2024 (6) TMI 1480 - HC - Companies Law

Official Liquidator's limitation period under Section 458-A starts from knowledge of debtor details, not winding up order date

Official Liquidator Of M/s United Breweries (Holding) Ltd (in Liqn) Versus M/s Mysore Fruit Products Pvt Ltd., Sri Krishnappa Munivenkataswamappa and M/s Dalavoi Audikesavulu Thejashwari, Bengaluru

Karnataka HC ruled on limitation period for Official Liquidator actions under Section 458-A of Companies Act, 1956. Court held limitation period begins ... Winding up of company - Time limitation for the Official Liquidator to take action against the company's creditors in terms of Section 458-A of the Companies Act, 1956 - extension of time perido if an appeal is filed challenging the winding up order and the winding up order is stayed - calculation of time period - investigation by Official Liquidator - application filed by the Official Liquidator under Section 446(2) of the Act can be said to be barred by law of limitation or not. When would the limitation period commence in terms of Section 458-A of the Companies Act, 1956, for the Official Liquidator to take action against the company's creditors? - HELD THAT:- It is trite law that the period of limitation is to be calculated from the date of knowledge; if the Official Liquidator has no knowledge of the Debtor, he cannot be expected to initiate proceedings. Looked at from another angle, the Law of Limitation is a fetter on a person initiating proceedings; if not done within the period of limitation, it does not wipe out the claim or obligation/debt; it only makes a person disentitled to a remedy through a court of law. For this reason, also, the period of limitation would have to be considered from the date the Official Liquidator came to know the amount due and the person from whom it is due. In the present case, the statement of affairs by the ex-directors was filed only on 3.12.2020 and part of the books were handed over to the official liquidator only on 26.10.2021. The earlier of the two dates, being 3.12.2020, the exclusionary period under section 458 would have to be taken into calculation from the date on which the statement of affairs was filed and not on the date on which the order of winding up was passed since such a reading would give rise to an anomalous situation of imposing an obligation on the official liquidator to take action against the creditor without knowing the details of the creditors, without knowing the amounts due from the creditors, without knowing the basis on which the amounts are due from such creditors. The period of 4 years would have to be calculated from the date on which the books of accounts were made available to the Liquidator, irrespective of whether the statement of affairs has been filed or not. Would the limitation period stand extended if an appeal is filed challenging the winding up order and the winding up order is stayed? If so, from when would the limitation period have to be calculated? - HELD THAT:- If the winding-up order itself is stayed in the appellate forum, the winding-up order cannot be implemented, and consequently, the Official Liquidator cannot take any step in furtherance of the order of winding-up stayed by the Appellate court. Thus, until the order of stay in the Appellate court is vacated, the Official Liquidator cannot do anything; as such, naturally, the limitation period would have to stand extended until the order of stay is vacated, the period between the date on which the Order of winding up is passed and the date on which the same was stayed would have to be excluded. In the event of the Appellate court not staying the original order/judgment, then the Official Liquidator would be free to take such action as is required, including that under Section 446 and other provisions of the Companies Act in furtherance of the order of winding up passed by the original court. Thus, in such a situation, there is no extension of limitation, which can be said to occur on the basis of filing an appeal where no order of stay is granted. At the time of disposal of the appeal, the Appellate Court may vary or modify the order passed by the original court. In the event of an interim order of stay having been granted by the Appellate Court and thereafter the Appellate Court varying/modifying the order/judgment of the original court, then as held supra, the Official Liquidator could not implement the order during the period of stay and would have to implement the order as modified by the Appellate Court. Thus, it is the modified order by the Appellate Court which would have to be implemented by the Official Liquidator. Thus, in the event of an appeal being filed challenging the winding up order and there is a stay granted by the Appellate Court, the extended period of limitation contemplated under Section 458A would only commence from the date on which the order of stay is vacated. In the event of no stay having been granted by the Appellate Court in the appellate proceedings, the extension of the limitation period as contemplated under Section 458A would commence as per my answer to Point No.1. Is the Official Liquidator expected to conduct an investigation, ascertain the creditors, and initiate action against such creditors on his own? - HELD THAT:- The scheme of the Act and the manner in which the provisions have been enacted do not impose any requirement on the part of the Official Liquidator to investigate, ascertain the creditors or nature of creditors, nature of the transaction and initiate action against such creditors. During the course of winding up it is required for the Official Liquidator to ascertain the money due to the company in liquidation and from whom, as also to ascertain the amount due by the company in liquidation and to whom. This is based on the documents filed before the Official Liquidator and it is on that basis the Official Liquidator has to ascertain the creditors and debtors of the company in liquidation - the Official Liquidator is not expected to, on his own an investigation, ascertain the creditor and initiate action against such creditor, until and unless the books of account are made available to the official liquidator and/or the statement of affairs indicating the creditors and debtors of the company filed by the ex-directors. It is, however, made clear that once the Books of accounts are made available to the liquidator and or the statement of affairs filed, a duty is cast on the liquidator to get the same examined and take necessary steps. In the present matter, can the application filed by the Official Liquidator under Section 446(2) of the Act be said to be barred by law of limitation and dismissed in limine at this stage? - HELD THAT:- There is no allegation made as regards fraud or fraudulent transfer, if the transaction is taken to be bonafide, the transaction having occurred during the pendency of the winding up proceedings, the time from that date till the date of winding up would stand excluded i.e. until 7.02.2017. In terms of Section 458A period of one year stands excluded from 7.02.2017; however, taking into account that the statement of affairs was filed on 3.12.2020, and few of the documents were handed over by the CBI to Official Liquidator on 26.06.2021, the time for filing statement of affairs being earlier, it is only from 3.12.2020 that the exclusion period of one year under Section 458A can be taken into consideration. The statement of affairs having been filed on 3.12.2020, the extension of period of limitation of 1 year being applicable until 2.12.2021 and the further period of three years under Article 137 being taken into consideration, the period of limitation would end on 2.12.2024. There being an order of stay as regards the order of winding up which was in force till 6.03.2020, further proceedings in pursuance of the winding up order could not be taken, thus the period of exclusion of limitation under Section 458A can also be taken to be from 6.03.2020 which would end on 5.03.2021 and the further period of three years under Article 137 being taken into consideration, the period of limitation would end on 4.03.2024 - The present application under Section 446(2b) having been filed on 13.09.2023, the same is within time. The application filed by the Official Liquidator under Section 446(2b) is not exfacie barred by limitation and is, therefore, not required to be dismissed in limine. The registry is directed to place the above matter before the Central Process Coordinator for recordal of evidence - The Official Liquidator is directed to file his affidavit in lieu of evidence and documents on or before 04.07.2024. The claim petition against respondent No.2 and 3 stands dismissed. The core legal questions considered by the Court in this matter are:i) When does the limitation period commence under Section 458-A of the Companies Act, 1956, for the Official Liquidator to initiate action against the company's creditorsRs.ii) Whether the limitation period is extended if an appeal challenging the winding up order is filed and the order is stayed, and if so, from when should the limitation period be calculatedRs.iii) Whether the Official Liquidator is expected to conduct an independent investigation, ascertain the creditors, and initiate action against them on his own accordRs.iv) Whether the application filed by the Official Liquidator under Section 446(2) of the Companies Act is barred by limitation and liable to be dismissed at the thresholdRs.v) What directions or orders should be passed in light of the above issuesRs.Issue-wise Detailed AnalysisIssue i): Commencement of Limitation Period under Section 458-AThe legal framework centers on the Companies Act, 1956, particularly Sections 444, 446, 454, 455, 456, and the amended Section 458-A, alongside Article 137 of the Limitation Act, 1908. The Apex Court's decision in Karnataka Steel & Wire Products and others is heavily relied upon, which held that the limitation period for claims by the Official Liquidator excludes the period from the commencement of winding up to the date of the winding up order (both inclusive) and an additional one year immediately following the winding up order. Thereafter, a three-year limitation period applies.The Court reasoned that the Official Liquidator only obtains custody of the company's assets, liabilities, books, and records after the winding up order. Prior to this, the Official Liquidator lacks knowledge of the company's affairs. Hence, the limitation period cannot be strictly computed from the date of the winding up order alone.Crucially, the Court emphasized the statutory obligation on the ex-directors to file a statement of affairs within 21 days (extendable up to three months) under Section 454. This statement provides particulars of assets, debts, creditors, and debtors. The Official Liquidator's ability to act depends on the availability of this statement or the company's books of accounts. If these are not filed or handed over timely, the limitation period's exclusionary one-year period under Section 458-A commences only from the date such documents are made available to the Official Liquidator.The Court held that if the statement of affairs or books of accounts are defective or incomplete, the limitation period for claims against particular creditors only begins once the defects are rectified and relevant details are disclosed.This interpretation balances the need to protect creditors' interests with the practical realities faced by the Official Liquidator in obtaining information to initiate recovery actions.Issue ii): Effect of Appeal and Stay on Limitation PeriodThe Court acknowledged that an appeal is a continuation of the original proceeding and that a stay on the winding up order prevents its implementation. Consequently, the Official Liquidator cannot take steps under the winding up order during the stay period.The Court held that if the winding up order is stayed, the limitation period under Section 458-A does not commence until the stay is vacated, effectively extending the limitation period by the duration of the stay.Conversely, if no stay is granted, the limitation period runs as per the normal computation outlined in Issue i).Further, if the appellate court modifies or varies the winding up order, the Official Liquidator must act in accordance with the modified order, and limitation will be calculated accordingly.Issue iii): Duty of the Official Liquidator to Investigate and Ascertain CreditorsThe respondents contended that the Official Liquidator is deemed to have possession of all company assets and liabilities from the date of the winding up order and thus must independently ascertain creditors and initiate action.The Court rejected this argument as onerous and impractical. It held that while the Official Liquidator is deemed to have custody of the company's property and documents, actual possession and information depend on the ex-directors filing the statement of affairs and handing over books of accounts.Where the ex-directors fail to comply, the Official Liquidator must take recourse to statutory provisions to compel production of documents or initiate proceedings before the Court under Section 468.The Court emphasized that the Official Liquidator is not expected to conduct an independent investigation or ascertain creditors without the necessary information being made available. However, once the statement of affairs and books are received, the Official Liquidator has a duty to examine them and take necessary recovery action within the prescribed limitation period.Issue iv): Whether the Official Liquidator's Application is Barred by LimitationThe transaction in question occurred during the pendency of the winding up petition but prior to the winding up order. The amount advanced by the company in liquidation to respondent No.1 was alleged to be repayable, but the respondent contended it was adjusted against losses due to non-utilization of manufacturing facilities.The Court noted that the winding up order was passed on 7.02.2017, but the statement of affairs was filed only on 3.12.2020, and some documents were handed over as late as 26.10.2021. Additionally, there was a stay on the winding up order until 6.03.2020 due to an appeal, which further extended the limitation period.Applying Section 458-A, the Court held that the exclusionary one-year period for limitation calculation would commence from the date the statement of affairs was filed or documents were made available, or from the date the stay was vacated. Calculating from these dates, the limitation period had not expired when the Official Liquidator filed the application on 13.09.2023.Accordingly, the Court held that the application is not barred by limitation and should not be dismissed at the threshold.Issue v): Orders to be PassedThe Court directed the registry to place the matter before the Central Process Coordinator for recording of evidence. The Official Liquidator was directed to file affidavit evidence and documents by 4.07.2024, with evidence to be recorded on 11.07.2024 and the trial to proceed thereafter.The Court also dismissed the claim petition against the directors of respondent No.1, holding that there was no personal liability on their part in the present transaction.Significant Holdings and Core Principles'It is only after a winding-up order is passed that the official liquidator takes over the company, its assets, liabilities, books, etc. Before such winding up, the official liquidator would not have any knowledge of the company's affairs.''Section 458A was introduced to provide for an extended period of time excluding the period from the date of commencement of winding up to the date of the winding up order (both inclusive) and a further period of one year immediately following the date of the winding up order.''The limitation period for the Official Liquidator to initiate recovery proceedings commences from the date on which the statement of affairs is filed and/or books of accounts are made available to the Official Liquidator, not merely from the date of the winding up order.''If an appeal against the winding up order is filed and a stay granted, the limitation period under Section 458A would commence only after the stay is vacated.''The Official Liquidator is not expected to conduct an independent investigation or ascertain creditors on his own without the requisite information being made available by the ex-directors or through statutory processes.''An application filed by the Official Liquidator under Section 446(2) is not barred by limitation if filed within the prescribed period calculated in accordance with Section 458-A and Article 137 of the Limitation Act, taking into account the filing of the statement of affairs, availability of books, and any stay on the winding up order.'The Court's final determination was that the Official Liquidator's application for recovery is maintainable and within the limitation period, and the matter should proceed to trial. The claim against the individual directors was dismissed as there was no personal liability established.