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The Calicut Bank Lim... v. Mekkat Alias Eppurat...
Factual and Procedural Background
The appeals concern whether the decree-holder must obtain the sanction of the Court that ordered the winding up of Calicut Bank under Section 171 of the Indian Companies Act to continue execution proceedings against the Bank, which is under liquidation. The execution proceedings were initiated by decree-holders who sought to sell mortgaged properties. The Bank was added as a party because it held a subsequent mortgage on those properties. The Bank had been a party to the original suits and execution proceedings but went into liquidation after the execution petitions were filed. The Bank contended that execution could not proceed without the sanction of the winding-up Court.
The first Court held that since the Bank was only a puisne mortgagee with a privilege to redeem but no liability to pay, no relief was granted against it, and therefore no sanction was required, relying on Narayanachari v. Annamalai Chettiar. The appellate Court upheld this decision and dismissed the appeals, also noting under Section 80 of the Civil Procedure Code that no notice is necessary to a pro forma defendant if no relief is sought against them. The Bank has appealed against this ruling.
Legal Issues Presented
- Whether the decree-holder must obtain the sanction of the Court that ordered the winding up of a company under Section 171 of the Indian Companies Act to continue execution proceedings against the company in liquidation.
- Whether a puisne mortgagee, such as the Bank, is a party against whom relief is granted under the decree and therefore requires sanction to continue execution proceedings.
- The proper interpretation of the term "proceeding" under Section 171 of the Companies Act—whether it includes execution proceedings or only original suits.
Arguments of the Parties
Appellant's Arguments (Calicut Bank)
- The Bank contended that execution proceedings against it could not continue without the sanction of the Court which ordered its winding up and appointed a liquidator.
- It relied on the principle that since it held a subsequent mortgage, it was a party to the execution proceedings and thus required Court sanction under Section 171.
Respondents' Arguments (Decree-Holders)
- The respondents argued that Section 171 applies only to original proceedings such as suits and not to execution proceedings.
- They relied on Shakuntala v. Peoples' Bank of Northern India, which held that sanction is required only for suits starting with a plaint, not for execution or summary proceedings.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Narayanachari v. Annamalai Chettiar (1939) 2 M.L.J. 225 | Held that a puisne mortgagee is not liable to pay under the mortgage decree and hence no sanction needed to continue execution. | The Court noted this was a single Judge decision and overruled it as inconsistent with later rulings. |
| Periaswami Chettiar v. Ramaswami Goundan (1940) 2 M.L.J. 513; I.L.R. (1941) Mad. 53 | Overruled Narayanachari; held that a puisne mortgagee is liable to pay and is a proper party against whom relief is granted. | The Court relied on this to hold the Bank was not a mere pro forma defendant and sanction under Section 171 was necessary. |
| Shakuntala v. Peoples' Bank of Northern India I.L.R. (1941) Lah. 760 (F.B.) | Held that sanction under Section 171 is required only for original suits commencing with a plaint, not execution proceedings. | The Court respectfully declined to accept this narrow interpretation of "proceeding" under Section 171. |
| Govinda-spuami v. Rasu (1939) 2 M.L.J. 225 | Defined "proceeding" to include supplemental proceedings, not only original suits. | Supported the Court's broader interpretation of "proceeding" to include execution proceedings. |
| In re Artistic Colour Printing Co. (Companies Act, 1862 provision) | Held that "proceeding" includes execution under a judgment. | Used to reinforce that execution proceedings require sanction under Section 171. |
Court's Reasoning and Analysis
The Court examined the nature of the Bank's interest as a puisne mortgagee and found that contrary to the earlier single Judge decision in Narayanachari, the Bank is liable to pay under the mortgage decree and is therefore a party against whom relief was granted. Consequently, the Bank is not a mere pro forma defendant.
The Court then analyzed the meaning of "proceeding" under Section 171 of the Companies Act. It rejected the narrow interpretation that it applies only to original suits commenced by filing a plaint, as suggested by the respondents relying on Shakuntala. Instead, the Court accepted that "proceeding" includes execution proceedings, citing authoritative sources and precedents that define "proceeding" broadly to include supplemental and execution proceedings.
The purpose of Section 171 is to enable the Court that ordered the winding up of a company to control whether execution proceedings should continue, potentially allowing adjustments or instructions to the liquidator.
Therefore, the Court concluded that the lower Courts erred in holding that sanction was unnecessary, and that sanction under Section 171 must be obtained before continuing execution against a company under liquidation.
Holding and Implications
The appeals are allowed. The Court remanded the petitions to the Court of First Instance with directions to enable the parties to obtain the necessary sanction to continue the execution proceedings against the Bank under liquidation.
The respondents-decree-holders were ordered to pay costs to the appellant Bank in this Court and the lower appellate Court.
The decision clarifies that execution proceedings against a company under liquidation require the sanction of the Court that ordered the winding up under Section 171 of the Indian Companies Act. No new precedent beyond this case's direct effect on the parties is established.
1. The only point for consideration in these two appeals is whether the decree-holder should obtain the sanction of the. Court which passed orders winding up the Calicut Bank (appellant) under Section 171 of the Indian Companies Act, for the purpose of continuing execution proceedings taken out against that Bank which is now under liquidation.
2. Both these appeals arise out of execution proceedings started by the decree-holders, and in both the appellant Bank was added as a party on the ground that it had obtained a subsequent mortgage of the properties which were sought to be sold in execution of the 'hypothecation decrees obtained by the decree-holders, in the two suits out of which these appeals arise. The Bank was a party to the suits and to the proceedings in execution. It went into liquidation subsequent to the filing of the execution petitions. The contention now is that the execution proceedings cannot be continued without the sanction of the Court which ordered the winding up of the Bank and appointed a liquidator.
3. The first Court held, that, as the Bank was only a puisne mortgagee, there was no relief granted as against the Bank, that the Bank had only a privilege of redeeming but not a liability to pay and that consequently it was not necessary that the sanction of the Court should be obtained and it relied upon the decision of this Court in Narayanachari v. Annamalai Chettiar (1939) 2 M.L.J. 225. The appellate Court followed the same decision and dismissed the appeals. It however stated that, under Section 80 Civil Procedure Code, it was not necessary that a notice should be sent to a pro forma defendant if no relief is asked against him and that the same principle should be applied to the facts of this case. Hence these appeals by the Bank.
4. The decision in Narayanachari v. Annamalai Chettiar (1939) 2 M.L.J. 225, was the decision of a single Judge and it has been overruled by a Bench of this Court in Periaswami Chettiar v. Ramaswami Goundan (1940) 2 M.L.J. 513 : I.L.R. (1941) Mad. 53 It is also pointed out in that case that there were several rulings of this Court which held differently from what Newsam, J., held in Narayanan Chart v. Annamalai Chettiar (1939) 2 M.L.J. 225. In that case it was held that a puisne mortgagee is also a person liable to pay the amount due under the mortgage decree, that he is entitled to have the debt scaled down under the Madras Agriculturists' Relief Act. It cannot therefore be said that the Bank is not a defendant against whom a relief was granted under the decree. The Bank was hence not a mere pro forma defendant.
5. It is urged for the respondents that the proceedings referred to in Section 171 of the Companies Act refers to an original proceeding like a suit started by the filing of a document similar to a plaint and not to execution and for this reliance is placed on the observations in Shakuntala v. Peoples' Bank of Northern India I.L.R. (1941) Lah. 760 (F.B.). There their Lordships had to consider the question as to whether a suit filed under Order 21, Rule 63 was a suit in respect of which sanction should be obtained under Section 171, and the contention was that the suit was really a proceeding in the nature of an appeal against a summary order passed on a claim petition and was not a suit proper. But it was held that it was a suit as it started with a plaint and therefore sanction was necessary. Reference was made to the meaning of the expression "proceeding" as used in that section and it was observed that it must be construed as meaning original proceedings similar to a suit. With great respect, I do not think I will be justified in accepting that interpretation of the word " proceeding." In Govinda-spuami v. Rasu (1939) 2 M.L.J. 225, Venkatasubba Rao, J., after referring to the meaning of the word "proceeding" as given by Stroud and in Black's Law Dictionary, points out that the Word need not necessarily relate to an independent originating proceedings, but may also relate to supplemental proceedings. Further it was pointed out in In re Artistic Colour Printing Co.2 with regard to a similar provision in the Companies Act, 1862, which runs thus, No suit, action, or other proceeding shall be proceeded with or commenced against the company except with the leave of the Court.
6. that the word "proceeding" includes execution under a judgment in an action. Further the object of the section is to enable the Court, which ordered the liquidation or the winding up of a company, to know whether it will be necessary to continue the execution proceedings and whether it will not be advisable to adjust the matter out of Court and to give the necessary instructions to the liquidator.
7. I therefore find that both the lower Courts were wrong in finding that it is not necessary to obtain the sanction of the Court under Section 171 to continue the execution proceedings taken against the Company after a winding up order has been made and a provisional liquidator has been appointed.
8. In the result, both the appeals are allowed, and the petitions are remanded to the Court of First Instance to enable the parties to get the necessary sanction to continue the proceedings. The respondents-decree-holders will pay the appellant costs both in this Court and in the lower appellate Court. Leave refused.
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