2008 (5) TMI 425 - HC - Companies Law

Court rules Companies Act does not allow stay of criminal proceedings against company/directors. Criminal cases must proceed independently.

The court held that Section 391(6) of the Companies Act does not authorize the company court to stay criminal proceedings against the company or its ... Compromise and arrangement, Winding up - Power of court to stay or restrain proceeding against company Issues Involved1. Power of the company court under Section 391(6) of the Companies Act, 1956, to stay criminal proceedings.2. Interpretation of the term 'proceedings' in the context of Section 391(6) of the Companies Act, 1956.3. Conflict of judicial opinions between the Bombay High Court and the Gujarat High Court on the stay of criminal proceedings.4. Applicability of Section 138 of the Negotiable Instruments Act, 1881, in the context of company restructuring schemes.Detailed Analysis1. Power of the Company Court under Section 391(6) to Stay Criminal ProceedingsThe primary issue in this case is whether the company court has the authority under Section 391(6) of the Companies Act, 1956, to stay criminal proceedings. The appellant argued that the criminal proceedings under Section 138 of the Negotiable Instruments Act (NI Act) could not be stayed by the company court. The court observed that there is an apparent conflict of opinion on this issue between the Bombay High Court and the Gujarat High Court.2. Interpretation of the Term 'Proceedings' in Section 391(6)The court examined the interpretation of the term 'proceedings' used in Section 391(6) of the Companies Act. The Bombay High Court, in State of Tamil Nadu v. Uma Investments (P.) Ltd., held that the term 'proceedings' does not include criminal proceedings. It was reasoned that if the legislature intended to stay criminal proceedings, it would have explicitly stated so. The court emphasized that the term 'proceedings' should be interpreted ejusdem generis with the term 'suit,' implying that it refers to civil proceedings.3. Conflict of Judicial OpinionsThe court acknowledged the conflicting views between the Bombay High Court and the Gujarat High Court. The Bombay High Court's view, which excludes criminal proceedings from the ambit of Section 391(6), was contrasted with the Gujarat High Court's broader interpretation, which includes criminal proceedings. The Delhi High Court followed the reasoning of the Bombay High Court, aligning with its interpretation that Section 391(6) does not cover criminal proceedings.4. Applicability of Section 138 of the NI ActThe court referenced several Supreme Court judgments, including BSI Ltd. v. Gift Holdings (P.) Ltd. and Kusum Ingots & Alloys Ltd. v. Pennar Peterson Securities Ltd., which clarified that criminal prosecution under Section 138 of the NI Act is not for the recovery of money but for penal liability. The court noted that the criminal proceedings under Section 138 of the NI Act could not be quashed or stayed merely because a scheme of arrangement under Section 391 of the Companies Act is in place.ConclusionThe court concluded that Section 391(6) of the Companies Act does not empower the company court to stay criminal proceedings against the company or its directors. The proceedings under Section 138 of the NI Act must continue independently of any scheme of arrangement or restructuring approved under the Companies Act. The impugned order staying the criminal proceedings was set aside, and the appeal was allowed with costs awarded to the appellant.