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CASE NO.: Appeal (civil)  5072 of 1998

PETITIONER: Harihar Nath & Ors

RESPONDENT: State Bank of India & Ors

DATE OF JUDGMENT: 04/04/2006

BENCH: Arun Kumar & R. V. Raveendran

JUDGMENT: J U D G M E N T

RAVEENDRAN, J.

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.1), 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.

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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 operation 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

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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.    

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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 proeeding 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 vs.  T. P. Kunhaliumma [AIR 1977 SC 282]. 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\005\005 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 (AIR 1969 SC 1335) 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 (AIR 1994 SC 2227). 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 applications 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

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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 vs. Md. Ibrahim [AIR  1971 SC 1292] 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 :

"\005\005..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 proceeding. 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 has 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

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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 accrues". 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 :

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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 of the  court to proceed with his 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)

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20.     Learned counsel for the appellant submitted that there  was no justification for the court to direct that 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 mannfer  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.