TMI Blog2008 (5) TMI 425X X X X Extracts X X X X X X X X Extracts X X X X ..... 25.5 per cent per annum. In case of default, the rate of interest was to be enhanced by an additional interest of 11 per cent per annum. It is the case of the appellant that the respondent failed to repay the ICD with interest and, thus, gave rise to two sets of separate proceedings. One proceeding arose out of the cheques issued by the respondent to clear the liabilities which were dishonoured on account of paucity of funds resulting in complaints being filed by the appellant under section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as the NI Act) and the other arose by reason of the appellant filing proceedings for winding up under the said act against the respondents after serving them with a legal notice. In respect of the complaint under section 138 of the NI Act, the respondent filed proceedings for quashing of the same before this Court but they were ultimately withdrawn. In the winding up proceedings, it came to light that certain shares kept by the respondent with the appellant as security, for the ICD had, in fact, been sold for an amount of about Rs. 37 lakhs and since the sale was without the leave of the Court, the proceeds were directed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claiming certain amounts as due and owing from the appellant under the transaction making part payment to a third party. In the alternative, the respondent was pleading that the matter in issue was in any case being tried in the Civil Court filed by the respondent. The appellant s case further was that there was nothing even in the scheme or in the list of the liability whereby payment had to be made to the appellant nor was the aspect of criminal liability forming part of the scheme. This was, of course, without prejudice to the plea that even if it was so included, the learned Company Judge would have no jurisdiction to stay the criminal proceedings. 6. It is not necessary to go into a further detailed Scrutiny of the facts, but the aforesaid averments have been set out to show that under the scheme there is really nothing to be paid to the appellant on account of the claim of the appellant. The only question, thus, to be considered is whether the learned Company Judge was entitled to stay the proceedings in the criminal complaint filed by the appellant against the respondent company and its Directors. It has already been noticed above that the endeavour of the respondent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accept Mr. Mehta s line of interpretation indicated above that the word proceedings embraces criminal proceedings. There is another angle from which the provisions of section 391 can be looked at in order to find out whether it is within the scope and object of the section to cover criminal proceedings. In the present application under section 391, there are three classes of creditors, namely, (1) creditors who were the subscribers of terminated chit group, (2) creditors who are the subscribers of existing group, and (3) other creditors of the company. A reference to these classes shows that all of them are, creditors. The question then arises as to what meaning is to be given to the word creditor. Creditor would be a person having a pecuniary claim against the company, whether actual or contingent. If the claims o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose 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 avoided or criminal process evaded by resorting to a scheme of compromise or arrangement under section 391. Section 391 does not provide an umbrella to a company and its directors and officers for a thing which is an offence or an infringement and violation of any law, rule and regulation punishable by imprisonment or fine or both. Offenders cannot be given refuge in this section, nor can it be a shield for delinquent directors for their misdeeds. This is not the scheme of section 391 or the policy of law in the manner urged by Mr. Mehta". (p. 245) 9. In the matter of winding up of Firth (India) Steel Co. Ltd. (In Liquidation), 1999 (1) Mh. L.J. 274, once again F.I. Rebello, J. had the occasion to examine the question whether the expression "suit or other legal proceedings" in section 446(1) and the expression "suit or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding up have been filed, the Company Court is to see that the assets of the company are not recklessly given away or frittered. In this context, one has to remember the main duty of the Company Court is to oversee the affairs of the Company to meet the debts of its secured or its unsecured creditors as also of its shareholders and powers have been accordingly conferred on it. It may also be noted that for the purpose of the Act, Court means under section 2( ii ) the Court having jurisdiction under the Act with respect to the matters relating to the Company under section 10 of the Act and in respect of any offence under the Act Judicial Magistrate, First Class, or Presidency Magistrate having jurisdiction. In this context would the expression other legal proceedings or legal proceedings include criminal proceedings ." 10. In support of the aforesaid view, learned counsel for the respondent also referred to the observations of the Supreme Court in BSI Ltd. v. Gift Holdings (P.) Ltd. [2000] 2 SCC 737 1 . The question arose whether section 2(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (in short SICA) declaring out a sick company could bar the instit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e committed an offence under section 138 of the NI Act. A bare reading of the section 22 of the SICA makes the position clear that during pendency of an inquiry under section 16 or during the preparation of a scheme referred to under section 17 or during implementation of a sanctioned scheme or pendency of an appeal under section 25, no proceedings for winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company, shall lie or be proceeded with further, except with the consent of the Board or, the Appellate Authority, as the case may be. The section only deals with proceedings for recovery of money or for enforcement of any security or a guarantee in respect of any loans or advance granted to the company and a proceedings for winding up of the company. The section does not refer to any criminal proceeding. In B.S.I. Ltd. v. Gift Holdings (P.) Ltd. Criminal Appeal N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Single Judge of this Court in the State of Tamil Nadu v. Uma Industries Ltd., ( supra ) has held the provisions of section 391(6) will not apply insofar as the criminal proceedings are concerned. The said judgment came up for consideration before me in Company Application No. 446 of 1997 in Company Application No. 457 of 1997 in (In the matter of winding up order dated 23-10-1997 of Firth (India) Steel Co. Ltd. (In Liqn.), Ion Exchange Finance Ltd.), decided on 4-9-1998 reported in 1999 (1) Mh L 3 274 and some other matters. I had occasion to consider expression suit or other legal proceedings . In the context of sections 442 and 446 of the Companies Act, I have considered Chapter V wherein expression suit or other legal proceedings have been included including the expression legal proceedings in section 391(6). I have therein considered a judgment of the learned Single Judge of the Gujarat High Court which has taken by different view than the view taken by this Court in the State of Tamil Nadu v. Uma Industries Ltd. ( supra ). After considering the various Judgments. I have reiterated that the view taken by this Court in Uma Industries Ltd. ( supra ) requires ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m frivolous and expensive litigation and to accelerate the disposal of winding up of proceedings and, thus, the Parliament devised a cheap remedy by conferring jurisdiction on the Court winding up the company to entertain petitions in respect of claims for and against the company. Thus, the object is to safeguard the assets of the company in winding up against wasteful and expensive litigation. It was observed as under: "12. Mere look at the aforesaid provisions would show that on the one hand, in section 457 of the Act, the Legislature has empowered the liquidator to institute or defend any suit or prosecution or other legal proceedings civil or criminal in the name and on behalf of company after permission from the court; and by section 454(5A) of the Act the Legislature has empowered the Company Court itself to take cognizance of the offence under sub-section (5) of section 454 of the Act and to try such offenders as per the procedure provided for trial of summons cases under the Code of Criminal Procedure, 1974; but on the other hand in sections 442 and 446 of the Act the Legislature has used only the expression "suit or other legal proceedings". The words "prosecution" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of assessment or re-assessment proceedings are subject to appeal to the higher hierarchy under the Income-tax Act. There are also provisions for reference to the High Court and for appeals from the decisions of the High Court to the Supreme Court and then there are provisions for revision by the Commissioner of Income-tax. It would lead to anomalous consequences if the winding up Court were to be held empowered to transfer the assessment proceedings to itself and assess the company to income-tax. 16. The reasoning adopted by the Supreme Court in the above case would be fully applicable to the facts at hand. Complaints under the penal provisions of other statutes against the company or its directors, (except those provided under the Companies Act) cannot be appropriately dealt with by the company court. Orders passed by the criminal court are subject to the appeal and revision etc. under the Code of Criminal Procedure. If the ( sic ) court is held to be empowered to transfer these criminal proceedings to itself it would lead to anomalous consequences. 17. While considering the prosecution of directors for violations of the provisions of Provident Fund Act, the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prosecution in the name and on behalf of the company by the official liquidator who has to incur expenses out of the Funds of the company. Section 179 is an enabling provision to enable the liquidator to do certain things with the sanction of the Court. It does not control the general law of the land . 19. When the powers of criminal court to take cognizance and power of an aggrieved person to institute any criminal proceedings against the company under liquidation are fully protected, can it said that power of a citizen would be subject to the sanction under section 446 of the Companies Act? The answer has to be in the negative." 18. The view taken by the learned Single Judge of the Gujarat High Court in Harish C. Raskapoor ( supra ), has been specifically disagreed with. 19. Learned counsel for the appellant sought to rely upon the judgment of the Single Judge of this Court in CRB Capital Markets Ltd. v. RBI [2006] 72 SCL 256 where references have been made to certain orders passed by the Bombay High Court staying the proceedings both in the civil and criminal court. In a passing reference it has been observed that the company court has ample powers under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less weight in the construction of a statute than in any other case. 23. The Legislature in its wisdom wherever it wanted to confer powers on the company court under the said Act to deal with matters of criminal offences has specifically so conferred the power. The discussion in this behalf is found in D.K. Kapur s case ( supra ) as well as the other cases of the Bombay High Court, which have been extracted aforesaid. Thus in section 454(5) of the said Act or in section 633 of the said Act the object is clear. A distinction has to be made in respect of the provisions like section 442, 446 or 391 of the said Act. The object of these provisions is to prevent vexatious litigation and cost on the company during the period of time when a scheme is being propounded. This object is not subserved by stay of the criminal proceedings. In Pennar Peterson Ltd., In re [2002] 36 SCL 525, the Division Bench of the Andhra Pradesh High Court comprising of S.B. Sinha, CJ. (as he then was) and V.V.S. Rao, J., while dealing with the question of whether the expression "other legal proceedings" occurring in section 446(1) of the Companies Act does include the criminal proceedings, held that an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed aforesaid and, clearly imply civil proceedings. It is only such construction which is in conformity with the intent of the Legislature introducing these provisions in the said Act. 27. We are also fortified by the views expressed by the Supreme Court in BSI Ltd. s case ( supra ) while dealing with the same provision of section 138 of the NI Act and the question whether these proceedings have to be stayed in view of the orders passed in section 22(1) of SICA. 28. The SICA Act is again one more legislation to revitalize a company which has gone sick. It has, thus, been observed that the criminal prosecution is neither for recovery of money nor for enforcement of any security and section 138 of the NI Act is a penal provision. It is in this context that the observations in Rajneesh Aggarwal s case ( supra ) become relevant that even on deposit of money, the criminal proceedings cannot be quashed. 29. The Legislature in its wisdom introduced section 138 of the NI Act conscious of the existence of the other provisions under the said Act. Thus, section 138 of the NI Act, a later enactment, envisaged criminal prosecution for the offence of negotiable instruments being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minal breach of trust, mis-appropriation, forgery and for that matter dishonour of cheque. Again the provision cannot be used to bring to an end a prosecution arising from Income-tax Act or Foreign Exchange Control Act. The proceedings are clearly not of a pecuniary nature involving recovery of money. Interestingly, even the scheme stated to be approved at the behest of the respondent-company does not envisage bar to any criminal proceedings or payment of any actual amount in the given facts of the case as discussed at the inception of this judgment, but only seeks to extinguish the liability of the appellant on the ground that the respondent is liable to pay a lesser amount, the interest not running, and the claim is alleged to have been extinguished by payment to a third party at the behest of the appellant for which there is no written document. 34. We are, thus, unequivocal of the view that section 391(6) of the said Act does not envisage either quashing or stay of criminal cases against the company or its Directors and, thus, the proceedings against the respondents under section 138 of the NI Act instituted by the appellant could not have been stayed. 35. The impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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