Kirloskar Inv. & Finance Ltd. v. OAS Appolo Tubes & Steels Ltd

15. It is submitted that the Companies Act, 1956 provides for a mechanism for the OL to consider the claims of creditors and the priorities of various classes of creditors and therefore, no single creditor can be permitted to be given priority.

16. It is submitted that the OL has already disbursed funds to the secured creditors and workers in pro-rata basis and no funds are now available for the unsecured creditors.

17. It is further submitted that captioned application, if allowed, would prolong the case and not serve any purpose as there are no funds available for the unsecured creditors.

18. Therefore, in view of the foregoing submissions, the learned Standing Counsel for OL submitted that the present application, being devoid of merits, may be dismissed.

19. Heard the learned counsel for the parties and perused the records.

20. The captioned application has been filed by the petitioner for seeking permission to execute the decree granted in favor of the petitioner by the Madras High Court vide order dated 24th November, 2023 and therefore, the petitioner is entitled to recover the amount from the judgment debtor. During the pendency of the suit, the petitioner had sought permission of this Court to continue the same as the judgment debtor was already directed to be wound up by this Court.

21. In the said application filed for seeking permission of this Court, the Court had allowed the same vide order dated 6th May, 2004 and held as under: CA 293/2001 By this application under Section 446 of Companies Act, 1956 the applicant M/s Annamalai Finance Limited is seeking leave of the court to continue with the proceedings in CS No.902/98 pending before the High Court of Madras against defendant 1-2 therein, namely, M/s Apollo Tubes and Steel Industries Limited and Mr. P.Rajarathinam. Notice of this application was issued to Official Liquidator, who has filed reply stating that permission may be granted to the applicant and it be ordered that if any decree is passed, it will not be executed without permission of the court. In view of above, the application is allowed in terms of prayer clause. Applicant is permitted to pursue the above noted suit against respondent company as well as the guarantor. However, it is clarified that, if any decree is passed, the applicant will not execute the same without the permission of this court.

22. The perusal of the above reproduced order makes it clear that even though, the petitioner was granted leave to continue with the proceedings before the Madras High Court, he was legally required to seek permission of this Court to execute the decree is passed in his favor.

23. Since the Madras High Court has passed the decree in favor of the petitioner vide order dated 24th November, 2023, the petitioner has approached this Court seeking permission for execution.

24. In summary, the petitioner/applicant has contended that since it had already been granted liberty to proceed with the suit, the said permission fulfills the statutory mandate as required under Section 446 of the Companies Act, 1956 and therefore, no requirement arise for the petitioner/applicant to seek this Court’s permission for execution of the decree. Furthermore, it has been contended that the settled position of law attest to the said claim and therefore, seeking permission for execution of the decree is a mere formality due to the instructions given by this Court while granting the leave to continue the suit.

25. In rival submissions, the learned counsel for the OL has submitted that the judgment debtor does not have funds to clear the debts and the petitioner being an unsecured creditor, cannot seek preference over the other creditors and therefore, the present application may be dismissed.

26. In light of the same, the issue for adjudication before this Court is whether the petitioner can be allowed to execute the decree passed in his favour by the Madras High Court vide order 24th November, 2023.

27. In order to answer the query posed before this Court, it is imperative for this Court to look into the relevant provision under which such permission is sought by the creditor. The said provision, i.e. Section 446 of the Companies Act, 1956 is reproduced herein: “446.

SUITS STAYED ON WINDING UP ORDER (1) 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 1[Tribunal] and subject to such terms as the 1[Tribunal]may impose. (2) The 2[Tribunal] 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 (including claims by or against any of its branches in India);

(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; whether such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960. (3) 3[***] (4) Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a high Court.”

28. The perusal of the above said provision makes it crystal clear that in order to continue a suit against a company whose winding up proceedings are ongoing, the party seeking such continuance of suit should seek leave from the Court for the same.

29. From the above said provision, it is evident that the permission is required to be taken for the continuation of the suit and the provision is silent on the aspect of whether such permission is required for execution of the decree as well or not.

30. In Bansidhar Shankarlal v. Mohd. Ibrahim, (1970) 3 SCC 900, the Hon’ble Supreme Court dealt with the objection raised with regard to obtaining of leave for execution and held as under:

6. When the Second Appeal No. 1380 of 1954 was pending before the High Court of Calcutta at the instance of the Company and Bansidhar against the decree passed by the District Court in enjectment, the Company was ordered to be wound up by order of the High Court of Calcutta and the liquidators were appointed. The liquidators prosecuted the appeal. There is no evidence on the record whether the liquidators obtained the sanction of the Court under Section 179(1)(a) of the Companies Act, 1913. But there is no reason to suppose that the liquidators did not obtain the sanction of the Court. If sanction of the Court under Section 179 to prosecute the appeal before the High Court was obtained, and it must be so assumed, the contention raised on behalf of Bansidhar loses all significance for an execution application is only a continuation of the suit and the control of the High Court enures during the execution proceeding also. If the sanction of the Court has been obtained for the prosecution of the suit, it would be plainly unnecessary to obtain fresh sanction to the institution of execution proceeding at the instance of the successful party. It is true that the sanction obtained by the liquidators is granted under Section 179 of the Companies Act to initiate or enforce a claim of the company or to defend an action, whereas the leave of the Court to institute or to continue a suit against the company in winding up is obtained under Section 171. It would be giving effect to a technicality divorced from the true object of the section to hold that even in a suit filed or prosecuted with the sanction of the Court, the decree may not be enforced by a successful party without leave under Section 171 of the Act.

7. Even granting that sanction under Section 179 does not dispense with the leave under Section 171 of the Act, to institute a proceeding in execution against a company ordered to be wound up, 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 the proceeding will be deemed instituted on the date granting leave.

31. The above said judgment settles the position of law and therefore, it can be said that once the leave is granted to proceed with the suit, there is no need for the parties to file another application to seek execution of the decree awarded in their favor.

32. It is no doubt that the execution proceedings are considered as continuation of the suit itself and the party in whose favour a decree has been granted can only reap the benefits of the same after execution of the said decree.

33. Therefore, the need for such permission as sought by the applicant herein is only arising due to the order passed by this Court on 6th May, 2004, whereby, the applicant was granted leave to continue with the recovery suit filed before the Madras High Court.

34. Now coming to the issue on merits, the OL has replied to the captioned application by stating that the applicant comes under the category of unsecured creditor and therefore, even if permission is granted to execute the decree, the same would not serve any purpose due to paucity of funds with the judgment debtor.

35. On this aspect, it is pertinent to note that if the applicant was provided with the liberty to proceed with the suit, staying it’s favorable decree would make the entire exercise futile and therefore, would render the resources and efforts a total waste.

36. Accordingly, this Court agrees with the contention of the applicant and therefore, holds that the arguments as advanced by the OL are subject matter of the execution proceedings and can be taken at a later stage.

37. At last, this Court also deems it imperative to distinguish the case law cited by the learned Standing Counsel for the OL. During the course of proceedings, the learned Standing Counsel for the OL had referred to the judgment passed by the Karnataka High Court in Pafco 2916 Inc. & Ors. v. Official Liquidator of United Breweries (Holdings) Limited, MANU/KA/5021/2019. The relevant parts of the said judgment reads as under:

8. The factual aspects inasmuch as the applicants being the decree holders of the decrees awarded by the High Court of Justice Queen's Bench Division Commercial Court, Royal Courts of Justice, United Kingdom is not in dispute. Now the epicenter of the dispute revolves round the leave to be granted under Section 446 of the Act to proceed with the Execution Petitions filed by the applicants which are pending consideration before the competent Executing Court pursuant to the winding up order passed by this Court on 07.02.2017 in COP No. 162/2013.

9. Section 446 of the Act reads thus:— “Sec 446 - Suits stayed on winding up order. (1) When a winding up order has been made or the Official Liquidator has keen appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date if the winding up order, shall be proceeded with, against the company, except by leave of the 4[Tribunal] and subject to such terms as the 4[Tribunal] may impose. 5[(2) 4[Tribunal] 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 (including claims by or against any of its branches in India);

(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; whether such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960 (65 of 1960).)] 7[****] 1[(4) Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court]”

10. In terms of the said provisions, it is mandatory to seek leave of the Company Court when winding up order has been passed or provisional Official Liquidator has been appointed to proceed with the legal proceedings pending at the date of the winding up order.

11. Now the question would be whether this Court exercising Section 446(1) of the Act can permit the applicants to proceed with the execution proceedings. There is much difference between the proceedings related to the original suit and the execution. In the case of original suit, it. is the debt which has to be quantified whereas 111 the execution proceedings the crystallized quantification made by the Court requires to be executed. In the case of Basavaiah supra, the Division Bench of this Court in the context of the proceedings initiated under Section 33C[2] of the Industrial Disputes Act, 1947 („I.D. Act‟ for short) qua the leave sought under Section 446(1) of the Act has observed that proceedings under Section 33C(2) of the I.D. Act are in the nature of execution proceedings and therefore do not require leave of the Company Court under Section 446(1) of the Act, proceeds on an misconception that execution proceedings are not legal proceedings and that leave of the Company Court under Section 446(1) of the Act is not required for initiating or continuing an execution proceedings. In paragraph Nos. 15, 18 and 19 it is observed thus:—

Achhiyavar Singh v. J.K. Manufacturers, Industrial Finance Corporation of India v. Cemury Metals Limited and Sarju Thakur v. Registrar of Companies]. Therefore proceedings under Section 33-C(2) of I.D. Act, even if they are in the nature of execution proceedings, requires the leave of the Company Court, under Section 446 of Companies Act.

18. Section 446 of the Act makes it clear that no suit or other legal proceeding shall be commenced or proceeded with after a winding up order is made, without leave of the Company Court. We have already held that proceedings under Section 33(2) is a legal proceeding, for purposes of Section 446. Even if the said proceeding had been initiated prior to the order of winding up, as the order of winding up was passed during the pendency of such proceeding, it was mandatory for the applicants to have obtained leave of the Company Court. A statutory mandate cannot be avoided on the ground of ignorance or hardship, it should also he noticed that the order was obtained ex parte without impleading the Official Liquidator who represented the company in liquidation. The Official Liquidator has refused to accept the order of the Labour Court. It is therefore not valid and unenforceable. The fact that in some other matters, the relevant contentions were not urged or that the Official Liquidator did not challenge the validity cannot be a ground for ignoring the requirements of Section 446(1). Consequently, these applications are liable to be rejected.

19. The learned Counsel for the applicants submitted that to avoid further delay leave may be granted under Section 446(1) of the Act to enable the quantification of their claim against the company by the Labour Court, after due notice to the Official Liquidator. The learned Counsel for Official Liquidator Respondent] has no objection for such permission being granted in these applications. As applicants, who are workmen, have been litigating for nearly two decades, interests of justice would be served if leave to proceed with the applications under Section 33-C(2) of I.D. Act is granted in these applications, instead of driving them to file fresh applications for leave under Section 446.”

12. It is true that this Court has placed reliance on the judgments of the Hon'ble Apex Court to declare that the proceedings under Section 33C(2) of the I.D. Act even if they are in the nature of execution proceedings squires leave of the Company Court under Section 446 of the Act. This judgment would rather support the Official Liquidator than the applicants for the reason that even in the execution proceedings, leave of the Company Court under Section 446 of the Act is necessary. Consequently, in the proceedings under Section 33C(2) of the I.D. Act, the leave granted under Section 446 of the Act would enable the quantification of the claim of the employees against the Company by the Labour Court after due notice to the Official Liquidator. The workmen who were litigating for nearly two decades were entitled to the quantification of their claim against the Company. Moreover, the claim of the workmen stands on a different pedestal in view of Section 529A of the Act.

13. This Court finds force in the submissions of the learned counsel for the Official Liquidator that the applicants cannot be treated as secured creditors to be out of the liquidation proceedings and the applicants cannot seek priority over the claims breaking the queue to recover the amount, merely based on the decree obtained from foreign Courts and the execution proceedings pending before the Indian Courts. The Companies Act provides a machinery/mechanism for the Official Liquidator to consider the claims of the creditors and the said proceedings have to be in consonance with the provisions of the Act. In the present scenario, granting permission to the applicants would adversely affect the rights of other creditors and all the contributors of the Company, who are standing in the queue. This appears to be the essence of Sections 447, 456, 529, 529A and 520 of the Act, permitting the applicants to proceed with execution proceedings would amount to giving a preferential right to such decree holders finally disturbing the rights of the secured creditors. The resultant factor, i.e., disturbing the rights of the secured creditors if to be avoided or interest of all the creditors should be uniformly safeguarded or maintained, this Court must exercise the power under Section 446(1) with circumspection while considering the permission claimed by the decree holders in the execution proceedings to execute their decrees. No doubt, the judgment of the Hon'ble High Court of Judicature at Madras has no binding effect on this Court, certainly it has some persuasive value and the view of this Court as aforesaid is fortified by the decision of the High Court of judicature at Madras referred to supra.

38. The perusal of the above said judgment makes it clear that the decree holders are no exception to the mechanism of winding up of an entity and therefore, the execution of a decree is also mandated to be permissible under Section 446 of the Companies Act, 1956, however, the Court did not comment upon whether the leave needs to be taken again for the execution of decree.

39. On the aspect of whether the decree holder had obtained leave of the Court for continuance of the suit, it is evident that the Court did not comment on the same therefore, leading to the inference that the same was not obtained by the decree holder.

40. Apart from the above said distinction, it is also apparent that in the above reproduced case, the decree was obtained from a foreign Court and therefore, the leave was sought to be taken at the time of its execution in India.

41. Since the decree holder had filed for the leave of the Court for the first time, it is apparent that the Court had adjudicated the issue on the basis of the same. On the contrary, the applicant herein had already been granted the leave to continue the suit. Therefore, the same amounts to valid permission for continuance of the same and execute the rights obtained after that.

42. The applicants had duly approached this Court for leave to continue the pending suit before the Madras High Court and had obtained the same from this Court vide order dated 6th May, 2004 and the suit continued for 20 years till the time it was finally decided in favour of the applicant last year.

43. It is clear that the applicant must have spent considerable resources fighting the suit for the last 20 years and therefore, it would not be appropriate to deprive him of the opportunity to execute the decree obtained in his favour.

44. In view of the foregoing discussion, the present application is allowed and the petitioner/applicant is granted leave to execute the decree passed by the Madras High Court vide order dated 24th November, 2023.

45. Accordingly, the application stands disposed of.

46. The order be uploaded on the website forthwith.