1. This is an application for leave under Section 171, Companies Act.
2. The facts are : Messrs. T.V. Purushotham & Co. dealing in wines took a lease of portion of the Subhodaya Buildings, Mount Road, Madras, from the voluntary liquidators of the Subhodaya Publications Ltd., Messrs. C. Vasudevan and Raghavarama Sastri. In para. 2 of the affidavit of T.V. Satyanathan, it is stated that the rent for the said portion of the premises was agreed at the time of the tenancy at Rs. 200 p.m. and that subsequently the applicants learnt that according to the valuation of the building by the Corporation of Madras at Rs. 500, the said rent of Rs. 200 for the portion of the premises was too high. Therefore the applicants are stated to have filed Appln. No. 1675 of 1954 before the House Rent Controller, Madras, for fixing the fair rent. In the reply affidavit filed by the company it is stated that the voluntary liquidators agreed to rent the portion first at Rs. 150 p.m. and wanted two months' rent in advance and when on the next day the applicants sent to the voluntary liquidators a cheque for Rs. 300/-, they changed their mind and demanded Rs. 200 p.m. On the other hand, the voluntary liquidators state in their counter affidavit that they did not ask for Rs. 150 in the first instance and changed it to Rs. 200 tbe next day, that they fixed the sum of Rs. 200 p.m. as the rent after ascertaining on measurement that the portion of the building which the applicants were taking on lease was one-third of the total extent of the premises, -- the other portions being occupied by Messrs. Gordon Press and a book-binder, Thyagi, -- for which the previous tenants Messrs. Parsons and Whittmore were paying Rs. 600 p.m. The voluntary liquidators have now got converted into Provisional Liquidators. The applicants want to continue the proceedings before the Rent Controller taking the leave of the Court under Section 171, Companies Act, alleging that they are now paying rent at Rs. 200 p.m., that they want the rent to be assessed by the Rent Controller and fair rent fixed and that for that purpose they should be allowed to continue the proceedings initiated before the Rent Controller.
3. Section 171, Companies Act, runs as follows. 'When a winding up order has been made, 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.'
4. The policy of Section 171 and of the analogous Sections 169 and 232 is to protect the assets for equitable distribution among those entitled, and to prevent the administration being embarrassed by a general scramble of creditors. When a winding up order has been made, the combined effect of Sections 171 and 232 is that such order operates automatically as a stay of all actions, executions, distresses, etc., against the company, subject to the discretion of the Court to allow such actions, executions, etc. to proceed notwithstanding the winding up.
5. The winding up of a company by the Court involves the realization and protection of assets and an administration of its affairs by the Court. Consequently once the Court has taken the assets of a company into its control or has passed an order for the winding up of the company, it would be improper to allow proceedings to he initiated or continued against the company and thus allow its assets to be wasted. The Legislature has therefore enacted this Section 171 with the intention of safeguarding the company's assets against wasteful or expensive litigation in regard to matters which and capable of determination more expeditiously and more cheaply in the winding up. Per Pearson J. in -- 'S.N. Mukerji v. Krishna Dassi : AIR1933Cal433 . This section prevents the commencement of new proceedings or the continuation of pending proceedings against the company after the appointment of a provisional liquidator or after the making of a winding up order, without the leave of the winding up Court.
6. The language of the section would seem to support the view that the restriction imposed by this section would apply to all actions and proceedings including proceedings in execution -- 'In re, Artistic Colour Printing Co : AIR1933Cal433 the Calcutta High Court held that it did not apply to proceedings under Section 145, Criminal P. C. initiated by a Magistrate. This case, though at first sight would appear to be inconsistent with the principles enunciated by the section, is really no exception to the general rule on the ground that a proceeding under Section 145, Criminal P. C. is not a proceeding against the company, it is a proceeding against the liquidator as an individual. This was pointed out by Pearson J. in his judgment at the bottom of page 933. Where a proceeding is taken against the official liquidator in his capacity as such, the trend of the decisions is to regard it as a proceeding against the company and thereby it attracts the restriction provided for in this section. See the observations of Huddleston B, in -- 'Graham v. Edge', (1888) 20 QBD 538 (C) and also -- 'R. v. Lord Mayor etc. of London', (1893) QB 146 (D). As regards actions, even actions by the Crown would come under the prohibition of this section: -- 'Bank of Bihar Ltd. v. Secretary of State', : AIR1932Pat1 (E).
7. But an order passed by the Custodian of Evacuee Property under Bombay Act 24 of 1949 vesting certain property in him is merely an executive act and cannot be termed as legal proceeding within the meaning of the section and therefore no leave under this section is necessary,
8. The phrase 'suit or other legal proceeding' has been the subject-matter of considerable case-law. The section refers to any suit or proceeding (other than suit) which is a legal proceeding. In short, the word 'other' has no ejusdem generis significance but is used in a purely alternative sense. Section 232 has nothing to do with Section 171: --'Shiromani Sugar' Mills v. Governor General in Council : AIR1945All354 . For further discussion see the Indian Companies Act by Sir N.N. 'Sircar and Susil C. Sen (1937) page 403 and following; K. Venkoba Rao's Indian Companies Act, 2nd Edn. (MLJ Office), page 623 and following; K.M. Ghosh's Indian Company Law, 4th Edition (Eastern Law House Ltd.) (1951), page 509 and following; and Rustomji's Company Law, Second Edition (1934) page 394 and following.
9. The general principles on which leave is granted in an action may be shortly summarised as follows: The leave of the Court cannot be obtained merely for the asking. It is not to be granted automatically or as a matter of course. The Court has not to examine the facts of each case separately and exercise its discretion. Such discretion must be exercised reasonably and not arbitrarily or capriciously. In the exercise of its discretion the Court may refuse leave even in the case of an application by a secured creditor: -- 'Hansraj v. Dehra Dun Mussoorie Electric Tramway Co. Ltd. : AIR1929All353 . The Court may in the exercise of its discretion grant leave unconditionally or may impose terms as a condition of granting leave.
10. (1) Cases in which the company is the sole defendant: As a general rule unless the question at issue in the action or proceeding is one which cannot be properly determined in the winding tip, leave will be refused: -- 'In re Poole Firebrick Co.', (1874) 17 Eq 268 (H); -- 'In re Keynsham Co.', (1863) 33 Beav 123 (I). Where however, the question at issue is such that it cannot be conveniently gone into in the winding up, leave will generally he given: 'Wilson v. Natal Investment', (1867) 36 LJ Ch 312 (J).
11. (2) Cases where the company is a necessary party to the action but there are other defendants as well. In these cases the Courts generally grant leave: see -- 'In re Marine Investment Co.', (1868) 17 LT 535 (K). The Court usually insists 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: See -- 'McEwen v. London, Bombay and Mediteranean Bank Ltd.', (1867) 15 LT 495 (L); -- 'Hegel v. Currie', (1867) WN 75 (M).
12. In a proper case a Court may revoke the leave already granted: Per Buckland J. in --'Hukumchand v. Radhakissen : AIR1925Cal916 .
13. Bearing these principles in mind if we examine the facts here, we find that this is a case where leave should be applied for and secondly, that this is a fit case where leave to proceed with the legal proceeding should be granted. The object of the section is to prevent a litigation against the company which is being wound up, except with the consent of the Court, of proceedings in which the company is either the defendant or the respondent or proceedings against the company. Legal proceedings before the Rent Controller is one such.
The leave will ordinarily be granted because we must have due regard to the rights of third persons who are not members of the company and who have not come in and claim to share and can stand wholly outside the winding up proceedings and the question is also one which cannot be conveniently dealt with in winding up except probably by way of giving directives to the provisional liquidators to compromise if the other party agrees to the same. The right to have the fair rent fixed under the Madras Buildings (Lease and Rent Control) Act is a right vested in both the applicants and the respondents and that right is not taken away by reason of any agreement between the parties. The order fixing a fair rent has to be made only by the Rent Controller after taking into consideration the various factors set out in the section and it is in the exclusive jurisdiction of the Rent Controller to fix the rent. But no order could be passed by the winding up Court.
14. In the result, the leave is granted and there is no necessity to impose terms because the reply affidavit states that the applicants are now paying Rs. 200 p.m. and which they will continue to do till the disposal of the proceedings before the Rent Controller.
15. The application is ordered as prayed for.