Other legal proceedings" occurring in Section446(1) of Companies Act does not include criminal proceedings

 Thus, it becomes apparent that the issue regarding the word "other legal proceedings" occurring in Section 446(1) of the Companies Act including criminal proceedings is now no longer res integra because the Hon'ble Apex Court has held that the term "other legal proceedings" occurring in Section446(1) of the Companies Act does not include criminal proceedings.

12. In the present case, a perusal of the charges which have been framed against the accused show that the accused have been charged for having cheated the respective complainants by inducing them in between the period of 1992 to 1997. Undisputedly, the proceedings for winding up of the company were instituted in the year 1998. Thus, there cannot be any restriction by virtue of Section 446(1) Cr.P.C. for the trial of the cases involving the offence of cheating which was committed by the accused much before the filing of the company petition even if it is assumed that the words 'other legal proceeding' should be interpreted so as to involve a criminal proceeding in them.1

Citation;2013ALLMR(Cri)193

IN THE HIGH COURT OF RAJASTHAN

Decided On: 03.02.2012

Appellants: Satyadev and Anr.
Vs.
Respondent: State of Rajasthan and Anr.

Hon'ble Judges/Coram:Sandeep Mehta, J.

1. Heard learned counsel for the parties. All these misc. petitions are being decided by this common order as they involve a common question of facts and law.

2. These misc. petitions have been preferred by the petitioners seeking quashing of the proceedings initiated against them for various offences including offences under Sections 120B, 420 and 409 IPC and Section 138 of the Negotiable Instruments Act in the respective cases pending against them in the Court of Additional Chief Judicial Magistrate, Sojat.

3. Briefly stated the facts of the case are that the petitioners were the erstwhile directors of a finance company named Gurushikhar Savings and Finance India Ltd. which was registered under the Companies Act. It is claimed that owing to the financial crunch faced by the company, the company fell short of funds and entered into financial crisis and accordingly, the petitioners filed an application for winding up of the company being Company Petition No. 9/98 (Satyadeo Sharma & Anr. vs. Gurushikhar Savings and Finance Ltd.) on 9.3.1998 so that the assets of the company may be realised and applied for payment of its debts to its creditors. It is further submitted that initially a provisional liquidator was appointed in the aforesaid company petition on 22.11.2002 and ultimately, the said winding up petition has been allowed vide order dated 16.12.2008 whereby this Court has directed to wind up the company and the Official Liquidator has been directed to proceed with the matter to administer the properties of the company for the benefits of its creditors and members by due process of law. It is claimed that certain creditors for the objective of gaining personal benefits and profits filed various complaints against the petitioners for the offences under Sections 120B, 420 and 409 IPC along with Section 138 of the N.I. Act with the allegations that the petitioners had induced and received huge amounts from various members of public including the complainants as investments and thereafter, when the creditors/complainants requested for refund, the petitioners refused to accede to the demand of the creditors and thereby cheating and defrauding these persons. It is also the case of the complainants that the cheques given for the refunds were also dishonoured and thus the petitioners committed the offences of cheating etc. It is stated that the complaints have been registered in the Court of A.C.J.M., Sojat under different numbers and the proceedings of these complaints are under challenge in the above mentioned misc. petitions filed before this court.

4. The petitioners have approached this Court seeking quashing of the criminal proceedings initiated against them in the Court of A.C.J.M., Sojat on the strength of the provisions contained in Section 446(1) of the Companies Act, 1956 (referred to herein after as 'the Act of 1956'). Counsel for the petitioners stressing upon the provision submits that the mandate of the provision under Section 446(1) of the Act of 1956 is that once a winding up order has been made or the Official Liquidator has been appointed as the Provisional Liquidator, then no suit or other legal proceedings can be commenced or if they are pending at the date of winding up of order, they cannot be proceeded with except by the leave of the Tribunal and subject to such terms as the Tribunal may impose. It is submitted that once the winding up order has been passed, then only the Company Tribunal has jurisdiction to entertain or dispose of any suit or legal proceedings by or against the company or any claim made by or against the company. Thus, it is submitted that the proceedings being without jurisdiction should be quashed. Learned counsel for the petitioners has placed reliance on the decisions of (1) Saurabh N. Soparkar. Vs. Official Liquidator of Renco Gears Ltd. reported in (1998) 5 Comp. LJ 99 (Guj) (Regular) and (2) Steel Authority of India Limited Vs. O.L. of Gujarat Steel Tubes Ltd. reported in MANU/GJ/0511/2005 : 2005 Law Suit (Guj) 607 in support of his contention.

5. Learned counsel for the petitioners further argued that the words 'other legal proceedings' referred to in Section 446(1) of the Act of 1956 include a criminal case as well and once the provision of Section 446(1) of the Act of 1956 is given effect to then the learned Magistrate has no jurisdiction to entertain or dispose of the criminal complaint filed in relation to the company in liquidation. Thus, it is prayed that the proceedings of the impugned complaints deserve to be quashed in their entirety.

6. Per contra, learned PP submits that the misc. petitions filed by the petitioners are absolutely misconceived. It is submitted that the criminal proceedings were initiated against the accused much before the appointment of the Official Liquidator or even the Provisional Liquidator. It is also submitted that the instant petitions being simply a means of stalling the criminal prosecution, do not deserve to be accepted.

7. I have given my thoughtful considerations to the arguments advanced at the bar.

8. In the opinion of this Court, the arguments advanced on behalf of learned counsel for the petitioners are thoroughly misconceived. The Hon'ble Apex Court while considering the effect of similar provision i.e. Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 in the case of Kusum Ingots and Alloys Ltd. vs. Pennar Peterson Securities Ltd. and Ors. reported in MANU/SC/0127/2000 : AIR 2000 SC 954 : [2000 ALL MR (Cri) 1223 (S.C.)] has held that there is no restriction on the powers of a Magistrate to proceed and try a case involving offence under Section 138 of the Negotiable Instruments Act despite Section 22 of the SICA. Section 22 of the SICA and Section 446(1) of the Act of 1956 are reproduced herein under for the sake of convenience:-

22. Suspension of legal proceedings, contracts, etc.--(1) Where in respect of an industrial company, an inquiry under Section16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the 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 the 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, as the case may be, the Appellate Authority.

446(1). Suits stayed on winding up order.--When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending as the date of the winding up order, shall be proceeded with, against the company, except by leave of the [Tribunal] and subject to such terms as the [Tribunal] may impose.

9. The Hon'ble Apex Court in the case of Kusum Ingots, [MANU/SC/0127/2000 : 2000 ALL MR (Cri) 1223 (S.C.)] (supra) held as reproduced herein under:-

9. Coming to the provisions of SICA Sections 22 and 22A which are relevant for appreciating the questions raised in the case are quoted hereunder:

22. Suspension of legal proceedings, contracts etc. - (1) Where in respect of an industrial company, an inquiry under S. 16 is pending or any scheme referred to under S. 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under S. 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the 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 the 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, as the case may be, the Appellate Authority.

(2) Where the management of the sick industrial company is taken over or changed (in pursuance of any scheme sanctioned under S. 18), notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or in the memorandum and articles of association of such company or any instrument having effect under the said Act or other law-

(a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company;

(b) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the Board.

(3) (Where an inquiry under S. 16 is pending or any scheme referred to in S. 17 is under preparation or during the period) or consideration of any scheme under S. 18 or where any such scheme is sanctioned thereunder, for due implementation of the scheme, the Board may by order declare with respect to the sick industrial company concerned that the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force, to which such sick industrial company is a party or which may be applicable to such sick industrial company immediately before the date of such order, shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date, shall remain suspended or shall be enforceable with such adoptions and in such manner as may be specified by the Board: Provided that such declaration shall not be made for a period exceeding two years which may be extended by one year at a time so, however, that the total period shall not exceed seven years in the aggregate.

(4) Any declaration made under subsection (3) with respect to a sick industrial company shall have effect notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law, the memorandum and articles of association of the company or any instrument having effect under the said Act or other law or any agreement or any decree or order of a Court, tribunal, officer or other authority or of any submission, settlement or standing order and accordingly-

(a) any remedy for the enforcement of any right, privilege, obligation and liability suspended or modified by such declaration, and all proceedings relating thereto pending before any Court, tribunal, officer or other authority shall remain stayed or be continued subject to such declaration; and

(b) on the declaration ceasing to have effect-

(i) any right, privilege, obligation or liability so remaining suspended or modified, shall become revived and enforceable as if the declaration had never been made; and

(ii) any proceeding so remaining stayed shall be proceeded with, subject to the provisions of any law which may then be in force, from the stage which had been reached when the proceedings became stayed.

(5) In computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy for the enforcement thereof remains suspended under this section shall be excluded.

22A. Direction not to dispose of assets - The Board may, if it is of opinion that any direction is necessary in the interest of the sick industrial company or creditors or shareholders or in the public interest, by order in writing direct the sick industrial company not to dispose of, except with the consent of the Board, any of its assets-

(a) during the period of preparation or consideration of the scheme under S. 18; and

(b) during the period beginning with the recording of opinion by the Board for winding up of the company under sub-sec. (1) of S. 20 and up to commencement of the proceedings relating to the winding up before the concerned High Court.

14. 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 S. 138 NI Act. A bare reading of the S. 22 of the SICA makes the position clear that during pendency of an inquiry u/S. 16 or during the preparation of a scheme referred to under S. 17 or during implementation of a sanctioned scheme or pendency of an appeal under S. 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 M/s. B.S.I. Ltd. v. Gift Holdings Pvt. Ltd. (Criminal Appeal No. 847 of 1999) (reported in MANU/SC/2443/2000 : 2000 AIR SCW 521) we held that pendency of proceeding under S. 22(1) of SICA alone is not sufficient to get absolved from the liability under S.138 of the NI Act.

18. The question that remains to be considered is whether S. 22A of SICA affects a criminal case for an offence under S. 138NI Act. In the said section provision is made enabling the Board to make an order in writing to direct the sick industrial company not to dispose of, except with the consent of the Board, any of its assets - (a) during the period of preparation or consideration of the scheme under S. 18; and (b) during the period beginning with the recording of opinion by the Board for winding up of the company under sub-sec. (1) of S. 20 and up to commencement of the proceedings relating to the winding up before the concerned High Court. This exercise of the power by the Board is conditioned by the prescription that the Board is of the opinion that such a direction is necessary in the interest of the sick industrial company or its creditors or shareholders or in the public interest. In a case in which the BIFR has submitted its report declaring a company as 'sick' and has also issued a direction under S. 22A restraining the company or its directors not to dispose of any of its assets except with consent of the Board then the contention raised on behalf of the appellants that a criminal case or the alleged offence under S. 138 NI Act cannot be instituted during the period in which the restraint order passed by the BIFR remains operative cannot be rejected outright. Whether the contention can be accepted or not will depend on the facts and circumstances of the case. Take for instance, before the date on which the cheque was drawn or before expiry of the statutory period of 15 days after notice, a restraint order of the BIFR under S. 22A was passed against the company then it cannot be said that the offence under S. 138 NI Act was completed. In such a case it may reasonably be said that the dishonouring of the cheque by the bank and failure to make payment of the amount by the company and/or its Directors is for reasons beyond the control of the accused. It may also be contended that the amount claimed by the complainant is not recoverable from the assets of the company in view of the ban order passed by the BIFR. In such circumstances it would be unjust and unfair and against the intent and purpose of the statute to hold that the Directors should be compelled to face trial in a criminal case.

10. The Hon'ble Apex Court while considering the provisions of Section 446(1) of the Companies Act in the case of Pennar Paterson Ltd. Vs. Shikshak Sahakari Bank Ltd. (Civil Appeal No. 4032/2002) decided on 29.4.2008 reported in MANU/SC/8576/2008 has held as under:-

1. In this appeal, the appellant - M/s. Pennar Paterson Ltd. calls in question whether the expression "other legal proceedings" occurring in Section 446(1) of the Companies Act, 1956 includes criminal proceedings or not. The High Court by the impugned order has held that it does not, relying on a decision of this Court in the case of BSI Ltd. and Anr. v. Gift Holdings Pvt. Ltd. and Anr. etc. MANU/SC/2443/2000 : AIR 2000 SC 926. The question involved in this appeal is also covered by the aforesaid decision relied on by the High Court. We do not find any merit in this appeal. The learned Counsel appearing for the appellant also could not satisfy us nor could he distinguish the decision relied on by the High Court. Since the question is covered by the aforesaid decision of this Court, we do not find any merit in this appeal. Accordingly the appeal is dismissed with no order as to costs.

11. Thus, it becomes apparent that the issue regarding the word "other legal proceedings" occurring in Section 446(1) of the Companies Act including criminal proceedings is now no longer res integra because the Hon'ble Apex Court has held that the term "other legal proceedings" occurring in Section446(1) of the Companies Act does not include criminal proceedings.

12. In the present case, a perusal of the charges which have been framed against the accused show that the accused have been charged for having cheated the respective complainants by inducing them in between the period of 1992 to 1997. Undisputedly, the proceedings for winding up of the company were instituted in the year 1998. Thus, there cannot be any restriction by virtue of Section 446(1) Cr.P.C. for the trial of the cases involving the offence of cheating which was committed by the accused much before the filing of the company petition even if it is assumed that the words 'other legal proceeding' should be interpreted so as to involve a criminal proceeding in them.

13. The cases which have been cited by learned counsel for the petitioners deal with the complaints for the offence under Section 138 of the NI Act which essentially involves financial reliefs. As has been observed above, in the present cases, one of the offences for which the accused are being tried is the offence under Section 420 IPC for which charge has been framed against the accused petitioners in their individual capacity. Thus, the petitioners cannot escape from the clutches of law from the offence of cheating which they committed with the public at large by taking the shield of Section 446(1) Cr.P.C.

14. Resultantly, all these misc. petitions, being bereft of any force, are hereby dismissed. Stay petitions also stand dismissed.

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