2025 (11) TMI 14 - HC - Companies Law

Company court limited to winding up functions; guarantors remain liable and cannot block post-liquidation recovery

P.C. Jhalani & Ors. Versus Jhalani Tools (India) Ltd & Ors.

HC dismissed the appeal, holding that the Company Court's role under the Companies Act is confined to supervising winding up, realising assets, ... Protection of guarantors from recovery proceedings initiated by creditors - whether, once a final winding up order has been passed against a Company and the Official Liquidator has taken charge, the Company Court is required to come to the aid of guarantors so as to shield them from recovery proceedings initiated by creditors? - HELD THAT:- The purpose of the Company Court under the Companies Act, 1956, is limited and well-defined. Its jurisdiction is to supervise the winding up of a company, ensure the realisation of its assets, adjudicate claims of creditors, and oversee the distribution of proceeds. The Company Court is not a forum for shielding guarantors from recovery proceedings once the liquidation process has attained finality - In the present case, the winding up of Respondent No. 1/ Jhalani Tools (India) Ltd. was ordered by this Court on 18.03.2003. A Provisional Liquidator and subsequently an OL were appointed. The Company’s six properties have been sold under the supervision of the OL, and proceeds have been distributed to secured creditors and workmen in accordance with Court directions, including the orders dated 25.05.2011 and 13.08.2023. The cut-off date for adjudication of claims was fixed as 18.03.2003. The liability of guarantors is independent of the Company’s liquidation. This principle is well-established in law, as held by the Supreme Court in Lalit Kumar Jain [2021 (5) TMI 743 - SUPREME COURT] which states that discharge of the principal borrower does not discharge the liability of personal guarantors. Accordingly, guarantors cannot invoke the jurisdiction of the Company Court to shield themselves from recovery proceedings after the winding up of the company has been completed. The Appellants are free to pursue remedies available to them in other fora, such as the Debts Recovery Tribunal or Civil Courts, to challenge any action taken by the Bank against them personally. However, this Court cannot exercise the Company Court’s jurisdiction to protect guarantors once the winding up process has been completed. There is no merit in the Appellant’s contention that the Company Court should intervene to restrain the Bank from recovery proceedings. The Impugned Order correctly observes that proceedings against guarantors are independent of the winding up proceedings - Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether, once a final winding up order has been passed against a company and the Official Liquidator has taken charge and realised and distributed the company's assets, the Company Court is required or entitled to intervene to restrain creditor recovery proceedings against personal guarantors of the company. 2. Whether alleged pre- or post-liquidation arrangements (including a purported One Time Settlement (OTS) and alleged delays in disbursement of liquidation proceeds) fall within the jurisdiction of the Company Court so as to shelter guarantors from independent recovery actions by creditors. 3. Whether the liability of personal guarantors is affected by the winding up of the principal debtor company and the distribution of its realised assets by the Official Liquidator. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Scope of Company Court jurisdiction to restrain creditor recovery against guarantors after final winding up and distribution by the Official Liquidator Legal framework: The Company Court's jurisdiction under the Companies Act is confined to supervising winding up of a company, realising its assets, adjudicating claims against the company as at the cut-off date, and distributing proceeds in accordance with law and court directions. Precedent Treatment: The Court referenced established principles (including treatment in later Supreme Court authority on guarantor liability) confirming the limited remit of the Company Court; no prior decision was overruled or extended to expand Company Court jurisdiction to protect guarantors post-liquidation. Interpretation and reasoning: The winding up in the present matter attained finality; the Official Liquidator assumed charge, sold all six properties, adjudicated claims with a fixed cut-off date, and distributed proceeds pursuant to court orders. The claim made by guarantors to restrain a creditor's independent recovery fell outside the statutory remit because such relief would require the Company Court to act beyond supervising the company's dissolution and distributions. The Court reasoned that permitting such intervention would convert the Company Court into a forum to adjudicate independent disputes between guarantors and creditors, which is inconsistent with the limited statutory purpose of winding up jurisdiction. Ratio vs. Obiter: Ratio - The Company Court lacks jurisdiction to grant relief to guarantors to restrain creditors' recovery once liquidation and distribution by the Official Liquidator have been completed. Obiter - Observations on ancillary procedural posture of the creditor and consortium membership are explanatory but not necessary to the core jurisdictional ratio. Conclusion: The Company Court is not required or entitled to restrain creditor recovery proceedings against guarantors after the winding up process has been completed and liquidation proceeds have been realised and distributed by the Official Liquidator. Issue 2: Effect of alleged One Time Settlement (OTS) and Official Liquidator's disbursement delays on guarantor liability and Company Court's power to intervene Legal framework: Contractual arrangements between guarantors and creditors (such as an OTS) and any alleged prejudice arising from the timing of liquidator disbursements are governed by ordinary principles of contract and civil/procedural remedies available in appropriate fora; the Company Court's role is not to adjudicate fresh bilateral disputes between guarantors and creditors once liquidation is final. Precedent Treatment: The Court relied on the principle (as reflected in higher court authority) that discharge or actions in respect of the principal borrower do not automatically affect personal guarantor liability; therefore, a purported OTS which was not implemented cannot be invoked to constrain creditor action in the Company Court after liquidation finality. Interpretation and reasoning: The material indicated the purported OTS was not implemented and no payments were made within stipulated time. Allegation that delay by the Official Liquidator caused prejudice to guarantors does not constitue a ground within the Company Court's jurisdiction to restrain an independent recovery claim. The Court emphasised that remedies for contractual or tortious prejudice caused by third-party delay lie in fora such as Debts Recovery Tribunals or Civil Courts, not in a concluded winding up proceeding. Ratio vs. Obiter: Ratio - Unimplemented or unperformed OTS and alleged liquidator delay do not provide jurisdictional basis for the Company Court to interpose between creditor and guarantor after liquidation is complete. Obiter - Comments about the factual sufficiency of valuation or better realisations are explanatory and not dispositive of the jurisdictional holding. Conclusion: Allegations of an OTS and delayed disbursement by the Official Liquidator do not confer jurisdiction on the Company Court to restrain creditor recovery proceedings against personal guarantors after winding up has attained finality; guarantors must pursue available remedies in appropriate tribunals or civil courts. Issue 3: Independence of guarantor liability from company liquidation and effect on remedies Legal framework: Established legal principle that personal guarantor liability is independent of the liability of the principal borrower; discharge of the principal debtor in liquidation does not automatically discharge the guarantor unless there is an express or implied release. Precedent Treatment: The Court applied the settled doctrine that guarantor obligations survive the liquidation of the principal debtor, following authoritative treatment which holds that guarantors cannot invoke company liquidation to defeat independent claims against them. Interpretation and reasoning: Given that the winding up had concluded, claims of the creditor were adjudicated vis-à-vis the company and proceeds paid out; that adjudication and distribution do not extinguish or alter the independent personal liability of guarantors. The Court noted that the creditor was entitled to pursue personal recovery against guarantors in appropriate fora and that company winding up orders did not preclude such recovery actions. Ratio vs. Obiter: Ratio - Guarantor liability remains independent of the company's liquidation; the Company Court's concluded winding up cannot be used to shield guarantors from independent recovery proceedings. Obiter - Directions about alternate fora for guarantors to seek relief are procedural guidance ancillary to the core principle. Conclusion: Personal guarantor liability survives company liquidation; guarantors may defend or challenge creditor recovery in competent tribunals but cannot obtain protection from the Company Court once liquidation and distribution are complete. Cross-references and Practical Consequences Cross-reference to Issues 1-3: The three issues converge on the single principle that the Company Court's jurisdiction is limited to winding up functions and does not extend to adjudicating or restraining independent creditor-guarantor disputes after liquidation is complete; alleged contractual arrangements or claims of prejudice tied to liquidation timing do not alter that limit. Practical consequence: Guarantors facing recovery after final winding up must seek relief in appropriate fora (e.g., Debts Recovery Tribunal, civil courts) and cannot rely on the Company Court to stay or restrain creditor action once the Official Liquidator has realised and distributed company assets pursuant to court orders.