2004 (11) TMI 626 - HC - Companies Law

Issues Involved:

1. Applicability of Section 391(6) of the Companies Act, 1956 to criminal proceedings.
2. Protection under Section 391(6) for sureties and guarantors.
3. Requirement of notice under Rule 71 of the Companies (Court) Rules, 1959.
4. Impact of the Sick Industrial Companies (Special Provisions) Act, 1985 on the proposed scheme.
5. Entitlement of the company to an order under Section 391(6) based on the facts and circumstances.

Issue-wise Detailed Analysis:

1. Applicability of Section 391(6) to Criminal Proceedings:

The court examined whether the term "proceeding" under Section 391(6) of the Companies Act, 1956, includes criminal proceedings against the company and its directors. It was held that the term "proceeding" does not encompass criminal proceedings. This interpretation was supported by the precedent set in the case of State of Tamil Nadu v. Uma Investments (P.) Ltd., where it was determined that the legislative intent was not to stay criminal proceedings, as they are meant to address illegal acts, and offenders cannot seek refuge under Section 391. The court further clarified that even if criminal proceedings have a pecuniary aspect, they do not fall under the scope of Section 391(6).

2. Protection for Sureties and Guarantors:

The court addressed whether sureties and guarantors could benefit from a stay under Section 391(6). It was concluded that Section 391(6) does not extend protection to sureties or guarantors. This was supported by the Supreme Court's decision in Punjab National Bank Ltd. v. Shri Vikram Cotton Mills Ltd., which established that a scheme under Section 391 does not affect the liability of a surety unless explicitly stated in the contract of suretyship. The court emphasized that the scheme is between the company and its creditors, and does not include directors, officers, or guarantors as parties.

3. Requirement of Notice under Rule 71:

The court examined the procedural requirement for notice under Rule 71 of the Companies (Court) Rules, 1959. It was found that the company failed to provide notice to the applicants, who had filed winding-up petitions, when seeking an ex parte stay order. The court held that winding-up petitions, even if stayed due to proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985, are still considered "pending" and thus require notice to be given under Rule 71. The court emphasized that a liberal interpretation of "pending" should be adopted to ensure the rights of petitioning creditors are not adversely affected.

4. Impact of the Sick Industrial Companies (Special Provisions) Act, 1985:

While the issue was raised regarding the impact of the Sick Industrial Companies (Special Provisions) Act, 1985, specifically sections 18, 26, and 32, on the proposed scheme under Section 391, the court found it unnecessary to decide on this matter due to the conclusions reached on other issues.

5. Entitlement to an Order under Section 391(6):

Given the findings on the applicability of Section 391(6) to criminal proceedings and the requirement of notice under Rule 71, the court dismissed the company's application for a stay under Section 391(6). The court found that the company was not entitled to such an order based on the procedural and substantive issues identified.

Order:

The court dismissed Company Application No. 339 of 2004 and granted the applications filed by various creditors to vacate the interim stay order. The interim order dated August 27, 2004, was extended until January 17, 2005, to allow the company to appeal. No order as to costs was made. All parties were directed to act on an ordinary copy of the order authenticated by the court registrar or stenographer.

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