 12, 1948, when it was directed to stop its business by the Government. An application for winding-up of the bank was moved on August 1, 1949, and a winding-up order was made on February 17, 1950, and the official liquidator was appointed to take charge of the assets of the bank. Shri Jwala Prasad preferred a special appeal against the above order and on February 24, 1950, the operation of the winding-up order was stayed by the appellate Bench. The special appeal was dismissed on October 24, 1950. The official liquidator took charge of the assets of the bank on November 1, 1950. Shri Jwala Prasad filed his claim for a sum of Rs. 8 lakhs in respect of his monthly salary, compensation for free furnished house, travelling allowance and the price of goodwill of his private concern. The salary claimed was from July 1, 1939, to June 30, 1946, from June 1, 1950, to October 31, 1950, and from November 1, 1950, to June 30, 1958. The official liquidator allowed his claim for salary for the period bet- . ween June 1, 1950, and October 31, 1950, and also allowed his salary for May, 1950, which he had by mistake not claimed but which was found due to him as also the travelling expenses between May 1, 1950, and October 31, 1950, at the rate of Rs. 300 per mensem. Rest of the claim was not allowed. Aggrieved, Jwala Prasad filed an appeal under Section 183(5) of the Indian Companies Act before the learned company judge. The learned company judge allowed the claim for travelling expenses from June 1, 1950, to October 31, 1950. The rest of the claim was rejected. In the special appeal, the claim was made for past salary from July 1, 1939, to June 30, 1946, at the rate of Rs. 2,000 per mensem, further salary from November 1, 1950, to June 30, 1958, at the same rate and the price of the goodwill at Rs. 5 lakhs.

14. The special appeal was heard by a Bench consisting of Agrawal and Upadhya JJ. They gave separate opinions as there was difference of opinion. The matter was referred to a third judge, R. N. Gurtu J. The question as to whether any part of the claim was barred or not was dealt with by Agarwala J. His observation is contained in paragraph 5 of the report and it will be relevant to quote the same to indicate whether the learned District Judge misunderstood and misconstrued the said observation.

15. Apart from this, the major portion of the claim is palpably barred by limitation. In order that the claim may be made before the official liquidator, it should be within time at the date of the order of winding-up. The date of winding-up would be treated as August 1, 1949, when the application for winding-up was made. The claim for the past salary from July 1, 1939, to June 30, 1943, would be barred by limitation even if the period of limitation be considered as six years under Article 116 of the Limitation Act.

16. The learned District Judge in his order states :

' The other ruling is the Division Bench ruling of our Hon'ble High Court in Jwala Prasad v. Jwala Bank Ltd. [ 1957] 27 Comp Cas 310 (All) which says that the date of winding-up would be treated as the date on which the application for winding-up was made. The aforesaid Division Bench ruling of our Hon'ble High Court and also the aforesaid Division Bench ruling of the Hon'ble Madras High Court clearly go to show that in the present case also, the limitation will be taken with reference to the date when the application for winding-up was moved which is May 13, 1954.

The advance in question was given to the company on July 9, 1951. Thus, this advance given to the company is well within time and cannot be said to be barred by time. '

17. Let us now examine whether the observation made by the learned District Judge is correct. Agarwala J. very clearly observed : (at p. 313 of 27 Comp Cas) : ' In order that the claim may be made before the official liquidator, it should be within time at the date of the order of winding up. ' This makes it clear that the claim has to be made before the official liquidator aiad it should be within time on the date when the winding up order is made. This view finds support from the observations of Lord Justice James in In re General Rolling Stock Co. [1872] 7 Ch App 646, the view of the Calcutta High Court in Chandbali Steamer Service Co. Ltd., In re [1960] 30 Comp Cas 61 (Cal), the view of the Punjab High Court in the case of Lahore Enamelling and Stamping Co. Ltd, [1958] 28 Comp Cas 216 (Punj), and the view expressed by the Division Bench of this court in the case of J. A. Dixit, AIR 1963 All 284. The next line of the judgement of Agarwala J. reads (at p: 313 of 27 Comp Cas) ;

' The date of the winding-up would be treated as August 1, 1949. '

18. It is to be noticed at once that his Lordship did not use the expression ' winding-up order ' in this sentence. Reference may be made to Section 162 of the Indian Companies Act, 1913. That section reads as follows:

' A winding-up of a company by the court shall be deemed to commence at the time of the presentation of petition for the winding-up. '

19. It appears to us that Agarwala J. had the provisions of Section 168 of the Indian Companies Act in mind. August 1, 1949, was the date when the application for winding-up had been made. There is no provision in the Companies Act which states that the date of the winding-up order would relate back to the date of the making of the application for winriing-up. Consequently, the court could not have taken the view that the winding-up order when passed would take effect from the date of the making of the winding-up petition. There is nothing in the Act which indicates that the right of a claimant against a company is suspended from the date of the presentation of the winding-up petition. A creditor has a right to proceed to recover his debt from the company even when his winding-up petition is pending and no final order has been passed thereon. Consequently, to suspend the operation of limitation even before the winding-up order was passed was not contemplated at all.

20. Reference may be made to Palmer's Company Law, volume I, page 1166. paragraph 85.53 reads :

' A statute-barred debt does not constitute a ' liability ' of the company for the purposes of winding-up. The liquidator in a compulsory winding-up or an insolvent voluntary winding-up is under a duty to reject the proof of a statute-barred debt ; in a solvent voluntary winding-up, he must do so likewise unless the contributories consent.....

A winding-up order stops the period of limitation from running in the company's favour so that a debt which is not statute-barred at the date of the order can be proved for. '

21. Buckley on the Companies Acts, 13th edition, page 630, Section 316 states :

'The assets are to be applied in payment of liabilities subsisting at the time of the winding-up order ; after the order is made, statutes of limitations do not run.

But, of course, a debt barred at the date of the order cannot be proved, and cannot even in a solvent voluntary liquidation properly be paid unless the contributories consent. '

22. It is, therefore, obvious from the above that the correct position in law is that a debt which is within time at the date of the winding-up order can be proved, but one which has already become time-barred cannot be proved. In other words, a claim which is time-barred cannot be entertained or allowed. It is also clear from the enunciation of law, viz., Halsbury's Laws of England, Palmer's Company Law and Buckley on the Companies Acts, as well as decided cases referred to above that the limitation is suspended from the date of the winding-up order. Thus, any amount which is within time at the date of the making of the winding-up order can be entertained and, if proved, may be allowed.

23. In the present case, what has happened is that the learned District Judge has interpreted the sentence. ' The date of the winding-up would be treated as August I, 1949, when the application for winding-up was made '. This is clearly unwarranted and appears to us to be a misconstruction of that sentence.

24. Let us now examine as to what was the order passed by Agarwala J. in the case of Jwala Prasad [1957] 27 Comp Cas 310 (All). He was of the view that the claim for past salary from July 1, 1939, to June 30, 1943, would be barred by limitation even if the period of limitation be considered as six years under Article 116 of the Limitation Act. It may be recalled that application for winding-up was filed on August 1, 1949. Six years from June 30, 1943, would take it to June 30, 1949. Thus, even this claim was barred on August 1, 1949. The other matter which was before the court was for future salary from November 1, 1950, to June 30, 1958. Agarwala J. held that this amount was payable because of the contract between Jwala Prasad and Jwala Bank and this contract subsisted. His Lordship held that the appellant's debt had to be evaluated as at the date of the winding-up order under Section 228 of the Companies Act after making a deduction for the fact that he Was now free to do any business or to seek employment of his choice. His Lordship deducted half the amount. It is, therefore, obvious from the above that the judgment of Agarwala J. was of no support to the appellant and the learned District Judge erred in taking the view that he has taken in his judgment.

25. The learned District Judge took the view that the single judge decision of the Punjab High Court in the case of Lahore Enamelling and Stamping Co. Ltd.[1958] 28 Comp Cas 216 (Punj), could not be preferred to the Division Bench decision of this court in Jwala Prasad [1957] 27 Comp Cas 310 (All). In Lahore Enamelling and Stamping Co. Ltd. [1958] 28 Comp Cas 216(Punj), Tek Chand J. was considering the question whether the principle enunciated under Section 168 could be extended to the period of limitation prescribed for filing suits, appeals, etc. Tek Chand J. observed (at p. 221 of 28 Comp Cas) :

' The Legislature in its wisdom did not choose to extend the operation of Section 171 to all suits and other legal proceedings filed or pending after the date of the winding-up petition.....The terminus a quo for purposes of a statutory bar under Section 171 against commencing and continuing legal proceedings dates from the winding-up order. A creditor can take legal proceedings against a company after the petition is presented, and if the petition is dismissed and no winding-up order is made, then the suit or other legal proceedings will go on unhindered by the provisions of the Indian Companies Act.'

26. Tek Chand J. observed that ' I cannot read in the words ' when a winding-up order has been made ' the words ' when a petition for winding-up is made '. ' He further observed (at p. 222 of 28 Comp Cas) :

' The principle governing limitation as embodied in Section 9 of the Indian Limitation Act is that when once limitation has commenced to run it will continue to do so unless it is stopped by virtue of any express statutory provisions.'

27. Tek Chand J. held (at p. 226 of 28 Comp Cas) ;

' The doctrine of relation back is restricted in scope and cannot be extended for all purposes. In particular, it will not be correct to extend it, so as to interfere with the law of limitation and especially with the rule embodied in Section 9 of the Indian Limitation Act. Moreover, if the scope of the doctrine of relation back is widened, that will introduce considerable uncertainty regarding the termination of the period of limitation.'

28. With respect, we entirely agree with the view expressed by Tek Chand J.

29. This decision came up before a Division Bench on appeal and is reported as Ram Chand Pun v. Lahore Enamelling and Stamping Co. Ltd. [1960] Comp Cas 515 (Pun). Reliance was placed on the decision in the case of Jwala Prasad [1957] 27 Comp Cas 310 (All). This is what the learned . judges have said in their judgment (at p. 519 of 30 Comp Cas) :

'In Jwala Prasad v. Jwala Bank Ltd. [1957] 27 Comp Cas 310 (All), which came before the Allahabad High Court, the point for consideration was similar to the one before us. The learned judges observed that the date of the filing of the application for winding up was the relevant date for computing limitation. The question in that case related to the claim for the recovery of the salary of the managing director. That part of the claim in respect of the salary, which was within limitation on the date the application for winding up was filed, was held to be provable.'

30. Paragraph 5 of the judgment in Jwala Prasad's case [1957] 27 Comp Cas 310 (All) was quoted. The Division Bench of the Punjab High Court held that the facts and law were in all fours and were similar to the case before them. The Division Bench observed (at p. 520 of 30 Comp Cas) :

' .....the Allahabad High Court held that for the purposes of limitation, the date when the application for winding up is made is to be considered the date when the order for winding up is made. This is, in effect, what Section 168 of the Companies Act provides.'

31. It appears to us and we say so with great respect that the judgment of Agarwala J.. was misconstrued. The observation of the Division Bench was as follows :

'The learned judges observed that the date of the filing of the application for winding up was the relevant date for computing limitation.'

32. No such observation had been made by Agarwala J. in the case of Jwala Prasad [1957] 27 Comp Cas 310 (All). Further, the observation that ' part of the claim in respect of the salary, which was within limitation on the date the application for winding up was filed, was held to be provable ', was also incorrect. The learned judge had not held that any part of the claim in respect of the salary was within limitation except what had been allowed by the official liquidator on the date when the application for winding up was filed. In our opinion, there is nothing in the judgment of Agarwala J. to warrant the conclusion that the material date was the date of the making of application for winding up.

33. On a consideration of the law and the various decisions cited above, we are of the opinion that the material date for the purposes of computing the limitation is the date of the passing of the order on the winding-up petition, which is commonly known as winding up order. We are further of the view that the date of making of the application for winding up is not the material date for the purposes of Section 171 of the Indian Companies Act. We are also of the view that there is no question of relating back the winding-up order to the date of the making of application for winding up.

34. Applying these tests to the admitted facts of the present case, it is clear that the advance which was given on July 9, 1951, could be recovered up to July 9, 1954. The winding-up order having been passed on May 4, 1955, the loan advanced to-the company was barred by time. Having held that the date of making of the application for winding up being irrelevant, the filing of the said application on May 13, 1954, would not enure to the benefit of the claimant. The material date being the date of the passing of the winding-up order, i.e., May 4, 1955, the claim was clearly barred by time. The view taken by the learned District Judge is patently erroneous and cannot be sustained. For the reasons indicated above, the appeal must be allowed.

35. A cross-objection has been filed by the claimant. A perusal of the grounds of the cross-objection shows that the claimant disputed the jurisdiction of the learned District Judge to impose restrictions having the effect of withholding its implementation. The impugned order was being challenged to the extent the restrictions had been imposed. The learned District Judge had in the order indicated that the claimant would be entitled to get the amount of the claim provided she was not found guilty of misconduct in the affairs of the company which misconduct led to the winding up of the company. We are of the view that the cross-objection has no legs to stand once the court comes to the conclusion that the claim is barred by time and not maintainable. Restrictions imposed would automatically fall on disallowing the claim. In this view of the matter, the cross-objection has no merits and must fail.

36. In the result, therefore, the appeal succeeds and is allowed. The judgment and decree of the learned District Judge dated September 8, 1977, are set aside. The cross-objection is dismissed. However, in the circumstances of the case, we direct the parties to bear their own costs.


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