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Civil Miscellaneous Nos. 25‑L and 31‑L of 1963 in Civil Original No. 122 of 1963, decided on 30th March 1964.

Application, by third party, to continue execution of decree, or proceedings in suit, against company, pending voluntary liquidation proceedings‑ Principles regarding grant or refusal of such application‑[In re Poole Firebrick Co. (1874) 17 Eq. 268 ; In re Keynsham Co. (1863) 33 Beav 123 ; Wilson v. Natal Investment (1867) 36 L J Ch. 312 ; In re Marine Investment Co. (1868) L T 535 ; McEwen v. London, Bombay and Mediteranean Bank Ltd. (1867) 15 L T 495 ; Hegal v. Curria (1867) W N 75 ; Hukumchand v. Radhakissen A I R 1925 Cal. 916 and S. N. Mukerji v. Krishna Dassi 37 Cal. W N 932 ref.]

Khalil‑ur‑Rahman and Saifuddin Chughtai for Petitioners.

Dilawar Mahmood and Sh. Almas Ali for Respondents.

Date of hearing: 17th February 1964.

On an application under section 162 of the Companies Act, filed in this Court on the 25th of March 1963, the Kashmir Theatres Limited, Lahore, was ordered to be wound up on the 17th of June 1963, and Mr. S. M. Almas Ali, Advocate, was appointed its official liquidator.

2. During the pendency of the proceedings for voluntary winding up of the company, an application was made on the 11th of May 1963 by Messrs. Nizami Pictures under section 171 of the Companies Act for permission to continue the execution of the decree, dated 16th of May 1961, which the decree‑holder had obtained against Messrs Kashmir Theatres Limited, Lahore, for a sum of Rs. 40,000, out of which Rs. 33,050 was still due from the company. In consequence of the liquidation proceed ings, the execution application could not proceed without the permission of this Court.

3. Similarly, on the 19th of April 1963, Muhammad Saif‑ur‑Rahman brought an application under section 171 of the Companies Act for permission to continue the suit filed by him in the Court of Mr. Ishaq Rahim Bakhsh, Senior Civil Judge, Lahore. The trial Court has stayed proceedings in the suit. The suit is for the recovery of Rs. 1,12,500 on the basis of an agree ment, dated the 2nd of March 1961, regarding the sale and transfer of the film named "AABROO" and for rendition of accounts. It was alleged in the plaint that the plaintiff had produced the film "AABROO" and the defendant, a private limited company, had entered into an agreement on the 2nd of March 1961 with the plaintiff, by which rights in the film were transferred to the defendant for a sum of Rs. 1,33,000, which had to be paid in four instalments, and the defendant had, in addition, to pay off certain liabilities of the plaintiff to his creditors. In case of failure of the defendant company at any stage to discharge its liabilities to the plaintiff or to the creditors of the plaintiff, the plaintiff was entitled, under clause (4) of the agreement, to stop the exhibition of the said film and the proprietary and other rights under the agreement were to revert to the plaintiff, who could dispose of the film or exhibit it in any manner he desired.

The defendant company had paid Rs. 20,5000 (and sent two cheques of Rs. 10,000 each to the plaintiff which were dis honoured), and, as stated above, a decree for Rs. 1,12,500 is claimed against the defendant.

4. The entire assets of the Kashmir Theatres Limited is the film "AABROO", and the claims of the creditors have to be met out of its sale proceeds, exhibition rights or income of its exhibition.

5. The guiding principles for the decision of these appli cations are these: ‑

(i) Leave of the Court cannot be obtained merely for the asking. It is not to be granted automatically or as a matter of course. The Court has to examine the facts of each case and exercise its discretion. Such discretion must be exercised reasonably and not arbitrarily or capriciously. In exercising) a discretion, the Court may grant leave unconditionally or may impose some conditions.

(ii) In cases in which the company is the sole defendant, its a general rule, unless the question at issue in the action or proceeding is one which cannot be properly determined in the winding up, leave will be refused. In re Poola Firebrick Co. (1874) 17 Eq. 268, and In re Keynsham Co. (1863) 33 Beav 123.

(iii) Where, however, the question at issue is such that A it cannot be conveniently gone into in the winding up, leave will generally be given. (See Wilson v. Natal Investment (1867 36 L J Ch. 312).

(iv) In cases where the company is a necessary party to the action, but there are other defendants as well, the Court generally grants leave. In re Marine Investment Co. (1868) L. T. 535.

(v) The Court usually insists, however, upon an under taking by the plaintiff that he will not enforce against the company any judgment which he may obtain without the leave of the Court. (See McEwen v. London, Bombay and Mideteranean Bank Ltd. (1867) 15 L T 495 and Hegal v. Curria (1867) W N 75.

(vi) In a proper case a Court may revoke the leave already granted. (See Hukumchand v. Radhakissen A I R 1925 Cal. 916).

6. The policy underlying section 171 and of the analogous sections 169 and 232 of the Companies Act is to protect and preserve the assets of the Company for equitable distribution among those entitled, and to prevent the administration being embarrassed by a general scramble of creditors. When a winding up order has been made, the combined effect of sections 171 and 232 of the Companies Act is that the order operates automatically as a stay of all actions, executions, distresses, etc., against the company, subject to the discretion of the Court to allow such actions, executions, etc. to proceed notwithstanding the winding up.

7. The winding up of the company by the Court involves the realization and protection of assets and an administration of its affairs by the Court. Consequently, once the Court has taken the assets of a company into its control or has passed an order for the winding up of the company, it would be improper to allow proceedings to be initiated or continued, and it assets to be wasted. Thus, section 171 has been enacted with the object of safeguarding the company's assets against wasteful or expensive litigation in regard to matters which are capable of determination more expeditiously and more cheaply in the winding up. See S. N. Mukerji v. Krishna Dassi (37 Cal. W N 932). The restriction on the commencement of new proceedings or the continuance of pending proceedings against the company after the appointment of a provisional liquidator or after the making of a winding up order without the leave of the Court applies to all actions and proceed ings, including proceedings in execution.

8. All wasteful and unnecessary expenditure has to be avoided and the income of the film "AABROO" has to be preserved for the benefit of the creditors for equal distribution among the creditors. It is not desirable or proper to allow the execution to proceed as it will mean giving undue preference to the decree‑holder, who is not a secured creditor, over the C other creditors of the company. In view of the principle stated above, the proceeding in execution of the decree cannot be allowed to continue.

9. The suit by Muhammad Saif‑ur‑Rahman is of a simple nature. It does not involve the determination of complex disputed rights or investigation into complicated questions of fact, so that the Civil Court is the more appropriate forum for their adjudication. The amount which may be due to the plaintiff can adequately be determined in the course of liquidation proceedings, and it is not desirable that any expenditure should be permitted to be incurred, as it will lead to wasting of the assets of the company in liquidation. It was argued before me on behalf of the plaintiff‑petitioner that as damages have been claimed in the suit, it should be allowed to proceed in the Civil Court, but no question of real complexity is involved. Having examined the plaint and all the circumstances of the case and also bearing in mind the principles stated above, there is no case for the exercise of discretion in favour of the plaintiff to allow the suit to proceed.

10. For the reasons given above, Civil Miscellaneous No. 31 by Nizami Pictures Lahore, and Civil Miscellaneous No. 25/L of 1963 by Muhammad Saif‑ur‑Rahman are both dismissed with costs.

A. H.

Petition dismissed.

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