TMI Blog1976 (1) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... up capital is Rs. 1,00,000 divided into 1,000 equity shares of Rs. 100 each. From its inception the company carries on chit business. According to the company from the month of October, 1973, it faced financial difficulties and was unable to meet its requirements and particularly the amounts payable to the non-prized members at the termination of the chits. Several reasons are given. One of them is that in the States of Tamil Nadu and Kerala misleading and incorrect news items appeared. The newspaper, Dina Thanti, published in Tamil Nadu, circulated false reports. Another cause was that the company's discharged employees had spread imaginary and false stories among the public. The company's managing director, Acharath Vasu Appukutta Gupta, was illegally detained for two days by the police of Madras in connection with a subscriber's complaint to the police regarding a cheque for Rs. 50,000 towards his dues. For all these reasons, the members of the chits started demanding payment of their dues. Many of them took legal proceedings against the company and obtained orders of attachment before judgment. In these circumstances, the company's business and its liquid resources were seri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous task of gathering particulars of the various suits and complaints filed against the company". This court (Bhatt J.) stayed the commencement or continuance of all civil and criminal proceedings against the company and its officers on the company giving an undertaking not to deal with or dispose of any of its assets either movable or immovable or any other property of the company without the previous sanction of this court save and except the payment of rent, taxes of any nature whatsoever and salaries of the employees of the company. On the application of the company, the said order was modified on 14th October, 1974, whereunder the expenses in connection with the application under section 391 of the Companies Act in Company Applications Nos. 142 of 1974 and 143 of 1974 and the expenses in connection with the chits operated in Madhya Pradesh, West Bengal and Nagpur City, limited to the actual recoveries made from chits being so run there, were further exempted from the said undertaking. These orders were communicated to the State in the month of October, 1974, by means of a letter. It appears that along with the intimation, photostat copies of orders were forwarded. Mr. Kh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the general body of the creditors. In order to appreciate the rival submissions, one has to look at the relevant provisions of sub-section (6) of section 391. These are as follows: "391. Power to compromise or make arrangements with creditors and members. (6) The court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the court thinks fit, until the application is finally disposed of ". The language of this sub-section is clear and unambiguous. The main controversy is focussed on the word "proceedings". According to Mr. Khambatta, the word "proceedings" cannot cover criminal proceedings against the company and its officers. It could not have been the intention of the legislature to stay the commencement or continuation of criminal proceedings. The company and its officers must face the consequences of their illegal acts. There seems to be considerable force in these arguments. If the intention of the legislature had been to stay the commencement or continuation of criminal proceedings, it would have specifically said so. It is difficult to acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f, the officers of the company are involved in offences like cheating, criminal breach of trust, misappropriation, forgery, using a forged document and falsification of accounts, in connection with the business of the company, can it be said that prosecutions can be stayed by the aid of subsection (6) of section 391 ? Again, if the officers of the company were to be held responsible for contravention and infringement of the Income-tax Act or Foreign Exchange Control Act, can a company by putting a proposal before the court under section 391 seek the protection of the court under sub-section (6) of section 391 and stay the pending prosecutions or prevent the authorities under the Income-tax Act or the Enforcement Directorate from launching prosecutions ? Again, section 5 of the Companies Act, 1956, provides that for the purpose of any provision of this Act, an officer who is in default" shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise. Can sub-section (6) of section 391 be made use of by a company (who is liable to be wound up) by coming forward with some sort of proposal ? In my opinion, criminal proceedings cannot be held over or avoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n my judgment, the provisions of sub-section (6) of section 391 are not meant to freeze the commencement or continuation of criminal proceedings against the company and its officers. It may be mentioned that both sides had taken somewhat extreme stands. Mr. Khambatta argued in the first instance that the State of Tamil Nadu is entitled to have the whole of the order vacated but, in the course of his arguments, submitted that the State seeks variation to the extent the order stays criminal proceedings. Mr. Mehta had argued that the State was not an aggrieved party within the meaning of rule 72 and, therefore, could not move the court for vacating or varying the order, but later stated that the State could do so to the extent it is affected. Mr. Khambatta laid emphasis that the company has not given any particulars of the civil or criminal cases pending against the company and its officers. There is considerable force in this complaint. In order to appreciate the point, it is necessary to look at the following schedule which sets forth the pending cases as on 10th October, 1974 : "SCHEDULE Pending in the Courts at Madras Case No. 2262/74 Mr. J. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us suits and complaints. The same deponent stated in the same breath that several branches have been closed on account of attachment before judgment and several complaints are also filed against the company and its officers. Even in his affidavit in reply to the present summons, filed after an interval of over 14 months, Shri Gupta maintains that whatever information was available had been furnished. The Director of Chits, Government of Tamil Nadu, in his affidavit in support of the present summons, has complained about the particulars. Now, it is the case of the company that it had several branches in the State of Tamil Nadu, and attachments before judgment have been levied on its properties. The records of the company are not said to be untraceable or not under the control of the company. Shri Gupta specifically speaks of complaints filed against the company and its officers in the States of Tamil Nadu, Karnataka and Kerala. In these circumstances, it is impossible to believe that the company and the deponent, namely, the managing director of the company, would not be aware of the courts in which civil and criminal cases are pending, the names of the plaintiffs or the complaina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was treated as one of cheating. Inspector of police. Mr. Agustain, had interrogated Gupta. According to Gupta, the person behind the case was the Assistant Commissioner of Police, Jayaraman, whose wife as a prize member was a defaulter of the company, and the company had insisted on payment by her. In the affidavit in reply to the present summons, Gupta says that the Commissioner of Police, Tamil Nadu, was the main cause of the downfall of the company and that the present summons are taken out to satisfy his vendetta. Prima facie, there is no merit in these allegations. The company itself has referred to several other reasons leading to the closure of its branches in the States of Karnataka and Kerala, apart from Tamil Nadu. The company also blames its own employees for spreading false and imaginary rumours. It also attaches responsibility to its members for ruining the company's business. It is not only the State of Tamil Nadu where civil and criminal litigation is brewing against the company and its officers but in several other States. The Director of Chit Funds has not dealt with these allegations, but on that account I cannot accept the allegations as true on the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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