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Ramanlal Amratlal Sodhan v. Employees' State Insurance Corporation.
Factual and Procedural Background
Employees' State Insurance Corporation (the plaintiff) filed Civil Suit No. 2831 of 1972 in the City Civil Court, Ahmedabad, against (i) the official liquidator of Anant Mills Ltd. (defendant No. 1) and (ii) the company's managing director (defendant No. 2), seeking recovery of Rs. 2,80,268.34 as a special contribution under the Employees' State Insurance Act. Anant Mills Ltd. was under liquidation. The official liquidator did not file a written statement; defendant No. 2 filed a written statement asserting lack of jurisdiction of the trial court. Issue No. 6 (jurisdiction) was tried as a preliminary issue; the trial judge held that he had jurisdiction. Defendant No. 2 challenged that order by way of this civil revision application.
Legal Issues Presented
- Whether Sub-section (1) of section 446 of the Companies Act bars the jurisdiction of the civil court to proceed with a pending suit against the company and/or against the guarantor after a winding-up order has been made and an official liquidator appointed.
- Whether the guarantor (managing director) can be separately sued and subjected to adjudication of liability in the civil court notwithstanding the company's winding-up proceedings, including where the guarantor's liability is co-extensive or alternative to the company's liability.
- Whether any priority or statutory discharge of the company's liability affects the jurisdiction of the civil court to proceed against the guarantor.
Arguments of the Parties
Defendant No. 2's Arguments (Mr. M. M. Shah)
- Invoked Sub-section (1) of section 446 of the Companies Act to contend that, once a winding-up order is made and an official liquidator appointed, no suit pending at the date of the winding-up order can proceed against the company except by leave of the court which made the winding-up order.
- Argued that this bar applies to proceedings against the company and, by implication, should prevent proceeding against the guarantor joined in the suit.
- Contended that priority of the plaintiff's claim in the liquidation does not affect the jurisdiction of the civil court to try the suit, but maintained the primary contention about s. 446(1).
- Applied in the revision for transfer of the suit from the City Civil Court to the revising court (stated but not finally decided in this revision).
Plaintiff's Arguments (Mr. S. B. Vakil)
- Asserted that the guarantor's liability is distinct from the company's liability and can be adjudicated independently in a civil court.
- Relied on the Supreme Court decision in Punjab National Bank Ltd. v. Shri Vikram Cotton Mills Ltd. to show that a managing director's guarantee may be a continuing guarantee and that a surety's liability under section 128 of the Contract Act is co-extensive with the principal debtor unless contract provides otherwise, so a suit against the guarantor may not be premature.
- Relied on Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath to argue that civil court jurisdiction to try a guarantor is not affected whether the guarantor's liability is co-extensive or alternative.
- Noted that this court had earlier granted leave (Company Application No. 166 of 1978, 4 August 1978) to the plaintiff to proceed with the suit against the company, enabling prosecution of the suit against both defendants.
- Observed that even if the company were statutorily discharged, that would not necessarily discharge the guarantor; any such contention is a merits defence for the guarantor to raise.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Punjab National Bank Ltd. v. Shri Vikram Cotton Mills Ltd. [1970] 40 Comp Cas 927; AIR 1970 SC 1973 | Principles: (a) A contract of guarantee requires concurrence of three persons; (b) a managing director's guarantee can be a continuing guarantee; (c) liability of surety under section 128, Contract Act, is co-extensive with principal debtor unless contract provides otherwise. | The court used these principles to support that a guarantor's liability may be co-extensive and that a suit against the guarantor need not be premature; this undermines the contention that s. 446(1) bars proceedings against the guarantor. |
| Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath [1941] 11 Comp Cas 11; AIR 1940 Bom 247 | Rule: Liability of guarantor/surety may be co-extensive or alternative; civil court jurisdiction to try the guarantor is not affected in either case. | The court relied on this authority to hold that jurisdiction to try the guarantor is not barred by the company's winding-up merely because the guarantor's liability may be co-extensive or alternative. |
Court's Reasoning and Analysis
The court examined Sub-section (1) of section 446 of the Companies Act, noting its language bars proceeding against "the company" after a winding-up order except by leave of the court which made the winding-up order. The court emphasized that the guarantor is a distinct legal person from the company; therefore the expression "the company" in s. 446(1) cannot be extended to include the guarantor without altering the statutory meaning. The court considered authorities relied upon by the plaintiff showing that a guarantor's liability may be co-extensive with the company's and that a civil court's jurisdiction to try a guarantor is not affected by the company's winding-up. The court observed that questions of co-extensiveness or statutory discharge of the company are matters of substantive defence for the guarantor to raise at trial, but do not deprive the civil court of jurisdiction to proceed. The court also noted that leave had already been granted by this court on 4 August 1978 to proceed against the company, removing any bar as to defendant No. 1. On these bases the court found no infirmity in the trial judge's conclusion that the trial court had jurisdiction.
Holding and Implications
HOLDING: The trial court has jurisdiction to proceed with the suit.
Implications: The impugned order upholding jurisdiction was sustained; the civil revision application by defendant No. 2 fails and is dismissed, and the rule is discharged with costs. The suit may proceed against both defendant No. 1 (official liquidator) and defendant No. 2 (guarantor). The court did not decide the transfer plea in this revision; defendant No. 2 remains at liberty to make an appropriate application for transfer. No broader precedent beyond the application of existing authority was announced by the court in this opinion.
1. Employees' State Insurance Corporation (hereinafter referred to as "the plaintiff") has filed in the City Civil Court, Ahmedabad, Civil Suit No. 2831 of 1972, against defendant No. 1, who is the official liquidator of Anant Mills Ltd., and defendant No. 2, who was the managing director of that company, for recovering a sum of Rs. 2,80,268.34, which, according to the plaintiff, are recoverable as a special contribution from Anant Mills Ltd. under the Employees' State Insurance Act. Anant Mills Ltd. is a company under liquidation. Defendant No. 2 has been joined as a party to the suit because he is the guarantor. The official liquidator representing the company has not filed the written statement in the suit. Defendant No. 2 has filed his written statement and, inter alia, raised the contention that the trial court has no jurisdiction to entertain the suit. Issue No. 6 raised by the learned trial judge relates to the jurisdiction of the court to entertain and try the suit. It was tried the learned trial judge as a preliminary issue. Reliance was placed upon s. 446 of the Companies Act, 1956, in support of the contention that the trial court has no jurisdiction to proceed with the suit. The learned trial judge negatived the contention and held that he had jurisdiction to try the suit.
2. It is the order which is challenged by defendant No. 2 in this civil revision application.
3. Mr. M. M. Shah who appears on behalf of defendant No. 2 has invited my attention to Sub-section (1) of section 446 of the Companies Act, which, according to him, bars the jurisdiction of the court to try the suit. It provides as follows :
"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 commended, in 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."
4. It is not is dispute that the winding-up order has been made in respect of Anant Mill Ltd. and that the official liquidator has been appointed. It is also not in dispute that when the winding-up order was made, the present suit was pending in the City Civil Court against both defendants. The contentions which Mr. M. M. Shah has raised is that, except by leave of the court which made the winding-up order, the suit cannot proceed against the company as well as against the guarantor. Sub-section (1) of section 446 expressly provides that except, by the leave of the court and subject to such terms as the court may impose, a pending suit shall not be proceeded with against the company only. The guarantor of the company is not the company itself. They are two different and distinct legal persons. Therefore, merely because the official liquidator representing the company has been joined as a party to the suit, it cannot be said that the said that the suit cannot proceed against the other defendant. To include a guarantor in the expression "the Company" used in Sub-section (1) of section 446 is to unduly widen its connotation and to introduce in the section what Parliament has not intended to introduce.
5. Mr. S. B. Vakil who appears on behalf of the plaintiff has argued that the liability of the guarantor is distinct from the liability of the company and that, therefore, independently of the liability of the company, the liability of its guarantor can be adjudicated upon and enforced in a court of law. In order to make good that contention, he has invited my attention to the decision of the Supreme Court in Punjab National Bank Ltd. v. Shri Vikram Cotton Mills Ltd. [1970] 40 Comp Cas 927; AIR 1970 SC 1973. The principles which have been laid down by the Supreme Court in that decision are as follows. A contract of guarantee requires concurrence of three persons, the principal debtor, the surety and the creditor, the surety undertaking an obligation at the request, express or implied, of the principal debtor's default. Where a managing agent of a company executes in favour of a bank a promissory note, a deed of hypothecation and a letter assuring the bank that the company shall remain solely responsible for all loss to the hypothecated stock, and as a part of the same arrangement, the managing director or the managing agent in his individual capacity executes a bond called an agreement of guarantee, reciting that he, the managing director, guarantees to the bank payment on demand of all monies which may at any time be due to the bank from the company, the guarantee is a continuing guarantee for the balance which may remain due to the bank on such cash credit account. The liability of the surety under section 128, Contract Act, is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Therefore, in each case the terms of the bond may have to be considered to find out whether the liability of the surety is not co-extensive with that of the principal debtor. In the case before the Supreme Court, the liability of the guarantor was co-extensive with that of the company. It was, therefore, held that the suit filed against guarantor was not premature.
6. In Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath [1941] 11 Comp Cas 11; AIR 1940 Bom 247, it has been laid down by the High Court of Bombay that the liability of guarantor or a surety may be co-extensive or may be in the alternative. If the liability of the guarantor or the surety is co-extensive with the liability of the principal debtor, then it is open to the creditor to recover the amount from any one of them. The jurisdiction of the civil court to try the suit against the guarantor is not at all affected irrespective of whether the liability of the guarantor is co-extensive with that of the company or is in the alternative. If it is co-extensive with that of the company, the proof of the liability itself will render the guarantor liable independently of the company. If his liability is in the alternative, the guarantor can raise that defence and escape on merits the liability to make good the amount until the company has finally failed to make it good. Whatever may be the nature of the liability, the jurisdiction of the civil court to try the suit against the guarantor is not at all affected. On merits, if the guarantor is not liable, he may raise the defence, prove is and succeed.
7. Mr. Shah who appears on behalf of defendant No. 2 has next argued that the plaintiff's claim has priority over other claims in the matter of its realisation from the assets of the company. Assuming that it has such a priority, it does not affect the jurisdiction of the civil court to entertain and try the suit against defendant No. 2. Priority or no priority, if the liability of the guarantor is co-extensive, the creditor can, at his option, lay his hands on any one, the principal debtor or the guarantor at any time. If the liability of the guarantor is in the alternatives, that defence can be raised on merits by the guarantor. In any case, if does not bar the jurisdiction of the civil court to entertain the suit against the guarantor.
8. Mr. Vakil has further argued that even if the company is statutorily discharged from the liability to pay the amount, the guarantee furnished by the guarantor is not necessarily discharged. I am not expressing any opinion on this aspect because it does not affect the jurisdiction of the court to proceed with the suit against the guarantor. If the guarantor thinks that the company has been statutorily discharged from the liability and that, therefore, he too is discharged from that liability, he may raise that contention is defence, make it good and have the suit as against him dismissed. This aspect has nothing to do with the jurisdiction of the civil court to entertain and proceed with the suit.
9. Mr. Vakil has brought to my notice the order made by this court in Company Application No. 166 of 1978 granting to the plaintiff on 4th August, 1978, leave to proceed with the suit as against the company. Therefore, not only the suit as against defendant No. 2. can proceed but is can also proceed as against defendant No. 1.
10. In the result, I find that the trial court has jurisdiction to proceed with the suit. The impugned order, therefore, suffers from no infirmity. The civil revision application, therefore, fails and is dismissed. Rule is discharged with costs.
11. In this civil revision application, defendant No. 2 has also prayed for transfer of the suit from the City Civil Court at Ahmedabad to this court. In cannot decide this plea in a revision application. Defendant No. 2 will be at liberty to make an appropriate to this court for the purpose if he thinks fit to do so.
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