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Intra‑Court Appeal No. 3 of 1981, decided on 3rd November, 1985.

‑‑ S. 171 Phrase "other legal proceedings" in S. 171, held would cover proceedings taken by Income‑tax Recovery Officer for recovery of Income‑tax arrears.

‑‑ S. 171‑Commencing or proceeding with a suit or other legal proceeding against a company in liquidation‑Leave of winding up Court was required only when an order for winding up had been made or a Provisional Liquidator had been appointed‑Where neither any order for winding up was made nor was Provisional Liquidator appointed until sale of property of company by Income- tax Department against recovery of arrear of Income‑tax dues from company ‑Section 171, held, was not attracted and no leave of winding‑up Court for sale of such property was required by Income‑ tax Officer in circumstances.

Smt. Shakuntla v. Peoples Bank of Northern India Ltd. A I R 1941 Lah. 392 ; West Laikdih Coal Co. Ltd., In re : A I R 1926 Cal 781 ; Governor- General‑in‑Council v. Shiromani Sugar Mills Ltd. A I R 1946 F C 16 and Shiromani Sugar Mills Ltd. v. Governor‑General‑in‑Council A I R 1945 All. 3 54 ref.

‑‑ Ss. 168, 171 & 169 ‑Scope and application of Ss. 168, 169 & 171‑Bar contained in S. 171, held, would not be operative on presentation of petition for finding‑up or on commencement of winding‑up of company ‑Section 171 would become operative only when order for winding‑up was made or Provisional Liqui dator was appointed and before such stage was reached S, 169 would take care of situation.

Section 168 of the Companies Act, 1913, provides that winding‑up of a company by the Court shall be deemed to commence at the time of the presentation of the petition for winding‑up but that this is‑only a statutory fiction which does not operate to extend the bar/restraint imposed by section 171 so as to make it effective from the date of the presentation of the petition for winding. The words presentation' of the petition for the winding up" in section 168‑cannot be read into sec tion 171 because the terminus a quo for purposes of statutory bar under section 171. against commencing and continuing legal proceedings dates from the winding‑up order or when the Provisional Liquidator is appoint ed. If the Legislature had intended that the bar contained in section 171 should be operative on the possession of the petition for winding up or on the commencement of the winding‑up of a company, it could have made its intention manifest by making a clear pro vision in that behalf. If that were the intention, section 171 would have been couched in some such language "on the presentation of a petition for winding‑up or with the commencement of winding tip of a company, no suit of other legal proceeding shall be proceeded with or commenced against the company except by leave of the Court " Section 171 becomes operative only when the order for winding‑tip is made or the Provisional Liquidator is appointed. Before that stage is reached, section 169 takes care of the situation as it gives power of the Court to restrain further proceedings in any suit or proceeding against the Company during the period between the presentation of the petition and the passing of an order for the winding‑up of the Company. Power under section 169 is discretionary and is to be exercised on the application either of the company or of any of its creditors or contributories.

A I R 1958 Pb. 341 ref.

‑‑ Ss. 232 & 171‑Company in liquidation‑Order of winding‑up of company, appointment of provisional liquidator tint vet made‑‑ Income‑tax Department attaching property of company and selling same for recovery of arrear of income‑tax of company‑No leave of winding‑up Court was required; by Income‑tax Department in circumstances‑Section 232(2) saves and, protects action taken and sale made by Tax Recovery Officer.

Subsection (1) of section 232 of Companies. Act, 1913 provides that any proceedings by way of attachment, execution or sale of any of the properties of the Company without the leave of the Court after commen cement of the winding‑up shall be void. Subsection (2) thereof declares in categorical terms "nothing in this section applies to proceed ings by the Government". Subsection (2) of section 232 saves and pro tects the action taken and the impugned sale made by the Tax Recovery Officer.

‑‑ Ss. 211, 227, 230 & 171‑Scope and application of Ss. 211, 227 & 230 ‑ Order of winding‑up of company or appointment of Provisional Liquidator not yet made‑income‑tax Department attaching property of company and selling same for recovery of income‑tax of company‑Income‑tax Officer, held, was not required to file claim before liquidator in circumstances.

Section 211, Companies Act, 1913 provides that the property of the Company, on its winding‑up, shall be applied in the pari pa su satisfaction of its liabilities. This provision is, however, subject to other provisions regarding preferential payments. Section 227(2) pre vents the disposition of the property of the Company after the com mencement of the winding up by declaring that every such disposition made without the permission of the Court shall be void. This provision was intended' to avoid fraudulent preferences. Sec tion 230 gives priority to certain debts due from the company which includes the debts in respect of the revenue, taxes, cesses and rates payable to the Government and local authority as also the debts in respect of the salaries or wages due to workers, servants, labourers and workmen etc. All these debts rank equally among themselves for the purposes of payment and have to abate equally if the assets are insufficient to meet them in full.

The Income‑tax Department attached the property of Company sold same to recover arrears of income‑tax before the appointment of Provisional Liquidator. The process of recovery set in motion by the Tax Recovery Officer was, therefore, completed and finalised before even the Provisional Liquidator was appointed. There was thus no occasion for the Income‑tax Department to have filed its claim before the Liquida tor. Provisions of sections 211, 227 and 230 are primarily intended to safe guard the interest of the creditors none of whom came forward to object to the sale in dispute." Even otherwise, there can be no dispute that the tax arrears for the recovery of which impugned sale was brought about had priority under section 230 as the same were due from the Company on the date specified in the provision.

Ch. Ghulam Mujtaba for Appellant No. 1

Nemo for Appellant No. 2.

Muhammad Ilyas Khan for Appellant No. 3.

Ch. Muhammad Afzal Wahala for Respondent

Malik Muhammad Akbar for Respondent No. 2.

Dates of hearing : 26th March, 8th, 9th, 13th and 15th April, 198

.‑Facts necessary for the disposal of this appeal directed against the judgment of a learned Single Judge of this Court passed in Civil Miscellaneous No. 455/L of 1980 (C..O. No. 67 of 1980) are as follows :‑

Premier Cloth Mills Ltd., Faisalabad which was the parent Company was split up into three Companies rig. A B. M. Associates Ltd., Hudaybia Textile Mills Limited and Zulfiqar Associates Limited by an order of this Court dated 26‑3‑1976 passed in C. O. No. 16/1975. It appears that the tax liability amounting to Rs. 1,17,00,000 outstanding against the parent Company was agreed to be shared by the newly‑cons tituted Companies. Tax Recovery Officer, Central Zone Lahore, initiated proceedings for the recovery of the arrears of income‑tax against Messrs A. B. M. Associates Ltd., Faisalabad and attached Muslim Ginning Factory, Tandlianwala on 25‑31- 80. It may be pertinently stated that this factory bad fallen to the share of Messrs A. B. M. Associates Ltd. On 27th March, 1980, Recovery Officer issued a proclamation for the sale of the aforementioned factory and this proclamation was also published in the daily Pakistan Times' and Mashriq' on 2nd April, 1980. One Noor Muhammad son of Kaman challenged the proceedings in a writ petition filed in this Court on 12‑5‑1980, in which an order of statue, duo was passed. That writ petition was, however, withdrawn on 15‑5‑1980. Thereafter, Tax Recovery Officer proceeded further in the matter and on 15‑9‑1980, tenders were invited for the sale of the aforesaid factory. Notices for that purpose were also published in daily 'Pakistan Times' and 'Mashriq', dated 17th September, 1980, giving 5th of October, 1980 as the last date for receiving the tenders. Tenders received by the fixed date were opened on 6‑10‑1980. Bid of Ch. Muhammad Aslam respondent No. 4 for Rs. ten lacs being the highest was accepted and the same was confirmed on 10‑11‑1980. Muhammad Aslam respon dent deposited the bid money in the Government Treasury on 25‑11‑1980 on which date, possession of the factory in question was given to him.

In the meantime, Begum Anwar Sultana appellant herein who was a Director and share‑holder of A. B. M. Associates Ltd., filed a petition in this Court (C. O. No. 67 of 1980) on 8th July, 1980 for winding‑up of this Company under section 162 of the Companies Act. It was averred in the petition, inter alia that "the Income‑tax Department is demanding Rs. 1,17,00,000 from the petitioner as the ex‑Director of the defunct‑Premier Cloth Mills Limited, which shows that Messrs A. B. M. Associates Limited has failed to pay its obligation to the Income‑tax Department." It was also submitted in the petition that the Income‑tax Department had advertised the auction of Muslim Ginning Factory for the recovery of tax arrears. Income‑tax Department was also mentioned as one of the creditors in the list of creditors appended with the petition. Alongwith the main petition an application (C.M. No. 269‑L‑80) was filed under section 175 of the Companies Act for the appointment of a Provisional Liquidator. It may be noted that although the appellant was aware of tae recovery proceed ings initiated by the Income‑tax Department when she filed the winding‑up petition, she did not ask for any restraint order against the Income‑tax Department although such a request could well be made under section 169 of the Companies Act.

Record shows that the winding up petition came up for hearing on 9‑7‑1980 when the counsel for the appellant sought adjournment to amend the petition. Amended petition was accordingly filed on 15‑7‑1980 together with an Application (C.M. No. 275‑L‑1980) seeking a stay order against the demand made by Punjab Employees Social Security Institution. Prayer for stay was disallowed and the miscellaneous application was dismissed on 16‑7‑1980.

On 26‑11‑1980, the learned Judge seized of the winding‑up matter appointed a Provisional Liquidator and directed him to take charge of all the assets of the Company immediately. Provisional Liquidator gave a notice to the Manager, Muslim Ginning Factory on 4‑12‑1980 for the purpose of taking over possession of the factory. Muhammad Aslam respondent, the auction‑purchaser feeling aggrieved with the action of the Provisional Liquidator moved an application under section 183 (5) of the Companies Act (C. M. No. 455‑L‑80) for quashment of the impugned notice. Respondent also prayed that the Provisional Liquidator be stopped from taking, over possession of the assets of the Muslim Ginning Factory which no more belonged to A. B. M. Associates, Ltd., as he had purchased it lawfully and bona fide.

Begum Anwar Sultana appellant also filed an application (C. M. No. 465‑L‑1980) on 16‑12‑1980 for setting aside the sale of the aforemen tioned Ginning Factory in favour of auction‑purchaser Muhammad Aslam alleging therein that her counsel had informed the Tax Recovery Officer on 6‑10‑1980 that the liquidation proceedings in respect of A. B. M. Associates Ltd., were pending in the High Court and as such Income‑tax Department could not proceed against the properties of the Company in liquidation except with the leave of the Court. It was complained in the application that in spite of this information, the Recovery Officer continued with the proceedings and confirmed the auction of the Ginning Factory. It was further alleged by the appellant that the Ginning Factory worth Rs. 70 lacs was sold through auction for a paltry sum of Rs. 10 lacs to the persons who were already running the factory on lease. The sale in question, according to the appellant. was a collusive and sham transaction lacking in bona fides and genuineness.

Both the Applications (C. M. No. 455‑1‑80 and 465‑L‑80) were heard together and disposed of by the learned Single Judge by one order dated 28‑2‑1981 impugned in the present appeal. The learned Judge repelled the objections raised by 'he appellant and upheld the sale made by the Tax Recovery officer wish the result that the application moved by the appellant was dismissed and that of the respondent No. 4 was accepted. The learned Single Judge on consideration of the case‑law cited before a him took the view that section 171 of the Companies Act requiring leave of the Court for commencing or proceeding with any suit or other legal proceeding against a Company in liquidation was not attracted to the present case because the proceedings taken by the Tax Recovery Officer were not covered by the phrase 'suit or other legal proceeding used in section 171. Reliance for this proposition was placed on a case decided by a Full Bench of this Court in Sint. Shakuntla v. Perples Bank of Northern India Ltd. (A I R 1941 1ah 192) wherein the expression 'legal proceeding' in section 171 was interpreted to mean proceedings ejusdem generis with the 'suit', i.e. original proceedings in a Court of first instance, analogous to a suit, initiated by means of a petition similar to a plaint. It was further observed that the term 'legal proceeding' in section 171 "appears not to cover attachment, distress or sale" used in section 232 (1). Learned Single Judge also made reference to section 232 of the Companies Act and observed that although subsection (1) of this section provides that when a Company is being wound‑up by or subject to the supervision of the Court, any attachment, distress or execu tion, put in force without leave of the Court against the estate or effects or any sale held without leave of the Court of any of the properties of the Company after the commencement of the winding‑up shall be void, sub section (2) saves the action or proceedings taken by the Government. The learned Judge relied‑.upon West Laikdih Coal Co. Ltd. In re : (AI R 1926 Cal. 781) for the view that "section 232 (2) prevails and consequently any proceedings taken by the Government were protected". Reference was also made to section 230 of the Companies Act whereunder taxes, rates, etc. payable to the Govern ment were given preference over other debts. Allegation of the appellant that the sale in question was fraudulent was also repelled in view of the fact that it was proclaimed twice in two daily newspapers.

2. We have heard the learned counsel for the parties as also the official Liquidator who appeared is person.

3. Learned counsel for the appellant contended that the proceedings taken by the Tax Recovery Officer for realization of the income‑tax arrears were other legal proceeding' within the scope of section 171 of the Companies Act and as such the proceedings in question could not be continued after the petition for winding up was filed on 8th of July, 1980, except by leave of the Court. For this proposition, learned counsel heavily relied upon a decision of the Federal Court of India in Governor‑General -in‑Council v. Shiromani Sugar Mills Ltd. (AIR 1946 F C 16) wherein the view taken by Allahabad High Court in Shiromani Sugar Mills Ltd. v. Governor‑General‑in- Council (A I R 1945 All. 354) which was not followed by the learned Single Judge was upheld and the different view taken by the Lahore Full Bench in the afore‑referred case was disapproved. View taken in Allahabad case was that words "other legal proceeding" in section 171 of the Companies Act have no ejusdem generis significance and that the steps taken by the Income‑tax Department for the recovery of income‑tax arrears amount to commencing or proceeding with a suit or other legal proceeding within the meaning of section 171. Federal Court affirmed the view of Allahabad High Court with the following observations:‑----

"Accordingly, we agree with the learned Judges of the Allahabad H1gh Court in holding that the words 'other legal proceeding' in section 171, Companies Act, 1913, comprise any proceeding by the revenue authorities under section 46 (-), Income‑tax Act . . . . ."

While referring to the contrary view of Lahore Full Bench, their Lordships of the Federal Court observed "as a statement of law of general application, we, as were the learned Judges in the Allahabad High Court in this case, are unable to accept the narrow construction put upon the expression "or other legal proceeding" in the judgment of the Lahore Full Bench. In our judgment, it need not, and therefore, should not, be confined to "original proceedings in a Court of first instance, analogous to a suit, initiated by means of a petition similar to a plaint."

It appears that the judgment of the Federal Court was not brought to the notice of the learned Single Judge who, therefore, followed the view taken by Lahore Full Bench in preference to the different view of Allahabad High Court. Be that as it tray, respectfully following the dictum of the Federal Court in the afore‑referred case of Shiromani Sugar Mills Limited, we uphold the contention of the learned counsel for the appellant that the proceedings taken by the Tax Recovery Officer for the recovery of the tax arrears are covered by the phrase other legal proceeding' in section 171 of the Companies Act. Question, however, arises whether to the present case, it was necessary for the ran Recovery Officer to have obtained the leave) of the winding‑up Court under section 171 for continuing with the proceed ings after 8th of July, 1980. Before proceeding to examine this question, reference may be made to section 171 of the Companies Act which is as follows :‑---

"171. Suits stayed on grinding‑up order.‑When a winding‑up order has been made (or a provisional liquidator has been appointed) no suit or other legal proceeding shall be proceeded with or com menced against the company except by leave of the Court, and subject to such terms as the Court may impose."

On the plain language of section 171, leave of the Court for commenc ing or proceeding with a suit or other legal proceeding against a company in liquidation is required only when an order for winding‑up has teen made or a Provisional Liquidator has been appointed. In the instant case, neither any order for winding up was made nor was the Provisional Liqui dator appointed until the sale in question was completed in 'favour of respondent No. 4. Section 171 was, therefore, not attracted to the present I case with the result that Tax Recovery Officer was not required to obtain leave of the Court for proceeding with the recovery process which ultimately culminated in the sale in dispute. It may be pertinently pointed out that in Shiromani Sugar Mills' case, Provisional Liquidator had already been appointed and order for compulsory winding‑up also passed before the proceedings for recovery of tax arrears were initiated by the Income tax authorities and on these facts, am‑nest others, it was held that leave of the winding‑up Court under section 171 was necessary for commencing or pro ceeding with the recovery proceedings.

Learned counsel for the appellant when confronted with the afore mentioned position sought to invoke the provisions of section 168 of the Companies Act to contend that the winding up of a Company would be deemed to commence with the presentation of the petition .for winding‑up and no Court or other authority after the commencement of the winding- up of a Company could pass any order or take any proceedings in respect of the property of the Company. No doubt; section 168 provides that winding‑up of a Company by the Court shall be deemed to commence at the time of the presentation of the petition for winding‑up but this is only a statutory fiction which does not operate to extend the bar /restraint imposed by section 171 so as to make it effective from the date of the presentation E of the petition for winding. The words "presentation of the petition for the winding‑up" in section 168 cannot be read into section 171 because the terminus n quo for purposes of statutory bar under section 171 against commencing and continuing legal proceedings dates from the winding-up order or when the Provisional Liquidator is appointed. (Refer A I R 1958 Pun. 341). If the legislature had intended that the bar contained in section 171 should be operative on the presentation of the petition for winding‑up or on the commencement of the winding‑up of a company, it could have made its intention manifest by making a clear provision in that behalf. If that were the intention, section 171 would have been couched in some such language "on the presentation of a petition for winding‑up; or with the commencement of winding‑up of a company, no suit or other legal proceed ing shall be proceeded with or commenced against the company except by leave of the Court. . ." Section 171 as its stands does not countenance the argument sought to be advanced by the learned counsel for the appellant. Quite clearly, section 171 becomes operative only when the order for winding up is made or the Provisional Liquidator is appointed. Before that stage is reached, section 169 takes care of the situation as it gives power to the Court to restrain further proceedings in any suit or proceeding against the Company during the period between the presentation of the petition and the passing of. an order for the winding‑up of the Company. Power under section 169 is discretionary and is to be exercised on the application either of the Company or of any of its creditors or contributories. Admittedly, no application under section 169 was ever made and the bar under section 171, as noted above, was not attracted to the present case. There was thus no legal impediment in the way of the pro ceedings which ultimately resulted in the impugned sale.

Even if it be assumed for the sake of argument that it was obligatory for the Tax Recovery Officer to have obtained the leave of the winding‑up Court for proceeding/continuing with the process of recovery, the proceedings taken by him without such leave could at the most have been stopped by the wind ing‑up Court. This precisely was done by Allahabad High Court in Shiromani Sugar Mills case and Income‑tax Authorities were restrained from proceeding without the leave of the Court with the subsisting proceedings for the recovery of income‑tax amount due from the Company in li4nidation. Now, in the instant case, the proceedings continued unbindered and the factory in dispute was eventually sold out to respondent No. 4 and it was there after that the appellant moved the Court for avoidance of the sale in question on a number of grounds including want of leave of the Court. Question arises whether the proceedings taken and the impugned sale made by the Tax Recovery Officer without the leave of the Court were void and ineffectual. Answer to this question is furnished by section 232 of the Companies Act. Subsection (l) of this section 232 provides that any proceedings by way of attachment, execution or sale of any of the properties of the Company without the leave of the Court after commencement of the winding‑up shall be void. Subsection (2) thereof declares in categorical' terms "nothing in his section applied to proceedings by the Government" In our view, subsection (2) of section 232 saves and protects the action taken) and the impugned sale made by the Tax Recovery Officer.

An argument was raised by the learned counsel for the appellant that the impugned sale could not be upheld to view of the provisions of the Act laying down a scheme of administration and application of the assets of a Company in liquidation. He particularly referred to sections 211; 227 and 230 of the Companies Act. Section 211 provides that the property of the Company, on its winding‑up, shall be applied in the pari pas su satisfaction of its liabilities. This provision is however; subject to other provisions regarding preferential payments. Section 227 (2) prevents the disposition of its liabilities. This Provision is however, subject to other provisions regarding preferential payment Section 227 (2) prevents the disposition of the property of the company after the commencement of the winding‑up by declaring that every such disposition made without the permission of the Court shall be void. This provision was intended to avid fraudulent preferences. Section 230 gives property to certain debts due from the Company which include the debts in report of the revenue, taxes, cesse and rates payable to the Government and local, authority as also the debt in respect of tile salaries or wages due to workers. servants, labourers an workmen etc. All these debts rank equally among themselves for the pur poses of payment and have to abate equally if the assets are insufficient to meet them in full.

Argument of the learned counsel based on the afore-referred provi sions was that the Income‑tax Department should have filed and proved its claim before the Liquidator alongwith other creditors. Argument raised by the learned counsel overlooks the fact that the process of recover set in motion by the Tax Recovery Officer was, completed and finalized before even the Provisional Liquidator was appointed. There was thus not occasion for the Income‑tax Department to have filed its claim before the Liquidator. It may also be observed that the provisions relied upon by the learned counsel for the appellant are primarily intended to safeguard the interest of the creditors none of whom came forward to object to the sale in dispute. Even otherwise, there can be no dispute that the fax arrears for the recovery of which impugned sale was brought about had priority under section 230 as the same were due from the company on the date specified in the provision.

Learned counsel for the appellant lastly argued that the sale in dispute was collusive and fraudulent, Ibis precise objection was that the property worth Rs. 70 lacs was sold for Rs. 10 lacs only and that the sale was made :, favour of a person who was already in possessions of the factory in question as a lessee and the sale in his favour was, therefore, made collu sively. This objection is devoid of any substance Undeniable position is that before the sale in question was made proclamations were published twice in daily Pakistan Times' and 'Mashriq'. As regards the price, it has not been shown that any other person offered a bid higher than Rs. 10 lacs. During the hearing of the appeal, learned counsel for the Income‑tax department placed on record photo copy of a letter purported to have been written by the Secretary of the Company to the Tax Recovery Officer on 12‑8‑7979 stating that after the best efforts, Muslim Ginning Factory can sold for Rs 8,25,000. Tax Recovery 0fficer allowed the Company to sell the factory in question for the said amount. This letter also negates the allegation that the factory in question was sold for a lesser price. In these circumstances, finding of the learned Single Judge that the sale was not fraudulent is not open to any exception.

Upshot of the above discussion is that we find no merit in this appeal which is accordingly dismissed but with no order as to costs.

M. B. A. Appeal dismissed.