2004 (11) TMI 328 - HC - Companies Law

Summary

Issues Involved:
1. Applicability of Section 391(6) to criminal proceedings.
2. Protection under Section 391(6) for sureties and directors.
3. Requirement of notice under Rule 71 of the Company Court Rules.
4. Maintainability of the proposed scheme under the Sick Industrial Companies (Special Provisions) Act, 1985.
5. Entitlement of the Company to an order under Section 391(6) in the given facts and circumstances.

Issue-wise Detailed Analysis:

Re: Submission I - Applicability of Section 391(6) to Criminal Proceedings:
The court examined whether the term "proceeding" in Section 391(6) of the Companies Act, 1956 includes criminal proceedings against the Company and its directors. The learned Counsel for the Applicants argued that it does not. The court agreed, referencing the judgment in *State of Tamil Nadu v. Uma Investments (P.) Ltd.*, which held that the word "proceeding" in Section 391(6) does not cover criminal proceedings. The court emphasized that the intention of the Legislature was not to stay the commencement or continuation of criminal proceedings, as criminal proceedings are meant to address illegal acts, which should not be shielded by Section 391(6). The court further noted that the judgment in *Uma Investments* is binding and rejected the submission that criminal proceedings with a pecuniary claim could be included under Section 391(6).

Re: Submission II - Protection for Sureties and Directors:
The court considered whether directors and guarantors of the Company are entitled to the benefit of Section 391(6). The submission was that they are not, and the court agreed. The Supreme Court judgment in *Punjab National Bank Ltd. v. Shri Vikram Cotton Mills* was cited, which held that a composition under Section 391 does not affect the liability of the surety unless the contract of suretyship provides otherwise. The court noted that the scheme under Section 391 does not release persons who are not parties to the scheme, and the directors and guarantors are not parties to the scheme between the Company and its creditors. The court also referenced the judgment in *B.K.M.S. Vanavarayar v. Somasundaram Mills (P.) Ltd.*, which supported the view that sureties are independently liable and not entitled to the benefits under Section 391.

Re: Submission III - Requirement of Notice under Rule 71:
The court addressed the grievance that the Company applied for the order ex parte and without notice to the Applicants, which was justified. Rule 71 of the Companies Court Rules mandates notice to be given to the petitioners in winding-up petitions. The court noted that winding-up petitions filed by some Applicants were pending when Company Application No. 339 of 2004 was filed. Despite the temporary suspension of proceedings due to an appeal before the AAIFR, the court held that the winding-up petitions were still pending. The court emphasized that the term "pending" includes cases where proceedings can be taken and cited definitions from Black's Law Dictionary and Stroud's Judicial Dictionary, along with the Supreme Court judgment in *Asgar Ali Nazarali Singaporawalla v. State of Bombay*, to support this interpretation.

Re: Submissions IV & V - Maintainability of the Proposed Scheme and Entitlement to Order under Section 391(6):
Given the conclusions on the above submissions, the court found it unnecessary to decide on the maintainability of the proposed scheme under the Sick Industrial Companies (Special Provisions) Act, 1985, and whether the Company is entitled to an order under Section 391(6) in the given facts and circumstances.

Order:
Company Application No. 339 of 2004 was dismissed. The other Company Applications (L) No. 827 of 2004, (L) No. 462 of 2004, (L) No. 880 of 2004, and (L) No. 942 of 2004 were made absolute in terms of prayer clause (a). The interim order dated 27th August, 2004, was extended until 17th January, 2005, to allow the Company to appeal. No order as to costs was made.