Co. Appeal No. 44/05 Page 1 of 31 * IN THE HIGH COURT OF DELHI AT NEW DELHI + Co.Appeal.44/2005 % Date of hearing : 08.05.2008 Date of decision : 23.05.2008 M/S KRISHNA TEXPORT INDUSTRIES LTD. ... APPELLANT Through: Mr.A.S.Chandhiok, Sr.Adv. with Ms.Suruchi Aggarwal, Ms.Vibha Dhawan and Mr.Navpreet Singh Ahluwalia, Advocates. Versus DCM LIMITED ... RESPONDENT Through: Mr. Kirat Singh Nagra, Advocate CORAM: HON'BLE MR. JUSTICE SANJAY KISHAN KAUL HON’BLE MR. JUSTICE MOOL CHAND GARG 1. Whether the Reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to Reporter or not? Yes 3. Whether the judgment should be Yes reported in the Digest? SANJAY KISHAN KAUL, J. 1. A conflict of judicial view between the Bombay High Court and the Gujarat High Court in respect of the power of the company court u/s 391 (6) of the Companies Act, 1956 (hereinafter referred to as the said Act) to stay Co. Appeal No. 44/05 Page 2 of 31 criminal proceedings has given rise to the present appeal. 2. The commercial relationship between the appellant and the respondent started with an Inter Corporate Deposit (ICD) of Rs.2.50 crores being placed by the appellant with the respondent under two separate agreements dated 26.9.1997 and 03.10.1997 by way of two separate cheques of Rs.1.25 lac each which were duly encashed. The said ICDs were for a period of 120 days and the respondent company were liable to repay the same before the expiry of the said period along with interest @25.5% per annum. In case of default, the rate of interest was to be enhanced by an additional interest of 11% per annum. It is the case of the appellant that the respondent failed to re-pay 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 u/s 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 Co. Appeal No. 44/05 Page 3 of 31 respect of the complaint u/s 138 of the NI Act, the respondent filed proceedings for quashing of the same before this Court but they were ultimately withdrawn.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.37.00 lacs and since the sale was without the leave of the Court, the proceeds were directed to be deposited in Court and are still lying deposited. A third proceeding arose out of a suit filed by the respondent, being Suit No.1815/2003, on the Original Side of this Court seeking reliefs of declaration, injunction, recovery etc. as according to the respondent the liability towards the ICD had been cleared and part of the claim was settled by payment to a third party at the behest of the appellant, which was disputed by the appellant. 3. In the proceedings before the learned Company Judge, interim orders were granted whereby in view of the pending scheme for restructuring and arrangement, the proceedings against the respondent company were stayed. The order with which the appellant is aggrieved in the present case was passed on 25.4.2005. The order notes the contention of the counsel for the respondent that the scheme had been sanctioned and the same Co. Appeal No. 44/05 Page 4 of 31 provided for payment to the creditors through the mechanism of an escrow account subject to the condition that the creditors withdraw all the cases against the company and its Executive Directors. It was pleaded that three persons, whose particulars were given, had not withdrawn the proceedings because of which payment could not be made to them although the respondent was ready and willing to make the payment in terms of the scheme subject to withdrawal of the criminal complaints. The learned Company Judge stayed the proceedings of the cases filed by the three parties. Not only that, it was noticed that some of the creditors had filed complaints before different consumer forums which claim also the respondent was willing to settle in accordance with the scheme. 4. The grievance of the appellant is that the criminal proceedings in the form of complaints filed u/s 138 of the NI Act by the appellant could not have been stayed by the learned Company Judge. 5. It is the submission of the appellant that under the garb of the escrow mechanism, really nothing is being paid to the appellant as it is the stand of the respondent that whatever amount was liable to be paid under the scheme to the appellant, in fact, already stands paid prior to the Co. Appeal No. 44/05 Page 5 of 31 scheme. This payment is in the form of part payment to the respondent and part payment to a third party. The scheme naturally did not envisage the payment of interest as per the terms of the ICD and it is in view thereof that the respondent was, in fact, 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 Co. Appeal No. 44/05 Page 6 of 31 appellant against the respondent company and its Directors. It has already been noticed above that the endeavor of the respondent to get the proceedings quashed in the hierarchy of the criminal courts had not succeeded and the quashing proceedings had been withdrawn. 7. There is an apparent conflict of opinion on this issue between the two High Courts. The Bombay High Court has taken a view that it is not within the domain of the Company Judge to stay the proceedings before the criminal court while exercising jurisdiction u/s 391 of the said Act while the view of the Gujarat High Court is to the contrary. We also have the benefit of the judgment of the learned single Judge of this Court, though not directly on Section 391 of the said Act, holding that criminal proceedings under the said Act cannot be stayed by the learned Company Judge unless there is specific empowerment in a particular section. In order to appreciate the aforesaid rival views, it is necessary to give a conspectus of the judicial pronouncements in this behalf. Section 391(6) of the said Act reads as under:- “391. Power to compromise or make arrangements with creditors and members. (6) The Tribunal may, at any time after an application has been made to it under this section stay the commencement or Co. Appeal No. 44/05 Page 7 of 31 continuation of any suit or proceeding against the company on such terms as the Tribunal thinks fit, until the application is finally disposed of.” 8. A learned single Judge of the Bombay High Court in State of Tamil Nadu Vs. Uma Investments Pvt. Ltd., Vol. 47 Company Cases 242 observed that it was not possible to take the view that Section 391 of the said Act is meant for freezing criminal proceedings which may be instituted either by a creditor or a member of a company or by the State either against the company or its officers for a thing which is an offence or an infringement or violation of any law, rule or regulation punishable by imprisonment or fine or both and that criminal proceedings can be commenced or continued notwithstanding the fact that the scheme for compromise or arrangement has been initiated under Section 391 of the said Act. The relevant observations are as under: “The language of this sub-section is clear and unambiguous. The main controversy is focused 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 Co. Appeal No. 44/05 Page 8 of 31 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 of the creditors are of a pecuniary character or founded on money considerations, can it then be said that sub-section (6) of section 391 is extended to cover proceedings other than proceedings which involve pecuniary claims or claims based on money considerations ? It is in respect of these classes of creditors that proposal is put forward by the company for a compromise or arrangement. Nothing has been pointed out to me that the company's proposal refers to or covers any criminal proceedings against the company and its officers. The provisions of sub- sections (1) and (2) of section 391 lay down that if any proposal is put forth by a company or a creditor or class of creditors or a member or class of members, the same is required to be considered under the directions of the court by calling, holding and conducting a meeting or meetings, and if approved by a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, and agreed to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all concerned. The compromises or arrangements are about civil liabilities where a creditor will accept a lesser payment or receive less on distribution or grant time or waive interest and work out other kindred things. It is impossible to Co. Appeal No. 44/05 Page 9 of 31 take the view that section 391 is meant for freezing criminal proceedings which may be instituted either by a creditor or a member of a company or by the State either against the company or its officers. If, the officers of the company are involved in offences lime 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 sub-section (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 of 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 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”. (emphasis supplied) 9. In the matter of winding up of Firth (India) Steel Co. Ltd. (In Liquidation), 1999 (1) Mh. L.J. page 274, once again Co. Appeal No. 44/05 Page 10 of 31 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 proceedings” in Section 442 of the said Act include criminal complaints filed u/s 138 of the NI Act. The company canvassed the plea that the expression “legal proceedings” or “other legal proceedings” should be given its widest amplitude and must, therefore, also include criminal proceedings as a contrary view would result in the company in the winding up being subjected to criminal prosecution and would, thus, defeat the object of Sections 442 and 446 of the said Act. On the other hand, the petitioners contended that the said expressions must be read ejusdem generis with the expression “suit” and, thus, only refer to civil proceedings which have direct bearing on the proceedings for winding up of the company and, thus, “other legal proceedings” must exclude criminal proceedings. The learned Judge thereafter proceeded to discuss the different provisions in the Act where such expressions have been used. A distinction was made in respect of the provisions like Sections 442 and 446 as compared to Section 454(5) of the said Act where a default is made in complying with any of the requirements of the section without Co. Appeal No. 44/05 Page 11 of 31 reasonable excuse and a person is liable to be punished with imprisonment. In such a case the winding up court can take cognizance of an offence under sub-section (5A) of Section 454 and, thus, a specific power to entertain a criminal complaint has been conferred. A similar position exists in Section 542 of the said Act where there is a provision for imprisonment. In Section 633 of the said Act, an Officer of a company in respect of certain types of misfeasance or breach of trust may move the High Court to relieve him. It was, thus, concluded that wherever the Parliament chose not to confer power on the company court to try criminal offences, it has so done. In this context, it was observed as under: “… The Legislature therein has used the expression "suit, "prosecution" or "other legal proceedings". The rule of interpretation in such a case is not to make the language redundant or otiose or hold it to be surplus-age. If the literal interpretation is accepted then the expression 'prosecution' has a different meaning than the expression 'legal proceedings'. The expression also appears in the same part and chapter. The main purpose or object behind sections 446 and 442 is that in respect of a Company in winding up or where proceedings in winding 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 Co. Appeal No. 44/05 Page 12 of 31 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'”. (emphasis supplied) 10. In support of the aforesaid view, learned counsel for the respondent also referred to the observations of the Supreme Court in BSI Ltd. And Anr. Vs. GIFT Holdings Pvt. Ltd. And Anr., (2000) 2 SCC 737. 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 institution of criminal complaint against the company and its Directors u/s 138 of the NI Act. It was observed in Paras 20 and 21 as under:- “20. A criminal prosecution is neither for recovery of money nor for enforcement of any security etc. Section 138 of the NI Act is a penal provision the commission of which offence entails a conviction and sentence on proof of the guilt in a duly conducted criminal proceedings. Once the offence under Section 138 is completed the prosecution proceedings can be initiated not for recovery of the amount covered by the cheque but for bringing the offender to the penal liability. What was considered in Maharashtra Tubes Ltd. (supra) is whether the remedy provided in Section 29 or 31 of the State Finance Corporation Act, 1951 could be pursued notwithstanding the ban contained in Section 22 of the SICA. Hence Co. Appeal No. 44/05 Page 13 of 31 the legal principal adumbrated in the said decision is of no avail to the appellants. 21. In the above context it is pertinent to point out that Section 138 of NI Act was introduced in 1988 when SICA was already in vogue. Even when the amplitude of the word "company" mentioned in Section 141 of the NI Act was widened through the Explanation added to the section, Parliament did not think it necessary to exclude companies falling under Section 22 of SICA from the operation thereof. If Parliament intended to exempt sick companies from prosecution proceeding, necessary provision would have been included in Section 141 of the NI Act. More significantly, when Section 22(1) of SICA was amended in 1994 by inserting the words ["and no suit for the recovery of money or for enforcement of any security against industrial company or of any guarantee in respect of any loans or advance granted to industrial company"] Parliament did not specifically include prosecution proceedings within the ambit of the said ban”. (emphasis supplied) 11. The plea, thus, was that the aforesaid observations apply on all fours in the context of even the provisions of the said Act. 12. In the same context, the Supreme Court in Kusum Ingots & Alloys Ltd. Vs. Pennar Peterson Securities Ltd., (2000) 2 SCC 745 observed as under: “15. The next question for consideration is whether under the provisions of the SICA there was any legal impediment for payment of the amount for which the cheques were drawn and for that reason the appellants cannot be taken to have committed an offence under Section 138 NI Act. A bare reading of the Section 22 of the SICA makes the position clear that during pendency Co. Appeal No. 44/05 Page 14 of 31 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. and Anr. v. Gift Holdings Pvt. Ltd., Criminal Appeal No. 847 of (1999) we held that pendency of proceeding under Section 22(1) of SICA alone is not sufficient to get absolved from the liability under Section 138 of the NI Act”. 13. In Rajneesh Aggarwal Vs. Amit J. Bhalla, (2001) 1 SCC 631, it was observed that even if the amount in question was deposited after the complaint had been instituted u/s 138 of the NI Act, by no stretch of imagination the criminal proceedings can be quashed on account of the said deposit of money in Court nor could it be held that the criminal proceedings were unsustainable in law because of deposit of money. 14. The aforesaid view has again been followed in Ion Exchange Finance Ltd. Vs. Bombay Leasing Co. Ltd. Co. Appeal No. 44/05 Page 15 of 31 (1999) 101 Bom. LR 180 which was affirmed by Vazifdar S., J. in G.E. Capital Services India Vs. Sharp Industries Limited, II (2005) BC 373. The said case also dealt with the prayer for stay of proceedings u/s 138 of the NI Act. It was observed as under: “12. In any event, the question whether proceedings under section 138 of the Negotiable Instruments Act are covered within the provisions of section 391(6) is also not res Integra. In Criminal Appln. No. 2517 of 1998, (1999(1) Learned Judgement 288), it was contended that complaints under section 138 of the Negotiable Instruments Act are filed by parties with the principal object that the payee must get his money. In that case took, the complaint was filed by the respondents against the applicant for dishonour of the cheque. The applicants in the judgments had prayed that the proceedings under section 138 ought to be stayed till the disposal of the application filed by the applicants before the Calcutta High Court under section 391 of the Companies Act. The learned Judge first held that in proceedings under section 482 of the Criminal Procedure Code the question of invocation of inherent jurisdiction under section 391(6) did not arise at all. With this part of the judgment we are not concerned presently. However the learned Judge in paragraph 4 considered the alternative case as well and held as under ; "4.....Secondly, even assuming that under section 482 this Court could have considered that proceedings