Restricting the Scope of “Suit or Other Proceedings” under Section 446 of the Companies Act, 1956 vis-`a-vis Section 138 of the Negotiable Instruments Act, 1881

Restricting the Scope of “Suit or Other Proceedings” under Section 446 of the Companies Act, 1956 vis-`a-vis Section 138 of the Negotiable Instruments Act, 1881.

[Jasvinder Singh]

Jasvinder Singh is a third-year student of National Law Institute University, Bhopal.

Introduction

It is manifest from a bare reading of section 446(1) of the Companies Act, 1956 [“Companies Act”], that when a winding-up order has been passed against a company or where a provisional liquidator has been appointed, then, except by the leave of the tribunal, neither a suit can be initiated against such company nor any other legal proceedings be commenced or proceeded therewith.[1] The purpose behind this provision is to safeguard the company, which is wound-up, against wasteful and expensive litigation by bringing all the matters against that company before a single adjudicating authority. Moreover, in cases of winding-up, as the assets of the company get distributed to all of its creditors and contributories, the proceedings are stayed in order to avoid situations of chaos among the creditors regarding the distribution of the assets.

Similar provisions exist under the Insolvency and Bankruptcy Code, 2016 [“IB Code”], which states that after the admission of the application of insolvency, the adjudicating authority can by order, declare moratorium, prohibiting the institution of suits or the continuation of pending suits or legal proceedings against the corporate debtor.[2] However, presently, we are only concerned with the application, the scope as well as the ambit of section 446 of the Companies Act. The aim of this post is to discuss the effect of section 446 of the Companies Act on the proceedings under Section 138 of the Negotiable Instruments Act, 1881 [“N.I Act”], which provision creates a statutory offence in case of dishonour of a cheque on account of insufficiency of funds, among other things.

The Problem

There have been certain disagreements with respect to the scope of the expression “suit or other legal proceedings” under section 446(1) of the Companies Act. Various high courts in several of their judgments have time and again delved into the provisions of the Companies Act so as clarify and demarcate the ambit of the said section. The High Court of Bombay took divergent views on the application of section 446(1) of the Companies Act to the proceedings under section 138 of the N.I Act.

In the case of Firth (India) v. Steel Co. Ltd. (In Liqn.),[3] the issue before the court was whether the expression ‘suit or other legal proceedings’ in section 446(1) of the Companies Act includes criminal complaints filed under section 138 of the N.I Act?  It was held by the Single Judge Bench that section 446(1) has no application to the proceedings under section 138 and hence leave of the Court is not necessary for continuing proceedings under the N.I Act.

Further in an unreported decision of Suresh K. Jasani v. Mrinal Dyeing and Manufacturing Company Limited & Ors.,[4] in order to decide on the relevance of section 446 of the Companies Act to the proceedings under section 138 of the N.I Act, the Single Judge Bench has taken diametrically opposite view altogether, and held that by virtue of the former provision, the matter under the latter could not be proceeded any further after the passing of the winding-up order as the proceeding under section 138 of the N.I Act arose out of civil liability of the company, which brings it under the purview of section 446(1). It was further held by the Court that the words “other legal proceedings” have a wider connotation and meaning and thus they include even the criminal proceedings which have some relevance with the functioning of the company.

Because of such disagreements in relation to the issue, the Single Judge Bench of the Bombay High Court decided to refer the matter to a larger bench.

Decision of the Division Bench of the Bombay High Court

The Division Bench of the Bombay High Court on May 06, 2016, in the case of M/S Indorama Synthetics (India) Limited v. State of Maharashtra and Ors.,[5] tried to reconcile and resolve the conflicting views taken in the above-mentioned judgments.

The Division Bench discussed the scheme and object of section 446 of the Companies Act. The court held that when the proceedings of winding-up against a company have been filed, the tribunal has to see that the assets of the company are not imprudently given away or frittered. It is the fundamental duty of the tribunal to oversee the affairs of the company and to meet the debts of its creditors as well as contributories. With regard to section 138 of the N.I Act, the court stated that the main object of the provision is to assure the credibility of commercial transactions by making the drawer of the cheque personally liable in case of dishonour of cheques.

The Bench cited the case of S.V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. (In Liquidation) v. V.M. Deshpande, Income Tax Officer, Companies Circle I (8), Bombay & Anr.,[6] wherein the Hon’ble Supreme Court considered the provisions of  section 446 of the Companies Act vis-à-vis those of section 147 of the Income Tax Act, 1961 dealing with the initiation of the reassessment proceedings against a company which is undergoing liquidation process, and held that “[t]he Liquidation Court cannot perform the functions of the Income Tax Officials while assessing the amount of tax payable, even if the assessee be the company which is undergoing a winding up process. The language of section 446 of the Companies Act must be so interpreted so as to eliminate any startling consequences.”

The Court observed that the expression “other legal proceedings” under section 446 of the Companies Act, should be read ejusdem generis with the expression “suit” and could only mean civil proceedings. Further, the expression “legal proceedings” under section 446 does not mean each and every civil or criminal proceeding; rather, it signifies only “those proceedings which have a direct bearing on the assets of a company in winding-up or have some relation to the issue of winding-up.”

The Court ascertained that under section 138 of the N.I Act, no civil liability against the drawer of the cheque is contemplated. Further, the offence committed under section 138 of the N.I Act is not dependent on winding-up of a company and is solely dependent upon the dishonour of cheque and the non-payment of amount. Hence, mere filing of petition for winding-up of a company would not result in staying of proceedings under section 138.

The Court then relied on the case of Jose Antony Kakkad v. Official Liquidator, High Court of Kerala Kochi and Anr.,[7] and stated that section 138 of the N.I Act has an overriding effect over section 446 of the Companies Act. It has to be presumed that Parliament enacted the provisions under the N.I Act keeping in view the provisions of the Companies Act and hence the N.I Act containing special provisions would have an overriding effect.

Therefore, keeping the ambiguity at rest, at least for some time, the Division Bench held:

“Taking a consistent view, which is in consonance with the object, spirit and purpose of the provisions of section 446 of the Companies Act as well as section 138 of the N.I Act, we hold that the expression ‘suit or other proceedings’ under section 446, chapter II, part VII of the Companies Act does not include criminal complaints filed under section 138 of the N.I Act.”

Comments 

The judgment of the Division Bench of the Bombay High Court in the case of Indoramarestricted the power of company courts to put a stay on proceedings, emphasizing that the expression “suit or other proceedings” should be judiciously used and should not be interpreted too widely so as to incorporate within its ambit each and every proceeding filed against the company. The court further tried to cut back the malpractices by companies in seeking stay on all the proceedings where the proceedings of winding-up have been instituted against them. Section 138 of the N.I Act is a special provision which was enacted for the well-being of the general public. Its main object is to reduce the cases of dishonour of cheques thereby strengthening the reliability of cheques in commercial transactions.

[1] The Companies Act, section 446. See the Companies Act, 2013, section 279.

[2] The IB Code, sections 13 and 14.

[3] Firth (India) v. Steel Co. Ltd. (In Liqn.), 1999 (5) Bom CR 907.

[4] Suresh K. Jasani v. Mrinal Dyeing and Manufacturing Company Limited, Criminal Revision Application No.245 of 1997.

[5] M/S Indorama Synthetics (India) Limited v. State of Maharashtra and Ors., 2016 (3) Bom CR (Cri) 130.

[6] S.V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. (In Liquidation) v. V.M. Deshpande, Income Tax Officer, Companies Circle I (8), Bombay, AIR 1972 SC 878.

[7] Jose Antony Kakkad v. Official Liquidator, High Court of Kerala Kochi, 1998 Cri.L.J. 4095.

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