Struck-Off Companies Can Continue Appeals To Defend Contractual Obligations: Madras High Court

The Madras High Court at Madurai has held that companies struck off from the register of companies can continue legal proceedings to defend their position on contractual obligations.

This is permissible where a decree for specific performance has crystallised a right in favour of the agreement holder and created a corresponding obligation against the companies.

A Division Bench of Justices M Dhandapani and N Dilip Kumar was examining whether companies struck off under Section 248 of the Companies Act, 2013, could continue an appeal under Section 250.

This provision states that a company's dissolution does not prevent it from realising amounts due or discharging its liabilities or obligations. Explaining how it applies to contractual obligations, the court observed:

“In fact the suit is decreed in this case and a right stands crystallised in favour of the agreement holder and the first defendants' is bound to discharge this obligation. Thus, it becomes an obligation mentioned in Section 250. Even if the company stands dissolved under Section 248 and hence, ceases to operate as a company and its Certificate of Incorporation is deemed to have been cancelled, it will not be given effect to and the litigation in defending the correctness of the implied termination of the Contract of sale agreement, can be continued de hors such dissolution / striking off.”

The case arose from a sale agreement dated April 21, 2005, under which the landowner agreed to sell more than 300 acres spread across five villages to P.A. Joseph. The agreed price was ₹16,250 per acre. Joseph paid ₹10,00,001 initially and another ₹20 lakh subsequently.

Joseph later claimed that a survey revealed that only 205.15 acres were available. He sought specific performance of the agreement for that extent. The landowners disputed the alleged shortage and contended that Joseph had failed to complete the transaction within the stipulated period.

Subsequent purchasers also claimed that they had bought the properties in good faith without notice of the earlier agreement. The trial court nevertheless decreed specific performance in Joseph's favour for approximately 205.15 acres.

During the pendency of the appeal, the two companies were struck off under Section 248(5) of the Companies Act. Joseph's counsel argued that the companies had ceased to exist and could not continue the appeal without first being restored to the register under Section 252. The companies' counsel contended that Section 250 preserved their subsisting contractual obligations and permitted them to defend the appeal.

The high court held that the expression “discharge of obligations” under Section 250 was not limited to performing a contractual promise. It also covered proceedings to defend the correctness of a decision to terminate or not perform a contract. The court therefore rejected the objection to the companies continuing the appeal despite being struck off.

On the merits, however, the court found that Joseph had failed to establish that the survey showing the availability of only 205.15 acres had been conducted or communicated to the landowners. His legal notice had sought execution of the sale deed for the entire extent under the agreement. It did not refer to the alleged shortage or seek specific performance for the reduced extent.

“In the absence of any such communication, we are left with no option, but to conclude that the plaintiff failed to establish his continuous readiness and willingness to perform his part of the contract,” the court observed.

The court also accepted the subsequent purchasers' claim that they had purchased the properties for value without notice of the earlier agreement.

It accordingly allowed the appeal, set aside the trial court's decree for specific performance, and dismissed the suit.

For Appellants: Senior Advocate S Parthasaathy, Advocates Vikram Veerasamy, Muthukamatchi V and M.P Senthil

For Respondents: Senior Advocate V Raghavchari and Advocate R Suriya Narayanan