Dismissed

Sharp Industries Ltd.and Ors. v. Dic India Ltd. and Anr.

Bombay HC26 Aug 2008WP/710/2008

Case brief

AI extract

What is this about?

A Constitution Bench of the High Court of Bombay considered whether a scheme of arrangement sanctioned under Section 391 of the Companies Act automatically compounds offences under Section 138 of the Negotiable Instruments Act. The court held that sanction does not amount to compounding or automatic termination of criminal proceedings. Petitions were dismissed, and the court directed parties to fi

What did the court decide?

Petitions dismissed; liberty granted to file separate petitions under Section 482 CrPC for quashing; hearing of complaints adjourned for 16 weeks.

Sharp Industries Ltd.and Ors. Vs Dic India Ltd. and Anr. — Cheque Dishonour | Bombay HC (2008)

¶1

- 1 -

¶2

IN THE HIGH COURT OF JUDICATURE AT BOMBAY CRIMINAL APPELLATE JURISDICTION

¶3

1.CRIMINAL WRIT PETITION NO.2770 OF 2006,

¶4

 JIK Industries Ltd. and another...Petitioners

¶5

vs.

¶6

Sunil Ranchorlal Bajaj and another...Respondents

¶7

2.CRIMINAL WRIT PETITION NO.2771 OF 2006,

¶8

 JIK Industries Ltd. and another...Petitioners

¶9

vs.

¶10

Paresh Kapadi and another...Respondents

¶11

3.CRIMINAL WRIT PETITION NO.2781 OF 2006,

¶12

 JIK Industries Ltd. and another

¶13

vs.

¶14

Amarlal V.Jumani and another

¶15

...Petitioners
...Respondents

¶16

4.CRIMINAL WRIT PETITION NO.2782 OF 2006,

¶17

 JIK Industries Ltd. and another...Petitioners
vs.
Phuli M. Jumani and another...Respondents

¶18

5.CRIMINAL WRIT PETITION NO.2783 OF 2006,

¶19

 JIK Industries Ltd. and another

¶20

vs.

¶21

Anil. P. Asudani and another

¶22

...Petitioners
...Respondents

¶23

6.CRIMINAL WRIT PETITION NO.2784 OF 2006,

¶24

 JIK Industries Ltd. and another

¶25

vs.

¶26

Rinku A.Hinduja and another

¶27

...Petitioners
...Respondents

¶28

7.CRIMINAL WRIT PETITION NO.2786 OF 2006,

¶29

 JIK Industries Ltd. and another

¶30

vs.

¶31

Renuka P.Asudani and another

¶32

...Petitioners
...Respondents

¶33

8.CRIMINAL WRIT PETITION NO.2787 OF 2006,

¶34

 JIK Industries Ltd. and another
vs.

¶35

Shyam N. Raheja and another

¶36

...Petitioners
...Respondents

¶37

- 2 -

¶38

9.CRIMINAL WRIT PETITION NO.2788 OF 2006,

¶39

 JIK Industries Ltd. and another...Petitioners
vs.
Vishal A.Hinduja and another...Respondents

¶40

10.CRIMINAL WRIT PETITION NO.2789 OF 2006,

¶41

 JIK Industries Ltd. and another...Petitioners
vs.
Anilkumar C.Hinduja and another...Respondents
11.CRIMINAL WRIT PETITION NO.288 OF 2007,
 JIK Industries Ltd. and another...Petitioners
vs.
Abhaykumar Worah and another...Respondents
12.CRIMINAL WRIT PETITION NO.290 OF 2007

¶42

 JIK Industries Ltd. and another

¶43

 JIK Industries Ltd. and another...Petitioners
vs.
Mahendrakumar J.Shah and another...Respondents

¶44

Mr.Amit Desai, with Ms Mili Thakkar and Ms Shital Thakkar
 i/b Shri Amit P. Ghag for the petitioners

¶45

 Mr.M.S.Mohite with Mr.A.R.Kapadnis and Mr.Ashish Sawant for
 Respondent No.1 in W.P.Nos.2770/2006, 2771/2006,2781 to
 2784/2006, 2786 to 2789/2006

¶46

 Mr.Dharmendra Rohra and Mr.Ashok Sahani for Respondent No.1
 in W.P.Nos.288 of 2007

¶47

 Mr.M.D.Mati for Respondent No.1 in W.P.No.290/2007
 Ms P.P.Shinde A.P.P. for State

¶48

AND
1.CRIMINAL WRIT PETITION NO.710 OF 2008,

¶49

 Sharp Industries Ltd. and others...Petitioners
vs.
D.I.C.India.Ltd.& anr....Respondents

¶50

2.CRIMINAL WRIT PETITION NO.711 OF 2008,

¶51

 Sharp Industries Ltd. and others...Petitioners
vs.
D.I.C.India Ltd.& anr....Respondents

¶52

3.CRIMINAL WRIT PETITION NO.712 OF 2008,

¶53

- 3 -

¶54

Sharp Industries Ltd. and others...Petitioners
vs.
D.I.C.India Ltd.& anr....Respondents

¶55

...Petitioners

¶56

4. CRIMINAL WRIT PETITION NO.713 OF 2008,

¶57

 Sharp Industries Ltd. and others...Petitioners
vs.
D.I.C.India Ltd.& anr....Respondents

¶58

5.CRIMINAL WRIT PETITION NO.714 OF 2008,

¶59

 Sharp Industries Ltd. and others...Petitioners
vs.
Traxpo Enterprises Pvt.Ltd.& anr....Respondents

¶60

6.CRIMINAL WRIT PETITION NO.715 OF 2008,

¶61

 Sharp Industries Ltd. and others...Petitioners
vs.
Traxpo Enterprises Pvt.Ltd.& anr....Respondents

¶62

7.CRIMINAL WRIT PETITION NO.716 OF 2008,

¶63

 Sharp Industries Ltd. and others...Petitioners
vs.
Traxpo Enterprises Pvt.Ltd.& anr....Respondents

¶64

8.CRIMINAL WRIT PETITION NO.717 OF 2008,

¶65

 Sharp Industries Ltd. and others...Petitioners
vs.
Traxpo Enterprises Pvt.Ltd.& anr....Respondents

¶66

9.CRIMINAL WRIT PETITION NO.718 OF 2008,

¶67

 Sharp Industries Ltd. and others...Petitioners
vs.
Traxpo Enterprises Pvt.Ltd.& anr....Respondents

¶68

10.CRIMINAL WRIT PETITION NO.719 OF 2008

¶69

- 4 -

¶70

Sharp Industries Ltd. and others...Petitioners
vs.
Traxpo Enterprises Pvt.Ltd.& anr....Respondents

¶71

Mr.S.V.Marwadi and Mr.Sushant S. Murthy for the petitioners
 in W.P.No.710/2008 to 719/2008
 Mr.P.O.Verghese i/b Mr.K.Balkrishnan for Respondent No.1 in
 W.P.NO.710/2008 to 713/2008

¶72

 Mr.Darius Khambatta, Senior counsel with Mr.Arif Doctor i/b
 Ms Hina G. Acharya for Respondent No.in W.P.No.714/2008 to
 719/2008

¶73

 Mr.D.P.Adsule A.P.P. for State.

¶74

AND
1.CRIMINAL WRIT PETITION NO.1424 OF 2008,
2.CRIMINAL WRIT PETITION NO.1425 OF 2008,
3.CRIMINAL WRIT PETITION NO.1426 OF 2008,
4.CRIMINAL WRIT PETITION NO.1427 OF 2008,
5.CRIMINAL WRIT PETITION NO.1428 OF 2008,
6.CRIMINAL WRIT PETITION NO.1429 OF 2008,
7.CRIMINAL WRIT PETITION NO.1430 OF 2008,
8.CRIMINAL WRIT PETITION NO.1431 OF 2008,
9.CRIMINAL WRIT PETITION NO.1432 OF 2008,
10.CRIMINAL WRIT PETITION NO.1433 OF 2008

¶75

 Sharp Industries Ltd. & anr.

¶76

...Petitioners
(in all the petitions)

¶77

vs.

¶78

 Henkel Cac Pvt.Ltd. and Anr.

¶79

...Respondents
(in all the petitions)

¶80

 Mr.S.V.Marwadi with Ms Sunita Sharma for the petitioner in
 W.P.No.1424/2008 to 1433/2008
 Mr.R.Satyanarayanan with Mr.Ravindra Sharma for Respondent
 No.1

¶81

 Mr.Y.S.Shinde A.P.P. for State.

¶82

CORAM: A.S.OKA,J.
DATE : AUGUST 14,21,22,25 & 26,2008

¶83

ORAL JUDGMENT:

¶84

 1.The submissions of the learned Counsel appearing for the

¶85

- 5 -

¶86

parties were heard earlier. These Petitions are being
 disposed of by a common judgement as following issues are
 involved in all these Petitions.

¶87

(1) Whether a compromise or arrangement sanctioned under
 section 391 of the Companies Act, 1956 (hereinafter referred
 to as ‘the said Act of 1956’) relating to the accused company
 amounts to compounding of the offence under section 138 read
 with section 141 of the Negotiable Instruments Act, 1881
 (hereinafter referred to as ’the said Act of 1881’)?

¶88

(2) What is the effect of an order of sanction of
 compromise or arrangement under section 391 of the said Act of
 1956 in relation to the accused company on a pending complaint
 alleging commission of offences under section 138 read with
 section 141 of the said Act, 1881 against the company and its

¶89

FACTS OF THE CASES

¶90

 2.The learned Counsel appearing for the parties have made
 submissions on the aforesaid issues. Shri Desai, learned
 Counsel appearing for the Petitioner in Writ Petition
 No.2770/2006 has made elaborate submissions. The other
 learned Counsel appearing in the connected matters have also
 made elaborate submissions. Before referring to the

¶91

- 6 -

¶92

submissions, it will be necessary to briefly refer to the
 facts of the case.

¶93

 3. In so far as Criminal Writ Petition Nos.2770 to 2771, 2781
 to 2789 of 2006, 288 and 289 of 2007 are concerned, the facts
 can be summarised as follows :-

¶94

(a) In these Writ Petitions, the first Respondent is the
 Complainant who filed separate complaints under section 138
 read with section 141 of the said Act of 1881. The

¶95

 Petitioners are the accused in the said complaints filed by
 the first Respondent. The first Petitioner (first accused) is
 a Company registered under the said Act of 1956. The first
 Petitioner-company had issued a cheque in favour of the 1st
 respondent towards repayment of a loan advanced by the 1st
 respondent to the 1st petitioner. The said cheque was

¶96

 .(b) The first Petitioner filed a Company Application in
 this Court alongwith a scheme of arrangement. In the said
 Company Application, an order was passed by this Court on 6th
 May 2005 directing the first Petitioner Company to hold a
 meeting of the equity share holders, unsecured creditors,
 fixed deposit holders, etc. Accordingly, a meeting was held
 on 25th June 2005. A report of the meeting was submitted to
 this Court. On the basis of the report, a Company Petition

¶97

- 7 -

¶98

under section 391 of the said Act of 1956 was filed and by
 order dated 16th September 2005, the scheme of arrangement was
 sanctioned by this Court.

¶99

 . (c) According to the case of the Petitioners, as per the
 scheme of arrangement approved by this Court, the first
 Petitioner was required to issue its equity share shares to
 all its un-secured creditors, fixed deposit holders, etc. as
 against its liability as existing on 28th February 2005. On
 the basis of the scheme of arrangement approved by this Court,
 an application was made by the Petitioners in the complaints
 filed by the first Respondent. In the said Applications, a
 contention was raised that the liability of the first
 Petitioner stands discharged by issuing equity shares to the
 first Respondent-Complainant. A contention was raised in the
 said application that the first Petitioner has complied with
 the order of this Court by issuing letters of allotment of its
 equity shares to the first Respondent-Complainant. The prayer
 in the application was that the offences under section 138
 read with section 141 of the said Act of 1881 may be

¶100

 .(d) The said application was contested by the first
 Respondent-Complainant by contending that a complaint under
 section 138 of the said Act of 1881 was not a recovery
 proceeding. It was contended that the application filed by

¶101

- 8 -

¶102

the Petitioner for compounding of the offence was not
 maintainable and therefore, the application be dismissed. By
 an order passed by the learned Magistrate on 19th September
 2006, the said applications made by the Petitioners were
 rejected. The learned Magistrate while rejecting the
 applications came to the conclusion that the parties will have
 to adduce evidence and before evidence was adduced, it was
 premature to declare that the offence was compounded.
 Revision Applications were preferred by the Petitioners before
 the Sessions Court for challenging the orders of the Trial
 Court. The Revision Applications were dismissed by the
 learned Additional Sessions Judge. While dismissing the
 Revision Applications, the learned Additional Sessions Judge
 observed that an order of compounding an offence cannot be
 passed against the wishes of the first Respondent-complainant
 and he cannot be compelled to enter into a compromise. The
 learned Judge held that compounding of an offence is a
 bilateral act. He observed that an offence cannot be
 compounded on the basis of the unilateral Act on the part of
 the accused.

¶103

 .(e) The prayers originally made in this group of

¶104

 Petitions were of declaration that the alleged offence was
 compounded and for setting aside the order of the Sessions
 Court in Revision. During the course of submissions, on the
 prayer was made by Shri Desai, the learned Counsel appearing

¶105

- 9 -

¶106

for the Petitioners, a prayer for quashing under section 482
 of the Code of Criminal Procedure, 1973 (hereinafter referred
 to as ‘the said Code’) was allowed to be incorporated by
 carrying out an amendment to the prayer clause and he was
 permitted to argue on the said prayer.

¶107

 4.The second group of Petitions consists of Criminal Writ
 Petition No.710/2008 to 719/2008. These Petitions have been
 filed by the original accused Nos.1 to 5 in complaints filed
 by the first Respondent in the said Petitions under section
 138 read with section 141 of the said Act of 1881. In the
 said complaints, process was issued by the learned Magistrate.
 After the process was issued by the learned Magistrate, an
 application was made by the petitioners invoking section 147
 of the said Act of 1881 for recording compounding of the
 offence on the basis of the scheme of compromise and
 arrangement relating to the 1st petitioner-1st accused company
 under section 391 of the said Act of 1956 which was approved
 by this court under order dated 17th September 2005. The
 learned Trial Judge rejected the application by holding that
 the petitioners had not produced any receipt showing the
 payment of the amount to the original complainant. The prayer
 in these petitions is for quashing the order of the learned
 Magistrate passed on the said application and for allowing the
 application made by the petitioners for compounding of the
 offences.

¶108

- 10 -

¶109

5. The third group of petitions (W.P.nos.1424 to 1433 of

¶110

 2008) is again filed by the accused in a complaint filed by
 the first Respondents therein under section 138 read with
 section 141 of the said Act of 1881. The process was issued
 by the learned Trial Judge on the complaints filed by the
 first Respondent. Here also an application was made by the
 petitioners for terminating the proceedings or for compounding
 of the offence on the basis of an order under section 391 of
 the said Act of 1956 in relation to the 1st Petitioner-1st
 accused company. The prayer made in these petitions is for
 quashing the complaints on the ground that the order passed
 under section 391 of the Companies Act,1956 sanctioning a
 scheme amounts to compounding the offence under section 138 of
 the said Act of 1881.

¶111

SUBMISSIONS

¶112

 6. As pointed out earlier, detailed submissions have been
 made by the learned counsel for the parties and especially by
 the learned counsel for the parties in the first group of
 petitions (W.P.2770 of 2006 and other connected matters). The
 submission of Shri Desai, learned counsel for the petitioners
 in the said first group is that once a scheme of arrangement
 or compromise is sanctioned by the Company Court in exercise
 of power under section 391 of the said Act of 1956, the scheme

¶113

- 11 -

¶114

supersedes all earlier contracts between the accused company
 and its unsecured creditors. His submission is that there is
 no legally enforceable liability de hors the scheme sanctioned
 by the court. The learned counsel for the petitioners
 submitted that after the scheme of arrangement is sanctioned
 by the Company Court, even if the company wishes to pay the
 amount payable under the dishonoured cheque, the company will
 be prohibited from paying the said amount except in a manner
 provided under the sanctioned scheme. His further submission
 is that once the scheme is sanctioned after obtaining the
 support of the requisite majority, it amounts to a deemed
 consent of the unsecured creditors. It is submitted that the
 scheme binds all the unsecured creditors whether they have
 supported the scheme or opposed the scheme and the sanction of
 the scheme amounts to compounding the offence under section
 138 r/w section 141 of the said Act of 1881.

¶115

 7. It was submitted that in essence the section 391 of the
 said Act of 1956 was enacted as a social measure so as to
 prevent the winding up of the companies. The learned counsel
 submitted that after the Company Court is satisfied that the
 scheme is fair, reasonable and is not opposed to the public
 policy, the scheme is approved/sanctioned and once the scheme
 is sanctioned, it binds all the unsecured creditors as if each
 of them had entered into a new contract with the company.
 Relying upon the decision of the Apex Court in case of

¶116

- 12 -

¶117

J.K.(Bom) P.Ltd. vs.Kaiser-I-Hind Sp.& Wvg. Co. (A.I.R.

¶118

 1970 S.C. 1041), he submitted that in view of the sanctioned
 scheme, the original debt becomes payable only in the manner
 and only to the extent provided in the scheme. Relying upon
 another decision of the Apex court in the case of S.K.Gupta
 and another vs. K.P.Jain and another (A.I.R. 1928 S.C.
 734), he submitted that the scheme under section 391 of the
 said Act is essentially a compromise between the company and
 its unsecured creditors and it binds not only the company but
 the dissenting unsecured creditors or members. He also placed
 reliance on a decision of this court in case of the Vasant
 Investment Corporation Ltd. vs. Official Liquidator and
 another [(1981) 51 Comp Cas 20 (Bom)] and submitted that under
 section 391 of the said Act of 1956, the scheme becomes
 binding upon all the members of the company, irrespective of
 the fact whether they have expressly consented to it or not.
 He submitted that once the scheme is sanctioned and is brought
 into force, the creditors of the company can demand repayment
 of their dues only in terms of the scheme and not otherwise
 than in terms of the scheme.

¶119

 8. The learned counsel for the petitioners after referring to
 the scheme which was subject matter of the first group of
 petitions submitted that on the said scheme being sanctioned,
 the same amounts to cancellation of all earlier contracts
 between the company and its creditors and would amount to

¶120

- 13 -

¶121

novation of the earlier contract within the meaning the Indian
 Contract Act, 1872. He submitted that in essence the scheme
 supersedes all the agreements between the company and its
 creditors and therefore, once the scheme is sanctioned, the
 debt for which the dishonoured cheque is issued ceases to be a
 legally enforceable debt.

¶122

 9. He submitted that while sanctioning the scheme, the
 Company Court always considers whether the scheme is fair and
 reasonable and only after duly recording its satisfaction, the
 scheme is sanctioned by the company court and that is the
 reason why it binds all the creditors, shareholders, members
 etc. He placed reliance on a decision of the Apex Court in
 the case of Miheer H. Mafatlal Vs. Mafatlal Industries Ltd.
 (A.I.R. 1997 S.C. 506).

¶123

 10. Turning to the facts of the case in the first group of
 petitions, he submitted that the arrangement or compromise
 which is approved by the court relates back to the appointed
 date and therefore, all the debts in existence before the
 appointed date have ceased to be legally enforceable debts.
 After referring to the decision of Lahore High Court in
 Hargopal Vs. People’s Bank of Northern India Ltd. [(1934)
 Com.Cas 352], the learned counsel submitted that the order
 sanctioning the scheme operates as a Judgment in rem and
 therefore, the company is entitled to raise a defence based on

¶124

- 14 -

¶125

the scheme.

¶126

 11. Referring to the section 147 of the said Act of 1881, he
 submitted that the offence under section 138 read with section
 141 of the said Act of 1881 is compoundable without the
 sanction of the court. He submitted that under section 147,
 the offence can be compounded at any stage. His submission
 was once there was a compromise recorded between the parties,
 the same automatically results in acquittal of the accused.
 He submitted that as the offence under section 138 of the said
 Act of 1881 is compoundable without sanction of the court,
 once was there a compromise which is binding on the parties,
 what remains to be done by the Court is only to pass a
 consequential order of closure of proceedings. He submitted
 that the legislative intent of making the offence compoundable
 by the amendment of the year 2002 cannot be ignored by the
 court. He relied upon the decision of the Apex Court in case
 of M/s.Dalmia Cement (Bharat) vs. M/s.Galaxy Traders and
 Agencies Ltd. and others (A.I.R. 1999 S.C. 1952).

¶127

 12. A submission made by him in the alternative is that once
 there is a scheme of compromise or arrangement sanctioned
 under section 391 of the said Act of 1956 , it is binding on
 all the concerned parties. On the basis of the scheme, this
 court can exercise power under section 482 of the said Code of
 quashing the proceedings. He placed reliance on the decision

¶128

- 15 -

¶129

of the Apex Court in the case of C.B.I. vs. Duncan Agro
 Industries, Calcutta (A.I.R. 1996 S.C. 2452). He submitted
 that in view of the law laid down by the Apex Court in the
 said decision, not only that the scheme amounts to
 compounding, as the debt covered by the concerned cheque
 ceases to be a legally enforceable debt, the continuation of
 the prosecution cannot be allowed as it will amount to abuse
 of process of law. He also invited my attention to the
 decision of the Apex court in the case of Hira Lal Hari Lal
 Bhagwati Vs. C.B.I. (A.I.R. 2003 S.C. 2545).

¶130

 13. The learned counsel also dealt with the contention raised
 by the original complainant on the basis of the certain
 Judgments dealing with the exercise of powers under section
 391 of the said Act of 1956. He submitted that sub-section 6
 of section 391 operates pending the proceeding for sanction of
 the scheme. He submitted that sub section 6 of section 391
 operates only at the interim stage and the same does not
 operate after the conclusion of the proceeding as a result of
 order of the court sanctioning arrangement or compromise. He
 pointed out that the intention of the legislature is to ensure
 that criminal proceedings are not stayed merely because
 proceeding under section 391 is pending for adjudication
 before the Company Court. Relying upon the decision of the
 Apex Court in case of State of Orissa vs. Debendra Nath Padhi
 (A.I.R. 2005 S.C. 359) and All Cargo Movers (I) Pvt.Ltd.

¶131

- 16 -

¶132

and others Vs. Dhanesh Badarmal Jain and another (A.I.R.
 2008 S.C. 247), he submitted that the Judgment of this court
 sanctioning the scheme under section 391 of the said Act of
 1956 can be looked into for considering the prayer for
 quashing the Criminal proceeding in a petition invoking
 section 482 of the said Code. He submitted that the Judgment
 sanctioning the scheme will be certainly relevant in view of
 section 40 of the Indian Evidence Act,1872.

¶133

 14. He placed reliance on the decision of the Apex Court in
 case of Kusum Ingots & Alloys Ltd.Vs. Pennar Peterson
 Securities Ltd. & Others [(2000) 2 S.C.C. 745]. He relied
 upon that part of the said decision where the effect of order
 passed under section 22-A of Sick Industrial Companies
 (Special Provisions) Act,1985 has been considered by the Apex
 Court.

¶134

 15. Adverting to the facts of the case, in the first group of
 petitions, he pointed out that as per the order of this court
 a meeting of the creditors was convened on 25th June 2005,
 which was chaired by an Officer appointed by this court. He
 pointed out that the scheme was approved by overwhelming
 majority in the meeting. He pointed out that in case of
 petitioners in seven petitions out of the first group, the
 cheques were deposited after the meeting was held. He
 submitted that the complaints in said seven cases were filed

¶135

- 17 -

¶136

on 16th September 2005. He submitted that as the scheme

¶137

 relates back to the appointed date i.e. 28th February 2005,
 the complaints filed after the said date were not
 maintainable. He pointed out that in one case, though the
 cheque was deposited before the date of meeting, notice period
 expired after the meeting. He pointed out that in the said
 case the shares have been accepted by the complainant in terms
 of the arrangement sanctioned by the court. He pointed out
 that in case of two petitions, cheques were dishonoured on 6th
 April 2005 and the appointed date of scheme is 28th February
 2005. He pointed out that even in two remaining cases, the
 cheques were dishonoured after the appointed date. Lastly, he
 submitted that the provisions of said Act of 1881 cannot
 override the provisions of the said Act of 1956.

¶138

 16. He also dealt with the submission made on behalf of the
 complainant on the basis of the element of mutuality in
 compounding. He submitted that though it may be true that the
 compounding of an offence involves an element of mutuality
 between the parties, once the scheme under section 391 is
 approved, element of mutuality must be presumed to exist as a
 matter of law and as a matter of legal inference. He pointed
 out that under section 138, a civil wrong is made an offence
 by a legal fiction and therefore, once the scheme is approved,
 an agreement not to prosecute will come into existence as a
 consequence of the arrangement or compromise under section 391

¶139

- 18 -

¶140

of the said Act of 1956 providing for repayment of the debt.
 He submitted that in substance the offence under section 138
 is an offence arising on account of non payment of legally
 enforceable debt. After a scheme is approved, the debt can be
 recovered only in the manner provided in the scheme.

¶141

 17. He concluded by submitting that allowing the complainants
 to prosecute a complaint under section 138 of the said Act of
 1881 will amount to allowing the unsecured creditors to back
 out from the scheme though they are bound by the scheme.

¶142

 18. In the first group of petitions (W.P.No.2770/2006 and
 other connected matters), Shri Mohite the learned counsel for
 the respondents (complainants) has made detailed submissions.
 His first submission is that in the facts of the case the
 scheme submitted is of an arrangement and not of compromise.
 He submitted that in any event, the compounding of an offence
 is not an unilateral but is a bilateral Act. He submitted
 that there is no provision under the said Act of 1956 which
 provides for compounding of the criminal proceeding without
 the consent of the complainant.

¶143

 19. He submitted that the section 391 of the said Act of 1956
 and the section 138 of the said Act of 1881 operate in
 altogether different fields. He placed reliance on the
 decision of the of this court in the case of Ion Exchange

¶144

- 19 -

¶145

Finance Ltd. Vs.Bombay Mills Company Pvt.Ltd. (101 (1)
 Bombay Law Reporter 150) as well as the decision of this court
 in case of State of Tamilnadu Vs. Uma Investment Pvt.Ltd.
 (1977 Company Cases Volume 47 page 242). Relying upon the
 decision of the Kerala High Court in case of Joes Anthony
 Kokkad Vs. Official Liquidator and another (1999 Company
 Cases Vol. 98 page 275), he submitted that the said Act of
 1881 being a special Act overrides the provisions of said Act
 of 1956. In this behalf, he relied upon a decision of this
 Court in case of Orkay Industries Vs. State of Maharashtra
 (2000 DoCh 484). He submitted that the arrangement under
 section 391 is essentially for revival of the company and
 therefore, the arrangement will not absolve the company from
 its penal liability.

¶146

 20. Coming to the facts of the case, Shri Mohite pointed out
 that even before the scheme was sanctioned by this court, the
 complaints subject matter of this group of petitions were
 already filed and the offences in these cases were already
 completed. He submitted that even if the scheme of compromise
 or arrangement is sanctioned, the original debt continues to
 exist and the scheme or arrangement provides only for modality
 of discharge of the debt. Relying upon the decision of the
 Apex Court in case of Dalmia Cement (Bharat) Ltd.Vs.

¶147

 M/s.Galaxy Traders & Agencies Ltd. (A.I.R. 1999 S.C. page
 1952), he submitted that the submission based on the scheme

¶148

- 20 -

¶149

under section 391 is nothing but an effort to defeat the
 objects of section 138 of the said Act of 1881 and submitted
 that the said effort is to be discouraged.

¶150

 21. He submitted that except for making an amendment to the
 prayer clause, there are no averments made in the petitions in
 the first group in support of the prayer for quashing under
 section 482 of the said Code. He submitted that there is
 nothing placed on record to show that the petitioners have
 complied with their obligations under the scheme. He
 submitted that apart from the fact that there is no automatic
 compounding, no case is made out for quashing as the
 petitioners have not complied with their obligations under the
 scheme. He also pointed out that section 392 of the said Act
 of 1946 provides for the consequences if the company fails to
 abide by the scheme.

¶151

 22. In Criminal Writ Petition No.710 of 2008 and other
 connected matters in the second group, Shri Marwadi the
 learned counsel for the petitioner submitted that the
 complainant was fully aware about his claim and was fully
 aware about the offer given by the first petitioner-company in
 the meeting of the creditors held on 1st June 2005. In
 W.P.No.710 of 2008, he pointed out that in fact in the said
 meeting the respondents/complainants were allowed to exercise
 options. He submitted that the offer for compromise was given

¶152

- 21 -

¶153

by the first petitioner which was accepted by the original
 complainant as the complainant has given implied consent by
 filling the ballot paper distributed in the meeting of the
 creditors. He invited my attention to the decision of the
 erstwhile Nagpur High Court in case Ramabai Bahadsingh Vs.
 Mt.Chandra Kumari Devi (AIR 1940 Nagpur 181). He submitted
 that where a document of compromise regarding an offence
 capable of being compounded without permission of the court is
 signed by the parties who have understood its contents, it is
 incompetent for any party to withdraw from it. He submitted
 that as the scheme or compromise under section 391 of the said
 Act of 1956 is binding on all unsecured creditors including
 the complainant, he cannot back out from the compromise. He
 submitted that in such a case even if any party to the
 compromise withdraws from it, subsequent withdrawal does not
 affect the compounding of an offence in as much as the
 compounding has an effect of acquittal of the accused.

¶154

 23. He also placed reliance on the decision of the Apex Court
 in the case of R. Rajeshwari Vs. H.N.Jagdish (2008 AIOL page
 307). He invited my attention to what is held by the Apex
 Court in paragraph 13 of its decision. He pointed out that
 the Apex Court held that while the settlement is arrived at in
 a complaint under section 138 of the said Act of 1881, it is
 not necessary to file any affidavit affirmed by the
 complainant or the accused and by reason of the authority

¶155

- 22 -

¶156

granted by the litigant in favour of his Advocate, he is
 empowered to enter into settlement on behalf of his client and
 such settlement will bind his client. He, therefore,
 submitted that the compromise or compounding of an offence
 need not be in the form of a writing signed by the
 complainant. He submitted that in any case when the
 complainant has consented to the scheme under section 391 of
 the said Act of 1956, it will certainly amount to compounding.
 He submitted that as the scheme binds all the concerned
 including the complainant, the offence under section 138 of
 the said Act of 1881 stands compounded. He also placed
 reliance on the decision of the Apex Court in the case of Tata
 Motors Ltd. Vs. Pharmaceutical Products of India Ltd. and
 another decided on 16th May 2008.

¶157

 24. The learned Senior Counsel Shri Khambata appeared on
 behalf of some of the Respondents in the second group of
 petitions. He invited my attention to the decision of the
 Full Bench of this court in case of Abasaheb Yadav Honmane Vs.
 State of Maharashtra (2008 (2) Mh.L.J. page 856). He
 submitted that compounding of offence cannot be inferred only
 on the basis of some settlement under which certain amount is
 agreed to be accepted by the complainant. He submitted that
 the concept of compounding is primarily based upon the
 mutuality between the parties. He submitted that an agreement
 not to prosecute the accused and knowledge of the actual

¶158

- 23 -

¶159

commission of crime are necessary ingredients of the
 compounding. He submitted that unless it is proved that the
 complainant has expressly desired to put an end to the
 prosecution, the compounding cannot be inferred.

¶160

 25. Shri Khambata, learned senior counsel invited my
 attention to the order dated 17th November 2005 passed by the
 learned company Judge. He submitted that on plain reading of
 the said order, it is obvious that it will not affect the
 pending criminal proceedings. He pointed out that a specific
 submission was made before the learned Company Judge that
 while exercising powers under sections 391, the Company Court
 has no jurisdiction to pass an order in respect of pending
 criminal actions. He pointed out that the learned Company
 Judge specifically accepted the contention that the criminal
 actions cannot be interdicted by the Company Court and to that
 extent, the relevant clause in the proposed scheme cannot be
 approved by the court. He also invited my attention to the
 order passed by the Appeal Bench on 13th April 2006. He
 submitted that the order of this court accepting the scheme by
 no stretch of imagination can be construed as compounding of
 an offence under section 138 of the said Act of 1881. He also
 placed reliance on certain other decisions including the
 decision of Madras High Court in case of M/s.Shree Maruthi
 Yarns, represented by its partner K.Murugesan & others vs.
 M/s.Sri Ramkrishna Mills (Coimbatore) Limited, represented by

¶161

- 24 -

¶162

its Accounts Officer/Power Agent R.Manoharan.

¶163

 26. I have also heard Shri Satyanarayanan appearing for some
 of the complainants. Reliance has been placed on the decision
 of this court in the case of G.E. Capital Services India Vs.
 Sharp Industries Ltd. (2005 (1) Bombay Cases Reporter page
 13). The said decision deals with the provisions of
 sub-section 6 of section 391 of the said Act of 1956. The
 learned Judge of this court held that the term proceeding used
 in sub-section 6 of section 391 does not include within its
 scope the criminal proceeding against the company and its
 directors. Reliance is also placed on the decision of the
 Apex Court in case of Anil Hada Vs. Indian Acrylic Ltd. (Vol
 99 Company Cases 36).

¶164

CONSIDERATION OF SUBMISSIONS ON COMPOUNDING

¶165

 27. I have carefully considered the submissions made by the
 learned counsel for the parties. It will be necessary to
 consider section 391 of the said Act of 1956. Section 391
 forms part of Chapter V which deals with Arbitrations,
 Compromises, Arrangements and Reconstructions. Section 391
 deals with the Power to compromise or make arrangement with
 creditors and members. Sub-section 1 of section 391 refers to
 proposal of compromise or arrangement between the company and
 its creditors or any class of them or between the company and

¶166

- 25 -

¶167

its members or any class of them. In the cases in hand we are
 really concerned with clause (a) of sub-section 1. Clause (a)
 deals with compromise between the company and its creditors or
 any class of them.

¶168

 28. Sub section 1 of section 391 provides that on application
 of the company or of any creditor or member of the company or
 in the case of a company which is being wound up by the
 liquidator, the court may order a meeting of the creditors or
 class of creditors as the case may be to be called and
 conducted in such manner as the court may provide.
 Sub-section 2 provides that if a majority in number
 representing three-fourths in value of the creditors or class
 of creditors, as the case may be, present and voting, either
 in person or by proxies, at the meeting agree to any
 compromise or arrangement, such compromise or arrangement
 shall, if sanctioned by the court, be binding on all the
 creditors, all the creditors of the class, all members, or all
 the members of the class, as the case may be and also on the
 company. Sub-section 3 provides that the order made of
 sanction under sub-section 2 shall have no effect until the
 certified copy of the order is filed with the Registrar.
 Sub-section 6 provides that the court may, at any time after
 an application contemplated by sub-section 1 of section 391
 has been made to it, stay the commencement or continuation of
 suit or proceeding against the company on such terms as the

¶169

- 26 -

¶170

court thinks fit until the application is finally disposed of.
 So the sub section 6 incorporates power to grant interim
 relief of stay to commencement and/or continuation of any suit
 or proceeding against the company until the application under
 sub-section 1 of the section 391 is finally decided.

¶171

 29. Section 392 of the said Act of 1956 may have some
 relevance. Sub section 2 of the said section gives power to
 the court to make an order of winding up of the company if the
 court is satisfied that compromise or arrangement sanctioned
 under section 391 cannot be worked satisfactorily with or
 without modification. Clause (b) of sub section 1 of section
 392 gives power to the court to make such modification in the
 compromise or arrangement as it may consider necessary for the
 proper working of compromise or arrangement.

¶172

 30. The argument which is advanced by the petitioners is
 based on the legal effect of the order of sanction under
 sub-section 2 of section 391 of the said Act of 1956. The
 argument is based on legal effect of the binding nature of the
 scheme of compromise or arrangement once it is sanctioned by
 the court under sub-section 2 of section 391.

¶173

 31. The question to be decided is whether the sanction of the
 scheme under section 391 ipso-facto amounts to compounding of
 the pending complaint under section 138 of the said Act.

¶174

- 27 -

¶175

Therefore, what is required to be considered is the legal
 effect of the order sanctioning the scheme in the light of the
 concept of the compounding of an offence. Therefore, before
 dealing with the submissions made on the legal effect of the
 sanction of the scheme, it will be necessary to ascertain the
 true meaning of the concept of the compounding of an offence.

¶176

 32. In this behalf it will be necessary to refer to the
 decision of the Full Bench of this Court in the case of
 Abasaheb Honmane (supra). While dealing with the scope of
 powers of this court under section 482 of the said Code, the
 Full Bench had an occasion to consider the legal meaning of
 expression "compounding". The Full Bench relied upon the
 meaning of the expression compounding in the Law Lexicon of P.
 Ramanatha Aiyer, 1997 Edition as well as in Black’s Law
 Dictionary, 6th Edition. The relevant portion of the Judgment

¶177

"The expression "compounding has been explained in Law
Lexicon by Ramanatha Aiyer (General Editor Justice
Y.V.Chandrachud), 1997 Edition as under :

¶178

Compounding: Arranging, coming to terms; conconde for
money arranging with the creditor to his satisfaction".

¶179

The Black’s Law Dictionary, Sixth Edition, defines

¶180

- 28 -

¶181

"compound" as under :

¶182

Compound : To compromise, to effect a composition with a
creditor to obtain discharge from a debt by the payment
of a smaller sum. To put together as elements,
ingredients, or parts, to form a whole, to combine, to
unite. To form or make up as a composite product by
combining different elements, ingredients, or parst, as
to combine a medicine.

¶183

Compounding crime : Compounding crime consists of the
receipt of some property or other consideration in return
for an agreement not to prosecute or inform on one who
has committed a crime. There are three elements to this
offence at common law, and under the typical compounding
statute :

¶184

(1) the agreement not to prosecute; (2) knowledge of the actual commission of a crime; and (3) the receipt of some consideration .

¶185

(Emphasis added)

¶186

33. In paragraph no.6.1 the Full Bench has held thus :

¶187

"6.1 The concept of compounding is primarily based upon mutuality between the parties. Mutual desire to put an

¶188

- 29 -

¶189

end to prosecution in certain offences may be settled by
action of the parties while in certain other offences it
has to be compounded only with the permission of the
Court..."

¶190

(Emphasis added)

¶191

 Thus, there appears to be a difference between a mere
 compromise and an action of compounding a crime. An agreement
 between the complaint and accused under which the complainant
 agrees to receive some amount or receive some consideration by
 itself does not amount to the compounding of a crime. An
 agreement to receive consideration or an agreement recording
 receipt of consideration by way of settlement of the dispute
 will amount to compounding of an offence provided it can be
 shown that there is a knowledge of the actual commission of
 offence and there is an agreement not to prosecute. Reliance
 was sought to be placed in this behalf on the decision of the
 Apex Court in the case of C.B.I. vs. Duncan Agro Industries
 Ltd. Calcutta (supra). Reliance was sought to be placed on
 what is observed by the Apex Court in paragraph 29 of the said
 decision which reads thus :

¶192

"29. In the facts of the case, it appears to us that there is enough justification for the High Court to hold that the case was basically a matter of civil dispute. the Banks had already filed suits for recovery of dues of the Banks

¶193

- 30 -

¶194

on account of credit facility and the said suits have
been compromised on receiving the payments from the
concerned Companies. Even if an offence of cheating is
prima facie constituted, such offence is a compoundable
offence and compromise decrees passed in the suits
instituted by Banks, for all intents and purposes, amount
to compounding of offence of cheating..."

¶195

 In the case before the Apex Court, in a civil suit between the
 bank and the borrower accused, consent terms were filed and a
 compromise decree was passed. The said compromise decree was
 treated by the Apex Court as amounting to compounding of
 offence of cheating under section 420 of the Indian Penal
 Code. This court had an occasion to deal with the said
 submission in a Judgment dated 20th October 2005 while
 disposing of the Criminal Writ Petition No.1339 of 2005
 (Narendra L. Jain vs. State of Maharashtra and another and
 other connected matters). This court considered the decision
 of the Apex Court in case of Central Bureau of Investigation
 (supra) and in particular what is observed by the Apex Court
 in paragraph 28 and 29 thereof. This court held that the said
 decision of the Apex Court cannot be read as laying down a
 proposition of law that in every case where there is a
 compromise in a money suit instituted by the bank against the
 borrower, the criminal prosecution against the borrower cannot
 be proceeded with. The aforesaid decision of the Apex Court

¶196

- 31 -

¶197

does not lay down that a compromise in a civil suit amounts to
 compounding of an offence in every case. The observation of
 the Apex Court referred to above is in the facts of the case
 before it.

¶198

 34. By a compromise in a civil suit or a civil proceeding
 between the complainant and the accused, the complainant may
 agree to accept certain amount or may agree to adjust the
 amount payable by the accused. The said compromise recorded
 in the civil proceeding will not amount to compounding of the
 pending prosecution unless an agreement on the part of the
 complainant not to prosecute the accused is incorporated in
 the compromise or is reflected from the compromise. Reliance
 was sought to be placed on the decision of this court dated
 8th September 2005 in case of M/s.Usha Badri Poonawala Vs.
 K.Kurian Babu in criminal Writ Petition No.1357 of 2005. It
 must be noted here that in the said case this court found that
 the memorandum of understanding was entered into by and
 between the complainant and accused pending a complaint under
 section 138 of the said Act of 1881 under which the
 complainant accepted certain payments and agreed to withdraw
 the complaint by making a suitable application. This was a
 case where after considering the admitted facts this court
 exercised powers under section 482 of the said Code and
 quashed the complaint. Therefore, this decision is of no help
 to the petitioners.

¶199

- 32 -

¶200

35. Reliance was sought to be placed on the decision of the
 Apex Court in the case of Hira Lal Hari Lal Bhagwati Vs.
 Central Bureau of Investigation (A.I.R. 2003 S.C. page
 2545). The Apex Court dealt with the Appeals arising out of a
 decision of Delhi High Court in the petitions filed by the
 Appellants before the Apex Court for quashing the F.I.R and
 the proceedings initiated on the basis of the F.I.R. This was
 a case where the offence alleged was under section 120 r/w
 section 420 of the Indian Penal Code. The Appellant was a
 Director of Gujrat Cancer Research Institute. The allegation
 against him was that by concealment of facts, he cheated the
 Government of India and obtained a customs duty exemption
 certificate in respect of certain machineries. Considering
 the provisions of Kar Vivad Samadhan Scheme 1998 which
 provided for compounding of offence on the basis of
 certificate obtained under the said scheme, and considering
 the fact that the disputed demand was settled by the
 authority, the Apex Court held that the criminal liability
 also stands compounded due to said settlement. Again this
 decision will not help the accused petitioners as the said
 decision is rendered dealing with the provisions of a scheme
 which has a force of a statute. Shri Desai also placed
 reliance on the decision of Allahabad High Court in case of
 Naresh Chandra Jauhari Vs. State of Uttar Pradesh wherein the
 learned Single Judge of Allahabad High Court held that it is

¶201

- 33 -

¶202

not necessary that the composition of offence should be in
 writing and it may be oral. In paragraph 14, the Allahabad
 High Court observed that if both the parties agreed that there
 is a compromise, it is not necessary that the compromise
 should be in writing. Thus the Allahabad High Court also held
 that both the parties have to agree for compounding of an
 offence.

¶203

 36. Reliance has been placed in this behalf on certain other
 decisions by Shri Marwadi, learned counsel for the petitioners
 appearing in Criminal W.P.No.710 of 2008 and other connected
 matters. He placed reliance on the decision of erstwhile
 Nagpur High Court in case of Ramabai (supra). This was a case
 where offence alleged was punishable under section 500 of the
 Indian Penal Code wherein the accused alleged that the case
 was compromised and an application in writing was made in the
 court for passing an order of acquittal. In the said
 application it was stated that the complainant and the accused
 had compromised the case out of the court and that the
 complainant was praying that the accused be acquitted and
 alleged defamatory letters be returned to the accused. There
 was some controversy as to the person to whom the impugned
 documents were to be returned. The learned Magistrate after
 recording evidence observed that there remains a doubt whether
 the compromise was really arrived at outside the court or not
 and therefore, it was not fair to accept that the case was

¶204

- 34 -

¶205

compounded. The learned Judge of the erstwhile Nagpur High
 Court observed that the real issue before the Magistrate was
 whether or not the case was compounded. The best evidence was
 the document a copy of which was produced in the court bearing
 the signature of the complainant and the counsel of the
 accused. The learned Judge held that if there was in fact a
 compromise that would oust the jurisdiction of the Magistrate
 for the reason that the offence complained of was capable of
 being compounded without the consent of the court. The
 submission made by Shri Marwadi on the basis of the said
 decision is that in the case in hand it was the duty of the
 learned Magistrate to ascertain and adjudicate whether there
 was a compromise. It must be stated here that the first issue
 to be decided is whether the sanction of the scheme of
 arrangement or compromise itself amounts to compounding of an
 offence under section 138 of the said Act. For deciding the
 said controversy the said decision of the Nagpur High Court
 may not be useful.

¶206

 37. Shri Marwadi also relied upon the decision of the Apex
 Court in case of R. Rajeshwari H.N.Jagadish (2008 AIOL 307).
 The Apex court has taken a view that the settlement could be
 arrived at by and between the parties and it is not necessary
 to file any affidavit affirmed by the complainant or by the
 accused. The contention based on this decision is that it is
 not necessary that there should be a document in writing or an

¶207

- 35 -

¶208

affidavit by the complainant recording his desire to compound
 the offence and the compounding can be inferred from the
 settlement between the parties. The said case will not help
 the petitioners-accused. In the case before the Apex court,
 the issue was whether an Advocate who was duly authorised
 could have agreed for settlement on behalf of his client.

¶209

Now it will be necessary to turn to the submissions made
 by the learned counsel appearing for the petitioners on the
 effect of order passed under section 391 of the said Act of
 1956. Shri Desai, learned counsel appearing for the
 petitioners has placed reliance on the decision of the Apex
 Court in the case of S.K.Gupta and another (supra). Reliance
 has been placed by the learned counsel on what is held by the
 Apex Court in paragraph 12 of the said decision which reads

¶210

".Section 391 envisages a compromise or arrangement
being proposed for consideration by members and/or
creditors of a company liable to be wound up under the
Companies Act, 1956. Compromise or arrangement has to
be between creditors and/or members of the company and
the company, as the case may be. It was always open to
the company to offer a compromise to any of the
creditors or enter into arrangement with each of the
members. The scheme in this case is essentially a

¶211

- 36 -

¶212

compromise between the company and its unsecured
creditors. The scheme when sanctioned does not merely

¶213

operate as an agreement between the parties but has
statutory force and is binding not only on the company
but even dissenting creditors or members, as the case
may be. The effect of the sanctioned scheme is "to
supply by recourse to the procedure thereby prescribed
the absence of that individual agreement by every member
of the class to be bound by the scheme which would
otherwise be necessary to give it validity" [see
J.K.(Bombay) Pvt. Ltd. v. New Kaiser-i-Hind Spg. &
Wvg. Co. Ltd]. Further section 391(1) itself, by a
specific and positive provision, prescribes who can move
an application under it. Only the creditor or member of
that company or a liquidator in the case of a company
being wound up is entitled to move an application
proposing the case of a compromise or arrangement. By
necessary implication any one other than those specified
in the section would not be entitled to move such an
application. "

¶214

(Emphasis added)

¶215

 The view taken by the Apex Court is that the scheme under
 section 391 which envisages a compromise or arrangement binds
 not only the company but even dissenting creditors or members
 as the case may be. Reliance was also placed on a decision of

¶216

- 37 -

¶217

Lahore High Court in the case of Hargopal Vs. People’s Bank
 of Northern India Ltd dated 07th March 1934 in which it is
 held that an arrangement with creditors approved by an order
 made under section 153 of the Indian Companies Act, 1913 is a
 judgment in rem and can be pleaded against creditor seeking to
 enforce his claim against the company. Reliance was also
 placed on a decision of Calcutta High Court in the case of
 Jaladhi Chandra v. Dharendra (41 C.W.N 1272). The Calcutta
 High Court held that a depositor of a Company who had
 instituted a suit may obtain a decree between the date of the
 meeting in which the scheme is approved and the date when such
 a scheme is sanctioned by the Court under section 153 of the
 said Act of 1913. It was held that even in execution of such
 a decree, the company can point out that the decree holder was
 not entitled to execute the said decree as he was bound by the
 said scheme which is approved under section 153 of the said
 Act of 1913.

¶218

 39.A submission on the basis of the decision of the Apex
 Court in the case of Miheer Mafatlal (supra) is that fairness
 of the scheme is always considered by the Company Court at the
 time of sanctioning the scheme. Reliance was placed on what
 is observed by the Apex Court in paragraph 28A of the said
 decision. The Apex Court held that the Court exercising
 powers under section 391 of the said Act of 1956 cannot act as
 a Court of appeal as the arrangement or compromise between the

¶219

- 38 -

¶220

company and creditors or its members shows the commercial
 wisdom of the concerned parties. The Apex Court quoted with
 approval the following portion of a decision of Lindley, L.J.
 of Chancery Division: (copy from page 12 of written arguments
 bracketed portion)

¶221

 ."... What the court has to do is to see, first of all,
that the provisions of that statute have been complied
with; and, secondly, that the minority has been acting
bona fide. The court also has to see that the minority
is not being overridden by a majority having interests of
its own clashing with those of the minority whom they
seek to coerce. Further than that, the court has to look
at the scheme and see whether it is one as to which
persons acting honestly, and viewing the scheme laid
before them in the interests of those whom they
represent, take a view which can reasonable be taken by
businessmen. The court must look at the scheme, and see
whether the Act has been complied with, whether the
majority are acting bona fide, and whether they are
coercing the minority in order to promote interests

¶222

adverse to those of the class whom they purport to
represent and then see whether the scheme is a reasonable
one or whether there is any reasonable objection to it,
or such objection to it as that any reasonable man might
say that he could not approve it."

¶223

- 39 -

¶224

While dealing with this submission it is also necessary to
 refer to the decision of the Apex Court in the case of
 M/s.J.K.Bombay Pvt Ltd (supra). It will be necessary to refer
 to paragraph 35 of the said decision relied upon by Shri
 Desai, learned counsel appearing for the petitioners which
 reads thus:

¶225

."The principle is that a scheme sanctioned by the
court does not operate as a mere agreement between the
parties; it becomes binding on the company, the
creditors and the shareholders and has statutory force,
and therefore, the joint-debtor could not invoke the
principle of accord and satisfaction. By virtue of the

¶226

provisions of section 391 of the Act, a scheme is
statutorily binding even on creditors and shareholders
who dissented from or opposed to its being sanctioned.
It has statutory force in that sense and therefore
cannot be altered except with the sanction of the Court
even if the shareholders and the creditors acquiesce in
such alteration. (cf.1938-4 All ER 337) (supra). The
effect of the scheme is "to supply by recourse to the
procedure thereby prescribed the absence of that
individual agreement by every member of the class to be
bound by the scheme which would otherwise be necessary
to give it validity". (Palmer’s Company Law, 20th

¶227

- 40 -

¶228

Ed.664). Sub-section (2) of Section 391 of the Act
allows the decision of the majority prescribed therein
to bind the minority of creditors unless such variation
is sanctioned by the court. The effect, therefore, of a
scheme between a company and its creditors is that so
long as it is carried out by the company by regular
payment in terms of the scheme a creditor who is bound
by it cannot maintain a winding up petition. But if the
company commits a default, there is a debt presently due
by the company and a petition for winding up can be
sustained at the instance of a creditor. The scheme,
however, does not have the effect of creating a new
debt; it simply makes the original debt payable in

¶229

the manner and to the extent provided in the scheme".

¶230

(Emphasis supplied)

¶231

What is important is that in case of a creditor of the

¶232

 company, the scheme of arrangement or compromise will be
 certainly binding on him once there is a sanction under
 section 391 of the said Act of 1956 though the concerned
 creditor may have opposed the scheme in the meeting. However,
 the Apex Court further held that so long as the scheme between
 the company and creditors is carried out by company by regular
 payment in terms of the scheme, a creditor cannot maintain
 winding up petition, but if the company commits default there
 is a debt presently due by the company and a petition for

¶233

- 41 -

¶234

winding up can be sustained at the instance of creditor. The
 Apex Court categorically held that the scheme does not have
 effect of creating a new debt and it simply makes the original
 debt payable in the manner and to the extent provided in the
 scheme. Thus, sanction of the scheme under section 391 does
 not have effect of extinguishment of the debt and it only
 curtails the right of a creditor to recover the debt in the
 sense that the debt will be payable only in accordance with
 the sanctioned scheme.

¶235

 40.An action under section 138 of the said Act of 1881
 contemplates the existence of a legally enforceable debt. The
 effect of sanction of the scheme is certainly not of the
 extinguishment of the debt payable by the company. The effect
 of the binding nature of the scheme is that the civil
 proceedings for recovery of debts may not proceed and it will
 not be open for a creditor to recover the debt in a manner
 which is contrary to the sanctioned scheme. After the
 sanction of the scheme, the debt becomes payable in the manner
 and to the extent provided in the scheme. The debt does not
 cease to be a legally enforceable debt merely because a scheme
 under section 391 is sanctioned. The company becomes liable
 to discharge the debt in accordance with the sanctioned scheme
 of arrangement or compromise.

¶236

 41. My attention was invited to the relevant clauses in the

¶237

- 42 -

¶238

scheme which deal with the pending proceedings against the

¶239

 company. On this aspect it will be necessary to go the
 decision of this Court in the case of Uma Investments Pvt Ltd
 (supra). This Court held that section 391 of the said Act of
 1956 is not meant for freezing criminal proceedings. Further
 it is held that criminal proceedings cannot be held over and
 avoided or criminal process cannot evaded by resorting to the
 scheme of compromise or arrangement under section 391. What
 is observed by the learned single Judge in the said decision
 reads thus:

¶240

".... 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."

¶241

(Emphasis added)

¶242

 42.On plain reading of the schemes which are subject matter
 of these three group of petitions, it is impossible to accept
 that the relevant clauses in the scheme have the effect of

¶243

- 43 -

¶244

automatic termination of the criminal proceedings pending
 against the company. Sanction of the scheme of arrangement or
 compromise under section 391 of the said Act of 1946 does not
 have effect of automatically terminating the criminal
 proceedings pending against the company under section 138 of
 the said Act of 1881. Shri Mohite appearing for the
 complainants in the first group has placed reliance on a
 decision of the Apex Court in the case of Pankaj Mehra v.
 State of Maharashtra [(2000) 2 Supreme Court Cases 756]. The
 Apex Court in the said decision has considered the provisions
 of section 138 of the said Act of 1881 in the context of the
 provisions of the Companies Act relating to winding up. What
 is important is the observations in paragraphs 30 and 31 of
the said decision which read thus:

¶245

"30.We therefore feel that the legislature has
thoughtfully used the word "fails" instead of other
expressions as failure can be due to a variety of
reasons including disability to pay. But the offence
would be complete when the drawer "fails" to make
payment within the stipulated time, whatever be the
cause for such failure.

¶246

31.The drawer of the cheque can have different
explanations for the failure to pay the amount covered
by the cheque. But no such explanations would be

¶247

- 44 -

¶248

sufficient to extricate him from the tentacles of the
offence contemplated in the section. Perhaps some kind
of explanations would be sufficient to alleviate the
rigour of the offence which may be useful to mitigate
the quantum of sentence to be imposed. But that is no
ground for consideration at this stage."

¶249

 43.The counsel appearing for both the sides have relied
 upon certain observations made by the Apex Court in the case
 of M/s.Dalmia Cement (Bharat) Ltd v. M/s.Galaxy Traders and
 Agencies Ltd and others (AIR 2001 Supreme Court 676). The
 Apex Court had an occasion to consider the entire scheme of
 section 138 of the said Act of 1881 and other connected
 sections. In paragraphs 3 and 4 the Apex Court has observed
 as under:

¶250

"3.The Act was enacted and section 138 thereof
incorporated with a specified object of making a special
provision by incorporating a strict liability so far as
the cheque, a negotiable instrument, is concerned. The
law relating to negotiable instrument is the law of
commercial world legislated to facilitate the activities
in trade and commerce kaing provision of giving sanctity
to the instruments of credit which could be deemed to be
convertible into money and easily passable from one

¶251

- 45 -

¶252

person to another. In the absence of such instruments,
including a cheque, the trade and commerce activities,
in the present day would, are likely to be adversely
affected as it is impracticable for the trading
community to carry on with it the bulk of currency in
force. The negotiable instruments are in fact the
instruments of credit being convertible on account of
legality of being negotiated and are easily passable
from one hand to another. To achieve the objectives of
the Act, the legislature has, in its wisdom thought it
proper to make such provisions in the Act for conferring
such privileges to the mercantile instruments
contemplated under it and provide special penalties and
procedure in case the obligations under the instruments
are not discharged. The laws relating to the Act are,
therefore, required to be interpreted in the light of
the objects intended to be achieved by it despite there
being deviations from the general law and the procedure
provided for the redressal of the grievances to the
litigants. Efforts to defeat the objectives of law by
resorting to innovative measures and methods are to be
discouraged, least it may affect the commercial and
mercantile activities in a smooth and healthy manner,
ultimately affecting the economy of the country.

¶253

4.Section 138 of the Act makes a civil transaction

¶254

- 46 -

¶255

to be an offence by fiction of law. Where any cheque
drawn by a person on an account maintained by him with a
banker for payment of any amount of money to another
person is returned by the bank unpaid either because of
the amount or money standing to the credit of that
person being insufficient to honour the cheque or that
it exceeds the amount arranged to be paid from that
account, such person subject to the other conditions,
shall be deemed to have committed an offence under the
section and be punished for a term which may extend to
one year or with fine which may extend to twice the
amount of cheque or with both....

¶256

 44.In another decision of the Apex Court in the case of
 NEPC Micon Ltd and others (supra) in paragraph 15 thereof the
 Apex Court has observed thus:

¶257

"15.In view of the aforesaid discussion we are of the
opinion that even though section 138 is a penal statute,
it is the duty of the Court to interpret it consistent
with the legislative intent and purpose so as to
suppress the mischief and advance the remedy. As stated
above, section 138 of the Act has created a contractual
breach as an offence and the legislative purpose is to
promote efficacy of banking and ensuring that in
commercial or contractual transactions cheques are not

¶258

- 47 -

¶259

dishonoured and credibility in transacting business
through cheques is maintained. The above interpretation
would be in accordance with the principle of
interpretation quoted above ‘brust away the cobweb
varnish, and show the transactions in their true light’
(Wilmot C.J.) or (by Maxwell) "to carry out effectively
the beach of the statute, it must be so construed as to
defeat all attempts to do, or avoid doing, to an
indirect or circuitous manner that it has prohibited."
Hence, when the cheque is returned by a bank with an
endorsement ‘account closed’, it would amount to
returning the cheque unpaid because "the amount of money
standing to the credit of that account is insufficient
to honour the cheque" as envisaged in section 138 of the
Act."

¶260

(Emphasis added)

¶261

45. Some submissions have been made in one of the three

¶262

 groups by contending that the complainant supported the scheme
 in the meeting of the creditors and shareholders convened in
 terms of order of this Court. It must be noted here that what
 is discussed in the meeting is whether the scheme of
 arrangement or compromise should be approved or adopted. When
 a creditor or unsecured creditor attends such meeting, he
 knows that if his opposition to the scheme is not successful
 and if majority supports the scheme, the same is bound to go
 through. A creditor who finds himself in minority may support

¶263

- 48 -

¶264

the scheme with the hope of recovering his dues. As stated
 earlier, the sanction of the scheme does not amount to
 extinguishment of legally recoverable debt of the company.
 The scheme lays down the mode and the manner in which and the
 form in which the debt is to be repaid by the company so that
 the company can be revived. Therefore, the action of a
 complainant in a complaint under section 138 of the said Act
 of 1881 of supporting the scheme in the meeting convened under
 sub section 1 of section 391 does not amount to an agreement
 on his part not to prosecute the company under section 138.
 Existence of such agreement can neither be presumed nor be
 inferred.

¶265

 46. It will be also necessary to refer to the other
 provisions of the said Act of 1956. What is important to be
 seen is section 392 of the said Act of 1956. Clause (b) of
 sub-section 1 of section 392 gives power to the Court to make
 such modifications in the compromise or arrangement as it may
 consider necessary for the proper working of the compromise or
 arrangement. Sub section 2 of the said section provides that
 if a compromise or an arrangement sanctioned under section 391
 cannot be worked satisfactorily with or without modifications
 it may either on its motion or on application of any person
 interested in the affairs of the company make an order winding
 up the company and such order will be treated by legal fiction
 as an order under section 433 of the Companies Act, 1956.

¶266

- 49 -

¶267

Even after sanction of the scheme under section 391, the
 scheme may not be implemented and ultimately the result will
 be winding up of the company under sub-section 2 of section
 392. The submission of Shri Desai, learned counsel appearing
 for the petitioners was that even if order is passed under sub
 section 2 of section 392, it is of no consequence. The said
 argument cannot be accepted for the reason that in case the
 company is would up, in so far as payment to the unsecured
 creditors is concerned, it will be governed by the relevant
 provisions which deal with winding up of the company. Once
 there is a winding up order passed under sub section 2 of
 section 392, unsecured creditors will have to follow the
 procedure of lodging the claim with the Official Liquidator
 and they may not get the amounts as provided under the scheme
 of arrangement or compromise under section 391. This is one
 more ground on which the argument that scheme has the effect
 of compounding of an offence under section 138 of the said Act
 of 1881 cannot be accepted.

¶268

 47.The Full Bench of this Court has held that an element of
 mutuality is an essential ingredient of the action of the
 compounding an offence. When doctrine of mutuality is
 applicable, it is obvious that the action of compounding has
 to be a bilateral act and not an unilateral act. By sanction
 of a scheme under section 391 of the said Act of 1956, an
 agreement on the part of the complainant not to prosecute

¶269

- 50 -

¶270

cannot be presumed or inferred. Even if the complainant has
 voted in favour of the scheme in the meeting, the said consent
 will not amount to compounding.

¶271

 48.Thus, the conclusion which can be drawn from the
 aforesaid discussion is that a scheme of compromise or
 arrangement sanctioned by the Company Court under section 391
 of the said Act of 1956 by itself will not amount to automatic
 compounding of an offence under section 138 and/or section 141
 of the said Act of 1881.

¶272

CONSIDERATION OF SUBMISSIONS ON EXERCISE OF POWERS UNDER
SECTION 482 OF THE SAID CODE

¶273

 49.The other limb of submission is that once there is a
 scheme approved by the Court under section 391, the company
 can never pay any amount to a creditor contrary to what is
 provided in the scheme. The submission is that the scheme
 binds all the creditors including the complainant, and
 therefore, it will be unjust to compel the directors of the
 company and the company to face a prosecution under section
 138 read with section 141 of the said Act of 1881. Shri Desai
 appearing for the petitioners has placed reliance on that part
 of the decision of the Apex Court in the case of Kusum Ignots
 (supra) which deals with a case where cheque is issued after
 passing of an order under section 22A of the SICA. Reliance

¶274

- 51 -

¶275

was also placed on the decision of this Court in the case of
 Poonawala (supra). It is not axiomatic that in every case
 where the scheme is sanctioned under section 391, this Court
 is bound to exercise powers under section 482 of the said
 Code. It will involve consideration of several factors.
 Whether the complainant has supported the scheme in the
 meeting and whether the company has acted upon the scheme by
 complying with all its obligations under the scheme in favour
 of the complainant are some of the factors which this Court
 may consider while exercising powers under section 482 of the
 said Code. The fact that the cheque is deposited by the
 complainant after a meeting is held as provided in sub-section
 1 of section 391 which he has attended is also a factor to be
 considered. If the cheque is deposited by the complainant
 after the scheme is sanctioned, this aspect will have to be
 considered by this court while deciding a petition under
 section 482 of the said Code filed for quashing a complaint.
 Another factor to be considered will be what is the nature of
 compromise or arrangement arrived at under the scheme.
 Pendency of the proceedings either under sub section 2 of
 section 392 of the said Act of 1956 will be again a relevant
 factor for consideration when this Court exercises
 jurisdiction under section 482 of the said Code. It will
 involve consideration of several factors such as conduct of
 the company and the complainant after the scheme is
 sanctioned. This obviously is not an exhaustive list of

¶276

- 52 -

¶277

factors which are required to be considered. These factors
 have been set out only by way of illustration. Therefore each

¶278

 case will have to be considered in the light of its peculiar
 facts while this Court considers the prayer for exercise power
 under section 482 of the said Code.

¶279

 50.The Criminal Writ Petition No.2770 of 2006 and other
 connected Writ Petitions in the first group, were originally
 filed for challenging the order dated 19th September 2006
 passed by the learned Magistrate by which he declined to
 record the compounding of the offences. By amending only the
 prayer clause, a prayer for quashing has been added. The
 learned counsel appearing for the petitioners in the said
 group has placed reliance on certain factual details annexed
 to the written submissions. Inviting my attention to the
 relevant dates in each case, a submission was made that though
 the scheme is sanctioned on 16th September 2005, it will
 relate back to the appointed date i.e 28th February 2005 on
 which date the offence in only one of the cases was complete.
 However, perusal of the chart annexed to the written
 submissions shows that the offence in two cases was completed
 before the appointed date. Infact complaints were filed
 almost in all cases before the date on which the scheme was
 sanctioned. Certain particulars are sought to be given in the
 annexures to the written submissions for showing that in terms
 of the scheme sanctioned by this Court, allotment letters of

¶280

- 53 -

¶281

shares were issued to the complainants (first respondents) in
 the first group of writ petitions. It was sought to be
 contended that some of the complainants have accepted the
 letters of allotment. It must be stated here that apart from
 the annexures to the written submissions, there is no factual
 foundation in the petitions in support of the prayer for
 quashing under section 482 of the said Code. The contention
 of the petitioners is that in certain cases they have complied
 with the requirements of the scheme by issuing allotment
 letters and in certain cases allotment letters have been
 accepted and acted upon. The first respondents complainants
 had no opportunity to meet the factual aspects which do not
 find place in the petitions. Therefore only on the basis of
 the amendment carried out to the prayer clause, the prayer for
 quashing cannot be considered in absence of material averments
 in the petitions. If the said prayer is to be considered only
 on the basis of the certain annexures to the written
 submissions, the same may cause prejudice to the first
 respondent-complainant and therefore, I am not considering the
 said prayer for quashing on merits. However, it must be
 stated that notwithstanding this judgment it will be open for
 the petitioners to file separate petitions invoking the power
 of this Court under section 482 of the said Code.

¶282

 51Now it will be necessary to turn to the second group of
 Writ Petitions i.e. Writ Petition Nos.710 of 2008 to 719 of

¶283

- 54 -

¶284

2008. The substantive prayer made in these petitions is again
 for quashing the order dated 29th January 2008 passed by the
 learned Magistrate. It is prayed that the applications made
 by the petitioners for compounding the offences may be
 allowed. Incidentally, there are averments made in the
 petitions regarding options provided under the sanctioned
 scheme and alleged exercise of second option by the 1st
 respondent. However, there is no substantive prayer in these
 petitions for quashing the complaints in exercise of power
 under section 482 of the said Code. There are some averments
 made on the basis of the alleged exercise of an option by the
 1st respondent during the course of the meeting. But in
 absence of specific prayer made, the request for quashing
 under section 482 of the said Code cannot be considered and
 the petitioners will have to file separate petitions in that
 behalf.

¶285

 52.Now turning to the third group of petitions starting
 from Writ Petition Nos.1424 of 2008, the substantive prayer
 made therein is for allowing compounding of the offence.
 Perusal of paragraph 9 of the petition shows that the case of
 the petitioner is that it was incumbent upon the learned
 Magistrate to allow compounding and record

¶286

 dismissal/termination of the complaints on application of the
 petitioners on the basis of orders of this court. The
 averments made in the petitions show that the petitions

¶287

- 55 -

¶288

proceed on the footing that the relevant clause of the scheme
 which provides for dismissal/termination of proceedings is
 also applicable to the pending complaints under section 138 of
 the said Act of 1881. Therefore, the prayer simplicitor under
 section 482 of quashing the complaint on the ground of the
 sanction of the scheme cannot be considered in these petitions
 and the petitioners will have to file separate petitions in
 that behalf so that the 1st respondent complainant gets an
 appropriate opportunity to deal with the prayer for quashing
 under section 482 of the said Code. In this group also it
 must be observed that on the basis of leave granted to amend
 by order dated 16th July 2008, an amendment is carried out
 only to the prayer clause. Hence, in all the petitions in
 these groups, a liberty deserves to be granted to file fresh
 petitions for quashing under section 482 of the said Code on
 the basis of the scheme sanctioned by this Court.

¶289

CONCLUSIONS

¶290

 53.Thus the questions framed in the first paragraph are

¶291

 answered as follows :

¶292

 (1)The sanction of the scheme under section 391 of the said
Act of 1956 does not amount to compounding of an offence
under section 138 read with section 141 of the said Act
of 1881.

¶293

- 56 -

¶294

(2)The sanction of the scheme under section 391 of the said
Act of 1956 will not have the effect of
dismissal/termination of proceedings of the complaint.

¶295

 54.Hence, I pass the following order:

¶296

(i)Criminal Writ Petition Nos. 2770, 2771, 2781,
2782, 2783, 2784, 2786, 2787, 2788 ,2789 of
2006, 288 and 290 of 2007, 710 to 719 of 2008
and 1424 to 1433 of 2008 are dismissed by
holding that the case for compounding is not
established.

¶297

(ii)This judgment will not preclude the petitioners
from filing separate petitions/applications
invoking the sections 482 of the Code of
Criminal Procedure, 1973 for quashing the
pending complaint and all contentions in that
behalf are expressly kept open.

¶298

(iii)On prayer made by the counsel appearing for the
petitioners it is directed that hearing of the
complaints will not proceed for a period of 16
weeks from 26th August 2008.

¶299

- 57 -

¶300

(A.S.Oka, J)

Sharp Industries Ltd.and Ors. v. Dic India Ltd. and Anr.

Case brief

What is this about?

What did the court decide?

Sharp Industries Ltd.and Ors. v. Dic India Ltd. and Anr.

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Cases cited

Statutes considered

Parties & counsel

Coram

Case details

Similar cases

M/S. Bhawani Builders through Its Proprietor andANR Vs Prashant Vishnupant Ladkat, and Others .

Shri Mrinal Jaswant Singh Bali . Vs the State of Maharashtra .

Mohd. Jahangir Shiakh Vs Executive Engineer, Bandra Div. M.H.D.A. and Ors.

Mr. Sadik Hussain Dolaria . Vs Jamila Sadik Dolaria and 05 Others.

Cyrus G.Mazkoori Vs Nagir Bharucha @ Nargis Ganeshprasad Gupta and Anr.

Mohan Kumar Rayana and Anr. Vs Rajendraprasad Rameshwarlal and Ors.