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Issues: (i) whether the power to stay proceedings under section 391(6) of the Companies Act, 1956 extends to criminal proceedings; (ii) whether directors and sureties/guarantors can claim the benefit of section 391(6); and (iii) whether notice of the stay application was required to be given to petitioning creditors under Rule 71 of the Company Court Rules, 1959.
Issue (i): whether the power to stay proceedings under section 391(6) of the Companies Act, 1956 extends to criminal proceedings
Analysis: The expression used in section 391(6) was construed in the light of binding precedent holding that the sub-section is directed to proceedings of a civil nature having a pecuniary character and a nexus with the proposed compromise or arrangement. The reasoning treated criminal prosecutions as outside the statutory purpose of freezing civil recoveries pending consideration of a scheme. Proceedings under section 138 of the Negotiable Instruments Act, 1881 were also treated as criminal proceedings not capable of being stayed under this provision.
Conclusion: The power under section 391(6) does not extend to criminal proceedings.
Issue (ii): whether directors and sureties/guarantors can claim the benefit of section 391(6)
Analysis: A scheme under section 391 operates between the company and its creditors and does not, by itself, release persons who are not parties to the scheme. The liability of a surety is not affected by a composition unless the contract of suretyship provides otherwise. On that basis, the protection under section 391(6) was held not to extend to guarantors or directors who were independently liable and not parties to the compromise arrangement.
Conclusion: Directors and sureties/guarantors cannot invoke section 391(6) for their own protection.
Issue (iii): whether notice of the stay application was required to be given to petitioning creditors under Rule 71 of the Company Court Rules, 1959
Analysis: Winding-up petitions that have been instituted but not finally disposed of remain pending even if further steps are temporarily restrained by another statute. Rule 71, read liberally, required notice to petitioning creditors where a winding-up petition was pending. The pendency of an appeal before the Appellate Authority under the Sick Industrial Companies (Special Provisions) Act, 1985 did not erase the pendency of the winding-up petition for this purpose.
Conclusion: Notice to the petitioning creditors was required, and the ex parte stay order was not properly obtained.
Final Conclusion: The stay application failed, while the creditor applications succeeded, with the earlier ex parte protection continued only for a limited period to enable further recourse.
Ratio Decidendi: Section 391(6) authorises a stay only of civil proceedings having a pecuniary nexus with the compromise scheme, does not protect criminal prosecutions, and does not extend to sureties or non-parties to the scheme; notice is required to petitioning creditors where a winding-up petition remains pending.
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