Case: Harihar Nath  Vs. State Bank Of India

2. Nalanda Ceramic & Industries Ltd. (second respondent herein, referred to as `the Company) was a company incorporated under the Companies Act, 1956 (for short `the Act). Appellant Nos. 1 to 3 were its Directors. The Company had obtained certain credit facilities from the State Bank of India (first respondent herein and referred to as the Bank). The loans were secured by mortgage of the assets of the Company. The repayment of the amounts advanced to the Company was guaranteed by the appellants. On 28.11.1988, the Bank filed a suit (Title Mortgage Suit No. 150/1988 on the file of the Special Subordinate Judge, Ranchi) against the Company (defendant No.1), the appellants (defendants 2 to 4), and four others namely, State of Bihar, Bihar State Financial Corporation, I.F.C.I. and IDBI (defendant Nos. 5 to 8). In the said suit, the Bank sought a decree for Rs. 5,95,98,258.31 against defendants 1 to 4 (the company and the appellants) with interest thereon and several ancillary and consequential reliefs3. Even prior to the said suit, other creditors had filed petitions for winding up of the Company, in Company Petition Nos. 1/79, 2/79 and 4/79 on the file of the Patna High Court, alleging that it was unable to pay its debts. During the pendency of the said company petitions, a notification dated 16.4.1984 was issued under the Bihar Relief Undertakings (Special Provisions) Act, 1982, declaring the Company as a relief undertaking, thereby preventing further progress of the petitions for winding-up. As the company became sick, a reference was also made to the Board for Industrial & Financial Reconstruction which directed an inquiry under Section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short SIC Act). In view of the said reference, the first appellant (second defendant in the suit), filed an application on 16.9.1989 in the Banks suit under Section 22 of the SIC Act, for stay of further proceedings in the suit4. The Bank resisted the said application, inter alia, on the ground that Section 22 of SIC Act had the effect of staying only proceedings in the nature of winding-up and execution and did not come in the way of progress of any suit for recovery of money due by the Company by enforcing the security5. When matters stood thus, an order for winding up the company was passed by the High Court on 24.10.1989. When the said order came to its knowledge, the Bank filed a further objection to the application under Section 22 of the SIC Act, contending that Section 22 of the SIC Act will not apply in view of the order for winding up. The Bank also submitted that having regard to Section 446(1) of the Act, it required the leave of the court only to proceed against the company, but there was no bar for proceeding against the other defendants. The Bank, therefore, prayed for dismissal of the application for stay (filed by appellant No. 1 herein) and further prayed that while the proceedings as against the first defendant company may be kept in abeyance, the suit may be proceeded with against the other defendants6. The trial court disposed of the application by an order dated 9.3.1990. It rejected the application filed by second defendant (appellant No. 1 herein) for staying the suit under Section 22 of the SIC Act. It, however, held that the suit against all the defendants will have to be stayed in view of the order of winding up. It was of the view that the liability to pay the amount due was on the principal-debtor, namely, the Company, and that the guarantors would be liable only if the Company defaulted; and that, therefore, if the proceedings against the Company had to be stayed, it had also to be kept in abeyance against all defendants till the Bank obtained an appropriate direction from the High Court. The Bank challenged the said order in CRP No. 388/1990 before the High Court7. When the Company Court was informed that an inquiry under Section 16 of the SIC Act had been directed by the BIFR, it passed an order on 16.7.1990, staying the operations of the order of winding up dated 24.10.1989. The said stay order dated 16.7.1990 was vacated subsequently by the Company Court on 16.12.1994 and the winding up order was revived8. The Bank withdrew its revision petition (CRP No. 388/1990) on 4.4.1995. Thereafter, on 11.8.1995, the Bank filed an application under Section 446(1) of the Act, seeking leave of the Company Court to proceed with its suit. The said application was resisted by the appellants herein, inter alia, on the ground that the application seeking leave was barred under Article 137 of the Limitation Act, 1963. The appellants contended that the application ought to have been filed within 3 years from the date of winding up, that is, on or before 24.10.1992 and the application filed on 11.8.1995 was barred by limitation9. The Company Court by order dated 17.9.1996 granted leave to proceed with the suit. The Company Court was of the view that though Article 137 of the Limitation Act was applicable to an application under Section 446(1) of the Act, the provision relating to limitation should be construed liberally and the period could be extended in exercise of judicial discretion even suo moto. It condoned the delay in filing the application for leave, being satisfied that there were sufficient causes for the delay, first being the stay of winding up between 16.7.1990 and 16.12.1994 (in view of the inquiry under Section 16 of the SIC Act) and the second being the prosecution of the revision petition (CRP No. 388/1990) from 1990 till its withdrawal on 4.4.1995. The grant of leave was, however, made subject to the condition that even if a decree was granted in the suit, jointly and severally against various defendants, the Bank should proceed to get the decree satisfied from other defendants, and if the decree was not fully satisfied, then the matter may be brought to its notice for proceeding against the Company for realization of residuary decretal dues. Feeling aggrieved by the said order granting leave, the appellants herein filed LPA No. 259 of 1996. A Division Bench of the High Court dismissed the appeal by order dated 1.9.1997. The said order is challenged in this appeal by special leave.

Court's reasoning:
In the present case, the suit was against the company as well as its Directors being guarantors in their personal capacity. The suit could have in any case proceeded against the guarantors. It was stayed by the trial court apparently under Section 446(1) even though there was no such prayer to that effect. The only prayer before the Court at the instance of first defendant in the suit for stay of suit under Section 22 of SIC Act which was not granted. The object of appellants in filing an application for stay was to drag on the suit. They have succeeded in their effort to stall the suit for more than 16 years on a virtually non-existent ground. The trial court will, therefore, have to proceed with the suit with all expedition