Companies Act Section 373

Companies Act, Section 373: Stay of Suits and Legal Proceedings Upon Winding Up Order for Companies Registered Under Part XXI

Section 373 of the Companies Act, 2013 addresses the automatic suspension (or stay) of legal proceedings against a company and its contributories once an order for its winding up has been passed or a provisional liquidator has been appointed. This section is particularly relevant to companies that have been registered under Part XXI of the Act i.e., companies that were previously incorporated under other laws or structures and later registered under the Companies Act.

This provision ensures that once a company enters the winding-up process under the supervision of the Tribunal, individual creditors or claimants cannot independently initiate or continue legal actions against the company or its contributories without the Tribunal’s approval.

Applicability and Triggering Events:

This provision becomes applicable in either of the following scenarios:

When a formal order of winding up has been made by the Tribunal against the company, or When a provisional liquidator has been appointed for the company by the Tribunal, pending the final winding-up order.
These are critical stages in the company’s lifecycle where it is considered to be under judicial control due to its financial or operational collapse.

Scope of the Stay on Proceedings

Once either of the above conditions is fulfilled:

No suit or other legal proceeding whether civil, criminal, quasi-judicial, or regulatory. Shall be initiated or continued against:
The company itself, or Any contributory of the company (i.e., past or present members liable to contribute to the assets of the company in the event of its winding up), In respect of any debt owed by the company, or any liability relating thereto.
This stay includes not only fresh cases but also cases that are already pending at the time the winding-up order or appointment of provisional liquidator is made.

Requirement for Prior Permission:

Despite the general restriction, legal action is not absolutely barred. Rather, it is subject to the prior approval ("leave") of the Tribunal. That means:

A person who wishes to initiate or continue a legal action against the company or any contributory must first obtain permission from the Tribunal.
The Tribunal has the discretion to grant or deny such permission, depending on the circumstances of the case.
The Tribunal may also impose specific terms and conditions under which such proceedings may be allowed to continue or commence.
This safeguard ensures that the company’s assets are equitably distributed during the winding-up process and that no single creditor receives preferential treatment by rushing to court independently.

Key Objectives and Rationale:

To centralize all claims and disputes under the authority of the Tribunal so as to ensure an orderly, just, and equitable liquidation process.
To protect the assets of the company from being depleted through fragmented or competitive legal actions.
To ensure that contributories (members/shareholders with outstanding liability) are not unfairly or prematurely pursued outside the Tribunal’s supervision.
To provide the Tribunal with complete oversight and control over any legal claims involving the company or its associated parties during the winding-up proceedings.