2010 (5) TMI 655 - HC - Companies Law

Scheme of arrangement between the company and its creditors for its nourishment and rehabilitation - irreparable loss application for grant of stay of general nature staying all proceedings pending in various tribunals and forums for winding up, recoveries of debts and other proceedings regarding non-payment of amounts by the company, commencement or continuation of any suit or proceeding against the applicant-company or its directors, employees, officers and ex-employees in connection with the affairs of the applicant-company. - Held that - application does not contain any foundation so as to establish that the balance of convenience is in favour of the applicant-company and that it would suffer irreparable loss in the event interim stay of the proceedings is not granted. It may be true to some extent that as the proposal of the applicant-company for its rehabilitation has been carried out in the two meetings it may be justified in saying that it had succeeded in establishing a prima facie case. However, with regard to the balance of convenience and irreparable loss, the manner in which the above referred pending proceedings of the civil nature or those likely to be commenced are going to affect the cause of the applicant-company vis-a-vis proposed scheme is not clear, application is accordingly rejected

Issues Involved:
1. Application under sections 391-394 of the Companies Act, 1956 for a scheme of arrangement.
2. Application under section 391(6) of the Companies Act for stay of proceedings.
3. Opposition to the stay application by creditors.
4. Interpretation of the term "suit or proceeding" under section 391(6).
5. The scope of interim stay for civil and criminal proceedings.

Issue-wise Detailed Analysis:

1. Application under sections 391-394 of the Companies Act, 1956 for a scheme of arrangement:
The applicant, a company incorporated under the Companies Act, 1956, applied for a scheme of arrangement between itself and its creditors for its rehabilitation. The Company Judge directed meetings of creditors and shareholders, which took place, showing majority support for the scheme. However, no application for a second motion was moved.

2. Application under section 391(6) of the Companies Act for stay of proceedings:
The applicant sought a stay on all proceedings, including winding up, debt recovery, and other related proceedings, pending consideration of the scheme. This was based on the claim that the company, previously profitable, suffered losses due to economic recession, necessitating the scheme for rehabilitation.

3. Opposition to the stay application by creditors:
Creditors, specifically DBS Bank and Kotak Mahindra Bank, opposed the stay application, arguing it was vague and did not specify how the company would suffer loss if proceedings continued. They contended that the application did not disclose the exact stage of the pending proceedings.

4. Interpretation of the term "suit or proceeding" under section 391(6):
The court analyzed section 391(6), which allows the tribunal to stay the commencement or continuation of any suit or proceeding against the company. The court noted that the term "proceeding" in conjunction with "suit" implies civil proceedings. Criminal proceedings are generally not included as they are independent and not related to the financial rehabilitation process of the company. This interpretation was supported by precedents from the Bombay High Court and Delhi High Court, which excluded criminal proceedings from the ambit of section 391(6).

5. The scope of interim stay for civil and criminal proceedings:
The court concluded that section 391(6) does not cover criminal proceedings. The court emphasized that the provision aims to prevent coercive financial actions against the company during its rehabilitation phase, not to provide protection from criminal liability. The court cited cases where criminal proceedings were not stayed under similar circumstances. The court also rejected the argument that criminal proceedings with financial implications should be treated differently, stating that such proceedings primarily aim at punishment and fines, not affecting the company's financial rehabilitation.

Conclusion:
The court found no basis to grant an interim stay of a general nature as requested by the applicant. It noted that the balance of convenience and irreparable loss were not in favor of the applicant, and the continuation of civil proceedings would not prejudice the company's rehabilitation efforts. The application for interim stay was accordingly rejected, leaving the applicant free to move afresh if necessary.

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