SUPREME COURT OF INDIA
Harihar Nath and Others
Vs
State Bank of India and Others
C.A. No. 5072 of 1998
(Arun Kumar and R.V. Raveendran, JJ)
04.04.2006
R. V. RAVEENDRAN, J.
1. This Appeal directed against the order dated 1.9.1997 of the Patna High Court in LPA No. 259/1996, relates to the applicability of Article 137 of Limitation Act, 1963 to a petition under Section 446(1) of the Companies Act, 1956, seeking leave of the Company Court to proceed with a pending suit.
2. Nalanda Ceramic & Industries Ltd. (second respondent herein, referred to as 'the Company') was a company incorporated under the Companies Act, 1956 (for short 'the Act'). Appellant Nos. 1 to 3 were its Directors. The Company had obtained certain credit facilities from the State Bank of India (first respondent herein and referred to as 'the Bank'). The loans were secured by mortgage of the assets of the Company. The repayment of the amounts advanced to the Company was guaranteed by the appellants. On 28.11.1988, the Bank filed a suit (Title Mortgage Suit No. 150/1988 on the file of the Special Subordinate Judge, Ranchi) against the Company (defendant No.l), the appellants (defendants 2 to 4), and four others namely, State of Bihar, Bihar State Financial Corporation, I.F.C.I. and IDBI (defendant Nos. 5 to 8). In the said suit, the Bank sought a decree for Rs. 5, 95, 98, 258.31 against defendants 1 to 4 (the company and the appellants) with interest thereon and several ancillary and consequential reliefs.
3. Even prior to the said suit, other creditors had filed petitions for winding up of the Company, in Company Petition Nos. 1/79, 2/79 and 4/79 on the file of the Patna High Court, alleging that it was unable to pay its debts. During the pendency of the said Company Petitions, a notification dated 16.4.1984 was issued under the Bihar Relief Undertakings (Special Provisions) Act, 1982, declaring the Company as a relief undertaking, thereby preventing further progress of the petitions for winding-up. As the company became sick, a reference was also made to the Board for Industrial & Financial Reconstruction which directed an inquiry under Section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short 'SIC Act'). In view of the said reference, the first appellant (second defendant in the suit), filed an application on 16.9.1989 in the Bank's suit under Section 22 of the SIC Act, for stay of further proceedings in the suit.
4. The Bank resisted the said application, inter alia, on the ground that Section 22 of SIC Act had the effect of staying only proceedings in the nature of winding-up and execution and did not come in the way of progress of any suit for recovery of money due by the Company by enforcing the security.
5. When
matters stood thus, an order for winding up the company was passed by the High
Court on 24.10.1989. When the said order came to its knowledge, the Bank filed
a further objection to the application under Section 22 of the SIC Act,
contending that Section 22 of the SIC Act will not apply in view of the order
for winding up. The Bank also submitted that having regard to Section 446(1) of
the Act, it required the leave of the court only to proceed against the
company, but there was no bar for proceeding against the other defendants. The
Bank, therefore, prayed for dismissal of the application for stay (filed by
appellant No. 1 herein) and further prayed that while the proceedings as
against the first defendant-company may be kept in abeyance, the suit may be
proceeded with against the other defendants.
6. The Trial Court disposed of the Application by an order dated 9.3.1990. It
rejected the application filed by second defendant (appellant No. 1 herein) for
staying the suit under Section 22 of the SIC Act. It, however, held that the
suit against all the defendants will have to be stayed in view of the order of
winding up. It was of the view that the liability to pay the amount due was on
the principal-debtor, namely, the Company, and that the guarantors would be
liable only if the Company defaulted; and that, therefore, if the proceedings
against the Company had to be stayed, it had also to be kept in abeyance
against all defendants till the Bank obtained an appropriate direction from the
High Court. The Bank challenged the said order in CRP No. 388/1990 before the
High Court.
7. When the Company Court was informed that an inquiry under Section 16 of the
SIC Act had been directed by the BIFR, it passed an order on 16.7.1990, staying
the operations of the order of winding up dated 24.10.1989. The said stay order
dated 16.7.1990 was vacated subsequently by the Company Court on 16.12.1994 and
the winding up order was revived.
8. The Bank withdrew its Revision Petition (CRP No. 388/1990) on 4.4.1995.
Thereafter, on 11.8.1995, the Bank filed an application under Section 446(1) of
the Act, seeking leave of the Company Court to proceed with its suit. The said
Application was resisted by the appellants herein, inter alia, on the ground
that the Application seeking leave was barred under Article 137 of the Limitation Act, 1963. The appellants contended that the
Application ought to have been filed within 3 years from the date of winding
up, that is, on or before 24.10.1992 and the Application filed on 11.8.1995 was
barred by limitation.
9. The Company Court by order dated 17.9.1996 granted leave to proceed with the
suit. The Company Court was of the view that though Article 137 of the
Limitation Act was applicable to an application under Section 446(1) of the
Act, the provision relating to limitation should be construed liberally and the
period could be extended in exercise of judicial discretion even suo moto. It
condoned the delay in filing the application for leave, being satisfied that
there were sufficient causes for the delay, first being the stay of winding up
between 16.7.1990 and 16.12.1994 (in view of the inquiry under Section 16 of
the SIC Act) and the second being the prosecution of the Revision Petition (CRP
No. 388/1990) from 1990 till its withdrawal on 4.4.1995. The grant of leave
was, however, made subject to the condition that even if a decree was granted
in the suit, jointly and severally against various defendants, the Bank should
proceed to get the decree satisfied from other defendants, and if the decree
was not fully satisfied, then the matter may be brought to its notice for
proceeding against the Company for realization of residuary decretal dues.
Feeling aggrieved by the said order granting leave, the appellants herein filed
LPA No. 259 of 1996. A Division Bench of the High Court dismissed the Appeal by
order dated 1.9.1997. The said order is challenged in this Appeal by special
leave.
10. Learned counsel for the appellants urged the following contentions:
(i) An application for grant of leave under Section 446(1) of the Act was governed by Article 137 of the Limitation Act, 1963. Therefore, the application by the Bank seeking leave to proceed with the suit ought to have been filed within 3 years from the date when the right to apply accrued. The right to apply accrued on 24.10.1989 when the order of winding up was passed. Therefore, the last date for filing an Application seeking leave was 24.10.1992 and the Application filed on 11.8.1995 was barred by limitation.
The Company Court erred in condoning the delay by exercising power under Section 5 of the Limitation Act, 1963 suo moto, in the absence of an application seeking condonation of delay.
(ii) Even if leave was to be granted, there was no justification for directing that the decretal amount should be recovered from the guarantors and only if there was any deficit, it should be recovered from the company.
Contention (i):
11. Sub-section (1) of Section 446 as it stood to the relevant point of time
provided that 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. Sub section (2) of the
said section provided that the Court which is winding up the company shall,
notwithstanding anything contained in any other law for the time being in
force, have jurisdiction to entertain, or dispose of - (a) any suit or
proceeding by or against the company; (b) any claim made by or against the
company; (c) any application made under Section 391 by or in respect of the
company; (d) any question of priorities or any other question whatsoever,
whether of law or fact, which may relate to or arise in course of the winding
up of the company. The claims against a company made directly to the winding up
Court under Section 446(2)(b) of the Act, present no difficulty. Section
3(2)(a)(iii) of Limitation Act, 1963 provides that
in the case of a claim against a company which is being wound up, for the
purposes of the Limitation Act, a suit is instituted when the claimant first
sends in his claim to the official liquidator. The period of limitation would
be, of course, as prescribed in the Schedule for the appropriate suit or
proceedings.
12. Sub-section (1) of Section 446 of the Act contemplated two categories of applications for leave being filed before the Company Court. They are:
(i) Applications seeking leave to file a suit or commence a legal proceeding
against the company, after an order for its winding up has been made.
(ii) Applications seeking leave to proceed with a pending suit or legal proceeding
against a company, filed or initiated before the order for winding up of such
company.
Neither the Companies Act, 1956 nor the rules
thereunder prescribe any period of limitation for applications under Section
446(1) of the Act. Article 137 of Limitation Act, 1963,
prescribes a three year period of limitation in regard to any application for
which no period of limitation is provided. The issue whether Article 137 will
apply only to application filed under the Code of Civil Procedure or to
applications filed under any Act, was settled in Kerala State Electricity Board
v. T.P. Kunhaliumma, . This Court held:
"Any other application" under Article 137 would be a petition or any
application under any Act. But it has to be an application to a Court The conclusion
we reach is that Article 137 of the 1963 Limitation Act will apply to any
petition or application filed under any Act to a Civil Court. With respect we
differ from the view taken by the two Judge Bench of this Court in Athani
Municipal Council case , and hold that Article 137 of the 1963 Limitation
Act is not confined to applications contemplated by or under the Code of Civil
Procedure."
The said view was reiterated in Additional Special Land Acquisition Officer v.
Thakoredas, 1. But the question is whether
Article 137 would apply to an application under Section 446(1) of the Act.
13. Insofar as the first category of application under Section 446(1) of the
Act, there is no question of any period of limitation. The period of limitation
is to be calculated, not with regard to the application seeking leave to file a
suit or proceeding, but in regard to the suit/proceeding itself. An
illustration may clarify. If the proposed suit is to enforce payment of money
secured by a mortgage by the company, the period of limitation for such suit is
12 years. Surely an application seeking leave to file such suit, cannot be
rejected by applying Article 137 on the ground three years have elapsed from
the date of the order of winding up, even though the 12 years period for filing
the suit has not expired. So long as the suit is within time as on the date of
filing the application for leave the application will be entertained. While
computing the period of limitation for the suit/proceeding, the time spent in
obtaining leave to file the suit/proceeding will have to be excluded by
applying the principle underlying Section 15(2) of Limitation
Act, 1963. Section 15(2) of Limitation Act provides that in computing
the period of limitation for any suit of which notice has been given, or for
which the previous consent or sanction of the Government or any other authority
is required, in accordance with the requirements of any law for the time being
in force, the period of such notice or, as the case maybe, the time required for
obtaining such consent or sanction shall be excluded. We may note that the
Company Court may not examine the question of limitation for the suit or
proceeding, leaving it to be dealt with by the Court where such suit/proceeding
is to be initiated.
14. This Court in Bansidhar Sankarlal v. Md. Ibrahim, 1971 AIR(SC) 1291,
indirectly affirmed the position that the limitation is to be considered only
with reference to the suit or proceedings, while considering the position of
suit/proceeding initiated after an order of winding up, without obtaining leave
of the Company Court. This Court held thus:
" we do not think that there is anything in the Act which makes the leave
a condition precedent to the institution of a proceeding in execution of a
decree against the company and failure to obtain leave before institution of
the proceeding entails dismissal of the proceedings. The suit or proceeding
instituted without leave of the court may, in our judgment, be regarded as
ineffective until leave is obtained, but once leave is obtained, proceeding
will be deemed to be instituted on the date of granting leave." (emphasis
supplied)
15. When there is no period of limitation for an application under the first
category of cases under Section 446(1) of the Act, it is inconceivable and
illogical to apply the period of limitation prescribed under Article 137, to an
application seeking leave falling under the second category.
16. The object of Section 446 of the Act is not to cancel, nullify or abate any
claim against the company. Its object is to save the company which has been
ordered to be wound up, from unnecessary litigation and from multiplicity of
proceedings and protect the assets for equitable distribution among its
creditors and shareholders. This object is achieved by compelling the creditors
and others to come to the Court which is winding up the company and prove their
claims in the winding up. For this purpose, all suits and proceedings pending
against the company are also stayed subject to the discretion of the winding up
court to allow such suits and proceedings to proceed. When a winding up order
is passed, the effect is that all the affairs pertaining to the company in
liquidation, including all suits/proceedings by or against the company, come
within the control and supervision of the winding up Court. The winding up
Court has to decide whether it will let the suit/proceeding to continue in the
Court where it is pending, or it will itself adjudicate the suit/proceeding.
Thus, under Section 446(1), the winding up court only decides about the forum
where the suit to be tried and disposed of. The Limitation Act which prescribes
the periods within which a party can approach a Court seeking remedies for
various causes of action, is not attracted to such applications under Section
446(1) of the Act. However, as elaborate arguments were advanced on this issue,
we will deal with it in some more detail.
17. An application seeking leave to proceed, in respect of a pending suit or
proceeding (filed before the order of winding up) is not an application for
enforcement of any claim or right. It does not seek any 'relief or 'remedy'
with reference to any claim or right or obligation or liability. It is an
application which is interlocutory in nature. An interlocutory application is
not subject to any period of limitation, unless otherwise specifically provided
by law. We are conscious of the fact that an application under Section 446(1)
seeking leave to proceed with the suit/proceeding, is not filed as an
'interlocutory application' in the suit/proceeding before the Court where such
suit/proceeding is pending. But an interlocutory application is nothing but an
application in the course of an action. It is a request made to a Court, for
its interference, in a matter arising in the progress of a proceeding.
Therefore, in a broad sense, the application under Section 446(1) filed before
the Company Court seeking leave to proceed with a pending suit or proceeding,
is an 'interlocutory application' with reference to the pending suit/proceeding.
Article 137 is intended to apply to applications for enforcement of a claim or
adjudication of a right or liability in a Court. An application for leave to
proceed with a pending suit or proceeding not being such an application for any
relief, will not attract Article 137.
18. It is now well settled that if any winding up order is passed, during the
pendency of a suit against the company, and if the suit is continued without
obtaining leave, in spite of that bar contained in Section 446(1), the decree
passed is only voidable at the instance of the liquidator, and not void ab
initio. In fact, where such decree has been passed against the company and
others, the only person who can avoid the decree on the ground of non-
compliance with Section 446(1) of the Act, is the official liquidator of the
company and not the other defendants. A suit/proceeding filed against a
company, prior to the order of its winding up, does not come to an end on the
passing of an order of winding up. The order of winding up merely stays further
proceedings in the suit/proceeding. The suit/proceeding becomes dormant.
Various alternatives are possible when a suit gets so stayed. The plaintiff in
the suit can move an application under Section 446(1) of the Act, and when leave
is granted, proceed with the suit. If the leave is refused, the suit may be
transferred to the company court for being tried and disposed of under Section
446(2)(a) of the Act. The plaintiff may also file an application for transfer
of the suit to the Company Court for disposal under Section 446(2)(a).
Alternatively, the plaintiff may get the suit dismissed with liberty to make a
claim under Section 446(2)(b) of the Act. Even if the suit is proceeded with,
without obtaining leave of the Company Court, either not being aware of the
order of winding up or ignoring the provisions of Section 446(1), the resultant
decree will not be void, but only be voidable at the instance and option of the
official liquidator of the company. It is also possible that the Court passing
the winding up order may at any time, on the application either of the
liquidator or of any creditor or contributory, make an order staying the
winding up either altogether or for a limited time on such terms and conditions
as the court deems fit, under Section 466 of the Act. When the winding up is so
stayed, a suit against the company (filed before the winding up order) which
stood stayed under Section 446(1) could be proceeded with, even though leave
had not been obtained to proceed with the suit. We have referred to these
alternative possibilities to show that having regard to the nature of an
application under Section 446(1) of the Act, it does not attract Article 137.
19. We may next examine the position by even assuming that Article 137 applied to an application under Section 446(1) for leave to proceed with a pending suit. Article 137 is a residuary provision applicable to all applications and petitions filed in a Court, for which no period of limitation is prescribed. It prescribes a limitation of three years and the period of limitation begins to run when the 'right to apply accures". To understand the meaning of the words "right to apply accrues", we may refer to the wording of Article 137 and a few other Articles in the Schedule to the Limitation Act:
Article No . Description of suit Period of Limitation Time from which period begins to run
137 Any other application for which no period of limitation is provided elsewhere in this division. 3 years when the right to apply accrues.
113 Any suit for which no period of limitation is provided elsewhere in this Schedule. 3 years when the right to sue accrues.
58. To obtain any other declaration. 3 years when the right to sue first accrues.
104. To establish a periodically recurring right. 3 years when the plaintiff is first refused the enjoyment
of
the right.
Article 58 provides that the time will begin to run when the "right to sue first accrues". Article 104 provides that time will begin to run when "the plaintiff is first refused" the enjoyment of the right. On the other hand, Article 137 uses the words when the "right to apply accrues" and is similar to Article 113. A suit, which is filed prior to the order of winding up and pending on the date of winding up, gets stayed when an order of winding up is passed. An order of winding up does not create any 'right' to file an application under Section 446(1) of the Act. Nor does any right 'accrue' to a plaintiff/petitioner in a suit/proceeding to file an application under Section 446(1), when an order of winding up is passed. On the other hand, passing of an order of winding up casts a duty or obligation on the person who has sued the company to obtain the leave to the Court to proceed with is suit for proceeding. The right to apply for leave accrues, not because of the order of winding up, but because the suit/proceeding is stayed. The right to apply for grant of leave under Section 446(1) accrues every moment the suit remains stayed. Consequently, it follows that as long as the suit/proceeding (filed before the order of winding up) remains stayed, an application for leave can be filed. Therefore, the application filed on 11.8.1995 was in time and not barred by limitation, even if Article 137 is applied.
Re: Contention (ii)
20. Learned counsel for the appellant submitted that there was no justification
for the court to direct the decretal amount should be recovered from the
guarantors first and only if there was any deficit, it should be recovered from
the company in liquidation. Learned counsel for the Bank and the Official
Liquidator fairly conceded that there was no reason or justification for
imposing such a condition, having regard to the legal position that the
liability of the principal-debtor and guarantors is joint or several. There is
no question of directing the amount to be first recovered from the guarantors.
The creditor has the option of recovering the amount in the manner he deems
fit. Though the Company Court has the power while granting leave, to impose
conditions, such conditions can be imposed only for good and valid reasons. The
terms imposed cannot affect the rights of third parties nor impose an
obligation contrary to law. Therefore, the condition imposed while granting
leave is deleted.
Conclusion:
21. In the present case, the suit was against the company as well as its
Directors being guarantors in their personal capacity. The suit could have in
any case proceeded against the guarantors. It was stayed by the Trial Court
apparently under Section 446(1) even though there was no such prayer to that
effect. The only prayer before the Court at the instance of first defendant in
the suit for stay of suit under Section 22 of SIC Act which was not granted.
The object of appellants in filing an application for stay was to drag on the
suit. They have succeeded in their effort to stall the suit for more than 16
years on a virtually non-existent ground.
The Trial Court will, therefore, have to proceed with the suit with all expedition.
22. In view of the above, subject to the deletion of the condition imposed by Company Court while granting leave, this Appeal is dismissed upholding the grant of leave. Parties to bear their respective costs.
J