1969 (9) TMI 68 - SC - Companies Law

Whether the plaintiff (bank) is not entitled to file this suit as against the defendant No. 1 (the company) without obtaining the leave of the company judge as alleged ? If so, its effect ? Whether the court has no jurisdiction to decide on the merits of the plaintiff s claim in view of the facts as alleged in para. 12(A) of the written statement ? If so, its effect ? Whether the suit against defendant No. 2 (Ranjit Singh) is not maintainable as pleaded under paras. 7,13 and 14 of the written statement ? Held that - Unable to agree with the High Court that the suit filed was premature. The bank was, under the terms of the bond executed by Ranjit Singh, entitled to claim at any time the money due from the company as well as Ranjit Singh under the promissory note and the bond. The suit could not, therefore, be said to be premature. The High Court, instead of dismissing the suit, should have stayed it till the ultimate balance due to the bank from the company was determined. We deem it necessary to observe that a binding obligation created under a composition under section 391 of the Companies Act, 1956, between the company and its creditors, does not affect the liability of the surety unless the contract of suretyship otherwise provides. The High Court, in our judgment, should have stayed the suit and after the ultimate balance due by the company was determined, the court should have proceeded to decree the claim according to the provisions of clause 4 of the bond. We accordingly modify the decree passed by the trial court. Liability of Ranjit Singh being only for payment of the ultimate balance which remains due on the cash credit account with the bank in favour of the company, the court will, when such ultimate balance is determined, proceed to pass a decree in favour of the bank.

Summary

Issues Involved:
1. Entitlement of the plaintiff (bank) to file the suit without obtaining leave of the company judge.
2. Jurisdiction of the court to decide on the merits of the plaintiff's claim.
3. Maintainability of the suit against defendant No. 2 (Ranjit Singh).

Issue-wise Detailed Analysis:

1. Entitlement of the Plaintiff (Bank) to File the Suit Without Obtaining Leave of the Company Judge:
The trial court held that the suit against the company was not maintainable without obtaining leave of the company judge, as required under the scheme of composition sanctioned by the High Court of Allahabad under section 391 of the Companies Act, 1956. The High Court of Allahabad confirmed this finding, stating that the scheme had statutory operation and was binding on all creditors, including the bank, regardless of their agreement. The scheme required that any suit against the company for establishing claims had to be filed with the leave of the court. Therefore, the bank's suit without such leave was not maintainable.

2. Jurisdiction of the Court to Decide on the Merits of the Plaintiff's Claim:
The trial court found that it had no jurisdiction to adjudicate the merits of the bank's claim because, under the scheme, the board of trustees was to scrutinize the claims, and their decision was final. The High Court upheld this view, emphasizing that the bank's rights and obligations had to be worked out under the scheme sanctioned by the court. The court could not adjudicate the claim independently of the scheme, which had a binding effect on all creditors.

3. Maintainability of the Suit Against Defendant No. 2 (Ranjit Singh):
The trial court dismissed the suit against Ranjit Singh, holding that he was only a guarantor and not a co-debtor. Since the company had not defaulted, the suit against Ranjit Singh was premature. The High Court confirmed that Ranjit Singh had executed an indemnity bond, which was essentially a contract of guarantee. The bond guaranteed payment of the "ultimate balance" due from the company to the bank. The High Court concluded that Ranjit Singh's liability would arise only after the ultimate balance was determined by the board of trustees and the company defaulted in payment. Therefore, the suit against Ranjit Singh was premature.

Supreme Court's Judgment:
The Supreme Court modified the decree passed by the trial court. It held that the bank's suit was not premature, as the bank was entitled to claim the money due under the promissory note and the bond executed by Ranjit Singh. However, the liability of Ranjit Singh was limited to the "ultimate balance" due from the company, which had to be determined under the scheme. The Supreme Court directed that the suit be stayed until the ultimate balance was determined, after which the court should proceed to decree the claim according to the bond's provisions. The decree of the High Court was set aside, and the suit was remanded to the trial court for disposal in light of the Supreme Court's observations. There was no order as to costs in the High Court and the Supreme Court, and costs in the trial court were to be costs in the suit.