SANCTION OF A SCHEME UNDER SECTION 391 OF THE COMPANIES ACT, 1956 DOES NOT AMOUNT TO COMPOUNDING OF AN OFFENCE UNDEER SECTION 147 OF NEGOTIABLE INSTRUMENTS ACT, 1881

[Mr. M. GOVINDARAJAN]

Section 147 of the Negotiable Instruments Act, 1881 (‘Act’ for short) provides for compounding of offences. The said section provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973, every offence punishable under this Act shall be compoundable. The offences under Section 138 of the Act has been made compoundable and it does not provide for any other or further qualification or embargo like Section 320(2) of Code of Criminal Procedure.  In ‘Ranaswamiaiah V. Shettappa’ – (2002) Cri LJ 4792 the Karnataka High Court held that in the present Criminal Procedure Code, there is no express prohibition against compounding of an offence under other laws, in the absence of such provision in the present code, and where the Negotiable Instruments Act itself is silent, such offence could be compounded.

Section 391, 392, 393 & 394 of the Companies Act, 1956 deals with merger, amalgamation and takeover. The issue to be discussed in this article is whether sanction of a scheme under Section 391 of the Companies Act, 1956 amounts to compounding of an offence under Section 147 of the Negotiable Instruments Act, 1881 with reference to decided case law.

In ‘JIK Industries Limited and others V. Amarlal V. Jumani and another’ – LW 23.03.2012 (SC) the appellant company came out with a scheme by which it was agreed that the appellant company should be revived and thereafter payments will be made to the creditors. Pursuant to such scheme, the appellant company filed a petitioner under Section 391 of the Companies Act before the High Court. The first order of scheme passed by the High Court on 05.05.2005.  A meeting was convened by the appellant company and the same was attended by several creditors including representatives of the first respondent who opposed the scheme.  Despite the opposition the scheme was approved by the majority of the creditors. taxmanagementindia.com

Another company petition was filed by the appellant company with a fresh scheme. After the said company petition was filed all proceedings which were initiated against the appellant company by different companies were stayed by the High Court. In view of the said judgment of High Court the appellant company filed a petition for compounding under Section 147 of the Act read with Section 320 of Code of Criminal Procedure. The respondents opposed the petition for compounding. The Chief Judicial Magistrate rejected the petition filed by the appellant company for termination of proceedings on the ground that the Magistrate has no power to quash or terminate the proceedings.

The appellant company filed writ petition before the High Court against the order of Chief Judicial Magistrate. The High Court dismissed the writ petition.  The High Court held that sanction of a scheme under Section 391 of the Companies Act does not amount to compounding of an offence under Section 138 read with Section 147 of the Act. The High Court further held that the sanction of a scheme under Section 391 of the Companies Act will not have the effect of termination or dismissal of complaining proceedings under the Act. Further the High Court made it clear that the judgment of High Court will not prevent the petitioners from filing separate application invoking the provisions of Section 482 of Code of Criminal Procedure. The appellant company approached the Supreme Court.

The Supreme Court held that the effect of approval of a scheme of compromise and arrangement under Section 391 of the Companies Act is that it binds the dissenting minority, the company as also the liquidator if the company is under winding up. Even if the aforesaid position is accepted the same does not have much effect on any criminal proceedings initiated by the respondent creditors for nonpayment of debts of the company arising out of dishonor of cheques.

The Supreme Court further held that Section 391 of the Companies Act does not have the effect of creating new debt. The scheme simply makes the original debt payable in a manner and to the extent provided for in the scheme.   In the instant appeal most of the cases the offence under the Negotiable Instruments Act has been committed prior to the scheme. Therefore the offence which has already been committed prior to the scheme does not get automatically compounded only as a result of the said scheme. The Supreme Court did not accept the contention of the appellant company that the scheme under Section 391 of the Companies Act will have the effect of automatically compounding the offence under the Act. l

A scheme under Section 391 of the Companies Act cannot contrary to any law. It cannot have the effect of overriding the requirement of any law. The compounding of an offence is always controlled by statutory provision. There are various features in the compounding of an offence and those features must be satisfied before it can be claimed by the offender that the offence has been compounded. Thus compounding of an offence cannot be achieved indirectly by the sanctioning of a scheme by a company court.

There is no statutory procedure for compounding of an offence under the Act. Therefore, the Supreme Court held that Section 147 of the Act must be reasonably construed to mean that as a result of the said section the offences under the Act are made compoundable, but the main principle of such compounding, namely, the consent of the person aggrieved of the person injured or the complainant cannot be wished away nor can the same be substituted by virtue of Section 147 of the Act.