1950 (11) TMI 12 - HC - Companies Law

Defendants can raise set-off/counterclaim in defense to a company's suit under liquidation. Importance of unhindered defense.

The court held that Section 171 of the Indian Companies Act does not restrict a defendant from raising a plea of set-off or counterclaim in defense to a ... Winding up – Suits stayed on winding-up order Issues Involved:1. Applicability of Section 171 of the Indian Companies Act to a plea of set-off or counterclaim in a suit filed by a company under liquidation.2. Whether leave of the court dealing with the winding up is necessary to raise a set-off or counterclaim.3. The nature and scope of set-off and counterclaims under the Indian Companies Act and their treatment in winding-up proceedings.Detailed Analysis:1. Applicability of Section 171 of the Indian Companies Act to a Plea of Set-off or Counterclaim:The primary issue revolves around whether Section 171 of the Indian Companies Act, which restricts suits or legal proceedings against a company under liquidation without the court's leave, applies to a plea of set-off or counterclaim raised by a defendant in a suit initiated by the company.The judgment clarifies that Section 171 does not bar a defendant from raising a plea of set-off or counterclaim in defense to a suit filed by a company under liquidation. The court emphasized that a defendant should be entitled to raise any defense without the necessity of obtaining leave, as it is fundamentally a defensive proceeding. The court cited Lord Davey's observation: 'When once an action by the company itself has been proceeded with, there is no necessity for the defendants in the action to obtain leave for any defensive proceeding on their part.'2. Necessity of Leave of the Court Dealing with the Winding Up:The court examined whether the defendant needs to obtain leave from the court dealing with the winding up to raise a set-off or counterclaim. The Official Liquidator argued that a set-off or counterclaim is akin to a suit and thus requires leave under Section 171.The court rejected this argument, emphasizing that defensive pleas, including set-offs and counterclaims, do not constitute independent suits but are part of the defense mechanism in the ongoing suit initiated by the company. The court referred to the decision in *Mersey Steel and Iron Co. v. Naylor, Benzon & Co.*, where it was held that a defendant must be entitled to raise any defense, including a set-off, without leave.3. Nature and Scope of Set-off and Counterclaims under the Indian Companies Act:The judgment also delved into the broader implications of set-offs and counterclaims within the framework of the Indian Companies Act and insolvency laws. The court highlighted that the right to set-off is recognized under Section 229 of the Indian Companies Act, which incorporates provisions from the Presidency Towns Insolvency Act and the Provincial Insolvency Act. These provisions allow for mutual dealings between the company and a creditor to be accounted for, ensuring that only the balance amount is payable or receivable.The court underscored that allowing a set-off or counterclaim aligns with principles of fairness and justice, preventing a scenario where the Official Liquidator could demand full payment while the defendant, if a creditor, would only receive a fractional dividend. The court noted that the processual law treats a written statement containing a plea of set-off as having the same effect as a plaint in a cross suit for procedural purposes, but it remains fundamentally a defensive plea.Conclusion:The court concluded that Section 171 of the Indian Companies Act does not apply to defensive pleas of set-off or counterclaims raised by a defendant in a suit initiated by a company under liquidation. Consequently, the defendant does not need to obtain leave from the court dealing with the winding up to raise such defenses. The appeal was dismissed, and the defendant was granted leave to defend the suit unconditionally.