1. By this judge's summons, the State of Tamil Nadu (hereinafter referred to as 'the State') seeks to vacate the ex parte order dated 11th October, 1974, and as modified by an order dated 14th October, 1974. The ex parte orders were obtained under section 391(6) of the Companies Act, 1956, by Uma Investments Private Ltd. (hereinafter referred to as 'the company') in an application filed by it under section 391 for sanction of a scheme of compromise with certain classes of creditors.
2. The background of the case is that the company was incorporated on 13th January, 1965. The registered office of the company is in Bombay. The authorised capital of the company is Rs. 5,00,000 divided into 5,000 equity shares of Rs. 100 each and the subscribed and paid up capital is Rs. 1,00,000 divided into 1,000 equity shares of Rs. 100 each. From its inception the company carries on chit business. According to the company from the month of October, 1973, it faced financial difficulties and was unable to meet its requirements and particularly the amounts payable to the non-prized members at the termination of the chits. Several reasons are given. One of them is that in the States of Tamil Nadu and Kerala misleading and incorrect news items appeared. The newspaper, Dina Thanti, published in Tamil Nadu, circulated false reports. Another cause was that the company's discharged employees had spread imaginary and false stories among the public. The company's managing director, Acharath Vasu Appukutta Gupta, was illegally detained for two days by the police of Madras in connection with a subscriber's complaint to the police regarding a cheque for Rs. 50,000 towards his dues. For all these reasons, the members of the chits started demanding payment of their dues. Many of them took legal proceedings against the company and obtained orders of attachment before judgment. In these circumstances, the company's business and its liquid resources were seriously affected. The daily reports from the administrative office at Madras showed that every day many proceedings were adopted against the company and attachments before judgment were obtained in many such proceedings.
3. In these circumstances, the company has proposed a scheme of arrangement between itself and three classes of creditors, namely, (1) creditors who were subscribers to terminated cit groups, (2) creditors who are the subscribers of the existing chit groups, and (3) other general creditors of the company. The said scheme, it appears, is restricted to the creditors in the States of Tamil Nadu, Karnataka, Kerala, Andhra Pradesh and Maharashtra, excluding the States of Madhya Pradesh and West Bengal and Nagpur City where the company any intended to remain a going company.
4. The proposal of the company for compromise and arrangement with three classes of creditors is the subject-matter of Company Application No. 142 of 1974. This application was filed on 11th October, 1974. Directions under rule 69 of the Companies (Court) Rules, 1959, have been obtained to call, hold and conduct meetings. Shortly stated, so far the result of the meetings held under the chairmanship of an officer of this court is not known as the report is not ready on account of some difficulties encountered by the chairman. What is the fate of the scheme cannot be foretold. Whether the court will sanction the scheme or not is also a thing of the distant future.
5. On 11th October, 1974, the company took out a judge's summons (Company Application No. 143 of 1974) praying that pending the hearing and final disposal of Company Application No. 142 of 1974, the continuation of proceedings pending in various courts, a list whereof is mentioned in the schedule thereto, and commencement or continuance of any other proceedings against the company, its officers and its properties, whether civil or criminal, whether by the creditors and/or chit subscribers or by any one else, be stayed. In support of this application the company used the affidavit of its said managing director affirmed on 10th October, 1974. After referring to the steps taken by the depends in keeping up the fair name of the company, he stated that the application was filed in order to get interim protection from further harassment. The company stated that it 'be given immediate protection and should be relieved from the onerous task of gathering particulars of the various suits and complaints filed against the company.'
6. This court (Bhatt, J.) stayed the commencement or continuance of all civil and criminal proceedings against the company and its officers on the company giving an undertaking not to deal with or dispose of any of its assets either movable or immovable or any other property of the company without the previous sanction of this court save and except the payment of rent, taxes of any nature whatsoever and salaries of the employees of the company. On the application of the company, the said order was modified on 14th October, 1974, whereunder the expenses in connection with the application under section 391 of the Companies Act in Company Applications Nos. 142 of 1974 and 143 of 1974 and the expenses in connection with the chits operated in Madhya Pradesh, West Bengal and Nagpur City, limited to the actual recoveries made from chits being so run there, were further exempted from the said undertaking.
7. These orders communicated to the State in the month of October, 1974, by means of a letter. It appears that along with the intimation, photostat copies of orders were forwarded.
8. Mr. Khambatta, the learned counsel for the State, contended that the orders passed are within the jurisdiction of this court under section 391(6) of the Companies Act, and even assuming that the facts as pleaded do invoke the section, criminal proceedings which have been filed or proposed to be filed cannot be stayed. Section 391(6), according to Mr. Khambatta, speaks of suits or proceedings against the company, and this section does not cover suits or proceedings filed against the officers of the company.
9. On the other hand, Mr. Mehta, the learned counsel for the company, placed reliance on rules 71 and 72 of the Companies (Court) Rules, 1959, and submitted that rule 71 contemplates granting of an ex parte order, and under rule 72 it is only a person aggrieved by the order passed under rule 71 who can move the court to vacate or vary such order. He submitted that the State cannot seek to vacate the whole of the order but only to the extent it is affected. The State cannot be said to be a person aggrieved by the suit filed by others against the company. He also submitted that there is nothing in section 391(6) to restrict the power of the court to stay criminal proceedings. The word 'proceedings' is a word of wide import. Given a normal and natural meaning, the word 'proceedings' would cover proceedings of civil and criminal character. In his submission, the power to stay proceedings is to facilitate the holding of the meetings, so that the company should not be made to run from one court to another or to pay a fine here or to pay a fine there. It is the policy of law that, normally, all proceedings should be stayed, so that the same do not influence the consideration of the question of compromise. The very fact that rule 71 makes provision for an ex parte order goes to show the policy of law underlying these provisions. He further urged that suits or proceedings would also embarrass the directors and officers of the company because all actions were being taken by them on behalf of the company. He submitted that the interpretation suggested by him is in consonance with the objection of section 391; otherwise, pressure could be brought on the officers of the company to act in a particular manner. This will amount to preferential treatment to some of the creditors. Fair and equal distribution would be affected. No creditor is to be preferred at the expense of the general body of the creditors.
10. In order to appreciate the rival submissions, one has to look at the relevant provisions of sub-section (6) of section 391. These are as follows :
'391. Power to compromise or make arrangements with creditors and members. - ...... (6) The court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the court thinks fit, until the application is finally disposed of ...'
11. 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 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.
12. 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 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.
13. Mr. Khambatta drew my attention to the Madras Chit Funds Act, 1961, and by reference to the affidavit of Shri A. S. Ahluwalia, Directors of Chits, Government of Tamil Nadu, pointed out that in respect of about 481 chits of the aggregate value of Rs. 20,54,500 run by the company in the various parts of the State, complaints numbering about 267 are pending and about 3,079 complaints cannot be filed in view of the stay order granted by this court. These complaints arise in connection with the infringement of sections 11, 14, 16 and 56(2)(c) of the said Act. Section 56 provides penalties for contravening the provisions of the said sections.
14. Mr. Mehta argued that the pending and intended prosecutions under the Madras Chit Funds Act, 1961, are of a coercive character, inasmuch as the fair object of section 391 to equally distribute the assets of the company among the creditors would be defeated and the scheme would be affected. There is no merit in this argument. The scheme is put forth for compromise and not to save the company or its officers from facing prosecutions for offences committed in the course of the business of the company. The provisions of section 391(6) do not apply to criminal proceedings against a company. The proceedings referred to in this sub-section are meant to be a civil nature. The character of the proceedings should be of pecuniary nature involving money considerations between the company and its creditors or members having a nexus or bearing with the proposal for compromise or arrangement, set afoot for consideration of the creditors or members as provided in sub-section (2) of section 391. The company and its officers are open to prosecution. Criminal proceedings can be commenced or continued notwithstanding the fact that a scheme for compromise or arrangement has been initiated under section 391. In my judgment, the provisions of sub-section (6) of section 391 are not meant to freeze the commencement or continuation of criminal proceedings against the company and its officers.
15. It may be mentioned that both sides had taken somewhat extreme stands. Mr. Khambatta argued in the first instance that the State of Tamil Nadu is entitled to have the whole of the order vacated but, in the course of his arguments, submitted that the State seeks variation to the extent the order stays criminal proceedings. Mr. Mehta had argued that the State was not an aggrieved party within the meaning of rule 72 and, therefore, could not move the court for vacating or varying the order, but later stated that the State could do so to the extent it is affected.
16. Mr. Khambatta laid emphasis that the company has not given any particulars of the civil or criminal cases pending against the company and its officers. There is considerable force in this complaint. In order to appreciate the point, it is necessary to look at the following schedule which sets forth the pending cases as on 10th October, 1974 :
SCHEDULE Pending in the Courts at MadrasCase No. 2262/74 - Mr. J. Sukumar (MD/6/24)Case No. 167/74 - Smt. Prasanna Kallat (MA-1/20)Case No. 3938/74 - Mr. D. Sambandhan (MA-13/17)Case No. 3411/74 - Mr. P. V. Subbiah (MD-7/10)Case No. 2717/74 - Mr. N. Ganapathy (MC-2/24)Case No. 3410/74 - Mr. A. Ranganathan (MC-2/35)Case No. 3811/74 - Mr. Mohammed Yakoob (MC-3/32)Case No. 4531/74 - Mr. D. Chowdaffer (MC-3/26)Case No. - Rajeshkumar & Co. (MC-4/25)- Mr. Rajendra, Royapettah BranchMr. V. Sankaran - T'Nagar BranchMr. V. Balasubramanian - Parrys BranchMr. Bashyam - Criminal complaint at CoimbatoreKerala - 50 cases.Pending in the Courts at Bombay5396/9823/73 - in Small Causes Court at Bombay5397/9824/73 - in Small Causes Court at Bombay5398/9825/73 - in Small Causes Court at BombayR/528/74 - in Court at Thana.Mr. K. P. Narayanan - Criminal Complaint No. 97/74 atQuilon Magistrate Court.Mr. Augusthy - Criminal Complaint in DistrictNaderkkul Magistrate's Court atTellicherry.'
17. It appears that the company, in its anxiety to arm itself with a general order covering all cases, has not given full information and particulars. The affidavit of the company's managing director, Shri Gupta, in support of the application shows that the company was 'faced with a number of attachments, lot of properties of the company were lying with courts in pursuance of the orders of attachment' and if the company were to be taken into liquidation, it will be a stupendous task for a liquidator to make an inventory of the assets. He further stated that he was filing the application (under rule 71) in order to get interim protection from further harassment, and then goes on to say that it is impossible for him to give details and particulars of various suits and other proceedings which are filed against the company and that whatever particulars he had been able to procure, he had given, namely, the said schedule. He further stated that he should be relieved from the onerous task of gathering particulars of the various suits and complaints. The same deponent stated in the same breath that several branches have been closed on account of attachment before judgment and several complaints are also filed against the company and its officers. Even in his affidavit in reply to the present summons, filed after an interval of over 14 months, Shri Gupta maintains that whatever information was available had been furnished. The Director of Chits, Government of Tamil Nadu, in his affidavit in support of the present summons, has complained about the particulars.
18. Now, it is the case of the company that it had several branches in the State of Tamil Nadu, and attachments before judgment have been levied on its properties. The records of the company are not said to be untraceable or not under the control of the company. Shri Gupta specifically speaks of complaints filed against the company and its officers in the State of Tamil Nadu, Karnataka and Kerala. In these circumstances, it is impossible to believe that the company and the dependent, namely, the managing director of the company, would not be aware of the courts in which civil and criminal cases are pending, the names of the plaintiffs or the complainants, and the nature of the civil and criminal proceedings. The fact remains that the company has transmitted the orders of this court to various parties including the State of Tamil Nadu in order to put the civil and criminal cases on the dormant lists. Again, a reference to the schedule shows that 50 cases are said to be pending in Kerala. Now, if 50 cases are pending in Kerala, surely the managing director of the company must have counted the number of these cases before stating on oath that 50 cases are pending in the State of Kerala. Some names of the parties are given without disclosing whether the cases are of a civil nature or of a criminal character. Except in the cases of K. P. Narayanan and Augusthy Naderkkul, it can be said that the schedule is completely devoid of proper particulars. Mr. Mehta by reference to the schedule tried to explain one item. In Case No. 2262/74, the name of J. Sukumar (MD/6/24) is given. Mr. Mehta says that 'MD/6' represents the series of the chit fund and the number '24' shows the book number. Now, if the dependent could know that J. Sukumar was a member of MD/6 chit fund, having book No. 24, surely if he was so minded, he could have given the particulars of Case No. 2262/74, whether J. Sukumar has filed a suit for recovery of his alleged dues and/or also obtained attachment before judgment or the case relates to a false criminal complaint filed against the officers of the company. It seems that for some ulterior motive, the full particulars have been kept back from the court.
19. Mr. Mehta strenuously urged that the purpose of the present application of the State of Tamil Nadu is mala fide. He contended that the Commissioner of Police of Madras has been vindictive in this case. For this purpose he referred to the various passages from the affidavit of the managing director, Shri Gupta, affirmed on 10th October, 1974, and the other affidavits on record. It was argued that the report which appeared in the Dina Thanti newspaper of Tamil Nadu was inspired by the police. Shri Gupta was detained for two days in the office of the Commissioner of Police and treated in an impolite manner. Shri Gupta had to obtain anticipatory bail as he apprehended further arrests. One subscriber had complained to the police at Madras that the company had issued to him a cheque for Rs. 50,000 towards his dues, but it was dishonoured and the case was treated as one of cheating. Inspector of police, Mr. Agustain, had interrogated Gupta. According to Gupta, the person behind the case was the Assistant Commissioner of Police, Jayaraman, whose wife as a prize member was a defaulter of the company, and the company had insisted on payment by her. In the affidavit in reply to the present summons, Gupta says that the Commissioner of Police, Tamil Nadu, was the main cause of the downfall of the company and that the present summons are taken out to satisfy his vendetta. Prima facie, there is no merit in these allegations. The company itself has referred to several other reasons leading to the closure of its branches in the States of Karnataka and Kerala, apart from Tamil Nadu. The company also blames its own employees for spreading false and imaginary rumours. It also attaches responsibility to its members for running the company's business. It is not only the State of Tamil Nadu where civil and criminal litigation is brewing against the company and its officers but in several other States. The Director of Chit Funds has not dealt with these allegations, but on that account I cannot accept the allegations as true on the facts of the present case. I am satisfied that the application is legitimate.
20. Another contention of Mr. Mehta was that there is undue delay in taking out the present summons and, therefore, the same should be dismissed. There is no doubt that there is delay in taking out the present summons. Having regard to the provisions of rules 71 and 72 of the Companies (Court) Rules, 1959, which provide for an ex parte order and for vacating or varying the same by an aggrieved person, it is clear that once an ex parte order is passed, it does not come for confirmation before the court and remains on the file as an ex parte order until an aggrieved person under rule 72 comes forward for vacating or varying the same. An ex parte order can remain ex parte until the scheme of compromise or arrangement set in motion under section 391 comes to an end either successfully or unsuccessfully. There is thus no time fixed for vacating or varying the ex parte order. In the present case, the State desires to continue the cases pending under the Madras Chit Funds Act and wants to commence further proceedings under the said Act. In my opinion, the delay in the present case is not so gross and glaring as to refuse the present application. The justice of the case requires that the delay should not come in the way of the court in granting the application. Moreover, I have taken the view that section 391(6) does not cover criminal proceedings. The ban imposed by the order must be lifted against public and private prosecutions. The State is always vitally interested in the administration of law and justice, so that the offenders are brought to book and, if found guilty, adequately punished.
21. In this view of the matter, I partly vacate the order dated 11th October, 1974, as further modified by the order dated 14th October, 1974, in the following manner :
'The State of Tamil Nadu shall be at liberty to commence or continue criminal proceedings against the company and its officers either under the Madras Chit Funds Act, 1961, or under any other law of the land. The stay granted by this court by its previous orders staying the commencement or continuation of criminal proceedings in the State of Tamil Nadu shall stand vacated forthwith and both the State and private parties including the creditors and members of the company shall be free to continue criminal proceedings against the company and its officers already pending in the courts within the State of Tamil Nadu or commence criminal proceedings against them.'
22. The company is directed to transmit within 15 days from to-day, this order to all courts and parties to whomsoever the company has communicated the previous ex parte orders dated 10th October, 1974, and 14th October, 1974, within the State of Tamil Nadu. Companies of such communications to be filed in the office by the attorneys of the company.
23. Order accordingly. The company to pay to the applicants costs of this judge's summons.