Piyush Rastogi vs Moulik Finance and Resorts Ltd.

Tarun Agarwala, J.—The petitioner, Piyush Rastogi, has filed the petition u/s 446 of the Companies Act, 1956 read with Rule 9 of the Companies (Court) Rules, 1959 for the quashing of all Civil and Criminal proceedings pending in various Courts, especially Criminal Case No. 2092 of 2005 pending in the Court of Special Judicial Magistrate, Lucknow and also prayed for absolving the petitioner from any civil or criminal liability in connection with the affairs of the Company, namely, Moulik Finance and Resorts Limited.

The brief facts leading to the filing of the petition is that the petitioner alleged to be the subscriber and Director of the Company known as Moulik Finance and Resorts Limited, a Company incorporated under the Companies Act, 1956 having its registered office at 301-A and B, Govind Apartment, Shah Najaf Road, Lucknow, which was incorporated as a non-banking financial company. The object of the Company, amongst others, was to receive deposits from the shareholders, to lend money to its shareholders and to accept deposits from the members of the public through fixed deposits, etc. The petitioner contended that the Company, on account of the faulty policies of the Government and the Reserve Bank of India fell into a financial crunch and was not doing any business since January 1995 and that the petitioner had tendered his resignation on 1-8-1998 which was accepted by the Board of Directors and which was forwarded to the Registrar of the Companies. The petitioner alleged that certain complaints were filed by the members of the public, including a First Information Report against the Company and that certain petitions for winding up of the Company was also filed before the Company Court, Lucknow Bench of the Allahabad High Court wherein, the Official Liquidator was appointed as the Provisional Liquidator who had taken the charge of all the assets of the Company. The petitioner further alleged that the Reserve Bank of India also filed a complaint case No. 2092 of 2005 before the Special Judicial Magistrate, Lucknow which the Court took cognizance of it and issued summons and consequently the present petition was filed u/s 446 of the Companies Act alleging that the petitioner had no concern with the Company since he had resigned, and that, in any case, no leave was taken by the Reserve Bank of India to file a complaint from the Company Court u/s 446 of the Companies Act and consequently the proceedings pending before the Special Judicial Magistrate was void and was liable to be quashed.

Sri S.P. Agarwal, another Director of the Company has also filed another Petition under Sections 446 and 633(2) of the Companies Act, read with Rule 9 of the Companies (Court) Rules praying also for the quashing of the complaint case No. 2092 of 2005 filed by the Reserve Bank of India before the Court of Special Judicial Magistrate, Lucknow and also for the quashing of the order dated 30-9-2004 passed by the Special Judicial Magistrate, Lucknow by which the Court has taken cognizance of the alleged offence. The petitioner has also taken the same grounds alleging that he was a sleeping Director and had resigned on 1-4-1998 which was duly accepted by the Registrar of the Companies and that the Court of Special Judicial Magistrate had wrongly taken cognizance of the alleged misfeasance against the Directors which could only be taken and proceeded by the Company Court u/s 633(2) of the Act. Further, no previous leave was taken by the Reserve Bank of India from the court u/s 446 of the Companies Act.

Since both the petitions are based on common facts and have prayed for the same reliefs, the same is being decided together.

The complainant, Reserve Bank of India, has filed a counter affidavit stating that the petitions filed by the petitioner was not maintainable u/s 446 of the Companies Act and that the Directors could not file an application u/s 446 for the quashing of the proceedings pending before the Court of the Special Judicial Magistrate, Lucknow. The respondents submitted that Section 446 of the Companies Act was only an enabling provision and an interlocutory application could only be filed in a pending petition seeking leave of the Court to file a suit or other legal proceedings but an application could not be filed for the quashing of the criminal proceedings. The respondents submitted that the Company Law Board had issued orders dated 31-7-2000 and 16-5-2002 directing the Company and its Directors to refund the deposits which they had received from their shareholders and from the public at large. Since these orders were not complied with, the Reserve Bank of India, in exercise of its powers u/s 58B read with Section 58C of the Reserve Bank of India Act, for violation of the Company Law Boards'' orders dated 31-7-2000 and 16-5-2002, filed a complaint case before the Special Judicial Magistrate, Lucknow, in which cognizance was taken by the Court by its order dated 30-9-2004. The bank submitted that criminal proceedings are outside the purview of the proceedings u/s 446 of the Companies Act and that no leave was required to be obtained from the Company Court. Further, the mere fact that the petitioners have resigned as Directors of the Company, did not absolve their liability of the acts which they had committed during their tenure as the Directors of the Company. The respondents further submitted that the criminal complaint was filed in public interest and in the interest of the depositors of the Company.

Heard Sri Pankaj Bajpai and P. Chakravarti, the learned Counsels for the petitioners, Sri Pratish Kumar, the learned Counsel for the Reserve Bank of India and Sri N.K. Agarwal, the learned Counsel for the Official Liquidator.

Before proceeding further, it would be relevant to consider the provisions of Sections 45QA 58B(4AAA) 58C and 58E of the Reserve Bank of India Act 1934, which are quoted herein under:

45QA. Power of Company Law Board to order repayment of deposit.� (1) Every deposit accepted by a non-banking financial company, unless renewed, shall be repaid in accordance with the terms and conditions of such deposit.

(2) Where a non-banking financial company has failed to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board constituted u/s 10E of the Companies Act, 1956 (1 of 1956) may, if it is satisfied, either on its own motion or on an application of the depositor, that it is necessary so to do to safeguard the interests of the company, the depositors or in the public interest, direct, by order, the non-banking financial company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order:

Provided that the Company Law Board may, before making any order under this sub-section, give a reasonable opportunity of being heard to the non-banking financial company and the other persons interested in the matter.

58B (4AAA). Whoever fails to comply with any order made by the Company Law Board under Sub-section (2) of Section 45QA, shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to a fine of not less than rupees fifty for every day during which such non-compliance continues.

58C. Offences by companies.� (1) Where a person committing a contravention or default referred to in Section 58B is a company, every person who at the time the contravention or default was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the contravention or default and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention or default was committed without his knowledge or that he had exercised all due diligence to prevent the contravention or default.

(2) Notwithstanding anything contained in Sub-section (1), where an offence under this Act has been committed by a company and it is proved that the same was committed with the consent or connivance of or is attributable to any neglect on the part of, any director, manager, secretary, or other officer or employee of the company, such director, manager, secretary, other officer or employee shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Explanation 1.� Any offence punishable under this Act shall be deemed to have been committed at the place where the registered office or the principal place of business, as the case may be, in India of the company is situated.

Explanation 2.� For the purpose of this section,--

(a) ''a company'' means any body corporate and includes a corporation, a non-banking institution, a firm, a co-operative society or other association of individuals;

(b) ''director'', in relation to a firm, means a partner in the firm.

58E. Cognizance of offences.� (1) No Court shall take cognizance of any offence punishable under this Act except upon a complaint in writing made by an officer of the Bank, generally or specially authorised in writing in this behalf by the Bank, and no Court other than that of a Metropolitan Magistrate or a Judicial Magistrate of the first class or a Court superior thereto shall try any such offence:

Provided that in respect of any offence punishable under Sub-section (5A) of Section 58B, a complaint in writing may also be made by an Officer of the State Government, generally or specially authorised in writing in this behalf by the Government.

(2) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974) a Magistrate may, if he sees reason so to do, dispense with the personal attendance of the officer of the Bank filing the complaint, but the Magistrate may in his discretion, at any stage of the proceedings, direct the personal attendance of the complainant.

Section 45QA gives power to the Company Law Board to order repayment of any deposit by a non-banking financial Company. In order to safeguard the interest of the Company or the depositors or in public interest, Sub-clause (4AAA) of Section 58A of the Act provided that if the order of the Company Law Board was not complied with, the same would become punishable. Section 58C provides that a person committing a default would be punishable and Section 58E provides cognizance of such offence by a Court. In the present case, the Company Law Board directed the Company and its Directors to refund the deposit made by the depositors. Since this order was not complied with, the Reserve Bank of India, which is the regulatory authority for non-banking financial Company under Chapter III-B of the Act, has filed the criminal complaint for non-compliance/contravention of the orders passed by the Company Law Board against the defaulting Company and its Director, who at the time of the contravention or default was in-charge and was responsible for the conduct of the business of the Company. In view of the aforesaid provisions, it is clear that the Reserve Bank of India had the power, jurisdiction and authority to file a criminal complaint against the alleged default/contravention made by the Company and its Directors. The submission of the counsel for the petitioner that the initiation of the criminal proceedings was wholly illegal and without any jurisdiction is wholly erroneous.

This takes us to the next question as to whether the petition filed by the petitioners under Sections 446 633(2) read with Rule 9 of the Company Court Rules was maintainable or not? Under the Companies Act, only certain petitions, as provided under Rule 11 of the Company Court Rules, can be filed. For facility, Rule 11 of the Company Court Rules is quoted hereinunder:

(a) Petitions.� The following applications shall be made by petition:

(1) Applications u/s 17 to confirm an alteration of the memorandum of association.

(2) Applications u/s 79 to sanction issue of shares at a discount.

(3) Applications u/s 101 to confirm reduction of share capital.

(4) Applications u/s 107 to cancel any variation of the rights of holders of any class of shares.

(5) Applications u/s 141 for rectification of the register of charges.

(6) Applications u/s 155 for rectification of the Register of Members.

(7) Applications u/s 186 by a director or Member of a company for calling a meeting of the company.

(8) Applications u/s 203 to restrain a fraudulent person from managing companies, or for leave by a person restrained to be a director of, or to manage, a company.

(9) Applications u/s 237 for an order that the affairs of a company ought to be investigated.

(10) Applications u/s 391(2) to sanction a compromise or arrangement.

(11) Applications u/s 395(1) or 395(2) for the purpose of preventing, or settling the terms of, the acquisition by a transferee company of the shares of a dissenting shareholder.

(12) Applications u/s 397 for the relief against oppression.

(13) Applications u/s 398 for relief in case of mismanagement.

(14) Applications u/s 407(1)(b) by a director or manager, whose agreement is terminated for leave to act as the managing or other director or manager of the company.

(15) Applications u/s 439 for the winding-up of a company, or u/s 583 for the winding-up of an unregistered company, or u/s 584 for the winding-up of a foreign company.

(16) Applications u/s 517 to set aside any arrangement between a company about to be or in the course of being wound-up (voluntary) and its creditors.

(17) Applications u/s 522 to continue a voluntary winding-up A subject to the supervision of the Court.

(18) Applications for a declaration u/s 542 (XI Schedule) in the course of proceedings u/s 397 or 398 that a person who was knowingly a party to carrying on business in a fraudulent manner shall be personally liable for all or any of the debts or other liabilities of the company.

(19) Applications by a creditor or member u/s 543 (XI Schedule) in the course of proceedings u/s 397 or 398, to enquire into the conduct of any of the persons mentioned in Section 543 (XI Schedule) and compel him to repay or restore any money or property to the company or pay compensation.

(20) Applications u/s 559 for declaring the dissolution of a company void.

(21) Applications u/s 560(6) to restore a company''s name to the Register of Companies.

(22) Applications u/s 579 to confirm the alteration in the form of the constitution of a company by substituting a memorandum and articles for a deed of settlement.

(23) Applications u/s 633(2) by an officer of a company for relief.

(b) Judge''s summons. - All other applications under the Act or under these rules shall be made by a Judge''s summons, returnable to the judge sitting in Court or in Chambers as hereinafter provided.

From the aforesaid, it is clear, that no petition can be filed u/s 446 of the Companies Act. Section 446 is only an enabling provision and an interlocutory application could only be filed in a pending matter before the Court seeking leave of the Court to file a suit or other legal proceedings against the Company. If any suit or proceedings is required to be instituted or to be continued with, then leave of the Court is necessary. Section 446 of the Companies Act however does not prohibit taking actions against the Directors and officers or servants of the Company. This provision cannot be invoked for the quashing of the criminal complaint.

For facility, Section 446 of the Companies Act is quoted hereinbelow:

Suits stayed on winding up order.� (1) 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 at the date of the winding up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose.

(2) The Court which is winding up the company shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of--

(a) any suit or proceeding by or against the company;

(b) any claim made by or against the company (including claims by or against any of its branches in India);

(c) any application made u/s 391 by or in respect of the company;

(d) any question of priorities or any other question whatsoever whether of law or fact, which may relate to or arise in course of the winding up of the company;

whether such suit or proceeding has been instituted or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960 (65 of 1960).

(3) Any suit or proceeding by or against the company which is pending in any Court other than that in which the winding up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that Court.

(4) Nothing in Sub-section (1) or Sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court.

In Harihar Nath v. State Bank of India [2006] 67 SCL 234, the Supreme Court held that the object of Section 446 of the Companies Act was not to nullify any claims against the company but the object of it was to save the company which has been ordered to be wound up from unnecessary litigation and from multiplicity of the proceedings and to protect the assets for equitable distribution amongst its creditors and shareholders. The Supreme Court held that the object of the Act would be achieved by compelling the creditors and others to come to the Court which is winding up the Company to prove their claims and, for this purpose, all the suits and the proceedings pending against the Company are stayed subject to the discretion of the Court to allow such suits and proceedings to proceed. The Supreme Court held:

An application seeking leave to proceed, in respect of a pending suit or proceeding (filed before the order of winding up) is not an application for enforcement of any claim or right. It does not seek any ''relief or ''remedy'' with reference to any claim or right or obligation or liability. It is an application which is interlocutory in nature. An interlocutory application is not subject to any period of limitation, unless otherwise specifically provided by law. We are conscious of the fact that an application u/s 446(1) seeking leave to proceed with the suit/proceeding, is not filed as an ''interlocutory application'' in the suit/proceeding before the Court where such suit/proceeding is pending. But an interlocutory application is nothing but an application in the course of an action. It is a request made to a Court, for its interference, in a matter arising in the progress of a proceeding. Therefore, in a broad sense, the application u/s 446(1) filed before the Company Court seeking leave to proceed with a pending suit or proceeding is an ''interlocutory application'' with reference to the pending suit/proceeding. Article 137 is intended to apply to applications for enforcement of a claim or adjudication of a right or liability in a Court. An application for leave to proceed with a pending suit or proceeding not being such an application for any relief, will not attract Article 137.

The Supreme Court made it clear that an application u/s 446 of the Companies Act is only an enabling provision and an interlocutory application could only be filed. Consequently, in the opinion of the Court, no application for quashing of the criminal proceedings could be filed u/s 446 of the Companies Act.

In D.K. Kapur v. Reserve Bank of India [2001] 105 Comp. Cas. 643 : 30 SCL 96. (Delhi), it was held that the expression "other legal proceeding and proceedings" must be read ejusdem generis with the expression "suit" in Section 446 of the Act and could only refer to any civil proceedings and that criminal proceedings have to be excluded. The words "suit", "legal pro ceedings" and "other proceedings" used in Section 446 of the Act has to be read in the light of the words "prosecution" or "criminal case" which are used in Section 457 of the Companies Act. In view of the aforesaid, this Court is of the opinion that criminal proceedings are excluded from Section 446 of the Companies Act. Consequently, no permission is required to be taken from the Company Court for filing a criminal case or a criminal complaint either against the Company or against its Directors.

There is another aspect of the matter. A complaint under a penal provision of a statute against the Company or its Directors, except those provided under the Companies Act, cannot be properly dealt with by the Company Court. The orders passed by the Criminal Court are subject to appeals, revisions etc. If the Winding up Court is held to be empowered to transfer these criminal proceedings to itself, it would lead to an anomalous consequence. The Criminal Court has the power to take cognizance to institute any criminal proceedings against the Company and/or against its Directors and it cannot be said that the power would be subject to the sanction u/s 446 of the Companies Act.

In view of the aforesaid, this Court is of the opinion that, sanction is not required to be obtained from the Companies Court u/s 446 of the Act for criminal proceedings being launched against the Company and its Directors.

In Nagarjuna Finance Ltd., Hyd. Vs. Kanosika Laboratories Ltd. and Another, it was held, that the words suit and other legal proceedings used in Section 446 of the Companies Act does not embrace the proceedings like those u/s 138 of the Negotiable Instruments Act. The Court held that the purpose of Section 446 of the Companies Act was to safeguard the assets and the property of the Company which had been wound up under the orders of the Court and if anything had to be realised from the assets of the Company, the same deserved to be done under the permission of the court only and that criminal proceedings u/s 138 of the Negotiable Instruments Act had no bearing whatsoever for the purpose for which Section 446 had been enacted.

Insofar as Section 633 of the Companies Act is concerned, the relief can only be granted to the Directors only in the case of the proceedings arising under the Companies Act and not under any other Act. In R.M. Gurjar and another Vs. High Court of Gujarat and others, the Supreme Court held--

The expression ''any proceeding'' occurring in Section 633 cannot be read out of context and treated in isolation. It must be construed in the light of the penal provisions. Otherwise what will happen if the penal clauses under the various other Acts would be rendered ineffective by application of Section 633. Again, if Parliament intended Section 633 to have a coverage wider than the Act, it would have specifically provided for it as, otherwise, it is a sound rule of construction to confine the provisions of a statute to itself.

Thus, we are clearly of the view that u/s 633 of the Act relief cannot be extended in respect of any liability under any Act other than the Act.

In view of the aforesaid, it is clear that the provision of Section 633(2) of the Companies Act could not be invoked by the petitioners.

There is another aspect of the matter. In the present case the Company has not as yet been wound up. The winding up proceedings are still pending. Further, the provisions of Section 446 can only be invoked against the Company and not against the Director. Similarly, a Director cannot invoke the provisions of Section 446 of the Companies Act.

In view of the aforesaid, this Court is of the opinion that the proceedings initiated by the petitioner u/s 446 read with Section 633(2) of the Companies Act was not maintainable. Even otherwise, on merit the petitioners are not entitled for any relief whatsoever.

In view of the aforesaid, the petitions lack merit and are dismissed, in the circumstances of the case there shall be no order as to cost. Interim order, if any stands discharged.