Companies Act Section 372

Companies Act, Section 372: Power of Court to Stay or Restrain Proceedings in Relation to Contributories of Companies Registered under Part XXI

Section 372 of the Companies Act, 2013 deals with the judicial power to stay or restrain legal proceedings during the period when a petition for winding up of a company has been filed but no final order for winding up has yet been passed. Specifically, it clarifies the scope of this power in the context of companies registered under Part XXI, i.e., companies that were previously formed under another structure (like partnerships or societies) and later registered under the Companies Act.

This provision also incorporates and aligns with the Insolvency and Bankruptcy Code, 2016, where applicable, ensuring a harmonious interpretation of overlapping procedures during insolvency and winding up processes.

Scope and Application

Once a petition for the winding up of a company has been presented, but before the court or tribunal has made a final order on that petition, the Companies Act and, where relevant, the Insolvency and Bankruptcy Code, 2016 empowers the Court or Tribunal to issue orders to stay or restrain suits and other legal proceedings against the company.

This power is primarily exercised to protect the assets of the company and to ensure a fair and equitable winding-up process for all creditors and stakeholders by preventing individual legal actions from disrupting or prejudicing the collective liquidation proceedings.

Extension to Companies Registered Under Part XXI

In the case of companies that have been registered under Part XXI of the Companies Act meaning entities such as partnerships, LLPs, or societies that were later registered as companies the provision makes a significant clarification:

Where a creditor applies to the court seeking to stay or restrain suits or other legal proceedings, this power of the Court or Tribunal to stay proceedings also extends to suits and legal actions against any contributory of the company.

A contributory, in this context, refers to any person who is liable to contribute to the assets of the company in the event of winding up, including past and present members who still hold financial liability toward the company's obligations.

Key Implications:

1. Protection of contributories:
Creditors cannot initiate or continue individual suits or legal actions against individual contributories during the pendency of a winding-up petition if a court has restrained such proceedings. This helps maintain the integrity and priority of collective insolvency proceedings.
2. Judicial discretion:
The Court or Tribunal retains the discretion to stay or restrain any proceedings, but only upon an application by a creditor and only during the interval between the filing of a winding-up petition and the issuance of the winding-up order.
3. Harmonisation with IBC:
The section explicitly notes that its provisions apply in accordance with or subject to the Insolvency and Bankruptcy Code, 2016, wherever applicable. This ensures that if the winding-up is governed by IBC, its provisions prevail or supplement the operation of this section.