049-SLLR-SLLR-2006-V-2-COMMERCIAL-BANK-OF-CEYLON-LTD-.-vs.-GUNARATNE-AND-OTHERS.pdf
CACommercial Bank of Ceylon Ltd. vs. Gunaratne377
and Others (Wimalachandra J.)
COMMERCIAL BANK OF CEYLON LTD.vs.GUNARATNE AND OTHERSCOURT OF APPEAL.
WIMALACHANDRA, J.
CALA 250/98 (LG).
DC COLOMBO 19806/MR.
MAY 25,2005.
JUNE 01, 2005.
Companies Act, No. 17 of 1982, Section 259, section 261, section 347, section353, section 353 (3), – Winding up proceedings-. When could the Court makean order under section 353(3) ? – Civil Procedure Code – Exparte order -Improperly obtained.
Plaintiff respondent G instituted action against the defendant M Company torecover a certain sum of money. Exparte judgment was obtained. The propertiesseised by the fiscal and belonging to M were sought to be sold by publicauction. The petitioner-Commercial Bank – made an application under section343 of the Civil Procedure Code read with section 259 of the Companies Act tostay the execution of the sale. After inquiry the Court on 08.10.1998 permittedthe sale subject to certain conditions imposed on the liquidator who wasadded as a respondent. An application to wind up the Company was made on17.02.1998.
HELD:
The winding up order was made on 18.05.1999 and the liquidatorappointed on 26.10.1999. At the time the impugned order was madeneither had a provisional liquidator been appointed nor winding uporder made. The order dated 08.10.1998 giving directions to theliquidator who was not even appointed at that time is clearly wrong.Court can make an order under section 353 (3) when a provisionalliquidator has been appointed or when a winding up order has beenmade.
The said order is also contrary to section 347 of the Companies Act. Italso defeats the provisons of section 261. 3
(3)The plaintiff-respondent obtained the exparte judgment entirely on thebasis of a letter of acknowledgement of the debt written by a Director ofthe Company sought to be wound up. There is a possibility that the
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Director had come forward to give such a letter of acknowledgement ofdebt and kept away from Court, allowing the plaintiff to obtain judgmentexparte.
Per Wimalachandra. J.
“It is my view that where an exparte decree appears to be improperlyobtained, the Court must investigate and call for independent proof of the debtdue to the company, the Court has power to go behind the judgment todetermine whether the judgment was properly obtained."
APPLICATION for leave to appeal from an order of the District Court ofColombo with leave being granted.
Case referred to:
Vanguard Insurance Co. Ltd. vs. Ruhunu Transit Co. Ltd. 65 NLR 60
Varuna Senadheera with Shivan Cooray for petitioner-petitioner.
Padma Bandara with S. B. Dissanayake for plaintiff-respondent-respondent.Chanaka de Silva for added respondents.
Cur. adv. vult.
October 14,2005.
WIMALACHANDRA, J.This is an application for leave to appeal from an order of the learnedAdditional District Judge of Colombo dated 08.10.1998.
Briefly, the facts as stated in the petition are as follows :
The plaintiff-respondent-respondent (plaintiff) instituted action No. 19806/MR in District Court of Colombo to recover a sum of Rs. 1,417,355.17 fromthe defendant-respondent-respondent (defendant). The matter proceededto trial ex-parte against the defendant as the defendant failed to appear inCourt on the summons returnable date. At the ex-parte trial the plaintiffproduced a letter acknowledging the said debt, signed by a Director of thedefendant-company. The plaintiff obtained an ex-parte judgment againstthe defendant and the ex-parte decree was served on the defendant. There
CA
Commercial Bank of Ceylon Ltd. vs. Gunaratne
and Others (Wimalachandra J.)
379
being no application to set aside the decree, the plaintiff filed papers forthe execution of the same. In executing the said decree, the Fiscal seizedproperties belonging to the defendant. Thereafter, the properties seized bythe Fiscal were sought to be sold by public auction on 3rd and 4th April,1998 for the recovery of the amount in the decree. On 1 st April 1998 thepetitioner-petitioner (the petitioner) made an application under section 343of the Civil Procedure Code to be read with section 259 of the CompaniesAct, to stay the execution of the sale. This application was supported bythe petitioner without notice to the plaintiff and an order was obtained tostay the sale. The plaintiff filed objections to the application made by thepetitioner and the matter was then fixed for inquiry. At the inquiry, bothparties agreed to tender written submissions and the learned judge madeorder on 08.10.1998 permitting the sale subject to certain conditionsnamely-:
after deducting the costs of the sale, the proceeds be deposited inCourt to the credit of the above-mentioned case No. 19806/MR andthe sum so deposited to be held to the credit of the liquidator in thewinding up application.
the liquidator to use part of the said money so deposited to pay thedebt due to the plaintiff in terms of the judgment in case No. 19806/MR
if there is an unreasonable delay to conclude the said winding upapplication No. 5066/Spl and make the payment of the money dueto the plaintiff in case No. 19806/MR, the plaintiff be entitled tomake an application to Court to withdraw the money due to theplaintiff and in such an event, after payment of the money due tothe plaintiff, the balance to be held to the credit of the liquidator inthe said winding up application No. 5066/Spl.
It is from this order the petitioner has filed this application for leave toappeal. The Court granted leave on 08.10.1998, and the order was madeon 18.05.1999 in the said winding up application No. 5066/Spl to wind upthe defendant company and a liquidator was appointed on 26.10.1999. On17.11.2000 the said liquidator in case No. 5068/Spl sought permission ofthis Court to intervene in this case pending in the Court of Appeal. TheCourt of Appeal by its order dated 30.08.2001 added the said liquidator asthe added-respondent.
2-CM 8103
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The petitioner has instituted several actions in the Commercial HighCourt of the Western Province, bearing No. 124/97(1) for the recovery ofapproximately Rs. 50.2 million together with interest and No. 126/97(1) forthe recovery of approximately Rs. 90 million together with interest, againstthe defendant. The petitioner obtained an ex-parte decree against thedefendant [vide *X2(a)’ and *X3(a),] and the ex-parte decree was duly servedon the defendant in terms of the provisions of the Civil Procedure Code.The defendant however failed to make an application to vacate the said ex-parte decree. In the meantime an application was filed No. 17.02.1998 inthe District Court of Colombo by one W. A. L. D. Felix Perera of Q/2/A,Bambalapitiya Flats, Colombo 04 under the provisions of the CompaniesAct, No. 17 of 1982 to wind up the defendant-company. The said windingup application bearing No. 5066/Spl is marked ‘X4’. The petitioner statesthat in view of this winding up application, it refrained from taking steps toexecute the aforesaid ex-parte decree as it would have become void interms of the Companies Act.
The Court can make an order under section 353(3) when a provisionalliquidator has been appointed or when a winding up order has been made.Admittedly, at the time the impugned order was made neither had aprovisional liquidator been appointed nor a winding up order made. It is tobe noted that the winding up order had been made on 18.05.1999 and theliquidator was appointed on 26.10.1999.
In the circumstances, the order of the learned District Judge dated08.10.1998 giving directions presumed to be made under section 353(3) ofthe Companies Act, to the liquidator in the winding up application No.5066/Spl who was not even appointed at that time is clearly wrong. Moreover,the learned judge did not have jurisdiction or the power to make any orderunder section 353 of the Companies Act, because by then there was nowinding up order. In terms of section 353 of the Companies Act No. 17of1982, it is imperative that a provisional liquidator should have been appointedby Court in order to apply section 353 of the Companies Act. The aforesaidorder made by the learned Judge is also contrary to section 347 of theCompanies Act which deals with preferential payments.
It appears that the impugned order made by the learned Judge frustratesand defeats the purposes of section 261 of the Companies Act and deprivesthe petitioner and other creditors of the defendant-company of their rightsunder the law. In making the said order the learned Judge has failed toconsider the principles laid down by the Supreme Court in Vanguard
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Commercial Bank of Ceylon Ltd. vs. Gunaratne
and Others (Wimalachandra J.)
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Insurance Co. Ltd Vs. Ruhunu Transit Co. Ltd. at p 62. Justice G. P. A.Silva, delivering the judgment said
“even if the assets were insufficient to meet theliabilities and all the creditors were to be paid pari passu,
It would always be possible for the added-defendant toapply to Court for stay of execution of the decree until hewas prepared to distribute the assets pari passu amongstcreditors at the final winding up”.
In the circumstances, it appears that the learned Judge has failed toconsider the principle of law stated in the Vanguard Case (supra) inmaking the impugned order permitting the auction sale of the seizedmachinery and other immovable properties, permitting the plaintiff to makean application to withdraw the sum due to him and giving direction to theliquidator to use a part of the sale proceeds so deposited to the credit ofthe case No. 19806/MR filed by the plaintiff to pay the debt due to theplaintiff in terms of the judgment in the said case.
It is to be observed that the plaintiff obtained an ex-parte judgment incase bearing No. 19806/MR entirely on the basis of the letter ofacknowledgement of the debt written by a director of the Company soughtto be wound up. There is possibility that the director of the Company hadcome forward to give such a letter of acknowledgement of debt and thenkept away from Court allowing the plaintiff to obtain a judgment producingex-parte evidence. In the circumstances, it is my view that where an ex-parte decree appears to be improperly obtained, the Court must investigateand call for independent proof of the debt due to the Company. The Courthas power to go behind the judgment to determine whether the judgmentwas properly obtained. In these circumstances, the Court has thediscretion to stay the execution of the judgment unless there are exceptionalreasons for the Court to allow the execution. In this case I am of the strongview that there are no exceptional reasons for the Court to allow theexecution of the judgment obtained by the plaintiff whilst the winding upapplication is pending.
Though a judgment is always prima-facie proof of a debt, neverthelesswhere there are circumstances casting doubts on the claim, the Courthas the power to call for independent proof. There are some logical reasonsfor this. If a judgment were conclusive, a director of a company which is tobe wound up might allow any number of judgments to be obtained by
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default against the company by his friends or relations without any debtbeing due to them at all.
In my opinion the order of the learned Additional District Judge is contraryto law and it will deprive the petitioner and other creditors of the defendanta just and fair distribution of the assets of the defendant. The impugnedorder would permit the plaintiff to proceed with the auction sale of theproperties seized by the fiscal and thereafter recover the debt due to theplaintiff in preference to the petitioner who is a judgment-creditor, and theother creditors of the defendant-company.
For these reasons I am of the view that the said order of the learnedAdditional District Judge dated 08.10.1998 is contrary to law and to theprinciple of pari passu recognized by law. Accordingly, I allow the appealand set aside the order of the learned Additional District Judge dated08.10.1998. The learned Judge is directed to proceed with the winding upapplication according to law. The appellant is entitled to the costs of thisappeal.
Appeal allowed.
District Court directed to proceed with the winding up applicationaccording to Law.