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Phirojshah Pestonji Contractor Vs. Ramnath Janarda, Prabhu and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtGujarat High Court
Decided On
Judge
Reported in(1965)6GLR477
AppellantPhirojshah Pestonji Contractor
RespondentRamnath Janarda, Prabhu and ors.
Cases ReferredChenchuramana v. Arunachalam A.I.R.
Excerpt:
.....did not present any difficulty in the way of the official liquidator for there was nothing in the indian companies act 1913 which expressly excluded the applicability of section 18 to an application under section 235. but the real controversy centred round the question whether the first condition was satisfied. it was of course not disputed that the indian companies act 1913 was a special law but the contention urged on behalf of the opponents was that the other requirements of the condition were not satisfied and the argument in this behalf was a two-fold argument. this contention was based on the premise that section 29(2) could apply only if there was some period of limitation provided for an application under section 235 by the first schedule to the limitation act and a period of..........(hereinafter referred to as the company) against its former officers under section 235 of the indian companies act 1913 and section 543 of the companies act 1956 the company was incorporated under the baroda companies act and carried on business of life insurance with its head office at baroda and branches in bombay and indore. opponent no. 1 was at all material times the manager of the bombay office; opponent no. 2 was the general manager and opponents nos. 3 to 5 were the directors of the company. as the financial position of the company was unsatisfactory the controller of insurance presented a petition for winding up the company in the district court baroda. in the petition an application was made for appointment of a provisional liquidator and on the application a provisional.....
Judgment:

P.N. Bhagwati, J.

1. These four appeals arise out of an application made by the Official Liquidator of the Bombay Baroda Assurance Company Limited (hereinafter referred to as the Company) against its former Officers under Section 235 of the Indian Companies Act 1913 and Section 543 of the Companies Act 1956 The Company was incorporated under the Baroda Companies Act and carried on business of life insurance with its Head Office at Baroda and branches in Bombay and Indore. Opponent No. 1 was at all material times the Manager of the Bombay Office; Opponent No. 2 was the General Manager and Opponents Nos. 3 to 5 were the Directors of the Company. As the financial position of the Company was unsatisfactory the Controller of Insurance presented a petition for winding up the Company in the District Court Baroda. In the petition an application was made for appointment of a provisional Liquidator and on the application a provisional Liquidator was appointed by the District Court on 28th April 1951. The petition was thereafter heard and an order for winding up the Company was made and the provisional Liquidator was confirmed as the Official Liquidator of the Company on 14th August 1951. In the course of winding up the Company the Official Liquidator found that the opponents were guilty of misfeasance breach of trust and or misapplication of the moneys of the Company and as a result thereof the Company had suffered a loss of Rs. 46 383 and he therefore filed the present application for an order requiring the opponents to contribute the sum of Rs. 46 383 to the assets of the Company by way of compensation in respect of such misfeasance breach of trust and/or misapplication. The application was headed as one under Section 235 of the Indian Companies Act 1913 and Section 543 of the Companies Act 1956 but it may be pointed out at the outset that since the winding up of the Company had commenced before the coming into force of the Companies Act 1956 the Companies Act 1956 did not apply in relation to the winding up of the Company and the Company was required to be wound up in accordance with the provisions of the Indian Companies Act 1913 (Vide Section 647 of the Companies Act 1956 The application was therefore really an application under Section 235 of Indian Companies Act 1913 The acts of misfeasance breach of trust and/or misapplication of the moneys of the Company charged against the opponents were set out in the application and it was alleged that by reason of these acts of the opponents the Company had been put to a loss of Rs. 46 383 The application was made on 7th September 1957 more than three years from the date of first appointment of the Liquidator and was therefore prima facie beyond the time prescribed by Section 235 of the Indian Companies Act 1913 but the Official Liquidator alleged in the application that he was kept from the knowledge of his right to make the application by means of fraud committed by the opponents and the fraud first became known to him on or about 2nd August 1957 or at the earliest on or about 21st December 1956 and the period of three years was therefore liable to be computed not from the date of first appointment of the Liquidator but from 2nd August 1957 or at any rate 21 December 1956 being the date when the fraud first became known to him and if that was done the application was within time. The Official Liquidator in taking this plea obviously invoked Section 18 of the Limitation Act. The application was resisted by all the opponents and amongst the various contentions raised by the opponents there were two of a preliminary character. The first was that the application was not tenable as it did not disclose a cause of action and the second was that it was barred by limitation. On these contentions two issues were raised by the learned District Judge and they were ordered to be tried as preliminary issues. At the commencement of the hearing of these two issues the issue in regard to the contention that the application was not tenable as it did not disclose a cause of action was given up and the only issue which was debated was whether the application was barred by limitation and that was on the assumption that the allegations as to fraud set out in the application were correct. The argument urged on behalf of the opponents was that even if those allegations were correct the application was time-barred since Section 18 of the Limitation Act did not apply to an application under Section 235 of the Indian Companies Act 1913 and the Official Liquidator was therefore not entitled to invoke the aid of that section in computing the period of three years prescribed by Section 235 of the Indian Companies Act 1913 It was also sought to be contended on behalf of the opponents that in any event those allegations even if correct did not constitute fraud within the meaning of Section 18 of the Limitation Act but the learned District Judge did not allow this contention to be urged since the issue as regards limitation was ordered to be tried as a preliminary issue only on the basis of the contention that Section 18 of the Limitation Act was not applicable and the learned District Judge observed that for this contention a separate issue would be framed if necessary and that issue could be decided later. The learned District Judge then proceeded to decide the contention as regards the applicability of Section 18 and held that by reason of Section 29(2) Section 18 was applicable to an application under Section 235 of the Indian Companies Act 1913 and that the Official Liquidator was therefore entitled to invoke Section 18 in computing the period of three years prescribed for the application by Section 235 of the Indian Companies Act 1913 and the application was consequently not barred by limitation Opponents Nos. 1 3 4 and 5 being aggrieved by this decision of the learned District Judge preferred separate appeals in this Court and these are the appeals which have come up for hearing before us to-day. Since these appeals are directed against the same judgment and involve the same question it would be convenient to dispose them of by a common judgment.

2. It would be seen from what is stated above that the question which arises in these appeals is a narrow one namely whether Section 18 of the Limitation Act applies to an application under Section 235 of the Indian Companies Act 1913 Section 235 of the Indian Companies Act 1913 requires an application under that section to be made within three years from the date of the first appointment of the liquidator in the winding up or of the misapplication retainer misfeasance or breach of trust as the case may be whichever is longer. Now so far as the present application is concerned it was obviously made more than three years from the date of the first appointment of the Liquidator that being the longer of the two periods available to the Official Liquidator under Section 235 and the application was therefore prima facie beyond the time prescribed by Section 235. The Official Liquidator was therefore obliged to rely on Section 18 of the Limitation Act and unless that section could be availed of by the Official Liquidator it is evident that the application would fail. Now Section 18 was sought to be made applicable by reference to Section 29(2) of the Limitation Act. Section 29(2) provided as follows:

29. (2) Where any special or local law prescirbes for any suit appeal or application a period of limitation different from the period prescribed therefor by the first schedule the provisions of Section 3 shall apply as if such period were prescribed therefor in that schedule and for the purpose of determining any period of limitation prescribed for any suit appeal or application by any special or local law-

(a) the provisions contained in Section 4 sees. 9 to 18 and Section 22 shall apply only in so far as and to the extent to which they are not expressly excluded by such special or local law; and

(b) the remaining provisions of this Act shall not apply.

It is clear on a plain reading of this section that two conditions must be satisfied before the section can be called in aid by the Official Liquidator. First there should be a special or local law which prescribes for an application under Section 235 of the Indian Companies Act 1913 a period of limitation different from that prescribed therefor by the First Schedule to the Limitation Act and secondly there should be no provision in such special or local law which expressly excludes the applicability of Section 18 to such an application. Now so far as the second condition is concerned it was not disputed that if the first condition was satisfied the second condition did not present any difficulty in the way of the Official Liquidator for there was nothing in the Indian Companies Act 1913 which expressly excluded the applicability of Section 18 to an application under Section 235. But the real controversy centred round the question whether the first condition was satisfied. Could it be said that the Indian Companies Act 1913 which by Section 235 prescribed a period of three years within which an application under that section should be made to the Court embodied a special or local law prescribing for such an application a period of limitation different from the period of limitation prescribed therefor by the First Schedule to the Limitation Act. It was of course not disputed that the Indian Companies Act 1913 was a special law but the contention urged on behalf of the opponents was that the other requirements of the condition were not satisfied and the argument in this behalf was a two-fold argument.

3. The first head of the argument was that no period of limitation was provided for an application under Section 235 by the First Schedule to the Limitation Act and it could not therefore be said that the Indian Companies Act 1913 prescribed for an application under Section 235 a period of limitation different from the period of limitation provided therefor by the First Schedule to the Limitation Act. This contention was based on the premise that Section 29(2) could apply only if there was some period of limitation provided for an application under Section 235 by the First Schedule to the Limitation Act and a period of limitation different from such period of limitation was provided for the application by the special law namely the Indian Companies Act 1913 But this premise is in our opinion not well-founded and must be rejected having regard to two decisions both of which have a binding authority on us. The first decision to which we must refer is a decision of a Division Bench of the Bombay High Court in Canara Bank Ltd. v. The Warden Insurance Company Ltd. (1951) 54 Bom. L.R. 661 where Chagla C.J. and Gajendragadkar J. as they then were observed that the period of limitation prescribed by the special law may be different under two different circumstances; it may be different if it modifies or alters a period of limitation fixed by the First Schedule to the Limitation Act and it may also be different in the sense that the First Schedule to the Limitation Act may omit to lay down any period of limitation for a particular appeal and the special law may provide a period of limitation in which case the special law would to that extent be different from the Limitation Act. This view taken by the Bombay High Court was confirmed by the Supreme Court in Vidyacharan v. Khubchand : [1964]6SCR129 where Ayyangar J. delivering the majority judgment observed after formulating the point under con-sideration:.There have been several decisions on this point but it is sufficient to refer to the decision of the Bombay High Court in Canara Bank Ltd. Bombay v. Warden Insurance Co. Ltd. Bombay where Chagla C.J., repelled this construction and held that even where there was no provision in the 1st Schedule for an appeal in a situation identical with that for which the Special Law provides the test of a prescription of a period of limitation different from the period prescrided by the first schedule is satisfied. This Court in Kaushalya Rani v. Gopai Singh : [1964]4SCR982 upheld this construction and approved the judgment of Chagla C.J. in the Canara Bank case : AIR1953Bom35 ...

It must therefore be held that even though no period of limitation was provided for an application under Section 235 by the First Schedule to the Limitation Act the Indian Companies Act 1913 in so far as Section 235 prescribed a period of three years within which such an application must be made to the Court was a special law prescribing for such an application a period of limitation different from that prescribed therefor by the First Schedule to the Limitation Act.

4. The second contention urged on behalf of the opponents for repelling the applicability of Section 29(2) was that Section 235 of the Indian Companies Act. 1913 did not provide any period of limitation at all and the condition requisite for the applicability of Section 29(2) was therefore not satisfied. The argument was that though undoubtedly Section 235 required that an application under that section must be made within three years from the date of first appointment of the Liquidator or of the misapplication retainer misfeasance or breach of trust as the. case may be whichever is longer this requirement did not prescribe any period of limitation but merely laid down a condition precedent on the fulfilment of which alone the Court obtained the jurisdiction to entertain the application. Section 235 it was contended constituted the Court a special Tribunal and the jurisdiction of this special Tribunal was dependent on the fulfilment of the condition precedent namely that the application should be made within the prescribed period of three years and if the condition precedent was not fulfilled the special Tribunal could not acquire jurisdiction and there was therefore no question of the applicability of Section 29(2) which could apply only if a period of limitation was provided. This contention is in our opinion based on an erroneous reading of Section 235. It is not correct to say that Section 235 set up any special Tribunal for determination of any claims which might be made in an application under that section. It is now well-settled that Section 235 did not create any new rights or liabilities but merely provided a summary remedy for enforcement of rights and liabilities which always existed and which could apart from Section 235 be enforced only by the Company in liquidation against the delinquent directors managers and other officers. No authority is necessary for this proposition but if any were needed it is to be found in the decision of the Bombay High Court tn the official Liquidator v. Dhirajlal Mody (1960) 58 Bom. L.R. 903. The Legislature having provided a summary remedy for enforcement of these rights and liabilities also declared in which Court the summary remedy should be enforced. There was no question of creating any special Tribunal. The District Court or the High Court as the case may be was invested with jurisdiction to grant this summary remedy when an application might be made to it for that purpose. When the Legislature first enacted Section 235 the Legislature did not provide any period of limitation. The result was that there was a conflict of decisions of various High Courts as to which was the appropriate Article of the Limitation Act which applied to an application under Section 235 Moreover it was also found that in several cases the Official Liquidator was not in a position to take action under Section 235 for the period of limitation computed from the date of the misapplication retainer misfeasance or breach of trust often expired before the Official Liquidator could investigate into the affairs of the company and ascertain whether there was any misapplication retainer misfeasance or breach of trust for which compensation should be claimed from the delinquent directors managers and other officers. The Legislature therefore amended Section 235 by the Indian Companies (Amendment) Act 1936 and introduced a period of limitation namely three years and fixed the terminus ad quern as the date of the first appointment of the Liquidator or the date of the misapplication retainer misfeasance or breach of trust whichever would provide a longer period of limitation to the Official Liquidator. This amendment laid at rest the controversy as regards the appropriate period of limitation and also left sufficient time to the Official Liquidator after he came in charge of the affairs of the Company within which he could take whatever action he found necessary to be taken under the section against the delinquent directors managers and other officers. If this legislative history of the enactment of Section 235 and of the amendment made in it is borne in mind the conclusion is inescapable that the period of three years provided in the section is a period of limitation. The Legislature introduced the period of limitation in the body of Section 235(1) itself. The legislature might have well enacted a separate Sub-section providing that an application under Sub-section (1) may be made within three years from the date of the first appointment of the Liquidator or the date of misapplication retainer misfeasance or breach of trust as the case maybe. If the Legislature had chosen to declare its intent in this latter form could it ever have been contended that what was prescribed by the Legislature was not a period of limitation? As a matter of fact we find that in the corresponding Section 543 of the Companies Act 1956 the Legislature has chosen to express itself in this form and has provided in Sub-section (2) of that section that an application under Sub-section (1) shall be made within five years from the date of the order of winding up or of the first appointment of the Liquidator or of the misapplication retainer misfeasance or breach of trust as the case may be whichever is longer. This would clearly and indubitably be a period of limitation. But then merely because the Legislature has not chosen to enact this provision separately in the form of a sub-section but has introduced it as part of the main provision can it cease to have the same character? There is no doubt that the period of three years provided by Section 235 is a period of limitation within which an application under the section must be made by the Official Liquidator. Of course the prescription of every period of limitation operates as a condition precedent to the exercise of jurisdiction by the Court for unless the application is made within the period of limitation the Court would have no jurisdiction to entertain it as observed by the Judicial Committee of the Privy council in Joychand v. Kamalaksh 76 Indian Appeals 131 while commenting upon the decision of the Allahabad High Court in Babu Ram v. Munna Lal 49 Allahabad 454 and in that sense the period of three years provided by Section 235 would certainly constitute a condition precedent to the exercise of jurisdiction by the Court in the matter of an application under that Section but that would not deprive the period of three years of its character of a period of limitation and if it is a period of limitation obviously Section 29(2) must apply.

5. Mr. N.V. Karlekar appearing on behalf of one of the opponents however urged an ingenious argument in support of the contention that the period of three years prescribed by Section 235 was not a period of limitation and that argument was based on the supposed analogy between Section 235 and Section 9(1)(c) of the Provincial Insolvency Act. Section 9(1) of the Provincial insolvency Act provides that a creditor shall not be entitled to present an insolvency petition against a debtor unless:

(a) the debt owing by the debtor to the creditor or if two or more creditors join in the petition the aggregate amount of debts owing to such creditors amounts to five hundred rupees and

(b) the debt is a liquidated sum payable either immediately or at some certain future time and

(c) the act of insolvency on which the petition is grounded has occurred within three months before the presentation of the petition.

6. The Madras High Court in a Full Bench decision reported in Chenchuramana v. Arunachalam A.I.R. 1935 Madras 857 held that what was provided by Section 9(1)(c) was not a period of limitation but was a condition precedent and that an insolvency petition was required to be presented to the Court within three months of the act of insolvency and no extension of the period of three months could be claimed by relying on any provision of the Limitation Act on the strength of Section 29(2) of that Act. Relying on this decision it was contended on behalf of the opponents that just as the period of three months set out in Section 9(1)(c) was construed by the Madras High Court to be a condition precedent and not a period of limitation so also the period of three years provided in Section 235 should be construed as a condition precedent and not as a period of limitation. This contention is obviously based on the supposed analogy between the two provisions but we are afraid there is no analogy between them. Section 9(1) lays down the conditions on which a creditor shall be entitled to present an insolvency petition against a debtor and each of the three conditions set out in Clauses (a)(b) and (c) of that section is a condition which must be fulfilled before an insolvency petition can be presented. Every insolvency petition must be founded on an act of insolvency and Section 9(1)(c) requires that the act of insolvency which can be relied upon must be an act of insolvency committed within three months before the presentation of the petition. It is not as if one has to look forward from the date of the act of insolvency and give a creditor three months time from that date in which to present an insolvency petition. Such would be the case if what is prescribed is a period of limitation. But what Section 9(1)(c) lays down is a condition precedent to the filing of the petition namely that the petitioning creditor must on the day when he presents his petition have in view some act of insolvency which the debtor has committed within the preceding three months. He has to see on that date and on that date alone what acts of insolvency are available to him and he cannot make use of any act of insolvency which has been committed outside the period of three months as that has ceased to be an act of insolvency. See the observations of Beasley C.J. at page 858 in Chenchuramanas case (supra). If the act of insolvency is not availed of within a period of three months it ceases to be an act of insolvency which can form the basis of an insolvency petition and there after no consequence whatsoever can follow from it. Beasley C.J. in the Madras case above cited quoted with approval the following observations of Thesiger L.J. in Ex parte Games In re Bamford (1879) 12 Ch. D. 314 where the learned Lord Justice stated:

With regard to the other point I will assume with Mr. Winslow that the execution of the deed was an act of bankruptcy and might have been set aside as an act of bankruptcy if any creditor had availed himself of it in sufficient time. But no creditor did avail himself of it and the time for doing so has passed by. What then is the position of things under the bankruptcy law? It appears to me that no consequence whatever can follow from an act of bankruptcy of which the creditors might have availed themselves if they had applied in time but of which they did not avail themselves as an act of bankruptcy within the time limited by the Bankruptcy Act.

This being the position it is difficult to see how any analogy can be drawn between Section 9(1)(c) of the Provincial Insolvency Act and Section 235 of the Indian Companies Act 1913 Under Section 235 of the Indian Companies Act 1913 the rights and liabilities created by acts of misapplication retainer misfeasance or breach of trust continue to exist irrespective of the fact whether proceedings for claiming compensation are taken or not and what Section 235 provides is merely a summary remedy for enforcing those rights and liabilities and a period of limitation is provided by that section for enforcing this summary remedy.

7. We are therefore of the-view that Section 235 of the Indian Companies Act 1916 piovides a period of limitation for an application under that section and since no period of limitation for such an application is provided by the First Schedule to the Limitation Act the Indian Companies Act 1913 is a special law providing for such an application a period of limitation different from the period of limitation provided therefor by the First schedule to the Limitation Act and the condition requisite for the applicability of Section 29(2) is consequently satisfied. Section 18 must accordingly be held to be applicable to such an application by reason of Clause (a) of Section 29(2). The District Court will therefore now have to proceed to consider whether the facts of the case justify the applicability of Section 18 and it the facts of the case are such as bring the case within Section 18 the learned District Judge will treat the application as within time but if the facts are not such as bring the case within Section 18 the application would have to be held to be barred by limitation. Since the application was tiled as far back as 7th September 1957 and is not yet disposed of we would direct the District Court to take up the hearing of the application immediately and to dispose of the same as expeditiously as possible. The appellant in First Appeal No. 365 of 1960 will pay the costs of the appeal to the Official Liquidator and there will be no order as to costs in the other appeals. Order accordingly.


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