Section 446 of the Companies Act — Jurisdictional Bar, Procedural Economy, and Contemporary Challenges

Section 446 of the Companies Act — Jurisdictional Bar, Procedural Economy, and Contemporary Challenges

Introduction

Section 446 of the Companies Act, 1956 (now largely paralleled by Section 279 of the Companies Act, 2013) constitutes the primary statutory mechanism for rationalising litigation once a company enters winding-up. It simultaneously (i) stays fresh and pending proceedings against the company, except with leave of the Company Court/National Company Law Tribunal (NCLT), and (ii) confers an expansive, quasi-exclusive jurisdiction on that forum to determine all disputes “in the course of winding-up.” Given the proliferation of specialised recovery regimes (e.g., the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDB Act”), Insolvency and Bankruptcy Code, 2016 (“IBC”)) and the criminalisation of commercial default (e.g., Negotiable Instruments Act, 1881 (“NI Act”)), the continued relevance, ambit, and limitations of Section 446 merit sustained doctrinal scrutiny.

Statutory Text and Purpose

Sub-section (1) imposes a moratorium on “suit or other legal proceeding” against the company after a winding-up order or appointment of a provisional liquidator.[1] Sub-section (2) vests the Company Court with jurisdiction to entertain:

  • (a) suits and proceedings by or against the company;
  • (b) any claim made by or against the company;
  • (c) any application under Section 391 (now Section 230, 2013 Act); and
  • (d) any question of priorities or any other question whatsoever arising in the course of winding-up.

Sub-section (3) saves appeals pending before the Supreme Court or a High Court, while sub-section (4) empowers transfer of proceedings from other fora. The legislative objective, repeatedly acknowledged by the Supreme Court, is three-fold: (i) asset conservation, (ii) avoidance of multiplicity, and (iii) summary adjudication within the winding-up forum.[2]

Scope of the Statutory Bar: Civil, Criminal, and Special Statutes

Civil and Contractual Claims

Early jurisprudence applied the bar liberally to civil actions, even where the claimant’s cause accrued prior to winding-up. In Balaji Patekar v. Official Liquidator the Allahabad High Court granted post-facto leave, recognising that literal insistence on pre-suit leave would unjustly time-bar creditors whose claims crystallised on the limitation cliff.[3] The Supreme Court has similarly emphasised the remedial rather than penal character of Section 446.[4]

Criminal Prosecutions

Whether criminal actions attract the moratorium has divided High Courts. The Kerala High Court in Jose Antony Kakkad v. Official Liquidator held that prosecution under Section 138 NI Act is not hit, because the proceeding concerns penal liability and not the company’s assets.[5] The Bombay High Court in Indorama Synthetics adopted the same functional test, warning against liberal and wide readings that would stifle legitimate criminal enforcement.[6]

Conversely, certain earlier decisions had suggested that the words “other legal proceeding” necessarily include criminal prosecutions.[7] The emerging consensus, however, treats the asset-centric purpose of Section 446 as determinative: criminal proceedings proceed unfettered unless the relief sought would deplete the company’s estate (e.g., criminal attachment or restitution orders).

Interplay with Special Recovery Regimes

Debt Recovery Tribunals and the RDB Act

The strongest dilution of Section 446 arises where Parliament has enacted a lex specialis for debt enforcement. In Allahabad Bank v. Canara Bank the Supreme Court held that Sections 17, 18, and 34 of the RDB Act grant the Debts Recovery Tribunal (DRT) exclusive jurisdiction to adjudicate and execute bank debts, overriding Sections 442, 537, and 446 of the Companies Act.[8] The Court employed purposive interpretation—emphasising legislative intent to expedite bank recoveries—and the principle lex specialis derogat legi generali. Consequently, secured creditors need not seek Company-Court leave before invoking DRT processes, and sale proceeds are distributed per Section 19(19) RDB Act read with Section 529-A of the Companies Act.

The doctrine was reaffirmed in Official Liquidator v. Allahabad Bank, where the Court directed the Official Liquidator to challenge auction irregularities only through the RDB Act’s appellate channel, not Company Court collateral review.[9]

Bank Guarantees and Autonomous Surety Liability

A cognate but distinct problem is whether a beneficiary of a bank guarantee must seek leave before invocation. In Maharashtra State Electricity Board v. Official Liquidator, the Supreme Court treated the guarantee as an independent contract, unaffected by the company’s liquidation and enforceable without leave.[10] The decision underscores that Section 446 does not interdict proceedings against third parties whose liability is autonomous, even if conceptually connected to the company’s default.

Winding-Up vis-à-vis Corporate Insolvency under the IBC

Post-2016, many winding-up matters are migrating to the NCLT pursuant to Section 434(1)(c) Companies Act, 2013 and the Companies (Transfer of Pending Proceedings) Rules, 2016. The Delhi High Court’s A.N. Buildwell line of cases demonstrates that once transferred, the IBC moratoria (Sections 14 and 33) replace the Section 446 framework, thereby harmonising insolvency, liquidation, and avoidance proceedings within a single code.[11]

Procedural Dimensions of Leave under Section 446(1)

Nature of Discretion and Terms

Leave is discretionary and may be conditional (e.g., security deposits, time-bound stages). In R.C. Garg v. Union of India the Allahabad High Court rejected the argument that notice to co-defendants is mandatory at the leave stage, observing that their substantive defences remain intact at trial.[12]

Retrospective Leave and Limitation

Although the statutory text appears prospective, courts routinely grant retrospective leave to cure technical invalidities, provided: (i) the suit was otherwise within limitation when filed, and (ii) no prejudice accrues to the company’s estate. Balaji Patekar is illustrative.[3]

Summary Adjudication under Sub-section (2)

The power under Section 446(2) is deliberately broad (Supreme Court, Sudarsan Chits v. G. Sukumaran Pillai). It allows the Company Court to entertain landlord-tenant disputes (Official Liquidator v. Bhagwat Saran Garg), eject trespassers (Pushpa Devi Jhunjhunwalla), or determine mortgage priorities, avoiding parallel suits.[13]

Analytical Synthesis

The judicial trajectory reveals a calibrated balance: where Parliament has expressly carved specialised fora or where proceedings target third-party obligations, Section 446 yields; where the action threatens the estate or duplicates winding-up issues, Section 446 prevails. The following propositions emerge:

  1. Asset-Centric Test: A proceeding is hit only if it seeks to realise, attach, or diminish the company’s assets.
  2. Special Statutes Override: Statutes with non-obstante clauses and specialised recovery mechanisms supersede Section 446 (RDB Act; IBC).
  3. Autonomous Liabilities Unaffected: Guarantees, indemnities, and criminal prosecution of directors proceed without leave.
  4. Company Court’s Residual Jurisdiction: Even after special statutes, questions of distribution of realised assets and residual claims fall within Section 446(2).

Contemporary Challenges and Reform

With the IBC now providing a comprehensive insolvency framework, Section 446 is gradually confined to legacy winding-up petitions. Nonetheless, transitional disputes persist—especially concerning partially-realised assets, overlapping DRT and Company-Court processes, and the treatment of contingent or unliquidated claims. Codifying a clear, cross-referenced hierarchy between the Companies Act, the IBC, and residual winding-up provisions would mitigate forum-shopping and procedural uncertainty.

Conclusion

Section 446 remains a cornerstone of Indian corporate insolvency jurisprudence, embodying the principles of asset preservation, judicial economy, and centralised control during liquidation. Courts have prudently adapted its reach to accommodate specialised regimes such as the RDB Act and the IBC, while preventing its misuse to obstruct legitimate criminal or third-party claims. The doctrinal tests distilled from the case law—particularly the asset-centric approach and the supremacy of lex specialis—offer a coherent methodology for future adjudication. As India consolidates its insolvency architecture, Section 446 will likely evolve from a blanket moratorium to a nuanced, gap-filling provision, ensuring that winding-up remains orderly without impeding efficient debt enforcement or corporate accountability.

Footnotes

  1. Companies Act, 1956, s. 446(1); Companies Act, 2013, s. 279 (pari materia).
  2. Sudarsan Chits (I) Ltd. v. G. Sukumaran Pillai, AIR 1984 SC 1579.
  3. Balaji Patekar v. Official Liquidator, 1967 SCC OnLine All 102.
  4. Dhirendra Chandra Pal v. Associated Bank of Tripura, AIR 1955 SC 213 (interpreting analogous s. 45-B, Banking Companies Act).
  5. Jose Antony Kakkad v. Official Liquidator, 2000 SCC OnLine Ker 302.
  6. Indorama Synthetics (I) Ltd. v. State of Maharashtra, Bombay HC, 2016.
  7. See, e.g., Prof. O. Narayanan Kutty v. Official Liquidator, 1998 (1) KLJ 656.
  8. Allahabad Bank v. Canara Bank, (2000) 4 SCC 406.
  9. Official Liquidator (U.P. & Uttarakhand) v. Allahabad Bank, (2013) 4 SCC 381.
  10. Maharashtra State Electricity Board v. Official Liquidator, (1982) 3 SCC 358.
  11. A.N. Buildwell Pvt. Ltd. series, Delhi HC, 2017 (applying Companies (Transfer of Pending Proceedings) Rules, 2016).
  12. R.C. Garg v. Union of India, 1974 SCC OnLine All 211.
  13. Official Liquidator v. Bhagwat Saran Garg, 1970 SCC OnLine All 67; Smt. Pushpa Devi Jhunjhunwalla v. Official Liquidator, 1993 SCC OnLine Cal 99.