2024 (8) TMI 28 - HC - Companies Law

Company in liquidation can execute decree without separate court permission under Section 446

Delhi HC granted permission to execute a decree against M/s Apollo Tubes and Steel Industries Ltd, currently under Official Liquidator's charge. The Court ... Execution of decree passed in favour - Permission to Applicant to Execute the Decree against Respondent, M/s Apollo Tubes and Steel Industries Ltd currently under charge of the Official Liquidator - whether the petitioner can be allowed to execute the decree passed in his favour by the Madras High Court? - HELD THAT:- The perusal of Section 446 of the Companies Act, 1956 makes it crystal clear that in order to continue a suit against a company whose winding up proceedings are ongoing, the party seeking such continuance of suit should seek leave from the Court for the same - it is evident that the permission is required to be taken for the continuation of the suit and the provision is silent on the aspect of whether such permission is required for execution of the decree as well or not. In BANSIDHAR SHANKARLAL VERSUS MOHD. IBRAHIM [1970 (9) TMI 62 - SUPREME COURT], the Hon’ble Supreme Court dealt with the objection raised with regard to obtaining of leave for execution - the judgment settles the position of law and therefore, it can be said that once the leave is granted to proceed with the suit, there is no need for the parties to file another application to seek execution of the decree awarded in their favor. It is no doubt that the execution proceedings are considered as continuation of the suit itself and the party in whose favour a decree has been granted can only reap the benefits of the same after execution of the said decree. On the aspect of whether the decree holder had obtained leave of the Court for continuance of the suit, it is evident that the Court did not comment on the same therefore, leading to the inference that the same was not obtained by the decree holder - it is also apparent that the decree was obtained from a foreign Court and therefore, the leave was sought to be taken at the time of its execution in India - Since the decree holder had filed for the leave of the Court for the first time, it is apparent that the Court had adjudicated the issue on the basis of the same. The present application is allowed and the petitioner/applicant is granted leave to execute the decree passed by the Madras High Court vide order dated 24th November, 2023. ISSUES PRESENTED AND CONSIDERED 1. Whether a decree obtained in a suit continued with leave under Section 446 of the Companies Act, 1956 can be executed without obtaining fresh leave of the winding-up Court. 2. Whether a decree-holder who was permitted to continue proceedings against a company in winding up can be permitted to execute the decree where the Official Liquidator contends the decree-holder is an unsecured creditor and funds in liquidation are insufficient. 3. Whether authorities relied upon by the Official Liquidator (including decisions treating execution proceedings as requiring leave under Section 446) disentitle a decree-holder who previously obtained leave to continue the suit from executing the decree without a fresh application. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Need for fresh leave to execute a decree after leave to continue suit under Section 446 Legal framework: Section 446 (1) of the Companies Act, 1956 prohibits commencing or proceeding with suits against a company in winding up except by leave of the Tribunal/Court; the provision grants the winding-up Court jurisdiction over suits, claims and questions arising in the course of winding up. Precedent treatment: The Court relied on an authoritative Supreme Court decision holding that execution proceedings are a continuation of the suit and, where leave to prosecute the suit has been granted, fresh leave for execution is unnecessary; proceedings instituted without leave may be treated as ineffective until leave is secured, but once leave is obtained the proceeding is deemed instituted on the date of grant of leave. Interpretation and reasoning: The Court reasoned that the statutory mandate of Section 446 requires leave to continue the suit; once such leave is granted and the suit proceeds to decree, execution proceedings are part of the continuation of that suit. Treating execution as a separate proceeding requiring fresh leave would be a technicality divorced from the provision's object, particularly where leave to continue was expressly granted with the caveat that any decree would not be executed without permission - this caveat makes the requirement procedural but does not mandate a fresh substantive discretion to refuse execution where leave to proceed with the suit already existed. Ratio vs. Obiter: The declaration that leave to continue the suit suffices for execution is advanced as the ratio governing the present application (binding for decision here). Observations about the nature of execution as continuation and the permissive effect of previously granted leave are treated as central ratio rather than incidental remarks. Conclusion: Where leave to continue a suit against a company in winding up has been validly obtained under Section 446, the decree-holder need not obtain a fresh, separate leave to initiate execution; execution is the continuation of the suit and may proceed subject to the terms on which leave was granted. Issue 2 - Effect of liquidation realities and unsecured creditor status on grant of permission to execute Legal framework: The Companies Act provides a machinery in liquidation for adjudicating claims and priorities among creditors; the winding-up Court and Official Liquidator administer distribution, and statutory priorities exist (including preferential claims), with secured creditors enjoying primary rights over secured assets. Precedent treatment: Decisions were cited to the effect that the winding-up machinery must protect the queue of creditors and that execution which disturbs the statutory distribution may be subject to control; courts have required circumspection in granting leave to execute where such execution would disturb other creditors' rights. Interpretation and reasoning: The Court acknowledged the Official Liquidator's submissions that execution may be ineffectual where the company's assets are exhausted and that the applicant is said to be an unsecured creditor. Nevertheless, the Court held that staying execution solely on the basis of alleged paucity of funds or asserted unsecured status would render the previous leave and two decades of litigation futile. The question of distribution, priority and actual availability of funds are matters arising in execution and liquidation administration and can be raised in execution proceedings; they are not, in the Court's view, a valid bar to granting leave to execute where leave to continue the suit had already been granted. Ratio vs. Obiter: The proposition that issues about paucity of funds and creditor classification are matters for execution/liquidation proceedings and not a ground to deny permission to execute is applied as the operative ratio for disposing of the present application. Observations about unfairness of depriving the decree-holder of execution after long litigation serve as supporting reasoning. Conclusion: The Official Liquidator's contention regarding unsecured status and insufficiency of assets does not, by itself, preclude granting permission to execute a decree where the decree arises from litigation continued under leave; those contentions are appropriate matters for the execution/liquidation stage and can be considered later in the execution process. Issue 3 - Weight and distinguishability of cases holding that execution requires leave Legal framework and precedent treatment: The Court examined a High Court decision which emphasised that leave under Section 446 may be required even for execution proceedings and cautioned against granting permission that would upset the statutory distribution among creditors; that decision was grounded in the statutory scheme and prior authority holding that legal proceedings after a winding-up order require leave. Interpretation and reasoning: The Court distinguished that authority on key facts: in that case the decree originated from a foreign Court and leave for continuance had not previously been obtained, so the question there concerned initial leave at the time of execution in India. Here, by contrast, the present applicant had obtained express leave to continue the very suit which produced the decree, and had litigated on that basis for many years; hence the factual premise underpinning the cited decision (absence of prior leave) was not present. The Court further noted that the cited decision supports the proposition that execution is subject to the winding-up court's control, but does not negate the principle that previously granted leave to prosecute a suit renders subsequent execution a continuation of that suit. Ratio vs. Obiter: Distinguishing the cited decision is essential ratio for the Court's decision to permit execution; remarks in the cited judgment emphasizing the need for circumspection in granting leave are accepted as persuasive but not dispositive here. Conclusion: The authorities relied upon by the Official Liquidator do not displace the applicant's right to execute where valid leave to continue the underlying suit was earlier granted; material factual differences justify distinguishing those precedents. Final Conclusion Given that leave to continue the suit was previously granted under Section 446 and execution is a continuation of that suit, and because contentions regarding creditor classification and paucity of assets are matters for the execution/liquidation process, the Court allowed the application and granted leave to execute the decree subject to the winding-up regime and subsequent enforcement proceedings.