Section 391 stay power limited to civil proceedings; criminal prosecutions and non-party liabilities remain outside its scope.

Section 391(6) of the Companies Act, 1956 is confined to civil proceedings with a pecuniary nexus to the proposed compromise or arrangement, so it cannot be used to stay criminal prosecutions, including complaints under section 138 of the Negotiable Instruments Act. The benefit of a sanctioned scheme also does not extend to directors or guarantors who are not parties to it, because their independent liabilities are not released merely by the company's compromise. Where winding-up petitions remain pending, even if further steps are barred by section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, rule 71 requires notice before an ex parte stay application is entertained.

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Issues: (i) Whether the stay power under section 391(6) of the Companies Act, 1956 extends to criminal proceedings, including complaints under section 138 of the Negotiable Instruments Act. (ii) Whether the benefit of section 391(6) can be claimed by directors and guarantors who are not parties to the compromise scheme. (iii) Whether notice of an application for stay under section 391(6) was required under rule 71 of the Companies (Court) Rules, 1959 where winding-up petitions were pending but could not be proceeded with because of section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985.

Issue (i): Whether the stay power under section 391(6) of the Companies Act, 1956 extends to criminal proceedings, including complaints under section 138 of the Negotiable Instruments Act.

Analysis: The expression "proceeding" in section 391(6) was held to be confined to proceedings of a civil nature having a pecuniary character and a nexus with the proposed compromise or arrangement. Criminal proceedings, including prosecutions for offences connected with the business of the company, were held not to fall within the provision. The earlier binding view was reaffirmed that the section cannot be used to freeze criminal process or protect offenders from prosecution merely because a scheme under section 391 is pending.

Conclusion: The stay provision does not extend to criminal proceedings, including proceedings under section 138 of the Negotiable Instruments Act.

Issue (ii): Whether the benefit of section 391(6) can be claimed by directors and guarantors who are not parties to the compromise scheme.

Analysis: A composition or scheme sanctioned under section 391 binds the company and its creditors, but it does not affect the liability of a surety unless the contract of suretyship provides otherwise. Persons who are not parties to the scheme, including guarantors and directors, cannot claim its protection merely because they are connected with the company. The scheme does not release other persons from their independent obligations.

Conclusion: Directors and guarantors are not entitled to claim protection under section 391(6) in respect of liabilities independent of the company.

Issue (iii): Whether notice of an application for stay under section 391(6) was required under rule 71 of the Companies (Court) Rules, 1959 where winding-up petitions were pending but could not be proceeded with because of section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985.

Analysis: Rule 71 permits an ex parte stay application, but requires notice where a winding-up petition is pending. The fact that proceedings could not be proceeded with further because of section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 did not mean that the petitions had ceased to be pending. A proceeding remains pending until finally disposed of, and the term was given a liberal construction to protect petitioning creditors whose rights would be affected by a stay order.

Conclusion: Notice to the petitioning creditors was required, and the ex parte stay order was liable to be vacated.

Final Conclusion: The stay order obtained by the company could not be sustained, while the creditors' applications for vacating it succeeded. The company's request for blanket stay of proceedings was rejected, and the interim protection was continued only for the limited period specified in the order.

Ratio Decidendi: Section 391(6) authorises stay only of civil proceedings having a pecuniary nexus with the compromise scheme, does not protect criminal prosecutions, does not extend to independent liability of sureties or non-parties to the scheme, and must be applied subject to the notice requirement in rule 71 where winding-up petitions remain pending.

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