East West Research & Design (Pvt) Ltd. v. Weerakoon, Commissioner
EAST WEST RESEARCH & DESIGN(PVT) LTD.v.
WEERAKOON, COMMISSIONER OF LABOUR
COURT OF APPEAL
S. N. SILVA, J„ EDUSSURIYA, J.
CA APPLICATION NO. 322/92.
HCRA NO. 82/91.
MC COLOMBO 11456/5.
JANUARY 28, 1993.
Company Law-Winding-Up of Company incorporated under the CompaniesAct, No. 17 of 1982 – Winding-up order made by the District Court and aliquidator appointed – Order against the Company for payment of compensationto a dismissed workman by Labour Tribunal – Right to prosecute the Companyin the Magistrate's Court for not complying with order of Labour Tribunal whilewinding – up is pending and a liquidator is appointed – Necessity for sanctionof District Court which ordered the winding-up – Industrial Disputes Act – Section40 (V(Q) – Companies Ordinance Section 171 – Sections 264, 259, 261 ofthe Companies Act, NO. 17 of 1982.
Section 264 of the Companies Act applies in two situations:
where a winding-up order has been made (in terms of section 258of the Act) or,
where a provisional liquidator is appointed (in terms of section 271 ofthe Act, after the presentation of a winding-up petition but before themaking of a winding-up order).
In either situation section 264 imposes a bar on other actions or proceedingsagainst the company. The bar is twofold : firstly, it strikes at the commencementof actions or proceedings against the Company. Secondly, it strikes at thecontinuance of actions or proceedings already commenced against such company.Such pending actions and proceedings are stayed by operation of law.
2 The bar imposed by section 264 can only be removed by the Court beforewhich the winding-up is pending. The section specifically provides * that no actionor proceeding shall be proceeded with or commenced against the company exceptby leave of the court, and subject to such terms as it may impose ". Thereforea person who intends to commence an action or proceeding against a companyin respect of which a winding -up order has been made or a provisional liquidatorappointed, has to get the prior leave of the court before which the winding-upis pending. Similarly, where an action or proceeding is pending, a party who wishesthat matter to be proceeded with, has to obtain the leave of the winding-up Court,for such purpose. Leave may be granted by the Court subject to terms, as providedin the section.
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The purpose underlying the provisions of section 264 and section 261(avoiding attachment, sequestration, distress or execution against the estate orassets of a company when winding-up is pending) is to put all unsecured creditorsupon an equality and to pay them pari passu for otherwise the winding-up willresolve itself into a scramble for the assets. The bar contained in section 264of the Act is an essential element of a legislative scheme to provide for theorderly winding-up of a company and the distribution of its assets and shouldbe effective in relation to all actions or proceedings against such company,whether pending or to be commenced, in the absence of a specific statutoryreservation.
The word ° proceeding " appearing in section 264 should be construed inthe light of the word " action “ and will encompass any proceeding institutedagainst the Company before an institution established by law for the administrationof justice. Hence a prosecution before the Magistrate's Court for an alleged failureto comply with the order of the Labour Tribunal, will be a proceeding ascontemplated by the section. Such a prosecution could not have been commencedor proceeded with except by the leave of the District Court which made thewinding-up order.
Per S. N. Silva, J :
" It has to be borne in mind that the liquidator should not be considered the
alter ego of the errant employerHe is an officer of court whose functions
are regulated by the provisions of the Companies Act and the orders made bythe winding-up court from time to time0.
Hire Purchase Co., Ltd., and Others v. Fernando 79 (2) NLR 15 distinguishedCases referred to :
Hire Purchase Co. Ltd., and Others v. Fernando  (2) NLR 15.
John and Others v. Coir Yarn and Textiles Ltd., AIR 1947 Kerala 60.
Re Oak Pitts Colliery Co., (1882) 21 Ch. D. 322, 329.
Ayerst v. C. & K. Construction Ltd., (1976) AC 167, 176.
Roberts Petroleum Ltd., v. Bernard Kenny Ltd., (1983) 2 AC 192, 208.
Mahenthiran with N. R. Sivendran for accused-petitioner.
K. Sripavan, S.S.C. for Attorney-General.
Cur. adv. vult.
East West Research & Design (Pvt) Ltd. v. Weerakoon, Commissioner
of Labour (S. N. Silva, J.)
February 26, 1993.
S. N. SILVA, J.
The accused-petitioner has filed this appeal from the judgmentdated 10.03.1992 of the Provincial High Court. By that judgment theProvincial High Court upheld the order dated 14.08.1991 of theAdditional Magistrate, Colombo, subject to certain reservations thatwill be referred to below.
The relevant facts are briefly as follows : The appellant is anincorporated company subject to the Companies Act, No. 17of 1982. On 01.03.1989 the District Court, Colombo, in caseNo. 2939/spl. made a winding-up order in respect of the companyand appointed a liquidator and an official receiver. The liquidationproceedings are in progress and no order of dissolution has beenmade. In the meanwhile, a person claiming to have been anemployee of the company whose services were wrongfully terminated,instituted proceedings in the Labour Tribunal against the company,for relief. The company was absent and unrepresented before theLabour Tribunal. On 01.06.1990, the Labour Tribunal took up theapplication for inquiry ex parte and made order directing the companyto pay a sum of Rs. 25,920 as compensation to the workman.It appears that learned President of the Labour Tribunal was awareof the liquidation proceedings since he directed that a copy of theorder be served on the liquidator. The order directs the company todeposit the said sum with the Asst. Commissioner of Labour, ColomboNorth, on or before 16.07.1990. The liquidator who received a copyof the said order sent letters dated 13.06.1990, 26.07.1990 and05.02.1991 to the Asst. Commissioner of Labour, Colombo North,informing him that the award against the company has been notedand that disbursement can be made only from the assets that arerealised, according to the Companies Act. There was no responseto these letters but the company was prosecuted by the Commissionerof Labour for an offence under section 40 (1)(q) of the IndustrialDisputes Act for failing to comply with the order made by the LabourTribunal.
The liquidator appeared in the Magistrate's Court in response tothe summons and counsel submitted that proceedings cannot becommenced in the Magistrate's Court against the company exceptwith the leave of the District Court that has made the winding-up
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order, in terms of section 264 of the Companies Act, No. 17 of 1982.Learned Magistrate called for written submissions from the partiesand by his order, decided to continue the prosecution against thecompany. In revision, learned Provincial High Court Judge upheld thatorder notwithstanding a specific submission made by State Counselrepresenting the Hon'ble Attorney-General that he has no objectionto relief being granted to the petitioner. Learned Judge has madea reservation that the liquidator should obtain the sanction requiredto appear in the Magistrate's Court and to make payment of theamount ordered by the Labour Tribunal. For this purpose the Mag-istrate was directed to afford reasonable time to the liquidator.
Submissions before this Court were one-way. Learned Senior StateCounsel, rightly in our view, did not seek to support the orders ofthe Additional Magistrate and of the Judge of the Provincial HighCourt. In view of the fact that the same issue has come up forconsideration in other applications, we decided to hear submissionsof both counsel and to set down reasons for the order that we proposeto make.
The specific issue that comes up for consideration is whethera prosecution could be instituted for an offence under section 40 (1 )(g)of the Industrial Disputes Act in the Magistrate's Court against acompany in respect of which a winding-up order has been made inliquidation proceedings, without the leave of the District Court thatmade the winding-up order. Section 264 of the Companies Act, No.17 of 1982, is directly in point and it states thus:
“ When a winding-up order has been made, or a provisionalliquidator has been appointed, no action or proceeding shall beproceeded with or commenced against the company except byleave of the Court, and subject to such terms as the Court mayimpose."
Learned Additional Magistrate and learned Provincial High CourtJudge made their respective orders on the premise that section 264has no bearing on proceedings taken under the Industrial DisputesAct for a non-compliance with the order of the Labour Tribunal. Itappears that learned Judges were guided by the judgment of theSupreme Court in the case of Hire Purchase Co. Ltd., and Othersv. Fernando, (,). In that case, the Supreme Court considered the
Bast West Research & Design (Pvt) Ltd. v. Weerakoon, Commissioner
of Labour (S. N. Silva, J.)
application of section 171 of the Companies Ordinance (which wasthen in operation and which was similarly worded to section 264 ofCompanies Act referred above), in relation to proceedings that werepending in the Labour Tribunal. A workman whose services hadbeen terminated prior to an order for winding-up made an applicationto the Labour Tribunal against the company after such order had beenmade. The liquidator was named as the 2nd Respondent to theapplication. Several objections were taken before the Labour Tribunal,of which one is of particular significance to this case. That, inview of section 171 of the Companies Ordinance proceedings couldnot have been commenced or continued against the companyexcept with the leave of the District Court that made the winding-up order. Learned President of the Labour Tribunal overruled theobjection and this order was affirmed in appeal by the Supreme Court.In the judgment of Tittawella, J. two grounds were relied uponto support the finding that section 171 has no bearing on theproceedings commenced in the Labour Tribunal. They are ;
that at the time the Companies Ordinance came to beenacted, Labour Tribunals were not in existence having beenestablished under Act No. 62 of 1957 and that the phrase “ actionor proceeding " found in section 171 could not be interpreted asapplying to proceedings in the Labour Tribunal. In other words,that the earlier Ordinance cannot detract from the later enactment(P19);
that the very character of Labour Tribunals appear to takethe proceedings before it out of the prohibition contained insection 171 of the Companies Ordinance (p. 20).
As regards the first ground, we have to note that the orderin point of time in relation to the two enactments is now reversed.The Companies Ordinance which was then in force has beenrepealed and the new Companies Act, No. 17 of 1982 was certifiedon 20.05.1982. Hence section 264 of the Companies Act shouldnow be considered the later enactment. It could no longer becontended that the legislature did not intend to bring within thepurview of section 264, proceedings before a Labour Tribunal underthe Industrial Disputes Act. Furthermore, the Industrial DisputesAct is a statute of general application with the overall objective ofproviding for the prevention, investigation and settlement of industrial
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disputes, irrespective of the character of the parties to such dispute.The Companies Act on the other hand, is a special enactment whichspecifically provides for the incorporation, regulation and dissolutionof companies. If one of the parties to an industrial dispute is acompany, such party would necessarily have to be subject to thespecial enactment which provides for its creation, regulation anddissolution. Therefore the first ground stated by the Supreme Courtin relation to section 171 of the Companies Ordinance cannot applyto section 264 of the new Companies Act which came into operationafter the amendment to the Industrial Disputes Act referred above.
As regards the second ground, it is seen that the Supreme Courtplaced reliance on certain observations of the High Court of Keralain the case of John and Others v. Coir Yarn and Textiles Ltd., (2>.In that case the High Court of Kerala considered the applicationof the corresponding provision of the Indian Companies Act inrelation to the Industrial Disputes Act (1947) of India. The relevantpassage is as follows:
“ The Companies Act can have no application to proceedingspursuant to a reference under the Industrial Disputes Act. To comewithin the scope of this section, the proceedings must be in thenature of an action against the property of the company. Toput it somewhat differently the proceedings must be for theenforcement of something in the nature of a personal right againstthe assets and not one in vindication of public interest."
The observations of the Supreme Court and the High Court ofKerala were made in relation to proceedings where a specialadjudicatory process was invoked in relation to an industrial dispute.The public interest there referred to is the resolution of the industrialdispute. These observations will not have a bearing where a pros-ecution is instituted against the company with penal consequences.
The judgment of the Supreme Court in the Hire Purchase Companycase is in relation to a proceeding pending in a Labour Tribunalagainst a company in respect of which a winding-up order had beenmade. We are inclined to accept the submission of counsel that thisjudgment should not have been applied in relation to a prosecutionin the Magistrate's Court for an alleged failure to comply with an orderof a Labour Tribunal. In any event, for the reasons stated above,
CA East West Research & Design (Pvt) Ltd. v. Weerakoon, Commissioner
of Labour (S. N. Silva, J.)197
we hold that the grounds upon which the judgment is based are notrelevant to the application of section 264 of the Companies Act,No. 17 of 1982, viz-a-vis such a prosecution.
I will now examine the component elements of section 264 of theCompanies Act and consider the ambit of its operation. The sectionapplies in two situations. They are :
where a winding-up order has been made (in terms of section258 of the Act) or,
where a provisional liquidator is appointed (in terms of section271 of the Act, after the presentation of a winding-up petitionbut before the making of a winding-up order).
In either situation, the section imposes a bar on other actionsor proceedings against the company. The bar is twofold. Firstly,it strikes at the commencement of actions or proceedings againstthat company. Secondly, it strikes at the continuance of actions orproceedings already commenced against such company. Suchpending actions and proceedings are stayed by operation of law.
The anterior stage, that is the interval of time between thepresentation of a winding-up petition and the making of a winding-up order (where no provisional liquidator is appointed), is coveredby section 259 of the Act. This section gives a right to the company,any creditor or contributory, to move for stay of any action orproceeding pending in any Court in Sri Lanka against the companysought to be wound up. In such a situation, there is no stay byoperation of law as in section 264 but, the Court before which theaction or proceeding is pending is given the discretion of staying orrestraining such proceedings.
The bar imposed by section 264 can only be removed by theCourt before which the winding-up is pending. The section specificallyprovides "that no action or proceeding shall be proceeded with orcommenced against the company except by leave of the court, andsubject to such terms as it may impose". Therefore a person whointends to commence an action or proceeding against a companyin respect of which a winding-up order has been made or a provisionalliquidator appointed, has to get the prior leave of the court before
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which the winding-up is pending. Similarly, where an action orproceeding is pending, a party who wishes that matter to be pro-ceeded with, has to obtain the leave of the winding-up Court, forsuch purpose. Leave may be granted by the Court subject to terms,as provided in the section.
Section 261 of the Act is also a provision of similar import to thatof section 264 referred above. This section avoids any attachment,sequestration, distress or execution against the estate or assets ofthe company after the commencement of the winding-up.
The purpose underlying these provisions is stated very clearlyin Palmer's Company Law, 24th edition (1987) vol. 1p. 448 asfollows:
" The object of the winding-up provisions of the CompaniesAct 1868, " said Lindley, LJ. in Re Oak Pitts Colliery Co. <3,uis to put all unsecured creditors upon an equality and to paythem pari passu. To accomplish this it was indispensable thatproceedings against the company by way of action, execution,distress or other process should be suspended ; otherwise thewinding-up would resolve itself into a scramble for the assets. n
As observed by Lord Diplock in Ayerst v. C. & K. ConstructionLtd. <A), " the making of a winding-up order brings into operation astatutory scheme for dealing with the assets of the company that isordered to be wound up, the scheme is now contained in Part Vof the Companies Act 1948 and extends to voluntary as well ascompulsory winding-up, but in so far as it deals with compulsorywinding-up its essential characteristics have remained the same sinceit was first enacted by the Companies Act 1862 A portion of theforegoing dicta was cited by Lord Brightman in the case of RobertsPetroleum Ltd. v. Bernard Kenny Ltd. <5) It was also observed furtherthat the general sense of the sections of the Act of 1948 is to" preclude inroads into the assets of a company once liquidation hasbegun “ (at p. 209).
It is thus clear that sections 261 and 264 of the Companies ActNo. 17 of 1982, referred above are based upon a clear legislativepurpose of preventing inroads into the assets of a company onceliquidation has begun. As observed in Palmer, in relation to the
CAEast West Research & Design (Pvt) Ltd. v. Weerakoon, Commissioner
of Labour (S. N. Siiva, J.)199
corresponding sections 128 (1) and 130 (2) of the English Act, theseprovisions are intended to avoid a “ scramble for the assets of thecompany “ that is being wound up. Hence, we are of the view thatthe bar contained in section 264 of the Act is an essential elementof a legislative scheme to provide for the orderly winding-up of acompany and the distribution of its assets and should be effectivein relation to all actions or proceedings against such company,whether pending or to be commenced, in the absence of a specificstatutory reservation.
The word " proceeding 11 appearing in the section should beconstrued in the light of the word “ action " and will encompass anyproceeding instituted against the company before an institutionestablished by law for the administration of justice. Hence aprosecution before the Magistrate's Court for an alleged failure tocomply with the order of the Labour Tribunal, will be a proceedingas contemplated by section 264 of the Act. Accordingly, we holdthat the prosecution at issue could not have been commenced or■ proceeded with except by the leave of the District Court whichmade the winding-up order.
Before I conclude, there are certain matters adverted to in theorder of learned High Court Judge that have to be dealt with. LearnedHigh Court Judge has adverted to the provisions of section 277 (1)(a)of the Companies Act and commented on the liquidator appearingin the Magistrate's Court and filing an application in the High Courtwithout the sanction referred to in that section. These provisionsempower a liquidator to bring or defend any action or other legalproceeding in the name and on behalf of the company. However,it is required that the liquidator should obtain the sanction either ofthe Court that makes the winding-up order or of the committeeof inspection. There is no evidence as to whether or not such sanctionwas obtained by the liquidator before he appeared in the Magistrate'sCourt or moved in revision to the High Court. Learned High CourtJudge’s comments appear to be based on the premise that no suchsanction was obtained. It is to be noted that section 277 (1)(a) isnot a bar to the liquidator bringing or defending any action orproceeding, against the company. It is an empowering provision whichenables the liquidator to do so, with the requisite sanction. Theliquidator is appointed by the Court before which the winding-upproceedings are pending and is an officer of that Court. If the liquidator
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has taken any action without obtaining the requisite sanction, it isa matter for that Court to inquire into and to consider whether suchsanction should be granted or refused. The provisions of section 277(1)(a) are not relevant to the matter at issue in this case. Here, weare not concerned with any step taken by the liquidator. Weare concerned with the validity of a prosecution instituted by theCommissioner of Labour contrary to the provisions of section 264of the Companies Act. The liquidator has appeared in the Magistrate'sCourt in response to a summons received from that Court, as theofficer of the District Court administering the affairs of that company.He certainly cannot be faulted for responding to the summonsand informing the Magistrate's Court of the salutary provisions ofsection 264 of the Companies Act. Learned Judge has also madecertain observations as to want of diligence on the part of the liquidatorin relation to the proceedings had before the Labour Tribunal. Theliquidator was not a party to the proceedings before the LabourTribunal and according to the order of the learned President hewas to be given notice of the order only after it was made. It hasto be borne in mind that the liquidator should not be consideredthe alter ego of the errant employer. As noted above, he is anofficer of Court whose functions are regulated by the provisionsof the Companies Act and the orders made by the winding-upCourt from time to time. Learned Judge has also made certainobservations with regard to section 347 (1) of the Companies Actas to preferential payments of assets of the company. It appears thatthese observations too are irrelevant to the matter at issue.
For the reasons stated above the appeal is allowed and weset aside the order dated 14.08.1991 of learned Additional Magistrateand the order dated 28.01.1982 of learned Judge of the ProvincialHigh Court. We make further order discharging the accused in theprosecution instituted by the Commissioner of Labour.
P. EDUSSURIYA, J. – I agree.