Section 633
POWERS
OF COURT TO GRANT RELIEF IN CERTAIN CASES
[2003] 114
COMP. CAS. 631 (CAL.)
v.
Registrar of Companies
ASHIM
KUMAR BANERJEE, J.
APRIL 24,
2003
D. Basak for the Petitioner.
S.S. Sarkar for the Respondent.
JUDGMENT
Ashim Kumar Banerjee, J.—Chandmani Tea Company Limited (hereinafter
referred to as the "said company") is having its principal
undertaking being Chandmani Tea Estate situated in the district of Jalpaiguri.
The registered office of the said company is also situated within the tea
estate. The said company entered into a memorandum of understanding with the
Government of West Bengal by which a portion of the tea estate was transferred
to a new company namely Lakshmi Township Limited which was incorporated for the
purpose of building a satellite township in joint venture with the Government
of West Bengal. By virtue of such memorandum of understanding a portion of the
tea estate was converted in a vacant land for the purpose of building such
township. Such decision of the company as well as the Government of West Bengal
gave rise to an industrial dispute and labour unrest. There had been intensive
agitations by the workers of the said estate causing casualty to one of the
workmen in a police firing. The situation was so grave that the directors and
the other executives of the company were prevented from entering into the said
tea estate as well as the registered office.
In view of such unfortunate incidents
the said company could not hold its annual general meeting for the year 2001-02
within the stipulated date. The company duly applied to the Registrar of
Companies for extension of time to hold the annual general meeting. The
Registrar of Companies considering the facts and circumstances extended the
time till December 31, 2002. Even then the company could not hold such annual
general meeting by December 31, 2002.
The present application had been
made by one of the directors of the said company asking for condonation of
delay in holding the annual general meeting as well as for an order of
restraint against the Registrar of Companies from drawing up any criminal
proceedings on account of such default.
During the pendency of the
application the company held its annual general meeting for the year 2001-02 on
January 31, 2003, and filed appropriate return and documents with the Registrar
of Companies on February 19, 2003. Xerox copy of the receipt of such filing was
filed in the court in the course of hearing.
Mr. D. Basak, learned counsel
appearing for the applicant submitted that in view of the facts and
circumstances as explained in detail in the petition it would ex facie show
that the reason for not holding the annual general meeting within the stipulated
date was beyond the control of the directors of the said company including the applicant. Mr.
Basak further submitted that the A said meeting could not be held despite bona
fide attempts on the part of the directors of the company including the
applicant. Hence, the applicant should be relieved of such responsibility under
section 633 of the Companies Act, 1956.
In support of his contention, Mr.
Basak relied on the following decisions :
(i) East
India Hotels Ltd., In re [1980] 50 Comp Cas 381 (Cal);
(ii) G.M. Mohan v. Registrar of Companies,
Karnataka [1984] 56 Comp Cas 265 (Karn);
(iii) P. Vaman Rao v. Secretary to Government
[1998] 93 Comp Cas 486 (AP);
(iv) In re, Filmistan Pvt. Ltd. [1959] 29 Comp
Cas 34; AIR 1959 Bom 245;
(v) M. Meyyappan v. Registrar of Companies
[2002] 112 Comp Cas 450 (Mad) ;
(vi) S.L. Kapur v. Registrar of Companies, Orissa [1964] 1 Comp LJ
211 (Orissa).
Relying upon the aforesaid
decisions Mr. Basak submitted that since the applicant acted honestly and
reasonably the applicant should be excused for such default and/or breach of
duty by not holding the annual general meeting within the time so stipulated.
Opposing the application Mr. S.S.
Sarkar, learned counsel appearing for the respondent, submitted that the reason
for not holding the annual general meeting within the time so stipulated in the
statute was considered by the Registrar of Companies and the Registrar of
Companies duly extended the time till December 31, 2002. Hence, the company
ought to have held the annual general meeting within the time so extended by
the Registrar of Companies. He further submitted that this court had no power
to extend the time to convene the annual general meeting, as prayed for, by the
applicant. Mr. Sarkar lastly contended that the circumstances explained in the
petition were not sufficient enough to condone the delay and excuse the
applicant for such default. Mr. Sarkar relied on two decisions reported in Coal
Marketing of India Pvt. Ltd., In re [1967] 37 Comp Cas 720 (Cal) and Sanatan
Ganguly v. State [1984] 56 Comp Cas 93 (Cal). Relying on the aforesaid two
decisions Mr. Sarkar submitted that this court should dismiss the petition for
want of adequate explanation.
To decide the issue may I first
deal with the cases cited by the parties.
(i) Coal Marketing of India Pvt. Ltd., In re [1967] 37 Comp Cas 720
(Cal) :
In the said case the company did
not hold any annual general meeting for six years. Initially on an earlier application
for the default committed by the company for two years for non-filing of
balance-sheet, profit and loss account as well as for not holding the annual
general meeting this court condoned the delay on an undertaking given by the
directors that they would hold the annual
general meeting and comply with the statutory requirements within six months.
Such undertaking was violated by the directors. This court on a second
application being made condoned the delay on a similar undertaking. The
directors violated the undertaking for the second time. Similarly on a third
application the delay was condoned by this court. When fourth attempt was made before this court by the said
judgment this court dismissed the petition. While dismissing the petition P.B.
Mukherjee J. held that the court had no power to relieve the directors from
liability for the default or to extend the time for holding the annual general
meeting or to file statutory requirement or balance-sheet and/or profit and
loss account. His Lordship was further pleased to observe that the default could be excused under section 167
of the Companies Act and the Central Government had power to permit calling of
such a meeting on an extended date. His Lordship further held that under
section 633, the court could relieve officers of the company from fines and
penalties and not the company from calling or holding or conducting the annual
general meeting.
(ii) In
re, Filmistan Pvt. Ltd. [1959] 29 Comp Cas 34 ; AIR 1959 Bom 245 :
In this case there had been a
default in submitting the balance-sheet and profit and loss account. The Bombay
High court held that the court had power to condone the delay on an appropriate
explanation given by the applicants. The court considering the facts and
circumstances condoned the delay and directed the Registrar of Companies not to
initiate any proceeding for such default.
(iii) S.L. Kapur v. Registrar of Companies,
Orissa [1964] 1 Comp LJ 211 (Orissa) :
The Orissa High Court considering
the facts and circumstances held that delay in holding the annual general meeting
and placing the balance-sheet before the said meeting and forwarding copies
thereof to the members was due to unavoidable reasons and caused by
circumstances beyond their control. Hence, the default should be excused under
section 633(2).
(iv) Sanatan
Ganguly v. State [1984] 56 Comp Cas 93 (Cal) :
In a criminal revision proceeding
Manoj Kumar Mukherjee J. was pleased to hold that the power of the court under
section 633(1) was a discretionary one and discretion had to be exercised when
the court was satisfied that the defaulting officer had acted honestly and
reasonably and having regard to the facts and circumstances of the case he
ought fairly to be excused.
(v) East
India Hotels Ltd., In re [1980] 50 Comp Cas 381 (Cal) :
In this case there had been a
violation of section 58A. The company although belatedly complied with the
requirement as directed by the Reserve Bank of India and no objection to the
said effect was ever made by the depositors. Hence, the court held that the
petitioners acted reasonably and honestly and they ought to be granted relief.
(iv) G.M. Mohan v. Registrar of Companies,
Karnataka [1984] 56 Comp Cas 265 (Karn)
:
In this case there had been
violation of section 58A of the said Act, Karnataka High Court considering the
facts and circumstances granted relief to the officers of the company under
section 633(2).
(vii) P.
Vaman Rao v. Secretary to Government [1998] 93 Comp Cas 486 (AP):
In this case the company was before
the BIFR where a reference was being held. During the pendency of the said
proceeding the Company Law Board directed cost audit to be done. The company
could not comply with such direction within the stipulated time. There were
other circumstances for which the company asked for exemption to have cost
audit done. In this backdrop the directors applied for being relieved of the
responsibility under section 633(2). The court upon considering the facts and
circumstances of the case allowed the application.
(viii) M.
Meyyappan v. Registrar of Companies [2002] 112 Comp Cas 450 (Mad) :
The company could not have the cost
audit done within the stipulated period. The Central Government also did not
pass any formal order on the application for extension of time to file the cost
audit report. There had been labour unrest in the company. The Madras High
Court considering the facts and circumstances held that the petitioner had
acted honestly and diligently and properly explained the delay in submitting
the cost audit report and as such the petitioner was excused for such default.
Considering the aforesaid cases
cited by the parties my understanding of the section being section 633(2) is as
follows :
(i) If there is any statutory default on
the part of an individual while acting on behalf of the company the court is
empowered to consider the application for excusing the said person from such
responsibility and/or liability.
(ii) While considering the application made
under section 633(2), the court will have to come to a conclusion that the
applicant had acted honestly and fairly and even after his honest and fair act
the default was committed for some unavoidable circumstances.
(iii) Non-compliance with such statutory
requirements by the applicant was caused due to incident beyond his control.
(iv) The court is neither empowered to extend
the time to hold annual general meeting or to comply with the statutory
requirements nor empowered to relieve the company from such responsibility
and/or liability.
The facts and circumstances as
explained by the petitioner in the instant application as briefly recorded by
me hereinbefore would show that there had been bona fide reason for not holding
the annual general meeting as well as for complying with the statutory
requirement by the company and/or its directors within the extended period. The
newspaper reporting annexed to the petition would show that the situation
prevalent at the said tea estate at the relevant point of time was too grave.
The Registrar of Companies considered all those aspects and extended the time
till December 31, 2002. The company and/or its directors even then could not
hold the said meeting by December 31, 2002, and ultimately held the meeting on
January 31, 2003. From the aforesaid facts I am convinced that the company
and/or directors could not have held the meeting and complied with the
statutory requirement within the stipulated period as also within the extended
period. Hence, for such default the petitioner being a director of the said
company, in my view, should be excused. I was told by learned counsel appearing
for the company who had drawn my attention to the xerox copy of the receipt
granted by the Registrar of Companies that all the statutory requirements were
complied with by the company and its directors on February 19, 2003, by filing
necessary annual report, balance-sheet and other related documents required in
law with the Registrar of Companies on the said date.
In the case of Coal Marketing of
India Pvt. Ltd. [1967] 37 Comp Cas 720 (Cal), the court dismissed the
application on the fourth attempt as the court was not satisfied with the
explanation given by the directors of the said company. Moreover, in the said
case there had been continuous defaults despite repeated undertakings given
before this court. Considering such facts and circumstances of the case, P.B. Mukherjee
J. dismissed the application. I do not find any scope to apply the said
decision in the instant case.
Similarly, in the case of Sanatan
Ganguly v. State [1984] 56 Comp Cas 93 (Cal), this court observed that the
magistrate while considering the application under section 633(1) ought to have
come to a finding that the petitioner acted honestly and fairly and without
coming to a finding the learned magistrate should not have granted relief under
section 633(1). I am unable to find any scope of application of the ratio
decided in this case.
The petitioner herein prayed for
relief on his behalf as well as on behalf of the other directors. In my view,
the statute requires application to be made by the person seeking relief under
this section. For the defaults committed by the directors of the company the
directors are individually responsible and are liable for conviction and hence
the petitioner is not entitled to make this application in representative
capacity.
Hence, the application succeeds
in part. The Registrar of Companies, West Bengal, is directed not to take any
punitive step against the applicant for non-compliance with the provision of
section 166 of the Companies Act for not holding the annual general meeting
within the stipulated date and also for non-filing of the statutory documents
with the Registrar of Companies within the stipulated period for the year ended
March 31, 2002. The application being C.P. No. 76 of 2003 is disposed of
accordingly. The Registrar of Companies, West Bengal, would, however, be entitled to costs of this application
assessed at Rs. 1,700 to be paid by the petitioner within a week from the date.
Urgent xerox certified copy would
be given to the parties, if applied for.
[1983] 53 COMP. CAS. 918
(DELHI)
HIGH COURT OF DELHI
In Re Bee Jay Engineers Pvt. Ltd.
D.K. Kapur and J. D. Jain JJ.
October 1, 1981
JUDGMENT
The judgment of the court was delivered by
J.D. Jain J.—In Company Petition No. 12/81 the
petitioners, S/Shri Satinder Sandhu, P.N. Handa, and N. S. Grewal constitute
the Board of Directors of M/s. Bee Jay Engineers Pvt. Ltd., at present. They
have moved an application under s. 633(2) of the Companies Act (for short
"the Act") read with rr. 7 & 9 of the Companies (Court) Rules,
1959, for being relieved/ excused from the proceedings which are likely to be
launched against them in respect of the alleged contravention of the Employees'
Provident Fund Act, Central Excise Act, State Insurance Act, Sales Tax Act and
the I.T. Act with reference to tax deducted at source. It is, inter alia,
contended by them that the original Board of Directors consisted of S/Shri J.S.
Grewal, B.S. Sandhu, Mrs. B.K. Kaur and Mrs. A.K. Sandhu. However, both the
ladies resigned from the Board of Directors some time in 1974 and the business
of the company was, therefore, being looked after by the remaining two
Directors. They too expired some time in 1980. The present Directors, it is
contended, are fresh entrants and two of them, namely, S/Shri P.N. Handa and
N.S. Grewal, have been appointed as Directors by virtue of their technical
skill. However, the Registrar of Companies launched prosecution against the
company and the present petitioners for committing default/breach of certain
provisions of the Act. Apprehending that fresh prosecutions may be launched
against them under the aforesaid Acts, they have prayed for relief against
liability for breaches and defaults commited by the company under the aforesaid
Act.
Similar prayer has been made by the petitioners,
S/Shri Bachan Singh, P.N. Handa, C.L. Mehta, A.L. Talwar, S.S. Sandhu, V.S.
Grewal, H.S. Sidhu and D.J.S. Sandhu in Company Petition No. 13/81, who
constitute the Board of Directors of the company—M/s. Atlantic Engineering
Services Private Ltd. As per averments in the said petition, out of the
original Directors, S/Shri J.S. Grewal and B.S. Sandhu, died some time in 1980
while Shri Bachan Singh resigned from directorship in October, 1980. Thereupon,
the present Board of Directors was constituted by co-opting four persons of
professional competence and repute. In this case too, the company had to face
prosecution launched by the Registrar of Companies under the Companies Act and
they are apprehending further prosecutions for contravention of the provisions
of the above-mentioned Acts.
Reliance was placed by the learned counsel for the
petitioners in both the cases on a decision of H.L. Anand J. in Om Parkash
Khaitan v. Shree Keshariya Investments Ltd. [1978] 48 Comp Cas 85 (Delhi) in
which under similar circumstances the learned judge had granted relief against
prosecution of the applicant, Shri Om Parkash Khaitan, a solicitor, who was appointed as a Director, by virtue of his
being its legal adviser, for defaults and breaches committed by the company in
relation to its obligations under the Employees' Provident Funds Act, Sales Tax
Act, Employees' State Insurance Act, Indian Textiles (Control) Order, Essential
Commodities Act and the Companies Act. The learned judge had, inter alia,
observed that it was unreasonable to fasten liability on the Directors for
defaults and breaches of a company where such directors are either the
nominee-directors or are appointed by virtue of their special skill or
expertise.
B.N. Kirpal
J. before whom both these Company Petitions were listed, has struck a
discordant note in his order of reference saying that he is unable to find any
provision under the Companies Act which can possibly justify any such
distinction amongst the directors. He has expressed the opinion that "whether
a person is a solicitor, an advocate or a businessman, as long as he is a
director he is obliged to comply with the provisions of the Companies Act and
the cases of all the directors have to be dealt with alike, even in cases where
an application under section 633 is filed". He has also doubted the
correctness of the decision of Anand J. and has posed a question as to whether
the court, while exercising powers under s. 633 of the Act, has any
jurisdiction to grant relief against prosecution under the other Acts. In his
view, relief under s. 633 can be granted only from the offences committed under
the Companies Act.
This
reference thus raises two questions of vital importance, namely,
(1) whether the court has jurisdiction to
grant relief to an officer of a com pany as envisaged in s. 633 of the Act
against the liability for negligence, default, breach of duty, etc., of the
provisions of Acts other than the Act,
(2) whether, while exercising jurisdiction
under s. 633 of the Act, the court can justifiably draw any distinction amongst
the directors who are on the Board purely by virtue of their technical skill or
expertise or because they represent certain special interests and those who are
in effective control of the management and affairs of the Company.
Question No.
1:
Section 633
is reproduced hereunder for ready reference :
"(1) If in any proceeding for negligence,
default, breach of duty, misfeasance or breach of trust against an officer of a
company, it appears to the Court hearing the case that he is or may be liable
in respect of the negligence, default, breach of duty, misfeasance or breach of
trust, but that he has acted honestly and reasonably, and that having regard to
all the circumstances of the case, including those connected with his appointment,
he ought fairly to be excused, the Court may relieve him, either wholly or
partly, from his liability on such terms as it may think fit :
Provided that in a criminal proceeding under this
sub-section, the Court shall have no power to grant relief from any civil
liability which may attach to an officer in respect of such negligence,
default, breach of duty, misfeasance or breach of trust.
(2) Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a Court before which a proceeding against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1).
(3) No Court shall grant any relief to any officer under sub-sec tion (1) or sub-section (2) unless it has, by notice served in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted".
Evidently this section is designed to provide
protection to the officers of a company against certain kinds of liabilities,
its object being to provide against undue hardship and harassment in deserving
cases and give relief from liability to persons who though technically guilty
of negligence, default, breach of duty, misfeasance or breach of trust are able
to convince the conscience of the court that they have acted honestly and
reasonably and having regard to the circumstances of the case they ought fairly
to be excused from the charge or charges made against them. However, it is
noteworthy that protection is sought to be given to an officer of a company,
which necessarily implies, that the liability arises on account of negligence,
default, breach of duty, misfeasance or breach of trust in relation to the
affairs of a company which he is required to conduct honestly and reasonably.
Surely, the protection afforded by this section will not extend to and cover
acts of misfeasance or breach of trust, etc., which have no connection
whatsoever with his status or duties as an officer of a company. All the same,
this section cannot be construed to mean that default/offence committed by or
proceeding against an officer must be under the Act as such. The expression
"any proceeding" occurring in this section is of wide amplitude and
comprehensive enough to include all kinds of proceedings, i.e. , civil as well
as criminal. There is nothing in the language or the context in which this
section is laid to limit, restrict or confine its operation to a liability
arising out of negligence, default, breach of duty, misfeasance or breach of
trust under the Act alone. In our opinion, protection under this section will
be equally available to an officer of a company against liability to be
proceeded against for negligence, default, breach of duty, etc., even under
other Acts so long as it is with regard to the affairs and functioning of the company. The power under this
section is manifestly a power to relieve from liability which in the context
mean's relief from the consequences, namely, fines and penalties that flow from
the negligence, default, breach of duty, misfeasance or breach of trust. Of
course, the grant of relief is discretionary having regard to the
considerations mentioned in the section itself.
It is the
cardinal rule of construction of statutes that the language used by the
legislature must be construed in its natural and ordinary sense; if the words
of the statute are themselves precise and unambiguous than no more can be
necessary than to expound those words in their ordinary and natural sense. In
other words, where the terms of a section are plain, the court should expound
it as it stands unless it finds either in the section itself or in any other
part of the statute anything that will modify or qualify or alter the language.
If, however, the plain interpretation leads to some absurdity or some
repugnance or some inconsistency with the rest of the statute, the grammatical
and ordinary sense of the words may be modified so as to avoid the absurdity
and inconsistency but no further. In the instant case, the language of the
section is clear and explicit and we must give effect to it whatever may be the
consequences. We see no ground for narrowing or limiting the application of the
wide words of the section "Any proceeding" are emphatic words and the
same ought not to be construed in a narrow sence. Hence, we are of the
considered view that this section will apply to all legal proceedings, civil,
criminal or otherwise, so long as the liability of an officer of a company
arises from negligence; default, breach of duty, misfeasance or breach of trust
and he can be relieved from such liability on account of his having acted
honestly, namely, in good faith and if he has justifiable reason to escape such
liability. We may, at the same time, make it abundantly clear that if the
provisions of any particular statute under which liability is sought to be
fastened on an officer of a company are in any way inconsistent with or have
overriding effect over the provisions of this section, the court exercising
power under this section will have to take due notice of the same before
granting relief from the liability.
Curiously
enough there is virtually no case-law on this aspect of the matter. As pointed
out by the learned single judge, there is no discussion on the point in Om
Parkash Khaitan [1978] 48 Comp Cas 85 (Delhi) and H. L. Anand J. seems to have
proceeded on the assumption that such a power vests in the court in regard to
liability arising out of defaults and breaches committed by an officer of a company
in relation to his obligations under various statutes like 'the Employees'
Provident Funds Act, the Sales Tax Act, etc. The only other authority alluded
to by the learned counsel for the petitioner is S.P. Chopra & Co. (Muktsar
Electric Supply Co. Ltd., In re) [1966] 36 Comp Cas 144 (Punj); 1 Comp
LJ 214, in which the petitioners were sought to be prosecuted under s. 409,
IPC, on the complaint of one Dayavrat. In that case, the petitioner, S. P.
Chopra & Co., was appointed voluntary liquidator of the Muktsar Electric
Supply Co. Ltd. having its registered office at Lahore. In the return filed by
the petitioners with the Registrar of Companies, Punjab, under s. 244 of the
Indian Companies Act, 1913, for the year ending 30th September, 1949, in Form
No. 58, Rs. 30,000 were shown to have been paid to the Custodian, Enemy
Property, Bombay, although Rs. 17,718 had, in fact, been paid to him by cheque
and Rs. 11,282 were spent on this account towards expenses. Relief was sought
against apprehended claims in respect of negligence, breach of duty, etc., by
the petitioners under s. 281(2) of the Indian Companies Act, 1913. On an
examination of various decided cases, A.K. Grover J. (as his Lordship then was)
held (at p. 157 of 36 Comp Cas) that:
"...the High Court can grant relief under
sub-section (2) and that the scope of that sub-section is wide enough to cover
criminal prosecution. The word 'claim' in sub-section (2) must be construed as
having been used in a special sense so as to include also criminal prosecution".
Evidently the word "claim" occurring in
sub-s. (2) of s. 281 has since been substituted by the words " any
proceeding " by Act 65 of 1960 so as to bring it at par with sub-s. (1)
and remove the ambiguity, if any, arising out of the correct connotation of the
word "claim". For the reasons stated above, we are in complete
agreement with the view expressed by Grover J. and we answer this question in
the affirmative.
Question No.
2 :
Upon its plain language, s. 633 confers discretion on
the court to relieve an officer of a company proceeded against for any
negligence, default, breach of duty, misfeasance or breach of trust, provided
the court finds that the officer has acted honestly and reasonably and also
having regard to all the circumstances of the case including those connected
with his appointment, he ought fairly to be excused. Thus, for getting relief
under this section it must be proved by the person concerned that (1) he acted
honestly, (2) that he acted reasonably, and (3) that having regard to all the
circumstances of the case, he ought fairly to be excused". Acting
reasonably " means acting in the way in which a man of affairs dealing
with his own affairs with reasonable care and circumspection could reasonably
be expected to act in such a case. (See Re Duomatic Ltd. [1969] 1 All ER 161,
171 (Ch D)). The expression "reasonable" means that an act or
decision, concurred is or can be supported with good reasons, or at any rate be
one which a reasonable person might reasonably make. Hence, the discretion
vesting in the court has to be exercised in favour of the officer concerned
when the court is satisfied about the existence of these conditions. Of course,
it has to take note of all the attending circumstances of the case for arriving
at a judicious and just decision. Looking from this angle the learned single
judge is
right in saying that no distinction can be drawn amongst the directors for
fastening liability or granting relief from liability on the consideration that
a person is on the Board purely by virtue of his technical skill or because he
represents certain special interests and there are other directors who are in
effective control of the management and affairs of the company. With respect,
we feel that H. L. Anand J., overstated the point in observing (at p. 88 of 48
Comp Cas) that:
"...it is necessary to make a distinction between the directors who
are on the board, purely by virtue of their technical skill or because they
represent certain special interests and those who are in the effective control
of the management and affairs of the company, whether or not they have any
financial stakes in it, in determining if relief from liability arising out of
the breaches and defaults of the company should be granted or not."
(emphasis
supplied)
The criteria for granting
relief having been explicitly laid down in the section itself, no other
criteria can be imported into it. Surely, the language of the section does not
warrant an interpretation drawing such a distinction. Indeed, Anand J. was
fully conscious of this fact when he observed that (p. 89):
"While there is a strong case for urgent legislative action, both in
the matter of widening the frontiers of accountability of a company, both to
its board of directors and to the members, as also in relieving the special category of directors from consequences of
default and breaches of the company, judicial moderation is necessary in
the administration of section 633 of the Act so as to ensure that such
categories of directors are not subjected to the harassment of legal
proceedings for breaches and defaults of a company, which may at times be
rather protracted". (emphasis* supplied)
While we do find some force in the argument that the
circumstance of a person being purely on the Board on account of his special
skill or expertise may be a relevant factor in deciding whether he has acted
honestly and reasonably in conjunction with other circumstances of the case it
is per se no ground for exonerating such a director from liability on account
of negligence, breach of duty, misfeasance or breach of trust, etc. He has,
like any other director, to satisfy the conscience of the court that he fulfils
the criteria to earn relief from liability as laid down in the section, and his
being on the Board on account of his expertise or special skill will not in
itself be enough to exonerate him from liability; it will be just one of the
circumstances to be taken notice of as a factor justifying the reasonableness
and honesty of the applicant's actions. Looked at from this angle, the fact of
a person being on the board of directors because of his special skill or expert
knowledge cannot be said to be a wholly extraneous circumstance having no
bearing whatsoever on the point in issue. We are, therefore, inclined to answer
this question accordingly.
Both the questions formulated in the reference having
been answered, the reference stands disposed of. Both the company petitions are
sent back to the learned company judge for disposal in accordance with law.
[1983] 54 COMP. CAS. 197 (BOM.)
HIGH COURT OF
BOMBAY
BHARUCHA J.
(ON APPEAL)
DESHPANDE C.J. AND REGE J.
APPEAL NO. 674 OF 1980 IN/AND COMPANY PETITION NO.
308 OF 1977
MARCH 3, 1981
J.M. Chagla and J.D. Dwarkadas for the Appellant.
D.R Dhanuka and D.J. Dalai for Respondent No. 1.
JUDGMENT
Bharucha J. (dated December 8, 1980) —The
petitioners were signatories of a prospectus which invited the public to
subscribe for shares of Tri-Sure India Ltd. (now referred to as
"Tri-Sure"). The prospectus contained mis-statements. The petition is
filed under the provisions of s. 633 of the Companies Act, 1956, to relieve the
petitioners of the liability under s. 633 of the Companies Act for making the
mis-statements.
On 12th February, 1960, a company called the Indian
Flange and Mfg. Co. Pvt. Ltd. was incorporated in West Bengal as a private
limited company. Its shareholders were the nominees of American Flange and Mfg.
Co. Pvt. Ltd. (now referred to as "American Flange"). On 22nd April,
1960, Tri-Sure's name was changed to Tri-Sure India Pvt. Ltd. On 17th June,
1960, Tri-Sure was authorised to issue 3,00,000 equity shares of Rs. 10 each on
condition that within 24 months from its incorporation American Flange would
sell 49% of its voting capital to Indian nationals at par. On 1st August, 1962,
the registered office of Tri-Sure was moved from Calcutta to Bombay.
Tri-Sure manufactures flanges and bungs (barrel
stoppers) at Mahul, Bombay.
On 7th March, 1963, Herbert Wheaton, the second
petitioner, American Flange's Vice-President, Operations, became a director of
Tri-Sure. On 20th October, 1965, Charles Grundy, the fourth petitioner, was
appointed a director of Tri-Sure. On 3rd May, 1968, Richard Parish, the first
petitioner, American Flange's President, was appointed a director of Tri-Sure.
On 23rd November, 1971, Albert Parker was appointed a director of Tri-Sure. On
1st, April, 1970, Shanker Hegde was appointed a director of Tri-Sure. On 1st
January, 1972, he was appointed and took charge as Tri-Sures' whole-time
director.
On 20th November, 1973, Tri-Sure's authorised capital
was increased and 2,53,336 fully paid-up equity shares were issued to and
subscribed by American Flange and its nominee. On 25th July, 1974, Tri-Sure
decided to dilute the holding of American Flange to 49% by a public issue of
2,63,680 equity shares of Rs. 10 each. On 30th July, 1974, Tri-Sure appointed
the First National City Bank, the managers of the proposed issue. On 9th
December, 1974, the Controller of Capital Issues consented to the proposed
issue of 2,63,680 equity shares of Rs. 10 each for cash with a premium of Rs.
7.50 per share.
On 20th
January, 1975, Hegde wrote to Parish at New York setting out the efforts that
he had made in regard to Tri-Sure. He concluded by suggesting that he should be
appointed the managing director of Tri-Sure. On 21st January, 1975, Hegde was
appointed Tri-Sure's managing director.
On 20th
February, 1975, Tri-Sure became a public company by passing appropriate
resolution.
Between 21st
and 26th February, 1975, printers proof's of the prospectus issued in regard to
the public issue were considered at meetings in Bombay at which Parish, Grundy
and Hegde were present. The evidence as to what transpired at these meetings is
relevant to the determination of this petition and I will consider it in due
course. On 26th February, 1975, at a meeting of Tri-Sure's Board, the
prospectus was signed. It was filed with the Registrar of Companies and issued.
The shares
which were issued were fully subscribed and were allotted.
On 3rd
October, 1975, Wheaton in the USA received a telephone call from an employee of
Tri-Sure named Singaravelu. Singaravelu said that he had much to report about
Tri-Sure and its accounts. Wheaton asked Singaravelu to contact Grundy.
Singaravelu thereupon telephoned Grundy who was in Calcutta. SingaraveJu met
Grundy in Calcutta on the night of 4th October, 1975. Giundy has deposed that
Singaravelu told him that at the end of August, 1975, the stocks produced by
the Tri-Sure had been removed from Tri-Sure's godown to avoid auditors'
inspection and had been secreted in outside warehouses. Singaravelu had the
addresses of two such warehouses where some of the stocks lay. Grundy and
Singaravelu thereupon spoke to Wheaton of this over the telephone.
On 6th
October, 1975, Grundy spoke to Parish in the U.S.A. over the telephone and
discussed what Singaravelu had disclosed. Parish suggested that a special
investigative audit should be carried out by Ferguson & Company, Tri-Sure's
chartered accountants in Bombay. Parish said that Wheaton would be coming
immediately to Bombay and that Fergusons' investigation should not start till
he arrived. Grundy got the requisite authority by telex from Parish and
authorised Fergusons to cany out a special investigation audit of Tri-Sure.
On 10th
October, 1975, Wheaton came to Bombay. He has deposed that he was met at the
airport by Grundy, Hegde and a representative of Fergusons. They went directly
to Tri-Sure's plant. Wheaton told Hegde that he had information that the goods
which had been shown as shipped were secreted in outside warehouses and that
Tri-Sure's accounts were in a mess. Hegde first said that this was because
Tri-Sure's own warehouse was full. This was discovered to be false. Wheaton
asked Hegde to bring to his office Tri-Sure's production and sales
manager and accountant and Hegde's personal assistant so that Wheaton could
confront them with his information. When they came, they first denied the
correctness of it but then they admitted that there were goods in outside
warehouses. Hegde stated that there were orders for some of those goods and he
would get orders for the rest. The accountant, Rammurthi, read out some
invoices. In Wheaton's words, "the invoice reading was an attempt to
juggle". Wheaton, Hegde and the Ferguson man then proceeded to the outside
warehouses and found in them goods which were shown as shipped in Tri-Sure's
books.
On 10th October, 1975, Fergusons commenced the
Special investigative audit.
On 17th October, 1975, Hegde tendered his resignation
as a director of Tri-Sure with immediate effect.
On 10th December, 1975, an inspector was appointed
under the provisions of s. 209A of the Companies Act to inspect Tri-Sure's
books.
On 20th April, 1976, the special investigative audit
report was made by Fergusons. It disclosed that there had been a wholesale
fabrication and falsification of Tri-Sure's books of account and records for
the years ended 31st August, 1974, and 31st August, 1975.
On 28th April, 1976, Tri-Sure issued a notice
convening its annual general meeting for the year ended 31st August, 1975.
Along with the notice was enclosed a complete copy of the special investigative
audit report. The directors' report for the year ended 31st August, 1975,
stated that this report disclosed that some of the statements in the prospectus
were incorrect and could not be justified. The directors offered to refund to
all allottees of shares who claimed to have subscribed for the shares by
reliance on the representations made in the prospectus all moneys paid towards
allotment with interest at the rate of 6% p.a. from the date of allotment. 595
members took advantage of the offer.
On 1st/2nd June, 1976, Tri-Sure's books of account,
records and files were seized by the I.T. authorities and not returned till
about the end of 1977.
On 9th July, 1976, the inspector appointed under s.
209A of the Companies Act made his report. No copy of it was sent to Tri-Sure
because it was confidential. The court has not had the benefit of seeing it.
On 10th September, 1976, on the requisition of
American Flange, an extraordinary general meeting of Tri-Sure was convened and
a special resolution was passed to the effect that the holders of equity shares
who had subscribed to the fresh issue but had not taken advantage of the
abovementioned offer should be returned the premium amount of Rs. 7.50 per
share.
On 5th March, 1977, the Registrar of Companies wrote
to Tri-Sure stating that the figures of sales for the year ended 31st August,
1974, as mentioned in the prospectus were not correct and that the statement
therein under the heading "present activities", that 30% of the
1972-73 production of Tri-Sure had been exported was not based on correct data.
The untrue statements in the prospectus, the Registrar stated, attracted the
penal provisions of s. 62 and 63 of the Companies Act. On 25th April, 1977, the
Tri-Sure's advocates replied to the Registrar.
On 24th March, 1977, this court confirmed the
reduction of Tri-Sure's capital, as a result thereof the premium amount of Rs.
7.50 per share was returned to all allottees.
On 25th April, 1977, the petitioners filed this
petition.
What precisely was done in regard to the production
and sales of Tri-Sure's products and the falsification and fabrication of its
books, the fraud, as I shall briefly call it, has not been the subject of
evidence before me. Wheaton obtained notarised statements from senior members
of Tri-Sure's staff. These are on record. The makers thereof were not subjected
to cross-examination. I do not propose to rely upon those statements, except to
note that one and all say that Hegde was the one who directed the fraud and compelled
Tri-Sure's staff to do his bidding. Criminal complaints filed against Hegde and
some members of the staff filed by Tri-Sure and by the Registrar of Companies
are, it must be noted, pending. Nothing that is said here should prejudice the
parties to those proceedings.
The special investigative report made by Fergusons is
also on record. Those who made the investigations and wrote the report have not
been examined. A suit filed by Tri-Sure against Fergusons for defaults in
carrying out the audits is pending ; the parties to it must also not be
prejudiced. I do not, therefore, propose to rely upon the report except to note
that for a period of two accounting years, Tri-Sure's books of account were
false and fabricated as were all supporting documents.
It is enough to recite, briefly, what is stated in
Tri-Sure's complaint against Hegde and others in regard to the fraud. The sales
figures for the year ended 31st August, 1974, were inflated by about Rs.
5,50,000 and for the year ended 31st August, 1975, by about Rs. 1,05,000. The
way this was done is said to be this During the year 1973-74, in respect of
oral or written orders received by Tri-Sure, which it was not possible to
execute during that year, the sales department of Tri-Sure was asked to raise
invoices. The amounts thereof were entered in Tri-Sure's books as if the sales
had been completed. Even though deliveries had not been made, Tri-Sure's
accountant was asked to prepare false delivery challans. These invoices and
challans were not parted with by Tri-Sure. When, in the next financial year,
deliveries were made, as per the orders, fresh sets of invoices and challans
were prepared and sent to the customers. Carbon copies of the first set of
invoices were kept on the Tri-Sure's records for inspection by the Tri-Sure's
auditors. Carbon copies of the second set of invoices and challans were
destroyed. The amount of sales shown by the first type of invoices was shown in
Tri-Sure's books as debts due to Tri-Sure. During the year ended 31st August,
1974, goods of the value of about Rs. 3,50,000 were shown as sold though not
even manufactured. For the year ended 31st August, 1975, the fraud was
continued to be practised so that the manipulations of the previous year should
not come to light. Since genuine orders could not now be anticipated in
proportion to the inflation a larger quantity of goods was manufactured than
was justified by the pending or expected orders. Books and records of Tri-Sure
relating to stores were falsified. During the last days, August, 1975, stocks
of finished goods lying with Tri-Sure were sent out for storage in outside
godowns so that at the year end stock-taking, the auditors would not raise
queries.
So much seems clear that production was shown of
goods which had not been produced and sales were shown of goods which did not
exist; that the books and records of Tri-Sure were fabricated and falsified to
show a false picture ; and that this could not have been done without the
complicity of much of Tri-Sure's senior staff. That the figures of profits and
sales in the prospectus are incorrect and that the statement in the prospectus
that 30% of the production of Tri-Sure in 1972-73 was exported is incorrect is
admitted.
The petition was first argued before me on the basis
of affidavits. When I indicated to the petitioners' counsel that I was not
satisfied, the petitioners elected to lead evidence. The evidence of Wheaton,
Grundy and Parish was led, in that order.
It is necessary first to construe s. 633 of the
Companies Act as applicable to this case. It reads thus:
"633.
Power of court to grant relief in certain cases.—(1) If in any proceeding
for negligence, default, breach of duty, misfeasance or breach of trust against
an officer of a company, it appears to the court, hearing the case that he is
or may be liable in respect of the negligence, default, breach of duty,
misfeasance or breach of trust, but that he has acted honestly and reasonably,
and that having regard to all the circumstances of the case, including those
connected with his appointment, he ought fairly to be excused, the court may
relieve him, either wholly or partly, from his liability on such terms as it
may think fit:
Provided that in a criminal proceeding under this
sub-section, the court shall have no power to grant relief from any civil
liability which may attach to an officer in respect of such negligence,
default, breach of duty, misfeasance or breach of trust.
(2)Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a court before which a proceeding against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1).
(3)No court shall grant any relief to any officer under sub-section (1) or sub-section (2) unless it has, by notice served, in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted."
Section 633 confers upon the Court the somewhat
exceptional power to excuse a petitioner from prosecution for and the liability
of an act which has, under the Companies Act, penal consequences. The power
must, in my view, be circumspectly exercised. Before excusing a petitioner the
court must be reasonably satisfied that he has acted in doing the act, which
has penal consequences under the Companies Act, honestly and reasonably, and
that, having regard to all the circumstances of the case, including those
connected with his appointment, he ought fairly to be excused. Section 633 does
not contemplate adversary proceedings in the ordinary sense: a petition under
s.'633 cannot be compromised nor can the court relieve the petitioner by an
order made in invitum, for it has to be, as aforesaid, reasonably satisfied.
The Registrar may, of course, state that no prosecution would be launched
against the petitioner, in which case the petition would not survive. The
relief under s. 633 is, as the use of the word " may " implies,
discretionary, the discretion to be judicially exercised.
Mr. Chagla for the petitioners referred to the
judgment in Pyare Lal Bhargava v. State of Rajasthan, [1963] AIR 1963 SC 1094,
and to the interpretation placed therein on the word "appears" in s.
24 of the Evidence Act. The Supreme Court said that the appropriate meaning of
the word "appears" was "seems" and it imported a lesser
degree of probability than proof. Mr. Chagla submitted, therefore, that under
s. 633 something less than proof or satisfaction was required. The Supreme
Court construed the word "appears" in the context of s. 24 of the
Evidence Act whereunder a confession is to be treated as irrelevant if it
appeared to the court to have been caused by inducement, threat or promise.
Even in that context the court said that the standard of a prudent man was not
displaced and a court's opinion based on pure surmise was not warranted. In my
view, Mr. Chagla's submission that something less than proof or satisfaction is
required by s. 633 is not tenable. In the context of s. 633, the expression
"appears to the court" must mean that the court is reasonably
satisfied that the requirements of the section are met.
I turn to consider the authorities on s. 448 of the
English Companies Act, 1948, and s. 372 of the English Companies Act, 1929,
which are the sections therein equivalent to s. 633. In re Duomatic Ltd, [1969]
1 All ER 161 (Ch D), Buckley J. said that s. 448 enabled the court to grant
relief where three circumstances are shown to exist. First of all, the position
must be such that the person to be excused is shown to have acted honestly.
Secondly, he must be shown to have acted reasonably. And, thirdly, it must be
shown that, having regard to all the circumstances of the case, he ought fairly
to be excused. The learned judge dealt with the question of reasonableness of
action thus: He said that a man would be shown to have acted reasonably if he
was acting in the way in which a man of affairs dealing with his own affairs
with reasonable care and circumspection could reasonably be expected to act in
such a case, for, such an imaginary character would take pains to find out all
the relevant circumstances.
In re Barry and Staines' Linoleum Ltd. [1934] 4 Comp
Cas 196 ; [1934] 1 Ch 227 (Ch. D), the court said that the jurisdiction ought
to be exercised with great care.
In re Gilt Edge Safety Glass Ltd. [1940] 10 Comp Cas
244; [1940] 1 Ch. 495 (Ch D), Crossman J. said that what he had to consider in
the case, having satisfied himself as to the first two conditions of the
exercise of the jurisdiction, that is to say, honesty and reasonableness, was
whether, having regard to all the circumstances of the case, including those
connected with their appointment, the petitioners ought fairly to be excused
for whatever their particular default is, negligence, default, breach of duty
or breach of trust. The petitioners in that case had ceased to be directors as
a result of the reduction of the company's capital. The shareholders of the
company opposed the application and the court said that that was only one of
the circumstances which it had to take into account. It held that the
petitioners had no idea that they had ceased to be directors and that since, no
loss had been caused to the company, the petitioners should be excused.
There are also useful judgments on s. 633 itself. In
re East India Hotels Ltd. [1980] 50 Comp Cas 381 (Cal), there was a default in
compliance with the Companies (Acceptance of Deposits) Rules, 1975. The company
had asked for an exemption but the request was turned down. After some months,
the company secured the excess deposits by creating a trust. In the meantime,
the directors filed an application under s. 633. The Calcutta High Court held
that since there had been no further violation the petitioners should not
suffer the consequence of the default which had been committed but which they
had made up.
In re Tolaram Jalan and hire Filmistan P. Ltd. [1959]
29 Comp Cas 34; AIR 1959 Bom 245, the default of the petitioners was that the
balance-sheet and the profit and loss account of the company of which they were
directors had not been filed in time. It was urged that the omission was
unreasonable inasmuch as accounts even for previous years had been delayed. The
court held that that was an omission with which the court was not concerned.
In Om Parkash
Khaitan v. Shree Keshariya Investment Ltd. [1978] 48 Comp Cas 85 the
Delhi High Court was concerned with a solicitor-director's petition. He was
also the company's legal adviser. A number of defaults and breaches were
committed by the company in relation to its obligations arising under the
Essential Commodities Act, the Companies Act, the Sales Tax Act, the Employees'
Provident Funds Act and the Employees' State Insurance Act. The petitioner
apprehended penal consequences. It was held that it was necessary to make a
distinction between directors who were on a board purely by virtue of their
professional skill and those who were in effective control of the company's
management and affairs. The court held that since the object of s. 633 appeared
to be to provide against undue hardship in deserving cases, it was proper to
give relief from liability to persons, who; though were liable in law, ought to
be excused rather than subjected to legal proceedings.
Bearing in mind these interpretations of s. 633, I
propose to consider the first requisite for its application ; in other words,
have the petitioners acted honestly ?
Till 20th February, 1975, Tri-Sure was a private
limited company. Its shares were fully owned by American Flange and its
nominees.Wheaton had testified that by reason of the inflation of the figures
of sales and profits for the years ended 31st August, 1974, and 31st August,
1975, Tri-Sure had paid, needlessly, income-tax in the sum of Rs. 38 lakhs for
the former year and would have paid, needlessly, about Rs. 63 lakhs for the
later year; whereas the total of the public issue was Rs. 46 lakhs. This
suggests that the owners of Tri-Sure's shares, represented on Tri-Sure's board
by the petitioners, lost rather than gained by the fraud.
When Singaravelu gave first indications of the fraud
to Grundy, the petitioners acted very promptly to have the fraud fully
investigated. Grundy immediately telephoned Wheaton. Wheaton conferred with
Parish. Parish conferred over the telephone with Grundy. Parish then sent a telex
authorising Fergusons to undertake the special investigative audit, which
commenced within 5 days of the disclosure by Singaravelu. Wheaton flew to
Bombay, also within 5 days of Singaravelu's disclosure, to catch the goods in
the outside warehouses and confront the perpetrators of the fraud with that
evidence. The promptitude with which the petitioners acted is indicative of
their honesty.
When the special investigative audit report was
received, the petitioners did not seek to conceal the disclosures. Rather they
gave it full publicity by annexing a copy of it to the notice convening
Tri-Sure's next annual general meeting. An offer was made in the notice to
those who had subscribed to the public issue that their shares would be taken
back, if they so desired, and their full share value would be repaid with
interest. About 600 shareholders took advantage of this offer. To those
shareholders who did not take the advantage of this offer, at the instance of
the petitioners, the premium amount of Rs. 7 50 was refunded. This also is an
indication of the petitioners' honesty.
Lastly, there is no evidence before me, nor have I
reason to suspect, that the petitioners bad participated in or had bad
knowledge of the fraud.
On the material before me, therefore, I am reasonably
satisfied that the petitioners acted honestly in signing the prospectus.
I now turn to the second requirement of s. 633 and
ask; did the petitioners act reasonably ?
Until 20th February, 1975, the petitioners had been
directors of Tri-Sure as a private limited company. Before I can decide whether
the petitioners acted reasonably, when they signed the prospectus, on 26th
February, 1976,. I must be clear as to what was required of them as directors.
Inre Denham & Co. [1884] 25 Ch. D 752, it was held
that it was sufficient if the directors appointed a person of good repute,
competence and skill to audit the accounts and had no ground for suspecting
that anything was wrong; also that directors were not bound to examine entries
in any of the company's books. Chitty J. held that the director before him was
entitled to trust the auditors and that, since there was nothing which could
have aroused the suspicion that the auditors were not doing their duties, the
director was not guilty of such gross and wilful negligence as was equivalent
to fraud, and was not liable.
In Dovey v. Cory [1901] AC 477 (HL), a director of a
banking company relied on the judgment, information and advice of the chairman
and general manager of the bank, by whose statements he was misled. It was held
that, upon a true view of the facts before the court, he had not been negligent
in the performance of his duties as a director. The argument was led by
Halsbury L. C. to raise the serious question as to the responsibility of all
persons holding pssitions as directors, and how far they are called upon to
distrust and be on their guird against the possibility of fraud being committed
by their subordinates of every degree. He held in a celebrated sentence that.
"The business of life could not go on if people could not trust those who
are put into a position of- trust for the express purpose of attending to
details of nanagement". Lord Davey said that a director was bound to give
and exercise his judgment as a man of business on the matters which were
brought before the board at the meetings which he attended and that he was
entitled to rely upon the judgment, information and advice of the chairman and
general manager, as to whose integrity, skill and competence he had no reason
for suspicion.
In City Equitable Fire Insurance Co. Ltd., In re
[1925] 1 Ch D 407 (CA), the directors were sought to be made liable for
negligence. The court considered the duties of directors. It was said by Romer
J. that in discharging the duties of his position a director must act honestly
but he must also exercise some degree of skill and diligence. The care that he
is bound to take is ieasonable care to be measured by the care an ordinary man
might be expected to take in the circumstances on his own behalf. The directors
are not responsible for mere errors of judgment. They are not bound to give
continuous attention to the affairs of the company. In respect of duties that,
having regard to the exigencies of business and the articles of association,
may properly be left to some other official, a director is, in the absence of
grounds for suspicion, justified in trusting that official to perform such
duties honestly.
In Huckerby v. Elliott [1970] 1 All ER 189 (QB), the
dictum of Romer J. in City Equitable Fire Insurance Company was applied. The
court asked itself whether the appellant had had any reason to distrust his
co-director who was the company's secretary and fully acquainted with its
business. It found on the evidence produced that she had no reason to distrust
him and could not be said to have neglected her duty.
In re Brazilian Rubber Plantations and Estates Ltd.
[1911] 1 Ch D 425, Neville J. measured the reasonable care that a director must
take in the despatch of a company's business as being that care an ordinary man
might be expected to take in the same circumstances on his own behalf.
In re Supreme Bank of India Ltd. [1964] 34 Comp Cas
34, the Mysore High Court held that it was a well established proposition of
law that directors are entitled to rely upon the skill and integrity of the
managing director or other principal officers of a company exercising
supervisory functions provided that before appointing the managing director or
officer they have been satisfied about the honesty and general competence of the
annointee. If, however, circumstances come to their notice which raise
reasonable doubt or suspicion about either the integrity or the competence of
the person placed in charge of the affairs, it is their plain duty to examine
the position and take such steps as may be reasonable in the circumstances. If
these are of such a character that no man with any degree of prudence acting on
his own behalf would have omitted to take corrective action, it is not open to
the directors to say that they continued to rely on the honesty and integrity
of the managing director or other officer or to rely upon any principle of law
in support of an argument that they have discharged the duty or responsibility
which the law placed upon them.
In Official
Liquidator, Supreme Bank Ltd. v. P. A. Tendolkar [1973] 43 Comp Cas 382,
the Supreme Court held that it was a question of fact to be determined upon
evidence in each case whether a director, alleged to be liable for misfeasance,
had acted reasonably as well as honestly and with due diligence so that he
could not be held liable for conniving at the fraud and misappropriation which
had taken place. A director may be shown to be so placed and to have been so
closely and so long associated personally with the management of the company
that he would be deemed to be not merely cognisant of but liable for fraud in
the conduct of the business of the company even though no specific act of
dishonesty was proved against him personally. He could not shut his eyes to
what would be obvious to everyone who examined the affairs of the company even
superficially.
Bearing these authorities in mind I proceed to
discuss the petitioners' contention that they acted reasonably.
The position of Hedge in Tri-Sure must first be
examined. On 16th October, 1970, Hedge was appointed a consultant by Tri-Sure.
He was not then concerned with the management of Tri-Sure. The day-to-day
affairs of Tri-Sure were managed by American Operations Managers. On 6th
January, 1972, Hedge was appointed a whole-time director. He was required under
cl. (1) of the agreement between him and the Tri-Sure to comply with the
directions of the board. Subject thereto, without having substantial powers of
management he had to attend to such aspects of the administration of Tri-Sure's
affairs as the board might allocate to him from time to time. Subject to such
directions his duties included, inter alia, the administration of the affairs
of the office of Tri-Sure in accordance with sound business practice. Under cl.
4 of the agreement, Hegde agreed to carry out faithfully and diligently such
duties as the board might from time to time decide. Under cl. 7 of the
agreement, Tri-Sure was entitled to terminate the agreement if Hegde
disregarded or acted contrary to directions. On 24th February, 1973, the
agreement to appoint Hegde as a whole-time director was renewed, in so far as
his duties were concerned, the terms remained identical.
On 20th January, 1975, Hegde wrote a letter to Parish
in which he said that he should be appointed the managing director of Tri-Sure.
He claimed that this had been suggested by the authorities concerned with the
conversion of the company into a public limited company. This is what he said :
"The crux of the matter is that unless we have
our own known and trusted person holding the title 'managing director' which
implies in effect effective control on behalf of the parent company, the public
and financial institutions will try to impose their own nominee to fill in such
a position, as mentioned earlier."
On the very next day, 21st January, 1975, Hegde was
appointed managing director of Tri-Sure. Under cl. (4) of his agreement, Hegde
was required to exercise and perform such of the powers and duties of the board
as the board would from time to time delegate to him subject to the board's
superintendence and control. Subject as aforesaid, he was entrusted with the
management and business of Tri-Sure. Clause 10 of the agreement entitled
Tri-Sure to terminate the agreement if Hegde disregarded or acted contrary to
or failed to comply with the board's directions.
Wheaton deposed that Hegde was appointed managing
director pursuant to the letter written by him because he was considered to be
a loyal employee and who knew the business of Tri-Sure well.
Parish deposed that when the management of Tri-Sure
was to be nationalised, Wheaton and he discussed the matter and came to the
conclusion that Hegde was the most outstanding and competent of Tri-Sure's
employees and they decided that he should be first appointed a director and
then managing director. Parish deposed that Hegde was required to report to
America in advance when Tri-Sure's policies or pricing required change and when
senior staff were proposed to be appointed and he had been directed to consult
Little & Co. in regard to legal matters. Apart from this, he said, Hegde
enjoyed autonomy in Tri-Sure's management.
In cross-examination, Parish said that Hegde had
appointed senior personnel despite the fact that he was not entitled to do so.
Parish said that he was aware that Hegde had to act under the board's
supervision under the terms of his agreement with Tri-Sure. He said that
effective supervision was not exercised over Hegde by Tri-Sure's board. By his
very nature Hegde would act independently and then come to the board and state
what he had done. The board tried to curb Hegde's initiative but found that
Hegde was doing a good job. The board tried to keep Hegde within bounds.
Wheaton and Parish had done this by writing letters to Hegde pointing out where
he had exceeded his authority. They had also told him so, personally and over
the telephone. Parish had had occasions more than once to express displeasure
to Hegde. The board had, however, found that Hegde was doing a good job. He was
an Indian, he had initiative and, though he had inexperience of business
matters, Parish felt that Tri-Sure needed him.
Grundy deposed that he had expressed to the American
directors views against the appointment of Hegde as a whole-time director. He
had done so because he had thought that better people would be available to run
the business and that somebody with wider experience would be better suited.
It is noteworthy that by the time Hegde was invested
with the powers of managing director, the fraud had already been in operation
for two years or so and that, during these two years or so, Hegde had had,
under the terms of his agreement with Tri-Sure, no substantial powers of
management but was subject to the directions of the board. Suffice it to say
that his appointment as managing director would appear to have been made only
on superficial appearances.
Wheaton deposed that he was concerned principally
with production and engirding and that Parish was concerned with finance but
they discussed all matters that pertained generally to the business.
Grundy deposed that the form of control to which
Hegde was subject was that he was required to prepare statements about
Tri-Sure's progress and send copies thereof to the American directors and,
often, to him. At the board's meetings, particularly when one of the Amrican
directors was present, Hegde would report new developments and policies and
these would be discussed.
Parish deposed that American Flange received from its
subsidiaries and affiliates, including Tri-Sure, monthly balance-sheets, cash
flow statements and reports written by sub-managers from time to time. These
statements, balance-sheets and reports were xeroxed and distributed within
American Flange. Parish himself received these and glanced at them to form an
impression how the business in these subsidiaries was going. Detailed study was
left to the departmental heads concerned and they were t xpected to bring to
Parish's notice what was considered relevant: financial difficulties,
borrowings, anything which was out of the ordinary. Parish said this is what in
fact happened.
The correspondence, statements and the reports sent
by Tri-Sure to the American directors had been disclosed. The correspondence
and reports pertain mainly to finance, plant and labour. The correspondence
shows that the Tri-Sure was encountering financial stringency. In a letter of
20th June, 1973, by Yien, American Flange's Financial Controller, to Hegde,
Yien recorded that Tri-Sure's explanation for shortage of funds was an unusual stockpiling of raw material
but, after a review of concerned financial statements, he saw no increase in
Tri-Sure's inventory. On 7th August, 1973, Parish wrote to Hegde that Rs. 15
lakhs available for bill market use had best be restricted to 120 days as a
precautionary measure and that any extensions, such as the 60 days that Hegde
had requested, taking it to the limit of 180 days permitted under the bank
agreement should be treated as a red flat warning to Hegde and the board of
directors of Tri-Sure and that Tri-Sure were dangerously close to a serious
financial problem. On 8th August, 1973, Yien called upon Ram-murthi, the chief
accountant of Tri-Sure, to explain why, all of a sudden, the bill acceptance
had to be extended to the full 180 days limit and why additional funds were requind.
On 10th August, 1973, Hegde wrote to Parish to say that it was prudent to
assume that all the sales collections of a month would be fully recovered
during the course of the third month only and that, after a careful examination
of the financial position, Hegde felt that Tri-Sure required to have all the
present bills extended to the maximum limit of 180 days. On 30th April, 1974,
Rammuithi wrote to Yien that it was Tri-Sure's practice to send out advance pro
forma invoices for expected deliveries at the time shipments were scheduled to
take place. On 30th May, 1974, Parish sent a telex message to Hegde, Rammurthi
and Grundy through Little and Co. to ask that Tri-Sure should not issue further
pro foima invoices until they were in a position to deliver the goods and that
Tri-Sure was only authorised cash against document and that the abuse of this
authority was regarded as a very serious matter. The telex required that proper
accounting of funds received against pro forma invoices should be sent to
Parish so that the Tri-Sure's true obligations would be known. On 7th June,
1974, Hegde wrote to Parish that payments against bills were inordinately
delayed and it was for this reason that payments from major customers were
collected against pro forma invoices prior to actual delivery. Hegde assured
Parish that this would not be repeated in future and that Tri-Sure would
collect cash from customers only when in a position to despatch goods right
from the shelf. On 17th June, 1974, Yien wrote to Rammurthi recording that he
and Parish were waiting to receive an accounting on the pro forma invoices and
advance receipts. He said that this was a form of borrowing and borrowing
should have full authorisation from the board and the board should be consulted
for it. Oa 5th July, 1974, the background of the pro forma invoices was sought
to be explained on the accounting sought for, does not appear to have been
furnished. In regard to the accounting Parish deposed that he did not recall if
the accounting had been sent. There is one further letter which may be noted
here. On 8th November, 1974, Rammurthi wrote to Yien. He said that payments by
the director general of supply and disposals had been held up and Tri-Sure was
rather worried that, in the event this payment was not expedited, it would be
hard put to find Rs. 20 lakhs as temporary accommodation from bank sources; he
asked that he be allowed to approach the Bank of India for this facility.
Parish deposed that between June, 1974, and August,
1975, he did not get regularly in New York monthly returns of Tri-Sure's
production and quarterly returns of stocks. These, he said, were statements
required by the Government and copies were endorsed to New York. He admitted
that, prior to this, New York had been getting copies of these statements
regularly. He said that he did not consider the reports in the form in which
they were relevant and that no explanation was sought as to why copies of these
reports stopped coming to New York. An affidavit made by Parish in these
proceedings needs to be referred to in this connection. The affidavit is dated
30th November, 1977. In para. 2(5)D of the affidavit, Parish states that there
were instances where consultation or communication with American Flange were
matters of required procedure but such procedure was not consistently followed
by Hegde. Tri-Sure, he adds, was registered with the directorate general of
technical development, Government of India, and, in this connection, Tri-Sure
had been sending to New Delhi monthly returns of production of flanges, bungs,
etc., and quarterly returns of stocks of scarce categories of steel and flange
steel. Copies of the returns when sent were also endorsed to American Flange.
The returns continued to be submitted by Hedge until the production return for
May, 1974, which was dated 14th August, 1974. Thereafter, there was a gap and
neither the Director-General nor American Flange received copies of such
returns until that dated 29 th December, 1975, for the period January-August,
1975, which was sent by the man who succeeded Hegde. Parish states that it was
obvious that the reason why such reports were stopped was that, at that point,
the records of Tri-Sure were being falsified on instructions by Hegde.
Tri-Sure's sales figures were regularly sent to New
York. They tell an interesting story. For the months ended September-October,
1973, sales are shown at Rs. 1,18,534 and Rs. 1,88,646 respectively. For the
month of June, 1974, sales are shown to have risen to Rs. 25,19,766, almost 12
times the figure for October, 1973. For July, 1974, the figure is shown as Rs.
31,97,477, an increase of over Rs. 6 lakhs over the previous month. The
aggregate of the sales between September, 1973, and July, 1974, are shown at
Rs. 1,44,79,910. The prospectus shows sales up to August, 1974, at about Rs.
1,85,03,000; that is, that in the month of August, 1974, there were sales of
about Rs. 41 lakhs. Parish deposed that when he received the sales figures for
the year ended August, 1974, he was stunned that the sales had been so large,
but he did not imagine that the sales had been inflated. Parish had made a
statement to the inspector appointed under the provisions of section 209A of
the Companies Act. In that statement he said that they in New York were stunned
to see the figures of sales for the year ended 31st August, 1975, but after
receiving the auditors' report, Parish did not see any reason to question their
authenticity.
Parish (and Grundy) deposed that he arrived in Bombay
on 16th February, 1975, in connection with the prospectus. He was authorised to
come by the Board of American Flange and was accompanied by American Flange's
House Counsel on Corporate Affairs, Drabek, and its Vice-President, Financial
and Planning, Yien. What is stated to have happened thereafter needs to be
examined carefully, the statements and affidavits in the chronological order of
their filing and the testimony in the order in which it was presented.
On 25th April, 1977, a reply was sent by the
petitioners' advocates to the Registrar of Companies, in response to his letter
dated 5th March, 1977. In that letter, it was said that the petitioners had
relied on information supplied by Hegde that 30% of Tri-Sure's production for
the year ended 31st August, 1973, had been exported. It was said that Hedge wanted
the prospectus to mention that the company expected to export 30% of its
production and this statement was included in the first proof of the prospectus
but was subsequently deleted. Some of the petitioners had questioned Hegde on
the statement that 30% of the production for 1972-73 had been exported before
the prospectus was signed. On the basis of information and statements supplied
by Hegde the petitioners had reasonable ground to believe and did believe that
the statement was true.
Next in order of chronology is the petition. In para.
15 it is stated that the information relating to the exports of the Tri-Sure
was supplied by Hegde and was, in fact, approved by him and the petitioners had
reasonable ground to believe and did in fact believe that the statement that
approximately 30% of Tri-Sure's production during 1972-73 was exported was
true. Again, in para. 24, it is stated that the petitioners had relied upon the
information supplied by Hegde with regard to exports of Tri-Sure before signing
the prospectus and that, at the time when the prospectus was drafted, it was
Hegde who was insisting on the inclusion of a statement regarding Tri-Sure's
exports and he wanted to include a statement that Tri-Sure expected to export
at least 30% of its production.
In Parish's affidavit dated 30th November, 1977, it
is stated (in para. 5) that when he was in Bombay during February, 1975, the
subject of exports came up and Hegde said that the subject of exports should be
included in the prospectus. Parish pressed Hegde to be certain not to overstate
the figures as he was concerned that the shareholders might be misled as to
what to expect in future. Parish pointed out to Hegde that a certain American
Flange licensee of some 47 years had historically supplied all of the market to
which the Tri-Sure was exporting. Parish asked Hegde to go back to his staff
and review the matter, which Parish was advised ; he did and later Hegde and
Rammurthi confirmed the export figures not only to Parish but also to Grundy
and Drabek some days prior to the signing of the prospectus. Again (in para. 35
of the affidavit) Parish says that he questioned Hegde at the meeting of 1975
about the export of 30% of the 1972-73 production because he thought that it
was too high a figure. Similar questions were asked of Hegde in Parish's
presence at some of these meetings by Yien, Drabdk and Grundy. Parish states
that it would be accordingly apparent that he and his co-petitioners had made
prolonged enquiries directed, as usual, to Hegde. In the same paragraph Parish
says that during the preparation of the prospectus, during his stay in India in
February, 1975, he distinctly detected "a great reluctance and
hesitance" on the part of Hegde to verify information and data contained .
in the prospectus with those involved in its preparation and he recalled
several instances where Hegde deliberately absented himself from some of the
many meetings held in connection with its preparation.
I now turn to the evidence regarding the discussion
of the export figures at the meetings of February, 1975. Wheaton was not
present. He has deposed that he saw the prospectus in its final form when
Parish brought it back to New York. In it Wheaton saw that 30% of the 1972-73
production was shown to have been exported. He said he asked Parish about this
and Parish replied that he had taken up the point with Hegde and what he had
been shown indicated that the statement was correct.
Grundy deposed that because Hegde said that Tri-Sure
had export orders in hand, it was stated in the first draft of the prospectus
that Tri-Sure would export 30% of its production. Hegde commented on the
phenomenal exports that Tri-Sure had already made and which it had expected to
make and referred to certificates of merit obtained by Tri-Sure on this
account. The discussion took place, Grundy said, on 15th or 16th February,
1975, or thereabouts. The first printer's proof of the prospectus was prepared
immediately after this discussion. In the second printer's proof, delivered on
22nd February, 1975, the statement that Tri-Sure expected to export 30% of its
production did not appear because Grundy had advised that a statement which was
not factual should not be made. There was a discussion about the statement that
in 1972-73, Tri-Sure had exported 30% of its production. Questions were asked
of Hegde by Parish, Drabek and Grundy. Export orders were mentioned by Hegde
and by heads of the departments, who were present, in support of the statement
and Grundy was satisfied. This aspect was reverted to in Grundy's
cross-examination. In regard to the statement about 30% exports of the 1972-73
production there was, Grundy deposed, a discussion at an earlier meeting
between Hegde, Parish and Yien. He said he had made a mistake in this
connection in mentioning Drabek in his examination-in-chief.
Parish deposed that he came to Bombay on 16th
February, 1975. He was accompanied by Drabek and Yien at the suggestion of
American Flange's board. He had no previous experience of the issuance of a
prospectus and Drabek and Yien were to aid him. On 18th February, 1975, Parish
and Yien went to Fergusons to meet the senior partner, Alpaiwalla. Parish said
he suggested to Alpaiwalla that Fergusons should undertake an audit for the six
mouths that had passed since the last audit. Alpaiwalla assured Parish that it
was not necessary. It was suggested that an inventory should be taken.
Alpaiwalla said that that too was not necessary. He said that he and Ferguson's
staff had intimate knowledge and confidence in Tri-Sure's employees and that
Parish and Yien should share that confidence. Parish deposed that between the
first and second printing of the draft prospectus there was a discussion about
export prospect. Hegde wanted a statement in the prospectus about the future
projects. Grundy and Parish wanted the prospectus to be confined to nutters of
fact. In the first draft, there was a statement about the exports made by
Tri-Sure during 1972-73. Parish deposed that he had asked Yien, Rammurthi and
Hegde to look into export figures and state whether they were correct. They
subsequently stated, in the presence of Grundy and Drabek, that the figures
were correct and there was no reason for Parish to doubt the statement.
Parish deposed that the figures of accounts in the
prospectus were incorporated from a statement of the accounts for 5 years
certified by Fergusons.
In cross-examination, Parish deposed that when he
signed the prospectus he was shown by Rammurthi in Yien's presence, a working
out of the figures of production and export for the year ended August, 1973, on
the basis of which he believed that Tri-Sure had exported 30% of its production
during that year. Parish said that he had been sensitive about the export
figures of Tri-Sure which was a new entrant in the market particularly in the
Middle East. Being sensitive about exports. Parish and Grundy were reluctant to
incorporate into the prospectus anything which was not factual. Parish said he
was satisfied with the figure of 30% export only after being shown the
worked-out statement by Rammurthi. He deposed that he had stated at the
meetings in regard to export figures for 1972-73, that Tri-Sure had no reason
to and should not exaggerate. Later. Parish deposed that when he first saw that
30% of the production for the year 1972-73 had been shown as exported he felt
that it was a large amount and asked that the figures be shown to him. He said
that "they" (presumably including Yien) came back with the statement
which showed that 30% had beea exported. Yien, he said, had satisfied himself
of the correctness of the figure.
In cross-examination Parish averred that he had not
discovered at the meetings held in February, 1975, any hesitation or reluctance
on Hegde's part to give information. After being shown his statement in the
affidavit (referred to above), he said that that statement was correct and his
answer in evidence was not. He went on to say that Hegde had deliberately
absented himself from some of the meetings in connection with the prospectus.
After the recess, Parish tried to explain away the hesitation to which he had
referred in the affidavit by saying that Hegde had seemed to suggest that
somebody else do produce the documents required in connection with the
proceedings and not he.
I cannot accept Parish's statement that Yien was
asked to go to Tri-Sure's Office and work out the figures and that Yien had
said that he had satisfied himself or that "they" (if he meant to
include Yien) had come back with a statement which showed that 30% of the
1972-73 production had been exported. I cannot do so because: (a) It has never
been so stated, or even indicated, in any prior statement, affidavit or
testimony, (b) Yien has not been examined to corroborate Parish's statement,
(c) As Wheaton has testified, the books of Tri-Sure showed that less than 30%
of its production in 1972-73 had been exported. If Yien had checked the books
he would have discovered that the figure of 30% was not correct.
I also cannot accept Parish's gloss over the
statement in his affidavit and in his testimony that Hegde was reluctant and
hesitant to provide information. The phraseology employed in the affidavit is
clear : Hegde was reluctant and hesitant, to " follow through and verify
the information and data contained in the statements in the prospectus ".
During the course of his cross-examination, I asked
Parish a question. The question and Parish's answer are reproduced :
"Q. On your own admission you were dealing with
a man who, despite your rebukes, insisted on acting on his own initiative; you
were stunned by the sales figures for the year ended August, 1974; you were
surprised that as much as 30% of the company's production for 1972-73, should
have been exported. Did all this not suggest to you that an enquiry into the
books and records of the company was necessary which by passed Hegde ?
A : In February, 1975, when I saw Alpaiwallalla told
me that 32% of the company's debtors had acknowledged their debt to the
company. He said that this was very unusual particularly when the debtors were
mostly governmental agencies. For the prior year he said that the percentage
had been 13% which was nearer the norm. Also, till the time the exposure was
made I felt that Hegde and Rammurthi were honest men. My father had carried the
same impression of Hegde. In February, 1975, receivables had aged 3
months."
The answer, it will be noted, is far from
satisfactory.
The factors I now set forth should have aroused the
suspicion or doubt in Parish's mind that all may not be well in Tri-Sure,
notwithstanding the rosy, picture painted by Hegde and the audited accounts.
(a) Tri Sure's perennial money problems.
(b) Accounting asked for by New York in regard to moneys receiv ed on pro forma invoices, that is, by way of price for goods yet unmanu factured and undelivered, not sent despite reminder.
(c) Progressive and the phenomenal increases shown in sales from June, 1974, onwards, month by month, the effect of which was, in Parish's words, to stun him.
(d) Copies of production returns from June, 1974, onwards not sent to New York.
(e) Hegde insisted on going his own way, contrary to established practice and procedures, despite rebukes from Parish and Wheaton and disagreements with Grundy.
(f) Parish's view that Tri-Sure's board had not exercised effective supervision over Hegde.
(g) Hegde had been reluctant and hesitant to supply information and verify data at the meetings in February, 1975, and had absented him self from some of them.
(h) Parish
found the statement that 30% of the production for 1972-73 had been exported
difficult to accept in view of the fact that an American Flange subsidiary was
the traditional supplier to the market at which Tri-Sure exports were aimed.
In the circumstances, Parish should not have accepted
at face value the figures of exports in 1972-73 provided by Hegde and
Rammurthi. Parish should have done whatever he considered reasonable to
determine, independently of Hegde, Rammurthi, et al, whether there was not
something about Tri-Sure's affairs which these men were trying to conceal; he
did not. Parish could have communicated and discussed the aforesaid factors, or
even some of them, with Grundy; he did not. Parish could have communicated the
aforesaid factors, or even some of them, to Alpaiwalla of Fergusons, asked for
advice or insisted on an audit or some other means of investigation; he did
not.
What I have just said holds as well regarding the
incorrect figures of profits and sales, in the prospectus as it does regarding
the incorrect statement about exports in 1972-73. Directors are entitled to
rely upon the audited books of account, but not when they have reason to
suspect or doubt that the books may not have been kept so as to reflect the
company's true position. I have no doubt that a reasonable man dealing with his
own investment when acquainted with the factors which I have mentioned or even
some of them, would have suspected that Tri-Sure's books might not reflect the
true position and that the figures provided by Hegde and other Tri-Sure's
employees might not be correct. A reasonable man would not have signed the
prospectus on the say-so of Hegde and Rammurthi and other Tri-Sure's employee's
or upon the basis of the books maintained by them. This is not, as I look at
it, a view borne out of hindsight or a view no businessman would take, as Mr.
Chagla submitted. To adopt the language of the Mysore .High Court in the
Supreme Bank of India's case [1964] 34 Comp Cas 34, circumstances came to
Parish's notice which should have raised reasonable doubt or suspicion about
the integrity of Hedge. It became then Parish's plain duty to examine the
position and take such steps as were reasonable in the circumstances. These
circumstances were of such a character, so plain, so manifest and so simple of
appreciation that no man with a degree of prudence on his own behalf, would
have omitted to, at least, look into the matter.
Mr. Chagla submitted that s. 633 took into account
cases of negligence. It does. There may be cases where negligent conduct may
yet be held to be reasonable. This is not one of them.
On the material before me, I am not reasonably
satisfied that Parish acted reasonably.
I turn now to consider whether Wheaton can be said to
have acted reasonably. He had almost the same grounds for suspicion as Parish
before Parish came to Bombay in February, 1975, but did not hearken to them.
Mr. Chagla urged that it was permissible for him to sign the prospectus by
proxy. It is; but, it is not permissible thereby to shift or evade the
responsibility of ascertaining the truth of the contents of the prospectus. I am
not, on the material before me, reasonably satisfied that Wheaton acted
reasonably.
Parish deposed that Parker had been practising as a
patent counsel and had now retired. He had not been well enough to come to
India in February, 1975, and was still in ill-health. Parker had filed an
affidavit in these proceedings in which he has set out matters which make it
clear that he was appointed a director of Tri-Sure by reason of his special
expertise as a lawyer. He could not have had knowledge of any of the factors
that should have raised suspicion and doubt; certainly, there is no evidence
that they or any of them were communicated to him. It is reasonable that he
should expect that Parish and Yien, who were men of business and directly
concerned with Tri-sure's business affairs, would ascertain the truth of the
contents of the prospectus before it was signed. On the material before me, I
am reasonably satisfied that Parker acted reasonably.
Grundy deposed that in 1962-63 Parish's father had
asked him whether he would act for Tri-Sure ; he had replied that his firm
would. Parish Senior had asked whether the firm would provide two directors and
had replied in the affirmative, provided that there was a businessman on the
board who was based in India. Since that time, Grundy's firm of Little and Co ,
and for a short while Grundy personally, have acted as Tri-Sure's legal
advisers.
Grundy deposed that a draft of the prospectus was
sent to him for legal advice. At the meetings of February, 1975, his
participation had been confined to legal matters. In cross-examination, Grundy
said that Hegde's instructions were that he (Grundy) should send copies of all
matters which had legal implications. He could not recall any occasion on which
Hegde had discussed with him a purely business matter with no legal
implications.
On the record before me it is clear that Grundy was
what is called a solicitor-director. As the Delhi High Court held in the case
of Om Parkash Khaitan [1978] 48 Comp Cas 85, a distinction has to be made
between directors who are on the board purely by virtue of their technical
skill and those who are in effective control of the management and affairs of
the company. It would be unreasonable, as that court said, to fasten liability
on independent directors for defaults and breaches of the company where such
directors were appointed by virtue of their special skill or expertise but did
not participate in the management.
It is reasonable that Grundy. should have expected
Parish and Yien to ascertain the truth of the contents of the prospectus before
it was signed. There is no evidence that any of the grounds of suspicion and
doubt were known to Grundy or communicated to him. On the material before me, I
am reasonably satisfied that Grundy acted reasonably.
In so far as Parker and Grundy are concerned, it now
becomes necessary to decide whether having regard to all the circumstances of
the case, including those connected with their appointment, they ought fairly
to be excused. As I have pointed out, the action of offering to take back from
allottees the shares of the company and to refund to them the share value with
interest and the action of refunding to shareholders who did not take advantage
of the aforesaid offer the premium amount of Rs. 7 50 per share shows that there
can have been no loss by reason of the mis-statements in the prospectus. There
is no reason that I can see why, then, Parker and Grundy should not fairly be
excused from the prosecution and its consequences.
In the circumstances, I would extend the protection
of s. 633 to Parker and Grundy.
I wish to make it very clear that this judgment does
not indicate, and should not be read to indicate that a prosecution should be
launched —or should not be launched—against Parish and Wheaton. If a
prosecution is launched the court hearing it should decide it, on the record
before it and independently of this judgment. It will be open to Parish and
Wheaton—if it is permissible in law—to plead s. 633 again before the court
hearing the prosecution and the court will decide upon this plea again having
regard only to the material before it.
I wish to record my appreciation of the fairness with
which counsel for the petitioners and for the Registrar of Companies have
brought to my attention the relevant portions of a voluminous record and the
apposite law.
In the result, the third and the fourth petitioners
are relieved of all liability under s. 633 of the Companies Act in regard to
the misstatements in the prospectus dated 23rd February, 1975. In so far as the
first and the second petitioners are concerned, the petition is dismissed. The
petitioners shall pay to the Registrar of Companies the costs of the petition
quantified at Rs. 4,000.
On Mr. Chagla's application I direct that no
prosecution shall, in any event, be filed against the 1st and 2nd petitioners
until after 12th January, 1981.
JUDGMENT
Deshpande C.J. (dated March 3, 1981)—This is
an appeal against the judgment of Bharucha J. dated 8th December, 1980, in
Company Petition No. 308 of 1977.
The four directors of a company named Tri-Sure India
Ltd. (hereinafter referred to as "the company)" filed the above
petition for relief under s. 633 of the Companies Act, 1956 (hereinafter
referred to as "the Act").
They, with some other directors of the company, are
the signatories to a prospectus dated 26th February, 1975. The company itself
was originally registered in West Bengal as a private limited company on 12th
February, 1960. Its shareholders were the nominees of the American Flange and
Manufacturing Co. P. Ltd. registered in America. The company decided to make it
a public limited company and invite applications for additional share capital.
On 20th February, 1975, the company became a public company by passing an
appropriate resolution. A few days before the same, one Hegde was appointed a
managing director of the company on 21st January, 1975. He had already been a
whole-time director of the company from 1972 itself. Three of the petitioning directors
are admittedly Americans and they reside in America. The fourth petitioning
director, Charles Grundy, is a citizen of U.K., but resides in India and is a
partner of the solicitors' firm, Little and Co. in Bombay.
The said prospectus admittedly contained two
incorrect statements : (1) that during the year 1972-73, 30% of the products of
the company were exported, and (2) that the figures of the sales and profits of
the company indicated by reference to the year ending on 31st August, 1974,
were highly inflated. The Registrar of Companies issued a show-cause notice on
5th March, 1977, calling upon the petitioning directors and other directors to
explain why they should not be prosecuted for offences under ss. 62 and 63 of
the Act for issuing a prospectus containing untrue statements with regard to
the affairs of the company. The present petition was filed by the four
directors mentioned above in this court on 25th April, 1977, for relief under
s. 633 of the Act relieving them from the proposed prosecution on the ground
that they had acted throughout the transaction honestly and reasonably.
At the trial three of the four petitioning directors
examined themselves on oath, when the learned trial judge indicated that
affidavit evidence filed in support of the petition was not enough to enable
him to adjudicate the points that arose in the petition. The Registrar of
Companies did not think it necessary to examine any witnesses in support of the
show-cause notice. Statement of the witnesses examined by one of the
petitioning directors, Wheaton, are placed on record, in addition to certain
other documents, though no attempt has been made to prove these by examining
the authors thereof. By his impugned order dated 8th December, 1980, the
learned judge held that all the four petitioning directors acted honestly. He,
however, held that of the four directors, Parker and Grundy alone can be said
to have acted reasonably. He was, however, not satisfied on the material placed
before him that the two appellants, viz., Parish and Wheaton, had acted
reasonably. Consistent with this finding, the learned judge relieved Parker and
Grundy, petitioners Nos. 3 and 4, of all liability under s. 633 of the Act in
regard to the said prospectus. The learned judge, however, declined to so
relieve the present appellants. Hence this appeal.
Before we deal with the points that really arise is
the present appeal, it will be convenient to take a resume of the circumstances
that ultimately led to the show-cause notice dated 5th March, 1977, and the
filing of the present petition on 25th April, 1977. Even before respondent No.
1 came to know about the said inaccuracies in the prospectus, the petitioning
directors had already started moving in the matter, as soon as they learnt that
the figures as to sales were inflated and the stock of the products
manufactured at the factory of the company was being removed by the managing
director of the company with a view to prevent its detection by the auditors of
the company and other directors of the company. On 3rd October, 1975, Wheaton
received a telephone call from an employee of the company, Siagaravelu,
indicating that the accounts of the company were not true. Singaravelu was
directed by Wheaton to contact Grundy. There was a meeting between Singaravelu
and Grundy on 4th October, 1975, at Calcutta. In the process of further
discussions, Grundy appears to have learnt from Singaravelu that at the end of
August, 1975, the stocks manufactured by the company were removed from the
company's godown to avoid inspection and were secreted in outside warehouses.
On Parish being apprised of such diversion of goods from the company's godown
on 6th October, 1975, Parish suggested that a special investigative audit
should be carried out by the company's chartered accountants, Ferguson and Co.
Wheaton also appears to have decided to come down to Bombay from America. On
getting an authority from the chairman, Parish, by a telex message, to Grundy
authorised Ferguson & Co. to carry out such a special investigative audit.
Wheaton arrived in Bombay on 10th October, 1975. Wheaton appears to have
discovered many more irregularities and the result was that Hegde tendered his
resignation on 17 th October, 1975. On 10th December, 1975, an inspector also
was appointed under s. 209A of the Act to inspect the company's books.
Ferguson & Co. submitted their special
investigative audit report on 20th April, 1976. The said report disclosed that
"there has been whole-sale fabrication and falsification of Tri-Sure's
books of account and records for the years ended 31st August, 1974, and 31st
August, 1975."
The annual general meeting of the company for the
year ending on 31st August, 1975, was convened by a notice dated 28th April,
1976. The special investigative audit report prepared by Ferguson & Co. was
enclosed along with the notice of the meeting. The report enclosed with the
notice disclosed that some of the statements in the prospectus were incorrect
and could not be justified. The directors offered to refund share moneys with interest
at 6% per annum from the date of allotment to all the allottees of shares who
claimed to have subscribed to the prospectus. About 600 allottees appear to
have taken advantage of this offer.
On "2nd June, 1976, the I.T. authorities seized
the account books, records and files of the company and the said records were
in their possession till the end of 1977. The inspector also submitted his
report on 8th July, 1976, under s. 209A of the Act. The report being
confidential was not sent to the company and was not available to the learned
trial judge. On 10th September, 1976, at an extraordinary general meeting of
the company, a special resolution was passed. In terms of the said resolution,
holders of equity shares who had subscribed to the fresh issue were made
entitled to get back the premium of Rs. 7.50 per share. There is no dispute
about these facts. It is sufficient to notice even at this stage that the
directors had started in right earnest in putting the house of the company in
order as soon as they came to know about the manipulation of the accounts from
Singaravelu on 3rd October, 1975. They also earnestly tried to compensate the
shareholders, who can be said to have been misled and put to some loss because
of the misrepresentations and incorrect statements which had crept into the
prospectus dated 26th February, 1975. It is not clear from the record as to
when precisely the Registrar of Companies learnt about these manipulations of
accounts and inaccuracies contained in the prospectus. It is, however, not in
dispute that the petitioning directors started corrective process even before
the Registrar had even come to know about these irregularities. Decision by the
Registrar to take action obviously is long after the initiation of the
corrective process commenced by the petitioners.
It is also worthwhile taking notice of the fact that
of the four petitioning directors, three including the appellants are the
residents of America. The Act itself makes a distinction between the
obligations of the whole-time director and the other directors who are expected
to look after the affairs of the company only through the eyes and ears of
executive officers appointed on the spot, and it is the whole-time director
such as the managing director, who is expected to be in charge of the day to
day affairs of the company, and who has better opportunities to detect the
irregularities and correct them in good time. It is not even suggested that the
petitioning directors or any one of them has been at any time party to the conspiracy
of manipulation of accounts or deliberate and intentional mis-statements in the
prospectus. Their liability for such inaccurate statements in the prospectus
springs from the provision of s. 63 of the Act. Sub-section (1) of s. 63 of the
Act reads as follows:
"(1) Where a prospectus issued after the
commencement of this Act includes any untrue statement, every person who
authorised the issue of the prospectus shall be punishable with imprisonment
for a term which may extend to two years or with fine which may extend to five
thousand rupees or with both, unless he proves either that the statement was
immaterial or that he had reasonable ground to believe, and did, up to the time
of the issue of the prospectus believe, that the statement was true".
Sub-section (2) is not relevant to the points that
arise in the present case. That the prospectus does include "untrue"
statements in regard to the two matters specified earlier is not in dispute.
Under the latter part of sub-s. (1) of s. 63 of the Act, it is open for the
person authorising the issue of the prospectus, such as the present directors,
to prove that "he had reasonable ground to believe, and did, up to the
time of the issue of the prospectus believe, that the statement was true".
It is true that the occasion for such person to prove
the reasonableness of his plea can arise only when he is prosecuted for an
offence under s. 63 of the Act. There is, however, no reason why the Registrar
should not take this into account, if in fact any such reasonable ground for
such belief is found by him to exist on the plea of such statement being
believed to have been true, even though ultimately the statement turns out to
be untrue. He has a duty to find if it is necessary, expedient and proper to
prosecute any one at all. This apart, s. 633 of the said Act expressly
authorises the court, before which the proceedings, for negligence, default,
breach of duty, misfeasance or breach of trust, are initiated against an
officer to relieve him either wholly or partly from his liability on such terms
and conditions as it may think fit. Sub-section (2) authorises the High Court
to give to the officer identical relief when such an officer has reason to
apprehend initiation of such proceeding against him. In other words, apart from
the right of such person to prove, reasonable ground of his belief in the
statement which subsequently turns out to be untrue on prosecution being
initiated, such an officer can also persuade the court to relieve him of his
criminal liability under s. 633 of the Act on proof of his honest and
reasonableness and all other circumstances of the case.
The learned trial judge has found that even the
appellant-directors had acted honestly in this matter. Mr. Dhanuka, the learned
advocate appearing for respondent No. 1, was fair enough not to challenge this
finding of the learned trial judge before us. As stated earlier, there is
nothing on record to suggest any dishonesty on the part of any one of these
directors excepting in the case of the managing director, Hegde, who is alleged
to have been responsible for all these mis-statements and the inflation of the
accounts. We may hasten to add that even his such alleged part is not the
subject matter of this case and anything that we may observe in regard to his
role cannot prejudice or otherwise affect his defence against such possible
charges against him. The learned trial judge declined to relieve the present
appellants only on the ground that they have not proved that they had acted
reasonably in the matter of signing the said prospectus.
The learned trial judge has relied on factors (a) to
(h) (p. 440 of the paper book, part I) which, according to the learned judge,
should have aroused the suspicion of the appellant-directors, suggesting that
all was not well in the company notwithstanding the rosy picture painted by
Hegde and the audited accounts. We have given our anxious consideration to
these factors. Mr. Chagla, the learned advocate for the appellants, contends
that none of these factors was enough by itself or collectively to justify any
suspicion or doubt in the mind of the chairman, Parish, against Hegde or any
officer of the company, and the directors must be held to have acted reasonably
while appending their signatures to the prospectus by relying on the managing
director, Hegde, and other executive officers of the company who were
instrumental in drafting the same. We find much substance in the contention of
Mr. Chagla. To begin with, we are unable to see how the company's perennial
money problems should have aroused the suspicion of the company's directors. In
any business concern, money problems are bound to be there even when it
flourishes. That money problem continued from year to year by itself cannot
justify any suspicion against the whole-time managing director or against the
officers of the company.
It is true that the American directors through their
local officers had called upon the managing director, Hegde, to submit accounts
of the moneys received on pro forma invoice and it appears that such accounts
were not sent by Hegde or other officers of the company in spite of demands
from them. It is not in dispute that the device of a pro forma invoice is
resorted to in cases where the company requires money and invoices are issued
for the goods which are yet to be manufactured. Such invoices reflect the
orders placed for production. The purchasers are required to advance purchase
price of the goods when the invoices are issued. It appears from the evidence
of the directors of the company that they did not approve of this method of
raising money. The chairman, Parish, from America had directed the managing
director, Hegde, to discontinue the said practice at once. Hegde's letter
informing about such discontinuation appears to have satisfied the chairman.
The last such letter was written by Hegde on 7th June, 1974. Admittedly, the
chairman, Parish, as also the financial adviser of the American Flange, Mr.
Yien, had called upon Hegde to give an account of the moneys that were
collected against the pro forma invoices, which were treated by Yien as
borrowings. It also appears from the record that notwithstanding such demands
for the statements of account, Hegde did not send the same. This correspondence
seems to have been carried on between May & August, 1974. The company's
officers themselves did not appear to have pursued the point further.
Reasonable inference from this conduct of the directors and Yien would be that
notwithstanding their objection to borrow moneys by taking advances against the
goods still not produced, they did not themselves think this irregularity to be
of any serious character. That the same appears to us to be grave at this late
stage when inflated figures are proved to have played a havoc by itself cannot
justify any conclusion that non-accounting of the moneys received against pro
forma invoices could have appeared to be equally grave at the time when Hegde
did not send the accounts thereafter, in spite of demand from Yien and the
chairman, Parish.
As indicated earlier, it is not suggested that Yien
and the other directors of the company did not act throughout honestly. If such
an honest director did not feel it necessary to pursue this point any further,
it cannot be said to be an unreasonable act on his part. It rather shows that
the irregularity did not appear to them to be so grave to justify any immediate
action. We will presently refer to the implications of the directors having
appointed Hegde as the managing director of the company on 21st January, 1975.
Suffice it to notice at this stage itself that such appointment of Hegde as the
managing director about five to six months after the detection of the
irregularities and the failure of Hegde to send the accounts as demanded
clearly indicate the degree of irregularities involved both in taking advances
against pro forma invoices and not sending the accounts for the benefit of the
directors. To our mind, the conclusion is irresistible that this irregularity
was not treated as of any consequence whatsoever. This alone can explain the inaction
of the directors to take immediate drastic action. It is difficult for us to
take subsequent events into account and judge, what appeared to everyone as an
insignificant act before 3rd October, 1975, to be an act of unreasonableness.
The third circumstance relied on by the learned trial
judge is with regard to the phenomenal increase shown in the sales from June,
1974, onwards month by month. It is true that in his evidence, the chairman,
Parish, claims to have been stunned by looking at the sale figures of
progressive and phenomenal increase. It is, however, not possible to isolate
his impression of being stunned from what he has said immediately thereafter.
He has stated in his evidence more than once that the explanations given to him
were quite satisfactory and he did not find anything objectionable whatsoever,
after he found that the balance-sheets pertaining thereto were duly audited by
the auditors of the company. It is again worthwhile to note that though sale
statements were sent month to month, the evidence is not clear as to how many
days after a particular month the statements were received in New York and how
many days thereafter they were processed and placed for the perusal of the
directors. It is also not clear as to with what degree of carefulness such
statements were examined or required to be examined by the directors personally
in the ordinary course. The directors are under no obligation to go through the
account books themselves carefully and even for that matter to examine the sale
statistics merely because such statements happen to have been received in their
offices. Mr. Dhanuka did not draw our attention to any provision in the Act or
any authority to suggest that the directors were under an obligation to examine
the statements of accounts without any rhyme or reason. We have already
indicated how the exact sale figures, howsoever inflated they may appear to be,
by themselves, cannot be sufficient to arouse any suspicion in the mind of the
directors. There is nothing to suggest that Hegde's integrity was ever in doubt
or whatever rebukes or remarks are claimed to have been passed by the directors
against him appear to have been due to his overacting. Overacting or indulging
in schemes which did not appear to be sound, would be irregular. This by
itself, in our opinion, cannot justify any suspicion in the mind of the
directors for doubting the correctness of the figures purported to have been
made in the account books.
The fourth circumstance relied on by the learned
trial judge is the failure of the Bombay office to send production returns from
June, 1974, onwards. It appears that such monthly production returns were sent
by the company to the Govt. of India. The record before us does not indicate as
to what was the source of the obligation of the company to send such returns.
It is, however, obvious that the obligation to send returns to the Government
must arise due to the arrangement between the company and the Govt. of India
under which the products might have been supplied to the Govt. of India. Copies
thereof appear to have been sent by the company to the American directors. Its
failure to send such copies and not of the statements, that appears to have
weighed with the learned trial judge. It is not suggested that sending of such
copies was obligatory on the part of Hegde under any arrangement arrived at
between the managing director, on the one hand, and the board of directors, on
the other.
It is true that the directors in America appear to
have noticed this failure on the part of Hegde to send such production returns
to New York. Though the Indian directors appear to have attributed their
ignorance about the company's affairs due to such failure on the part of Hegde,
in their statements and affidavits made by them after the fraud was detected,
there is nothing on the record to suggest that any one of the directors had any
occasion to take a very serious view of the failure of Hegde to send such
returns to them. Apart from the absence of anything on record, failure to send
such return was never considered to be important by the directors themselves.
Failure may assume some importance now that some fraud and falsification of
accounts has been discovered. We are, however, unable to see how this failure
by itself could have been sufficient to arouse any suspicion of the American
directors against the way in which the accounts were maintained by Hegde in the
company. A lot of prejudice appears to have been caused in this case while
judging the honesty and reasonableness of the petitioning directors by taking
into account the events which have been subsequently discovered. This approach,
to our mind, is not correct and is likely to result in miscarriage of justice.
Our attention is not drawn to any provision of the
articles of association of the company or to any agreement between the managing
director or the board of directors to suggest that the managing director or the
officers of the company were under any obligation to send such production
returns for enabling the directors in America to know the working of their
company in Bombay.
The fifth circumstance relied on by the learned trial
judge is that Hegde insisted on going his own way. This is based on the
evidence of the directors suggesting that Hegde used to do what he liked in Bombay
regarding the affairs of the company. Now, the anxiety to act without
consulting the directors by itself cannot be a ground for suspecting his
honesty and integrity. The details elicited on this point in the
cross-examination of the three petitioning directors do not justify any
conclusion that Hegde was abusing his position as the managing director by
acting in his own way. The petitioning directors, at any rate, did not appear
to have suspected even though they were displeased with the manner in which he
was acting on the work of the company. We are also unable to find any
justification for describing the exchange of thoughts between Hegde on the one
side, and the American directors on the other, as rebukes and disagreements.
It is true that in his evidence the chairman, Parish,
admitted that the board did not exercise effective supervision over Hegde. The
question at issue while considering the directors' liability under s. 633 of
the Act is not whether the board had exercised effective supervision over Hegde
or not. The only question is whether the directors were carrying on their
statutory obligations or were they required to do more than what they were
doing. Mr. Dhanuka was unable to tell us how this supposedly lack of
supervision had anything to do with the detection of inflated sales figures or
mis-statements in the prospectus as to the percentage of exports. These two
things could not have been ascertained by the directors correctly except by
examining the account books themselves. If the information given to them by the
managing director turned out to be incorrect and inaccurate, the same cannot be
attributed to the supposed ineffective supervision by the board of directors.
It is true that the directors' evidence suggests as
if Hegde was reluctant to give any information and verify the data contained in
the prospectus from other sources, when questions were asked at the meeting
held in February, 1975, in which the prospectus appears to have been signed by
the directors. The chairman, Parish, suggested that Hegde even absented himself
from the meetings on some occasions. The true effect of these supposed acts of
Hegde shall have to be determined not by discussing what was discovered
subsequently, but what was known to the directors at the time when the
prospectus was signed by them on 26th February, 1975. It is in this context
that the evidence of the petitioning directors appears to be of much
significance. Notwithstanding the rebukes alleged to have been hurled at him by
the directors from time to time and notwithstanding the supposed disagreement
between Grundy and Hedge and notwithstanding the dislike of some of the
directors for Hegde, the latter was unanimously elected as the managing
director of the company on 21st January, 1975. Such appointment of Hegde as the
managing director reflects the degree of faith that the directors chose to put
in him. Such confidence could not have been put in by the directors in spite of
his having committed so many faults had these faults been of any serious nature.
He had gained such confidence due to his continued working as a whole-time
director from 1st January, 1972. The admissions made by the directors with
regard to the conduct of Hegde have got to be tested by reference to the
confidence which they found it possible to repose in him just one month
earlier. This confidence is eloquent enough to suggest that the stories about
disagreements and rebukes were of superficial nature, and nothing appears to
have been done by Hegde to justify any suspicion on his conduct. Even his
reluctance not to supply any information or absenting himself from some of the
meetings by themselves cannot detract from the degree of confidence that
appears to have been reposed by the directors in him which is reflected in his
appointment as the managing director unanimously on 21st January, 1975.
It is true that the chairman, Parish, has admitted in
his evidence that he found it difficult to believe that exports could have been
30% of the production during the year 1972-73. He does not appear to have made
some enquiry to allay his doubts. It cannot, however, be forgotten that Hedge
was a co-signatory along with all the directors to the prospectus. His becoming
a co-signatory could easily furnish an assurance to the other directors that to
the knowledge of Hegde the statements made in the prospectus were true. The
fact that Hegde was as much liable to be prosecuted as the other directors in
the event any of the statements turned out to be untrue also could have created
confidence in the truthfulness of these statements. Having regard to all the
facts and circumstances of the case as that had existed to the knowledge of the
directors on 26th February, 1975, we are unable to hold that the directors
acted unreasonably. If they found Hegde to be trustworthy to be appointed as a
whole-time director on 21st January, 1975, certainly they could not have found
anything suspicious when he himself became a signatory to the prospectus and
when the board of directors had chosen him unanimously.
The degree of care and vigilance that is required to
be exercised by the directors in a limited company is now a matter of settled
law. The learned trial judge himself has referred to a judgment of the House of
Lords in the case of Dovey v. Cory [1901] AC 477. The said ratio was followed
by Romer J. in the case of In re City Equitable Fire Insurance Co. Ltd. [1925]
1 Ch D 407 (CA), at page 427. These observations have been followed by all the
Indian courts till this day. If the conduct of the appellants is judged by all
the tests laid down by Lord Halsbury and Romer J. in these cases, they, in our
opinion, are entitled to be relieved of their liability under s. 633 of the
Act.
We accordingly set aside the judgment of the learned
trial judge to the extent to which it applies to the appellants and allow the
appeal as also their application for relief under s. 633 of the Act against any
liability under s. 633 thereof. The appellants to pay to respondent No. 1 the
costs of this appeal quantified at Rs. 2,000. The order of the trial court as
to the costs of the Registrar of Companies in the petition will remain.
Mr. Chagla states that the
notarised statements of the officers of the company are marked Ex. B in the
present proceedings. He requests for the return thereof. The same may be
returned to the appellants on their furnishing copies thereof for the record of
the court and on their undertaking to produce the originals thereof in the
event they are called upon to do so.
[1966]
36 COMP. CAS. 585 (ALL.)
HIGH COURT OF ALLAHABAD
Ramchandra & Sons Private Ltd.
v.
D
P UNIYAL, J.
CRIMINAL
REVISION NO. 828 OF 1964
APRIL
8, 1966
JUDGMENT
These ten
connected revisions involve the consideration of identical questions of law and
I, therefore, propose to dispose of them by a single judgment.
In nine of the
above cases, three applicants who are a private limited company, managing
director and director of the company, have been convicted under section 220 of
the Companies Act for committing default in filing with the Registrar copies of
the balance-sheet and the profit and loss account of the company within 42 days
of holding of the annual general meeting. In the last mentioned case they have
been convicted under section 162 for not complying with the provisions of
section 159 which requires every company to file with the Registrar an annual
return made by the company within the prescribed period.
It is not
denied-indeed it is admitted-that no general meeting of the company had been
called and the balance-sheet and profit and loss account of the company had not
been laid before it. It is also admitted that the annual returns had not been
filed with the Registrar within the stated period as required by section 159.
The defence
put forward by the applicants was that in the years in question no general
meeting had been held and, therefore, no balance-sheet and profit and loss
account was filed with the Registrar of the Joint Stock Companies. It was urged
that these preliminaries not having been fulfilled, it was impossible for the
company or the directors to comply with the requirements of section 220. It was
said that the applicants should have been convicted, if at all, not under
section 220 but under section 168 for default in calling a general meeting.
In this
connection stress was laid on the language of section 220(1) which says:
"After
the balance-sheet and the profit and loss account have been laid before a
company at an annual general meeting as a aforesaid, there shall be filed with
the Registrar at the same time a copy of the annual return referred to in
section 161."
It was
contended that the opening words of the section require the filing of the
balance-sheet and the profit and loss account with the Registrar after the same
had been laid before the general meeting. No balance-sheet and profit and loss
account could have been filed with the Registrar as the condition precedent had
not been fulfilled. It was, therefore, sought to be contended that the
conviction of the applicants under section 220 could not be sustained.
On behalf of
the applicants strong reliance was placed on Emperor v. Pioneer Clay and
Industrial Works Ltd. A.I.R. 1948 Bom. 357. In that case the applicants had
been convicted under section 134(4) of the Companies Act for failure to file
with the Registrar three copies of the balance-sheet and accounts of the
company. Chagla C.J. accepted the defence of the accused and held that the
stage had not arrived when they could be called upon to send copies of the
balance-sheet and profit and loss account, because that stage could only be
reached after a general meeting had been called and the balance-sheet and
profit and loss account had been placed before that meeting. The learned Chief
Justice was of the view that in the circumstances no offence had been
committed. He did not agree with the opinion of the Calcutta High Court in
Devendra Nath Das Gupta v. Registrar of Joint Stock Companies (1918) I.L.R. 45
Cal. 486, which followed the rule laid down in Park v. Lawton [1911] 1 K.B.
588, 592, that it is not open to an accused to plead in answer to a charge
under section 134 his prior default in respect of the calling of the prescribed
general meeting and of placing before the company at such meeting duly prepared
and audited balance-sheet.
The facts upon
which a conviction had been founded in Park v. Lawton [1911] 1 K.B. 45 Cal. 486
were these. The accused, two directors of the company, were charged with an
offence under section 26 of the English Companies ( Consolidation ) Act, 1908,
in that they knowingly and wilfully permitted default to be made by the company
in forwarding to the Registrar of Companies a copy of its list of members, with
summary as to capital and shares for the year 1909, as required by section 26.
Section 26 of the English Act provided that a company, "shall once at
least in every year make a list of all persons who, on the fourteenth day after
the first or only ordinary general meeting in the year, are members of the
company". No general meeting of the company had been held during the year
1909 and the accused had taken no steps to hold such a meeting. The question
turned on the meeting of section 26 of the English Companies Act; sub-section
(5) of that section imposed a penalty if default was made in complying with the
requirements of the section. Lord Alverstone C.J. stated that principle of law
in these words:
" The
cases of Gibson v. Barton L.R. 10 Q.B. 329 and Edmonds v. Foster 45 L.J. (M.C.)
41 are clear authorities that a person charged with an offence under section 26
is not entitled by way of defence to plead the impossibility of complying with
section 26 by reason of no general meeting having been held, at any rate if the
person charged was also a party to the default in holding the meeting; in other
words, a person charged with an offence cannot rely on his own default as an
answer to the charge. If it were the case that everything required to be
inserted in the list was dependent on the fact of the general meeting having
been held, it might perhaps have been contended with some force that it is
impossible to calculate a continuing penalty from a day which has never come
into existence: but when one sees that section 26 requires a number of most
important matters to be included in the list of members which are entirely
independent of the holding of a general meeting this very much weakens the
contention that no list need be compiled if, owing to the failure to hold a
general meeting, it is impossible to say what day is the fourteenth day
thereafter."
The above
principle was affirmed by the Supreme Court in State of Bombay v. Bandhan Ram
Bhandani [1961] 31 Comp. Cas. 1, 6; [1961] 1 S.C.R. 801. Their Lordship were
considering a case in which the directors of a company had been charged with
offences under section 32(5) and section 133 of the Companies Act for having
knowingly and wilfully failed to file the summary of share capital for a
certain year as required by section 32(3), and for failure to lay before the
company at the general meeting the balance-sheet and profit and loss account as
required by section 131. No general meeting had been held in that case and the
point raised before the Supreme Court was that as no annual general meeting had
been held it was impossible for the directors to comply with the provisions of
section 131. On behalf of the accused if had been contended that the view taken
by Chagla C.J. in Emperor v. Pioneer Clay and Industrial Works Ltd. A.I.R. 1948
Bom. 357 was the sound one and the accused were not liable to be convicted for
default in complying with the provisions of section 131 inasmuch as no annual
general meeting had been held which was a condition precedent to the filing of
these documents with the Registrar. The Supreme Court pointed out that Chagla
C.J. had not questioned the correctness of the decision in Park v. Lawton
[1911] 1 K.B. 588 and observed [1961] 31 Comp. Cas. 1, 6; [1961]1 S.C.R. 801:
" The
fact that one of the requirements of the English section 26 is not present in
section 32 of our Act cannot create any material difference between section 32
of our Act and section 26 of the English Act. If the principle that a person
charged with an offence cannot rely on his own default as an answer to the
discharge is correct, as we think it is, and which we do not find Chagla, C.J.
saying it is not, then that principle would clearly apply when a person is
charged with a breach of section 32 of our Act."
It is true
that section 220 is not very happily worded in that the opening words of the
section indicate that the balance-sheet and profit and loss account required to
be filed with the Registrar must be such as have been laid before the annual
general meeting. That, however, in my opinion does not and cannot absolve the
company or its directors from performing their statutory duty in filing the
balance-sheet and the profit and loss account with the Registrar within the
stated time. It seems to me that the fact that sub-section (3) of section 220
makes the offence a continuing one shows that the obligation to file the
balance-sheet and the profit and loss account is independent to the holding of
a general meeting.
In Viswanathan
v. Assistant Registrar of Joint Stock Companies [1953] 23 Comp. Cas. 63.
Ramaswamy J. pointed out that sections 76 and 133 create two distinct offences,
namely, one for not holding a general meeting and another for not laying
balance-sheet before the general meeting. Thus the same transaction may give
rise to several distinct offences and it is not open to the accused directors
to plead their own default by saying that as no general body meeting could be
held no question of placing the balance-sheet arose and, therefore, no offence
was commited.
The above
discussion would go to show that all the High Courts, with the exception of the
Bombay High Court in the case of Emperor v. Pioneer Clay and Industrial Works
A.I.R. 1948 Bom. 357 are of the view that the company and its directors are
liable to be convicted for their failure to file the balance-sheet and the
profit and loss account with the Registrar of Joint Stock Companies even if no
annual general meeting had been held at which it could have been laid.
It was next
contended that it had not been shown that the applicants were officers who had
committed default. The expression "officer who is in default" has
been defined in section 5 and means any officer of the company who is knowingly
guilty of the default, etc., or who knowingly or wilfully permits such default.
The submission was that the default had not been committed knowingly and
wilfully by the applicants and, therefore, they could not held guilty under
section 220.
In Gibson v.
Barton [1874-75] L.R. 10 Q.B. 329,339, at page 339, Blackburn J. said that:
" If a
man is allowed to manage the company, so that de facto he can get a meeting
called when he likes, and he does not show that he ever made the attempt to
call a meeting, it is some evidence that he has knowingly and wilfully
permitted a default in calling the meeting, the meeting being necessary as a
condition precedent before a list of members could be sent."
Lush J. agreed
with the opinion of Blackburn J. and pointed out that :
" If
the accused had shown that he had summoned the directors and taken reasonable
steps to enable them to hold the meeting, then he might not have become liable;
but there is nothing of that kind shown, and I think that the inference is a
very reasonable one that the omission to hold the general meeting in the year
1873, which according to our view the company ought to have held, was an
omission with its sanction. He is, therefore, guilty and liable to the penalty
for having knowingly and wilfully committed that default."
In Reg. v.
Senior [1899] 1 Q.B. 283, Lord Russell of Killowen C.J. said that the
expression "wilfully" means that the act is done deliberately and
intentionally; not by accident or inadvertence, but so that the mind of the
person who does the act goes with it. He further said that "neglect is
want of reasonable care, that is, the omission of such steps as a reasonable
person would take such as are usually taken in the ordinary experience of
mankind."
It is not
disputed that the applicants were under an obligation to call a general meeting
every calendar year, and also that they were under a statutory duty to lay the
balance-sheet and the profit and loss account of the company before that
meeting. The statute further provides that the company and its directors shall
forward copies of the balance-sheet and the profit and loss account laid before
the general meeting to the Registrar of Joint Stock Companies within the stated
time. Failure to do either has been made punishable and is treated as a
continuing offence. It was said by the accused that they were unable to hold
the annual general meeting as the books of the company had been filed in
criminal courts in connection with certain cases. Even if that was so, it could
not have prevented the applicants from inspecting the documents with the
permission of the court concerned. There was no difficulty in preparing the
balance-sheet and the profit and loss account after verifying the figures and
getting it audited. I am not statistical that the applicants took steps to get
the balance-sheet and profit and loss account prepared as required by the
Companies Act. The applicants being responsible officers of the company could
not be heard to say that they were not aware of the duties imposed by law on
them. The duties attaching to the office of director of a company required him
to call an annual general meeting and to see that the requisite balance-sheet
and profit and loss account are prepared and, after being laid before the
general meeting, they are forwarded to the Registrar in accordance with law.
The applicants were thus liable for not complying with the mandatory provisions
of the Companies Act. The applicants were in my opinion officers who were in
default.
The further
question that requires to be considered in this connection is whether the court
ought to excuse them for their default in exercise of its power under section
633. The court has discretion to relieve an accused from liability if it is
satisfied that he has acted honestly and reasonably. I have already said enough
to show that the failure of the accused to hold the general meeting and to file
the balance-sheet and the profit and loss account with the Registrar within the
prescribed time were acts done in violation of their statutory duties as
director. They could not, therefore, be said to have acted honestly, that is,
bona fide or reasonably, which is the same thing as acting with due care and
diligence expected of a person holding a responsible office. In the
circumstances there could be no question of the applicants being given the
benefit of section 633.
So far as the
revision application relating to the conviction of the applicants under section
162 is concerned, it had been entertained on the question of sentence only by
the learned sessions judge. Having regard to all the circumstances of the case
he was of the opinion that there were extenuating circumstances in favour of
the applicants and he accordingly reduced their sentences of fine from Rs. 150
to Rs. 50 each. I see no reason to make any further reduction in the sentences
of fine imposed on the applicants.
Before I part
with this case, I would like to emphasise that under the Companies Act several
duties have been imposed on the directors in order to safeguard public interest
at various stages in the management of the company. If the directors were
allowed to flout the obligatory provisions of the Act, it would set at naught
the very object for which the law has been enacted.
In the result
these revisions fail and are dismissed.
[1960]
30 COMP. CAS. 523 (RAJ.)
V.
I
N Modi, J.
CRIMINAL
REVISION NOS. 88 TO 91 OF 1959
February
22, 1960
I N MODI,
J.- These are four revisions
between the same parties and involve the determination of identical questions
of law. I, therefore, propose to dispose of them by a single judgment.
The material
facts leading up to these revisions may be shortly stated as follows.
Petitioner No. 1, Messrs. Saraswati Printers Ltd., Jaipur, was a firm which
having a share capital was incorporated as a public limited company on the 21st
January, 1944, under the Companies Act of the former Jaipur State. Petitioner
No. 2 was the managing director of that company while petitioners Nos. 3 to 6,
among others, were its directors at all relevant times. The last annual general
meeting of the company was held on the 24th December, 1952. Thereafter no such
meeting was held until the 11th January, 1957. The petitioners were, therefore,
prosecuted at the instance of the Registrar of Companies, Rajasthan, for not
having held a general meeting under section 76 of the Indian Companies Act (VII
of 1913) (hereinafter referred to as the Act), and for not submitting the
annual list of its members and the various other particulars under section
32(3) of the Act, and for not laying before the company in general meeting a
balance-sheet and a profit and loss account under section 131(1) , and for not
sending three copies of such balance-sheet, and profit and loss account to the
Registrar under section 134 of the said Act with respect to the years 1953 to
1956. It is also alleged that notices were issued from time to time to the
company and its officers asking them for compliance with respect to the provisions
afore- mentioned but without any effect.
The defence of
the petitioners was that it was found some time towards the end of 1952 that
the company was working at a loss and so it was resolved that with a view to
meet the claims of the various creditors of the company the board of directors
be authorised to sell or otherwise dispose of all the fixed or liquid assets of
the company in one or more lots on such terms or conditions as the board should
think fit and the directors were further authorised to take all the necessary
steps to achieve this end. It was also pleaded that the directors in their
meeting dated the 24th December, 1952, had decided to transfer the total assets
of the company to Messrs. Indermal chandmal, a firm of the managing director chandmal
against the entire debts due from the company, and that the petitioner Chandmal
had taken upon himself the entire responsibility with respect to the affairs of
the Company from December, 1952, onwards. The petitioners, other than Chandmal,
therefore, contended that they were not responsible for calling the general
meetings or doing the various other acts with respect to which they had been
prosecuted. So far as the petitioner Chandmal is concerned, he admitted that he
was the managing director of the company from 1953 to 1956 but his defence was
that as he had to go to Indore on account of unavoidable business commitments
he could not call the general meeting or carry out the various other functions
which he was required to do under the Act but his defaults were not made
wilfully, and, therefore, he prayed for condonation under section 281 of the
Act.
The trial
court found the company and the other petitioners guilty under sections 32, 76,
131 (1) and 134 of the Act and sentenced them to pay a fine of Rs. 50, on each
count for each of the four years in question. The petitioners thereafter went
in appeal to the learned sessions Judge, Jaipur City, who upheld their
convictions but halved their fines. THe petitioners have now come up to in
revision to this court.
The main
contention of the petitioners before this court was that once the petitioners
were convicted under section 76 of the Act, they should not have been further
convicted under the various other sections under which they were prosecuted as
a matter of law, inasmuch as the other defaults all flowed from the fact that
no general meeting for the respective years had at all been held, and,
therefore, the other defaults were a natural and inevitable consequence of the
primary default under section 76 and did not constitute any independent default
on the part of the petitioners. Developing the point it was argued that where
an annual general meeting was not held for a particular year, then it was
impossible to lay the balance-sheet or the profit and loss account of the
company before the said meeting or to send a copy thereof to the Registrar or
even to send a list of the members and the other particulars required under
section 32 of the Act. Putting the same argument from another angle, it was contended
that if a general meeting had been held for a particular year and then the
various requirements had not been fulfilled as laid down in section 32 of 131
or 134 of the Act, then a prosecution for these other defaults could well have
been successfully launched, but not where the annual general meeting itself had
not been held, and, therefore, it was physically impossible to comply with the
various requirements of the other sections with which we are concerned. Learned
counsel for the petitioners placed strong reliance on In re Narasimha Rao
{[1937] 7 Comp. Cas. 80}, Surendra Nath v. Emperor {[1942] 12 Comp. Cas. 252.}
and Emperor v. Pioneer Clay & Industrial Works {[1948] 18 Comp. Cas. 31}.
In In re
Narasimha Rao {[1948] 18 Comp. Cas. 31}, certain directors of the company were
prosecuted for not sending a copy of the balance-sheet after laying it before
the general meeting of the company, both under section 131 and section 134,
with respect to a number of years. It was held by a learned single judge of the
Madras High Court that a conviction under sections 131 and 134 both with
respect to the same persons for the same years was not possible because section
134 contemplates the sending of a copy of the balance-sheet only after it had
been placed before the general meeting of the company, and where the
balance-sheet had not at all been so placed, the offence under section 134
could not possibly have been committed. In this view of the matter, the
convictions under section 134 were quashed.
In Surendra
Nath v. Emperor {[1942] 12 Comp. Cas. 252.} the facts were these, The managing
director of a company was convicted under section 76 of the Act, and thereafter
he was prosecuted under section 32 and was convicted by the trial court. In
revision it was held by a learned single judge of the Calcutta High Court that
the second prosecution was "rather pointless after the first". The
learned judge proceeded to observe that it would have been another matter if
the defence of the petitioner had been that the general meeting was held and
then it was found that he had committed a default under section 32. The
attention of the learned judge was invited to the decision of the Court of
Appeal in Park v. Lawton {[1911] 1 K.B. 588}, which dealt with the
interpretation of a similar provisions under the English Act; but the latter
ruling was distinguished by saying that all it held was that a person could not
put forward the impossibility as a defence if the impossibility had been due to
his own default. With all respect, it seems to me rather difficult to hold that
the decision in the English case was not applicable because the same petitioner
was first prosecuted under section 76 and then under section 32, and obviously,
therefore, it could hardly be said of him that the impossibility of carrying
out the requirements of section 32 had not proceeded from his own default under
section 76.
It is
important to point out here that there was an earlier Bench decision of the
Calcutta High Court in Debendra Nath Das Gupta v. Registrar of Joint Stock
Companies, Bengal {A.I.R. 1917 Cal. 1.}, which does not seem to have been
brought to the notice of the learned single judge. The petitioner in this case
was a director of a joint stock company and was convicted under section 134 of
the Act in respect of a default made about filing with the Registrar the
balance-sheet for a certain year. The defence of the petitioner in revision was
that there was no general meeting in that year, and, therefore, no
balance-sheet was laid before the company at any such general meeting, and as
these preliminaries had not been fulfilled, it was impossible for him or his
company to comply with the provisions of section 134, and that if at all he
should have been convicted under section 76 or section 131 but not under section
134. This contention was repelled, it having been held that the petitioner as
one of the directors was himself responsible for ensuring that all necessary
preliminaries should have been observed, and that on the principle of the
decision of the Court of Appeal in Park v. Lawton {[1911] 1 K.B. 588}, it was
not open to the petitioner to plead his prior default with respect to the
calling of the prescribed general meeting.
This brings me
to the decision of the Bombay High COurt in Emperor v. Pioneer Clay &
Industrial Works {1948] 18 Comp. Cas. 31}. The default in this case arose under
section 134(4) of the Act in the matter of filing with the Registrar of
Companies three copies of the balance-sheet and the profit and loss account of
the company for a certain year. It was common ground that no general meeting of
the company was called at which the balance-sheet and the profit and loss
account of the company for the year 1944 could have been laid. It was held that
the acquittal of the accused under section 134(4) was correct. The ratio of
this decision was that no conviction under section 134(4) is possible until the
stage of sections 76 and 131 has been gone through. With reference to the
decision of the Court of Appeal in Park's case {[1911] 1 K.B. 588}, it was held
that that decision was based on section 26 of the English Act which in its
scheme and terms was entirely different from the section with which we are
concerned. The learned judges in the this case refused to follow the decision
of the Calcutta High Court in Debendra Nath Das Gupta v. Register of Joint
Stock Companies A.I.R. 1917 Cal. 1, and pointed out that the learned judges in
the Calcutta case had not taken due note of the language of section 134 as we
have it in India. It was further pointed out that what the accused person
realise on in a case like this is not on his earlier default but on the factor
that the stage at which his prosecution could have been made had not arrived.
In other words, the real defence was that they could have sent copies of the
balance-sheet and the profit and loss account only after general meeting had
been called and the balance-sheet and the profit and loss account had been
placed before that meeting. In this view of the matter the acquittal of the
accused under section 134 was maintained.
As I
understand the case,however, I may state at once that it is no authority for
the broad proposition for which learned counsel contends, namely, that once the
accused has been prosecuted under section 76 of the Act, his further
prosecution under section 32 or section 131 of the Act cannot be maintained. In
fact CHAGLA, AG. C.J. as he then was, clearly laid down that in that case the
directors were in default both in not calling a general meeting and also in not
laying the balanced-sheet and profit and loss account before such a meeting,
and that in not carrying out either of these requirements and obligations they
rendered themselves liable to the penalties provided by the Act, and it was
open to Government to prosecute them under either of these two sections. What
seems to have prevailed with the learned Acting Chief Justice in the case was
the peculiar language of section 134 which, to my mind, is rather unhappy. The
wording of the section is that " after the balance-sheet and profit and
loss account (or the income and expenditure account as the case may be) have
been laid before the company at the general meeting ", three copies
thereof signed by the manger or secretary of the company shall be filed with
the Registrar at the same times as the copy of the annual list of members and
summary prepared in accordance with the requirements of section 32. In the
other words, certain copies of the balanced-sheet and the profit and loss
account have to be filed with the Registrar only after the balance-sheet and
the profit and loss account or the income and expenditure account, as the case
may be, have been laid before the company at the general meeting. Where,
however such balanced-sheet and account have not been placed before a general meeting
of the company, it would appear, on the authority of this case, that an offence
under section 134 would not be committed. I propose to examine the Bombay view
as a to the correct interpretation to be put on section 134, a little more
closely hereafter. But even on this view of section 134 which is indeed
plausible, I have no hesitation in saying that the further contetion that a
prosecution under section 32 or under section 131 is not possible in law on
account of a prosecution under section 76 would be going very far indeed, and
for such a proposition the case of Emperor v. Pioneer Clay & Industrial
Works, [1948] 18 Comp. Cas. 31., is no authority. The reason is that the
language of all the other sections with which we are concerned, namely,sections
32, 76 and 131, is entirely different from that of section 134, and the
considerations which may possibly seem to apply to section 134(1) do not and
cannot apply to the other sections. Thus section 32 provides that every company
having a share capital shall within a certain period from its incorporation and
thereafter once at least in every year make a list of all persons, who on the
day of the first or only ordinary general meeting in the year are members of
the company , and of all persons who have ceased to be member since the date of
the last return or the date of the incorporation of the company, as the case
may be. This list, it is further provided must state certain particulars
mentioned in sub-section (2) of the section. Sub-section (3) then provides that
the company shall send a copy of the above list and summary signed by the
director or the manager together with the certificate of its correctness to the
Registrar. Sub-section(5) then provides that if a company makes a default in
complying with the requirements of this section, it shall be liable to a fine
not exceeding fifty rupees for every day during which the default continues,
and every officer of the company who knowing and wilfully authorises or permits
the default shall be liable to the like penalty. It clearly seems to me that
the requirement of this section is essentially a requirement which is
independent of either section 76 or section 131. There is no question that, so
far as section is 76 is concerned, it lays down a basic requirement namely that
general meeting of every company shall be held within a certain period from the
date of its incorporation and thereafter once at least in every calendar year
and not more than fifteen months after the holding of the last preceding
general meeting and a default in this respect is punishable under sub-section
(2) of the section.
Then comes
section131. This section, broadly speaking, provides for the laying of a
balance-sheet and profit and loss account or an income and expenditure account
duly audited by the auditors of the company with their report at a general
meeting which must be called by the directors with reference to certain points
of time stated in sub-section (1) of section 131. Sub-section (3) of section
133 inter alia then provides that if any default is made in laying before the
company, or in issuing a balance-sheet and profit and loss account or income
and expenditure account as required by section 131,the company and every
officer of the company who is knowingly and willfully a party to the default
shall be punishable with fine which may extend to five hundred rupees. In the
my opinion, this provision on its plain language, provides for a distinct
default. Thus, where the directors are in default in not calling a general
meeting or in not laying the balanced -sheet or profit and loss account before
such a meeting or in not sending the list of members together with a summary
under section 32, I am of opinion that they render themselves liable to the
penalties provided by the Act for each and every one of these defaults provided
of course that so far as the directors or other officers are concerned, their
default is wilful and not inadvertent as distinguished from the default of the
company itself which has been made liable independently of any such requirement
and its liability is therefore,absolute.
It seems to me
that, to a default in any of the respects last mentioned the principle of the
decision of the Court of Appeal in Park's case [191[] 1 K.B.588 fully applies
without any doubt whatsoever. The facts in this case were that the respondents
who were all directors of the company were charged with an offence under
section 26 of the companies (consolidation) Act, 1908, for having knowingly and
wilfully permitted default to be made by the company in forwarding to the
Registrar of Companies a copy of its list of members with a summary of its
capital and shares etc. It was common ground that no general meeting of the
company had been held during the year in question. It was, therefore, contended
that it was impossible for them to comply with the requirements of section 26.
Now section 26 of Act of 1908 provided that once at least in every year a list
was to be made of all persons who " on the fourteenth day after the first
or only ordinary general meeting in the year are members of the company , ''
and further the list must contain a summary of some important particulars and
sub-section (5) of section 26 imposes a penalty if default is made in
compliance with the requirements of the section. LORD ALVERSTONE C.J., relying
on Gibson v. Barton L.R. 10 Q.B. 329 and Edmonds v. Foster 45 L.J. (M.C.) 41 ,
repelled the contention raised by the directors and held that :
" .....a
person charged with an offence under section 26 is not entitled by way of defence
to plead the impossibility of complying with section 26 by reason of no general
meeting having been held, at any rate meeting; in other words, a person charged
with an offence cannot rely on his own default as an answer to the
charge."
It was further
observed that : "
If it were the
case that everything required to be inserted in the list was dependent on the
fact of the general meeting having been held, it might perhaps have been
contended with some force that it is impossible to calculate a continuing
penalty from a day which has never come into existence; but when one sees that
section 26requires a number of important matters to be included in the list of
members which are entirely independent of the holding of a general meeting this
very much weakens the catenation that no list need be complied if,owing to the
failure to hold a general meeting, it is impossible to say what day is the
fourteenth day thereafter. "
Therefore, it
was held that it was no defence to the charge under section 26 for the
directors that no general meeting had been held the directors themselves having
been parties to the default in holding the general meeting .
In this view
of the matter, I have no hesitation in coming to the conclusion that the
conviction of the petitioners under sections 32 and 131 read with section 133
cannot be said to be wrong on the reasoning that their default under section 32
or 133 read with section 133 proceeded from an earlier dedault under section 76
of the Act and for which they stand prosecuted and punished.
The further
question which requires to be considered in this connection is whether the
default of petitioners Nos. 2to 6 under these section was intentional and
wilful. It may be pointed out in this connection that under the Act a company had
been made liable only where he knowingly and wilfully authorises or permits the
default. The result, therefore , is and must be that a company would be always
liable where any such requirements are not fulfilled without more, but the
officers of the directors of the company would be liable only if they knowingly
and wilfully authorise or permit such defaults.
Now there is
ample authority for the proposition that in order that the default should be
wilfully and knowingly committed, it need not necessarily be suggestive of
dishonesty or fraud on the part of those concerned. It is important to remember
in the this connection for the reasons already pointed out that the party in
default cannot be allowed to plead the impossibility of complying with the various
provisions of the Act for which he is being prosecuted on the ground that some
thing which was required to be done earlier was not done when such
impossibility is due to his own previous default. Be it noted that the language
of the relevant provisions is wide enough. A default to be punishable may not
have been authorised and yet it may be wilfully permitted, and if that is so,
it would be punishable. The law presumes,and rightly, that those who have
accepted the office of directors of a company know the duties attaching to
their office. Thus a positive duty had been laid on the directors to call an
annual general meeting under section 76 and to see that the requisite list and
summary of particulars are prepared and sent to the Registrar under section 32
and that a balance-sheet and a profit and loss account (or an income and
expenditure account, as the case may be ) duly audited are laid before the
company in general meeting, broadly speaking , once in every calendar year
under section 131 of the Act. The directors, therefore, cannot be allowed to
escape the performance of these duties by the mere plea that they had no real
control over the affairs of the company and therefore, they did not wilfully
permit the default. It is their duty not to mere passive spectators of what is
going on but to see and make the nursery attempt that the statutory
requirements are carried out, and where this has not been done, the courts can
and would legitimately infer that the defaults thought not expressly authorised
were still wilfully permitted. See Ballav Das v. Mohan Lal Sadhu [1936] 6 Comp.
Cas. 432 and Bhagirath Chandra Das v. Emperor [1947] 17 Comp. Cas. 93. Now, so
for as the instant cases are concerned, there is evidence on the record to show
that the Registrar of the Companies, Rajasthan had sent notice to the
petitioners to comply with the various requirements with respect to which they
have been subsequently prosecuted (exhibits P-3, P-4, P-5 and P-6) but without
nay effect whatever. That being so, the conclusion is inescapable that the
defaults on the part of the petitioners were committed knowingly and wilfully
and not inadvertently. This disposes of the second question raised by learned
counsel for the petitioners.
The next point
that remains to decide is whether the conviction of the petitioners under
section 134 (1) is correct. I have already referred to the authorities on which
learned counsel for the petitioners relies, and the leading authority which
supports him on his this aspect of the case is Emperor v. Pioneer Clay &
Industrial Works [1948] 18 Comp Cas. 31. As against this, the learned Deputy
Government Advocate relies on the Debendranath Das Gupta v. Registrar of Joint
Stock Companies, Bengal (1918) I.L.R. 45 Cal. 486. which takes the contrary view.
The question for decision, therefore, is the better of the two views. As
already stated, the language of section 134 appears to me to be rather unhappy
and it is that which has perhaps given rise to divergence between the Calcutta
and the Bombay views. Since the decision in Emperor v. Pioneer Clay and
Industrial Works [1948]18 Comp. Cas. 31 was given the matter came up for
consideration before a learned single judge of the Madras High Court in In re
Gangipati Appayya [1952] 22 Comp. Cas. 78 In this case, the Assistant Registrar
of Joint Stock Companies prosecuted the directors of a certain motor transport
company for their failure to place the balance-sheet before a general meeting
of the company under section 131 (1) read with section 133 (3) of the Act. The
defence was that as no general meeting had been held, the question of placing
the balance sheet before a general could not possibly arise, and, therefore, no
offence had been committed at all. The directors were convicted by the trial
court and their conviction was maintained in the High Court. Referring to
Emperor v. Pioneer Clay & Industrial Works [1948] 18 Comp. Cas. 31 , the
learned judge disagreed with the view taken in that case. This decision
proceeded on the footing that the directors were relying on their own default
in not having called the general meeting and this they could not be allowed to
do as held in Park v. Lawton [1911] 1 K.B. 588 and Debendranath Das Gupta v.
Registrar of Joint Stock Companies, Bengal (1918) I.L.R. 45 Cal. 486 , already referred
to above.
But before I
deal with this aspect of the case, I wish to point out that the case before the
learned judge, In re Gangipati Appayya was a case under section 131 (1) read
with section 133 (3) and not under section 134, and the considerations which
might possibly arise on the language of section 134 do not in my opinion rally
arise with respect to a prosecution under section 131(1) read with section 133
(3) or under section 32 or 76 because the language and tenor of those sections
are entirely different from language the of section 134 (1) as already
discussed above. Be that as it may, the question directly arises here whether a
director who has failed to comply with the requirements of section 134, can be
allowed to plead that the balanced sheet and the profit and loss account or the
income and expenditure account had not been laid before the company at the
general meeting and therefore he could not send the requisite copy to the
Registrar and, therefore, he has not committed any offence under section 134
(1) even though the directors who were sought to be prosecuted under section
134(1) are the very persons who were responsible for not calling the general
meeting and not placing the balanced sheet and the profit and loss account
before the general meeting of the company. On a careful and anxious
consideration of the pros and cons of the two views, I think, on the whole,
with respect, that though the Bombay view is plausible, it is not sound and is
perhaps needlessly narrow. As I look at the matter, untramelled by authority
one way or the other, the substantial requirement of section 134 (1) appears to
me to be the sending of a certain number of copies of the balance sheet and the
profit and loss account or the income and expenditure account as the case may
be to the Registrar and it is there that the true emphasis of the section lies
and not on the introductory part of the section namely, " after the
balance sheet and profit and loss account (or the income and expenditure
account as the case may be ) has been laid before the company at a general
meeting as seems to have been supposed. I say so because if the liability of
the directors or officers of the company in the matter of sending such copies
to the Registrar could be successfully met and answered merely on the pretext
that the balanced sheet and the profit and loss account were not laid in
general meting before the company it should be only one step further from this
to say that as no annual general meeting was held, it was scarcely material
whether the balance sheet and the profit and loss account were prepared or not,
or again the that for that reason a list of the members along with a summary
under section 32 need not or could not have been prepared and sent to the
Registrar. A reasoning like this in my considered opinion, would very largely
render nugatory the various obligatory provisions of the Act by which several
important duties are imposed on the directors in the public interest at various
stages in the management of the company. It may be that these stages are
different and the default at one stage may be due to a default at a prior stage
; but, nevertheless, in the eye of law, these are independent defaults for
which the directors concerned are accountable at every respective stage, and it
cannot be a satisfactory answer for them to say that they are not responsible
for them because there was a default at an earlier stage, the more so where the
persons who are at fault at both stages are one and the same. It does seems to
me that the courts should not place an interpretation upon a section which
would put a premium on a double default, or, putting it slightly differently,
permit the evasion of or escape from on e default simply because this default
was the inevitable consequence of another default, and where both these
defaults are punishable in the eye of law and where those responsible for the
second default are also responsible for the first, I am disposed to hold the
view that the proper course is to punished the persons guilty for both the
defaults and not for one only. I hold accordingly.
In the view of
the matter, the conclusion I come to is that the conviction of the petitioners
under section 134(1) is not untenable in law and does not call for any
interference. Further, as to whether the default under this section also was
knowingly and wilfully committed by the accused petitioners, my observations
under this head made in the foregoing part of this judgment with respect to
their default under other sections fully apply as to the present count and I
consider it unnecessary to repeat them.
The last
question raised by the learned counsel for the petitioners is that even if his
court concurs in the conclusion of the courts below that the accused
petitioners are guilty of the various offences discussed above, they should be
given the benefit of section 281 of the Act. The short answer to the this
submission is that before section 281 can be properly invoked it must be shown
that the person or persons so seeking relief had " acted honestly and
reasonably". In the other words the conduct of he accused must satisfy the
two-fold requirement of lack of dishonesty as well as lack of unreasonableness,
and honesty by itself would not be enough. Assuming that the petitioners in
this case were not dishonest, I find it difficult to hold that their satisfies
the test of reasonableness. One of them was a managing director and the rest
were directors. They held a certain position of trust and responsibility with
respect to the affairs of the company. The statute had placed certain
obligations upon them and their breach thereof for no satisfactory reasons
cannot be lightly disregarded for obvious reasons. I have already held above
that their neglect to comply with the duties under which they were bound to act
according to the statute continued over a number of years and was wilful
inasmuch as they failed to do in spite of warning or notice by the Registrar.
The lapses, therefore, were not the result of any accident, unforeseen or
unforeseeable, but were if, I may say so, born of sheer recklessness. This in
my judgment disentitles them to the benefit of section 281. I hold accordingly.
The result is
that these revisions fail and are hereby dismissed.
Petitions
dismissed.
[1964]
34 COMP. CAS. 34 (MYS.)
HIGH COURT OF MYSORE
A
NARAYANA PAI, J.
CIVIL
PETITION (B) NO. 28 OF 1956 (I.A. NO.I)
CIVIL
APPLICATION NO. 690 OF1956
NOVEMBER
8, 1963
JUDGMENT
This is an
application by the official liquidator under section 235 of the Indian
Companies Act of 1913 (Central Act VII of 1913) read with section 45H of the
Banking Companies Act of 1949 to examine into the conduct of fourteen persons
impleaded as respondents, 7 of whom were directors, one the auditor and the
rest employees of the company named above, in relation to the affairs of the
company, and to direct them either jointly and severally or in such manner as
the court may deem just to repay or restore to the company a sum of Rs.
4,26,000 said to have been misapplied or retained by the respondents or in
respect of which they are said to have become liable or accountable on account
of misfeasance, breach of trust or fraudulent conduct in relation to the
company, or such other sum as the court may fix or adjudge in that regard.
Before the
Companies (Court) Rules of 1959 came into force, the official liquidator of
this court appears to have obtained orders or directions of this court by
simply filing into court what are called "report" and sometimes in
the form of interlocutory applications as in the case of other civil matters.
They were numbered as I. As serially in each case. This practice appears to
have continued even after the Companies (Court) Rules, 1959, came into force
until some time towards the end of 1961, where after, the company court
insisted on strict compliance with the Rules. This application was filed on
August 27, 1960, as Liquidators report No. 20 and numbered by the office of
this court as I.A. No.1
Respondents
Nos. 1 to 7 were directors of the company of whom the first five, viz., S.G.
Pant Balekundri, S.K. Samant, P.A. Tendolkar, D.R. Angolkar and L.S.
Ajagaonkar, were promoter-directors. Out of them, the first respondent, S.G.
Pant Balekundri, was the chairman of the board of directors from the commencement,
and the second respondent, S.K. Samant, was managing director from July, 1946.
The sixth respondent, R.W. Porwal, became a director in 1951. The seventh
respondent, R.N. Kalghatgi, became a director in July, 1953; his elder brother,
G.N. Kalghatgi, was a director of the company until he died in 1952. It is
stated that the seventh respondent was made a director to fill the vacancy
caused by the death of his said brother.
The fourteenth
respondent, D.B. Kulkarni, was the auditor of the company from its inception.
Respondents
Nos. 8 to 11, viz., K.V. Savadi, V.K. Nadgouda, S.N. Ajarekar and M.S.
Deshpande, were working at the head office of the company at Belgaum. Savadi,
Nadgouda and Ajarekar worked as cashiers from time to time, and Nadgouda also
as an accountant for some time. Ajarekar was cashier at the time the company
closed business and for some length of time immediately prior to that date.
Deshpande was for some time assistant accountant and later head accountant or
chief accountant.
The twelfth respondent,
H.A. Kulkarni, who was originally working at the head office, was made the
branch manager of Kolhapur Branch some time in 1945 and continued to hold that
position till the company closed its business in November, 1954. It also
appears that some time early in 1955, he was made the office superintendent at
the head office. The twelfth respondent, R.M. Kekare, was the branch manager at
Aronda branch for the company from June 29, 1949, till the company closed
business in November, 1954. It is stated that he along with Kulkarni was
continued it service of the company even after the closure of business.
It will be
convenient to refer to the respondents by their names.
During the
pendancy of this application, four respondents died, and one of the points for
consideration in this case arise out of the applications made by the official
liquidator to implied their legal representatives and continue the main
application (I.A. No.1) against them and the objection raised by the legal
representatives that proceedings under section 235 of the Indian Companies Act
of 1913 cannot be properly continued against them. I give below a short summary
of these proceedings.
The eleventh
respondent, M.S. Deshpande, died on 2nd October 1960, and a memo to that effect
was field by his advocate, Mr. Raikar, on November 7, 1960. I.A. No.III was
filed by the official liquidator to implied his legal representatives as
supplemental respondents in I.A. No. I on 9th December, 1960, together with
another application, I.A. No. IV, to appoint one of the proposed legal
representatives, viz., the wife of the deceased, as guardian ad litem of her
four minor children also proposed to be impleaded as legal representatives. The
wife of the deceased, through her advocate, Mr. R.V. Jagirdar, filed consent
for being appointed as such on February 14, 1961. Among other persons sought to
be impleaded as legal representatives were the parents of the deceased. They
appeared through Mr. Raikar, and on objection taken by him, the father was
removed from the list of legal representatives, but the mother was retained in
the list. Thereafter, Mr. R.V. Jagirdar asked for and obtained from the court
permission to make a detailed inspection of the relevant records in the
possession for the liquidator. On April 13, 1961, the wife filed on behalf of
herself and her children an affidavit of objections, in which, among other
things, she contended that proceedings in misfeasance under section 235 of the
Indian Companies Act of 1913 could be taken only against the persons
specifically mentioned in the section, but not against their executors, heirs
or legal representatives. She prayed, therefore, that the legal representatives
may be deleted from the array of respondents in the main application, so that
they may be spared unnecessary expense and hardship. On August 3, 1961, Hombe
Gowda J. directed that the said objections of the legal representatives be
decided in the first instance and that I.A. No. III be posted for hearing those
objections. Arguments on I.A. No. III were heard later by Kalagate J., who made
an order on 29th August, 1961, in the following terms :
"The
question which has been canvassed before this court is whether the heirs of the
deceased accountant are liable for the acts of the deceased. To my mind, at
this stage, it may not be necessary to decide the liability of the heirs unless
the liability of the deceased himself is decided. If it is held that the
deceased respondent No. 11 is not liable, then the question of liability of his
heirs does not survive. Therefore, in my view, unless the liability of
respondent No. 11 is fixed, the question of the liability of his heirs need not
be considered. This application should be considered after the liability of the
deceased is fixed."
Hence, the
legal representatives other than the father continued on record and took part
in the trial of the applications through Mr. R.V. Jagirdar in the earlier
stages and later through Mr. Mendagi on behalf of Mr. R.V. Jagirdar.
On August 29,
1961, Mr. G.D. Shirgurkar, learned counsel for the first respondent, S.G. Pant
Balekundri, filed a memo into court stating that the said first respondent died
about a week prior thereto. Thereupon, on September 12, 1961, the official
liquidator took out two applications numbered I.A. Nos. V and VI, the former to
implied the wife and children of the deceased as his legal representatives in
the main application and the latter to appoint the wife as guardian ad litem of
one of the children, Lata, who was a minor. Notices were directed on both these
applications on September 18, 1961. Notices, however, could not be served
promptly. On February 16, 1962 I ordered fresh notices to the proposed legal
representatives fixing March 16, 1962, as the date of return and directing that
the main application also be posted for hearing on the same date. Those notices
were also not served and, therefore, on the date of return, viz., March 16,
1962, I directed issue of further notices returnable on June 15, 1962. On June
11, 1962, Mr. G.D. Shirgurkar filed vakalat executed in his favour by Kusum
Tai, wife of the deceased, for herself and as guardian ad litem of her minor
daughter, Lata, by Gopal, one of the sons, and by Usha, one of the daughters.
Mr. Shirgurkar represented in court that he would proceed with the case on
behalf of these legal representatives. There was another legal representative,
viz., a daughter, named Tai. She also had been served with notice issued by
registered post by the official liquidator who, along with his memko dated June
29, 1962, has filed into court all the postal acknowledgements. The
acknowledgement relating to the notice addressed to Tai is signed by her
mother, Kusum Tai. As all the legal representatives have thus been served and
in view of Mr. Shirgurkar's representation mentioned above, I.A. Nos. V and VI
stood closed without need for any further orders thereon.
After
consulting the convenience of counsel in the matter of getting ready with the
case for trial, I made an order on November 9, 1962, fixing December 10, 1962, for
commencement of the trial by recording evidence and gave necessary directions
regarding summoning of witnesses, documents, etc.
In the
meanwhile, it would appear the fourth respondent. Angokar, died on October 10,
1962, in consequence whereof the official liquidator took out two applications,
viz., Company Applications Nos. 2 and 1 of 1963, the former for impleading his
legal representatives and the latter for appointing one of them, viz., the wife
of the deceased, as guardian ad litem of such of the legal representatives were
served and some not, Mr. H.B. Datar, advocate, filed vakalat for all and
consented to both the applications being ordered. They were accordingly ordered
as prayed for on February 8, 1963.
After the
trial had progressed to some considerable extent, the fourteenth respondent,
D.B. Kulkarni, died on April 1, 1963. The official liquidator on June 28, 1963,
filed two applications, viz., Company Applications Nos. 42 and 43 of 1963, the
former for impleading his legal representatives and the latter for appointment
of one of the legal representatives as guardian ad litem of such of the legal
representatives as were minors. Mr. N.C. Mahajan, who originally appeared for
the deceased fourteenth respondent, filed vakalat for most of the proposed
legal representatives together with an affidavit of one of them raising, among
other things, the objection that there proceedings under section 235 of the
Indian Companies Act of 1913 cannot be continued against the legal
representatives. As the said objection had already been made the subject-matter
of one of the points formulated for consideration in the main application,
Company Application Nos. 42 and 43 have been heard along with the main
application without interrupting the trial.
Before
proceeding to summarise the pleadings and contentions of the parties in this
case, it is necessary to state a few preliminary facts leading up to the
institution of these proceedings as to which there is no controversy between
the parties.
The company
was incorporated under the Indian Companies Act of 1913, on May 27, 1939, and
commenced business on October 6, 1939. On the coming into force of the Banking
Companies Act of 1949, it became necessary for the company, by virtue of
section 22 of that Act, to apply for issue of license by the Reserve Bank of
India to carry on banking business subject to the provisions of the proviso to
sub-section (2) thereof, according to which the companies in existence at the
commencement of the Act could carry on business until the Reserve Bank either
grants a license or informs the company by notice in writing that license
cannot be granted to it. With a view to examine the question whether or not a
license could be properly issued to this company, the Reserve Bank appears to
have inspected this company once in 1950 and once in 1952. The communications
to the company by the Reserve Bank of their observations at the said two
inspections are marked in this case as exhibits A-1 and A-2. Exhibit A-1 is
dated 7th March, 1951, and relates to the affairs of the company as on 31st
July, 1950. Exhibit A-2 dated 5th March, 1953, relates to the affairs of the
company as on 30th November, 1952.
Section 35 of
the Banking Companies Act empowers the Reserve Bank to conduct inspection of
banking companies and their books of account. If the Reserve Bank conducts any
such inspection, it is required by that section to supply the banking company
with a copy of the report of such inspection. The Reserve Bank conducted
inspection of this banking company in 1954. Its report of that inspection dated
27th August, 1954, is produced in this case as exhibit A-3 together with a
covering letter of the Reserve Bank, exhibit A-3(1), dated September 13, 1954,
under cover of which the report was communicated to the company.
Shortly
thereafter the company found itself in considerable difficulty and suspended
business or payments on 26th November, 1954, at the head office at Belgaum and
on 27th November, 1954, at its branches at Kolhapur and Aronda.
On December 1,
1954, the company applied to the High Court of Bombay under section 37 of the
Banking Companies Act praying for the grant of moratorium for a period of six
months. On the same date, the Bombay High Court made an interim order granting
moratorium for a period of two months and staying all actions against the
company for the said period, appointing Mr. V.R. Kotbagi, advocate, Belgaum, as
special officer under sub-section (3) of section 37 with powers to file suits
on behalf of the company and liberty to obtain further order, if necessary, and
also calling for a report from the Reserve Bank under the proviso to subsection
(2) of section 37.
Mr. Kotbagi,
who has been examined as P.W. 4 in this case, took charge of the company as its
special officer appointed by the Bombay High Court on 7th December, 1954. He no
doubt states in his evidence that he was appointed on 5th December, 1954.
Apparently, that might be the date on which he received the warrant of
appointment or the order of court forwarded to him by the Assistant Registrar
of the Bombay High Court. That order, however, appears to have been made on 1st
December, 1954, itself.
Pursuant to
the directions of the High Court of Bombay, the Reserve Bank deputed one
Amritlal Bhatia to inspect the company for the purpose of submitting to that
High Court the report called for under the proviso to sub-section (2) of
section 37. He has been examined as P.W. 1 in this case. He was at the head
office of the company at Belgaum for the purpose from 14th to 17th December,
1954. The report of the Reserve Bank consequent upon P.W. 1's inspection dated
13th January, 1955, is filed as exhibit A-4 in this case.
On or about
20th December, 1954, the board of directors with the concurrence of the special
officer appointed one Kasinath Yeshwant Wagle, an auditor, to examine the books
and papers of the company for two purposes, viz., for ascertaining the frauds,
if any, by members of the staff and for exploring the possibilities of
reconstructing the company by submitting a scheme of arrangement to the High
Court. Wagle has been examined as P.W. 3 and his report dated February 16,
1955, is produced as exhibit A-21.
A scheme for
reconstruction also appears to have been presented to the High Court of Bombay,
the principal feature of which appears to have been for payment of deposits in
certain instalments spread over a period of years. Though meetings appear to
have been called, at which it is stated the scheme received the assent of those
present, the High Court did not accept the scheme, obviously in view of the
Reserve Bank's report, exhibit A-4, which opined that there were no reasonable
chances of the company being able to pay its debts if moratorium was granted
even for a maximum period of six months permissible under section 37 of the Banking
Companies Act.
I should have
stated earlier that the initial period of two months of moratorium granted by
the High Court of Bombay was extended for a further period of two months by the
High Court. The application for sanction of the scheme was dismissed by the
Bombay High Court on March 17, 1955. With the dismissal of the application,
Mr.Kotbagi's term of office as special officer also came to an end. He states
in his evidence that he handed back charge to the chairman of the board of
directors on 4th April, 1955.
On March 8,
1956, one H.G. Deshpande, a depositor, or creditor of the company, presented a
petition to the High Court of Bombay to wind up the company. That application
was numbered by the Bombay High Court as Civil Application No. 690 of 1956.
According to
the averments contained in the winding up petition, after the directors took
charge from the special officer, five persons were elected by the depositors to
act as advisers to the board and about 12 1/2 per cent of the amount of deposits
as on December 26, 1954, excluding interest for 1954, was paid out to the
depositors or some of the depositors. It is also stated in the petition that on
26th February, 1956, the directors called a meeting of the depositors at which
it was unanimously decided that the company should be wound up and a committee
consisting of the winding up petitioner and three others was appointed to take
steps in that direction.
The winding up
petition was accepted by the High Court of Bombay on March 13, 1956, on which
date the court receiver and liquidator was appointed provisional liquidator and
the date of hearing of the petition was directed to be advertised. On April 16,
1956, the company was ordered to be wound up and the provisional liquidator was
confirmed as the official liquidator.
The official
liquidator filed into court on July 31, 1956, a report under section 45C of the
Banking Companies Act annexing thereto a list of suits and execution petitions
pending in various courts seeking directions in respect thereto under the said
section. The court on August 1, 1956, directed notice under section 45C (3).
After Mr.
Kotbagi ceased to be the special officer but before the winding up petition was
filed, when the directors were in charge of the company, they appointed in
July, 1955, one D.D. Joshi to investigate into the affairs of the company. The
said D.D. Joshi has been examined as P.W. 2 in this case. According to his
evidence, the object with which he was required to make the said investigation
was to see whether the responsibility or liability for the alleged frauds or
misappropriation said to have been committed in the company could be clearly
fixed on any particular individual or individuals and to identify and collect
evidence or material in support of substantiation thereof. By the time he could
complete his investigation and make his report, the company was wound up and
the liquidator appointed by the Bombay High Court. Although originally he was
appointed by the board of directors and expected to report to them, his report
having been completed only on May10, 1957, was actually submitted by him to the
official liquidator. It is marked exhibit A-9 in this case.
Consequent
upon the reorganisation of the States pursuant to the States Reorganisation Act
(Central Act XXXVII of 1956), the winding up proceedings were transferred from
the Bombay High Court to this court, before notices under section 45C(3)
ordered by the Bombay High Court could be issued.
After receipt
of the proceedings in this case, they were renumbered as C.P.(B) No. 28 of
1956. On August 26, 1957, the official liquidator of this court was appointed
as the official liquidator of the company.
In his report
to this court dated 21st July, 1958, filed into court on the following day, the
official liquidator brought D.D. Joshi's report to the notice of this court and
sought directions for obtaining explanations of this court and sought
directions for obtaining explanations of the directors and officers of the
company. On 29th July, 1958, the court directed him to send copies
of the said report to the directors and officers and obtain their explanations.
Time for furnishing explanations was extended from time to time, and ultimately
after receipt of their explanations the liquidator filed into court his report
No. 20 marked I.A. No. 1 and thus initiated these proceedings.
The said
report No. 20 of the official liquidator, which I shall hereafter refer to as
the main application, sets out the case of the liquidator against the
respondents. It has three annexures. Annexure "I" is a copy of P.W.
3, Wagle's report, exhibit A-21. Annexure "II" is a copy of P.W. 2,
D.D. Joshi's report, exhibit A-9. Annexure "III" contains copies of
the explanations elicited from the respondents in respect of Joshi's report pursuant
to the order dated July 20, 1958, of this court.
It is clear
both from the averments made in the course of the main application as well as
from paragraph 3 of the verifying affidavit of the liquidator accompanying the
main application, that his case is based upon the observations contained in the
aforesaid reports of the auditors, exhibits A-21 and A-9, as also the report of
the Reserve Bank under section 37(2) of the Banking Companies Act, viz.,
exhibit A-4. In paragraph 3 of his verifying affidavit, the liquidator states :
"I
hereby solemnly affirm and state that the averments made in paragraphs 1 to 18
of the said petition are gathered from the reports and proceedings including
those relating to the winding up taken up in the courts and records of the bank
whatever inferences are drawn by me from the facts and circumstances averred
are so drawn by me bona fide and believe to be true."
For making the
general allegations contained in paragraph 6 of the main application to the
effect : "... the procedure adopted by the bank for the conduct of the
business was highly irregular and was such as to afford free scope for the
officers of the bank to deal with the amounts belonging to the bank in any
manner they pleased", the liquidator states, in the sentences immediately
following the above, that he relied upon the statements made in paragraph 6 of
exhibit A-21, paragraph 22 of exhibit A-9 and also on exhibit A-4, Mr.
Srinivasa Iyengar, learned council for the official liquidator, in his opening
address also told me that his clients case rests principally on exhibits A-4,
A-9 and A-21 and that he would produce oral and documentary evidence to
substantiate the principal allegations of fact constituting the foundation of
the Liquidators case. The basis for the general allegations in paragraph 7 of
the main application that the directors of the company had been grossly
negligent and failed to exercise due control over the conduct of the company's
business and thereby occasioned loss to the company and that the managing
director's conduct had been fraudulent resulting in misapplication or
misappropriation of company's funds by him or under his instructions or
directions is also apparently the same.
Regarding the
auditor, respondent No. 14, the general allegation in paragraph 9 and 10 of the
main application are that in spite of several serious irregularities, the
yearly reports of the auditors made no mention of the same, that the
balance-sheets and profit and loss accounts certified as correct by the
auditors were prima facie false, that when the additional shares issued in 1946
could not be fully subscribed, the auditors advised the allotments to the
directors without payment of cash, opening suspense accounts to bear the
relative debits and crediting dividends on such shares to interest account,
which advice, it is contended, was highly irregular, that they did not at any
time prepare or call for reconciliation statements in relation to the accounts
of the company with other banks and that in the proceedings commenced by the
Institute of Chartered Accountants of India against the fourteenth respondent,
this court in Civil Referred Case No. 2 of 1958 recorded a finding that the
auditors were grossly negligent. The liquidator adds that though on the
material then placed before the court, it could not be said that any dishonesty
on the part of auditors had been made out, the material available in this case
is sufficient to make one believe that the auditors must have connived at the
several irregularities committed by the company's directors and some members of
its staff.
In view of
these circumstances and particularly in view of the fact that several amounts
or estimate of amounts in respect of which the respondents are said to have
been guilty of improper conduct making them liable or accountable for the same
set out in the main application are taken from one or other of the reports,
exhibit A-4, A-9 or A-21, the peculiar position in this case is that the said
reports or at any rate certain of the figures or estimate of figures contained
in those reports have been in a sense incorporated in the pleadings themselves.
Wagle's
report, exhibit A-21, was made to the directors themselves in February, 1955,
and was available to them. D.D. Joshi's report was, however, made only in 1957,
and as already stated sent by him direct to the liquidator. Hence a copy
thereof must be taken to have been made available for the first time to the
directors and other respondents only when the official liquidator of this court
sent them a copy thereof pursuant to the order of this court dated July 29,
1958. Every one of them has had an opportunity to read it and send his
explanation. The Reserve Bank's report, exhibit A-4, was made to the High Court
of Bombay and was put in evidence in the course of the trial of this
application through Amrital Bhatia, examined as P.W.1. Obviously, that was the
first time when the respondents had an opportunity to acquaint themselves with
the contents thereof. D.D. Joshi states in his report, exhibit A-9, that except
as to the deficit in cash in relation to which he looked in the relevant books
himself and stated the result of his investigation in his report, he relied on
exhibits A-4 and A-21 for making his observations in regard to differences in
banker's accounts (i.e., accounts of this company with other banks) and branch
adjustments.
As already
summarised above, the general allegations which, according to the liquidator,
constitute the basis of the liability which he proposes to bring home to the
respondents, are that the directors have been guilty of gross negligence in the
management of the affairs of the company, that the conduct of the managing
director may be said to be even fraudulent, that the manner in which the
business of the company was permitted to be conducted by the directors was such
that it was possible for the members of the staff to misappropriate or misapply
the company's funds and that the auditor may be said to have connived at the
several irregularities and deliberately certified as correct balance-sheets and
profit and loss accounts which were in fact false.
The liquidator
in paragraph 19 of the main application claims that the total amount in respect
of which the respondents should be held guilty is Rs. 4,26,000.
In paragraphs
12 to 17, he gives certain details of figures which apparently are those that
lead to the total amount mentioned above.
In paragraph
12, it is stated that on the date the company closed business, viz., November
26, 1954, the cash book showed a cash balance of Rs. 1,50,471-15-7. He adds
that to ascertain the real cash position, reference should also be made to a
set of what are called rough cash books maintained at the company's head office
(to which reference has been made by both Wagle and D.D. Joshi in their respective
reports); these books, according to D.D. Joshi's report, showed a deficit of
Rs. 8,773-15-8. Hence adding the two figures together and deducting there from
Rs. 645-0-4, which was the actual cash found to be available on that date, the
liquidator claims that the total cash deficit on the date of closing was Rs.
1,58,600-14-11.
In paragraph
13, he refers to the position in regard to two branches at Kolhapur and Aronda.
According to the figures stated therein, unexplained differences between the
accounts at the branches and at the head office amounted to Rs. 32,500 with
reference to Kolhapur branch and Rs. 49,000 with reference to Aronda
branch-making a total of Rs. 81,500; he also refers to a draft for Rs. 10,000
issued on Kolhapur branch entering only Rs. 5,000 in the counterfoil and thus
showing a difference of Rs. 5,000 and also another draft for Rs. 6,000 without
receiving any cash. These figures are apparently taken from Wagle's report. In
addition, he refers to a sum of Rs.10,000 said to have been brought in cash by
the managing director from Kolhapur branch and another sum of Rs. 42,000 said
to have been brought in cash by the managing director from Aronda branch. All
these figures make a total of Rs. 1,44,500.
In paragraph
15, he refers to the issue of new shares and the allotment of some of them to
the directors and their friend without payment of cash. No specific amount said
to have been lost to the company in this connection is set out in this
paragraph. It may be added that in the course of his evidence, D.D. Joshi, P.W.
2, deposed that the cash, if any, remaining unpaid in respect of these shares
is reflected in the total cash deficit as on the date of closing.
In paragraph
16 of the main application, the liquidator refers to the practice consistently
resorted to by this company of window-dressing its balance-sheets year after
year. But is it clear that the statements made in this paragraph are only in
the nature of general allegations and not an independent source of a specific
liability.
In paragraph
17, the liquidator gives a list of amounts said to have been withdrawn by the
directors and their friends within a week next before the company closed
business. The paragraph concludes with the following statement :
"From
the above it is clear that the directors have abused and misused their
influence and made premature payments and permitted withdrawals to the
detriment of the depositors at large and the shareholders and thus are guilty
of fraudulent conduct."
It is not
stated whether the figures stated in this paragraph go to make up the total of
Rs. 4,26,000 nor is it clear whether the allegations in this paragraph are not
intended merely to emphasise that even in a period of crisis the conduct of the
directors has been open to reproach.
Although it is
difficult from the figures set out in the main application of the
liquidator-some of which are taken from Wagle's report, some from Joshi's
report, and some from Bhatia's report-to arrive at the exact total of Rs.
4,26,000 set out in paragraph 18, it is clear that the said total amount is
taken from Wagle's report, exhibit A-21, in which by way of conclusion he
states :
"The
total amount involved in the fraud is assessed roughly to be Rs. 4,26,000. So
far, an amount of Rs. 3,75,000 has been traced from the various sources. The
balance can be traced provided the accounts are reconciled."
Now the
figures stated by Wagle are the following :
|
|
Rs. |
|
Cash deficit |
1,73,000 |
|
Defalcation through branches |
81,500 |
|
Defalcation through accounts |
|
|
with other banks |
1,20,725 |
|
Total |
3,75,225 |
This amount,
according to Wagle, is the amount which he has been able to trace. In his
report, exhibit A-21, he has not referred to the sum of Rs. 10,000 from
Kolhapur branch and the sum of Rs. 42,000 from Aronda branch said to have been
brought in cash by the managing director but only to the unexplained
differences amounting to a total of Rs. 81,500 which are referred to in
paragraph 13 of the main application. If the above sums of Rs. 10,000 and Rs.
42,000 are added, the total goes beyond Rs. 4,27,000.
So far as the
defence is concerned, there has been from the commencement a clearly noticeable
difference between the defence of the managing director, S.K. Samant, on the
one hand and that of the other directors on the other. Even in his explanation
dated 4th April, 1959, to D.D. Joshi's report submitted pursuant to the order
of this court, after stating that in the absence of relevant documents in his
possession he was unable to give any specific answers to the points in
question, he made the following allegations :
"I
understand that other directors of the bank are trying to throw all the burden
and responsibility on me. I flatly deny any such allegations, if they have so
made. Simply taking advantage of the fact that I was designated managing
director, they are trying to evade the responsibility. All the transactions of
the bank were made under the supervision and direction of the board of
directors. All the directors of the bank, therefore, were naturally responsible
for all the dealings of the bank. They cannot evade their responsibility by
throwing the burden on somebody else."
He then added
that because criminal proceedings against him were already pending, it was
expedient and advisable that he should not give any detailed statement until
the termination of criminal proceedings and requested that be excused for his
inability to answer the points. In his written statement or affidavit of
objection to the main application, he disputed the correctness of the reports,
annexures, "I" and "II", to the main application and denied
every material averment made in the application and claimed that he was not
guilty of either misfeasance or malfeasance, and that he was not responsible
for any claim made by the liquidator. He added that the affairs of the company
were carried out according to the policy and directions of the board of
directors and that having had the misfortune of being the managing director, he
had been a tool in the hands of the directors. He also claimed that the
petition was barred by time.
Among the
other directors, the defence of Pant Balekundri, the chairman, Tendolkar,
Angolkar, Ajgaonkar and Kalghatgi is the same. The material allegations in
their written statements or affidavits of objections are same or similar.
All of them
say that the liquidator's applications is vague and does not make out any
specific allegations or charges against them and that no prima facie case as
required by section 45F of the Banking Companies Act has been made out by the liquidator
against them. They do not admit that the reports of either Wagle or Joshi
disclose the exact amount in respect of which fraud, if any, had been committed
and put the liquidator to strict proof of his claims. All of them allege that
in or about the year 1946-47,S.K. Samant was appointed as managing director,
since when he had been solely and entirely in charge of the affairs of the
company. They also rely upon articles 109 and 112 of the articles of
association of the company detailing the duties of the managing director. They
contend that the statement said to have been made by Samant to the effect that
everything done by him was so done in consultation with the other directors is
false. They state that until exhibit A-3 was received, there was no detection
of any fraud and that even after the receipt of exhibit A-3 no fraud by the
managing director had been discovered and that it was only after the company
closed down business that the directors came to know that the managing director
had himself been a party to it and had misappropriated large amounts out of the
company's funds. They alleged that in December, 1954, the managing director,
S.K.Samant, had made certain admissions before P.W. 1, Bhatia, and that he had
made similar admissions before the special officer, Kotbagi, P.W. 4, and that
in consonance with those admissions he had executed promissory notes for Rs.
1,11,500 and also executed sales of his movable and immovable properties in
favour of the company in part liquidation of the amount admitted to have been
misappropriated by him. They assert that this conduct on the part of Samant is
alone sufficient to show that none of the other directors had either
participated in or connived at the acts of the managing director in relation to
the day-to-day affairs of the company. They also contend that as mere directors
they were not responsible for looking into the day-to-day affairs of the
company or checking its daily cash balances and that it was the duty of the
managing director, cashier and accountants to carry on the business of the
company properly and correctly. For the rest, the written statements contain
specific denials of almost every statement made in the main application. I
shall refer to the other details, if found necessary, at a later stage of this
order. They claim that the application is barred by time.
The written
statement of the sixth respondent, Rikabchand Wardichand Porwal, is slightly
different. He states that he has paid in full for the shares taken up by him,
that the affairs of the company were exclusively managed by the managing
director, that the reports of the auditors never showed any defalcation or
misappropriation later detected by Wagle or Joshi, that had he known about any
such defalcations or misappropriations or frauds, he would not have become a
director at all, that his case cannot be treated on par with the case of other
directors, that there is no specific allegation against him individually, that
he acted honestly and reasonably as a director, that he being completely
innocent and he having trusted the integrity and competence of the managing
director and the staff, proceedings against him should be dropped.
The seventh
respondent, R. N. Kalghatgi, as already stated, follows the lines of the
written statements of respondents Nos. 1,3,4 and 5. He, however, adds that the
irregularities or frauds or misuse of the company's funds, if any, relate to a
period before he joined as director and that, therefore, he should not be made
liable for the same.
Respondent No.
8, Savadi, in his written statement states that he was a petty clerk acting
under the orders of his superiors, that the managing director and the eleventh
respondent, Deshpande, were the sole masters of the affairs of the bank whose
orders it was impossible for him to disobey, that they were in charge of the
keys, cash, etc., and that respondents Nos. 2 to 5 and the deceased eleventh
respondent had formed a party among themselves and utilised the company's money
for their own purposes. He states that just before the company closed business,
respondents Nos. 1 to 5 threatened him to execute a document for a big sum of
Rs. 25,000, that he was taken to the house of the auditor, D.B. Kulkarni, and
there threatened to execute a document. He states also that he was not an
officer of the company and that no specific instances are alleged against him
and that therefore no action can be taken against him.
The ninth
respondent, Nadgauda, states that he resigned from the service of the company
of March 2, 1954, when he found that the affairs of the company were not being
conducted properly by the persons responsible for the same and that the said
persons were bent upon finding scapegoats and foisting the blame on innocent
persons like him. He generally denies the allegations, and contends that the
main application is absolutely vague and general in character and that the same
is barred by time.
The tenth
respondent, Ajarekar, contends that there is no material to hold him
responsible, that nothing specific is alleged against him and that the
application against him is barred by time.
The eleventh
respondent, M.S. Deshpande, died before filing any written statement.
Regarding the
written statements of H.A. Kulkarni, the twelfth respondent, and R.M. Kekare,
the thirteenth respondent, it is sufficient at this stage to mention the fact
that the former admits having given Rs. 10,000 into the hands of the managing
director, S.K. Samant, and the latter admits the fact that Rs. 42,000 were
brought at the instance of the managing director from Aronda branch. Both of
them admit that they did not make debit entries relating to these amounts in
the account books of the respective branches.
The fourteenth
respondent, D.B. Kulkarni, auditor, claims that the application against him is
time-barred. He also relies upon the observation of this court in the judgment
in Civil Referred Case No. 2 of 1958 to the effect that no dishonesty on his
part has been proved. It is not necessary at this stage to refer to the other
allegations contained in his written statement.
The petition
to wind up this company was, as already stated, filed on 13th March, 1956.
Hence, under section 441(2) of the Companies Act of 1956, the winding up of the
company must be deemed to have commenced on that date. According to section 647
of the same Act, therefore, these proceedings must be taken to be governed by
the provisions of the Indian Companies Act of 1913. Hence the provisions of law
under which these proceedings are instituted are section 235 of the Companies Act
of 1913 and section 45H of the Banking Companies Act of 1949. Under section 235
the burden of proving the entire case is on the liquidator. This burden is,
however, to a considerable extent lightened by the latter section, viz.,
section 45H, and also to some extent by section 45F of the Banking Companies
Act of 1949. Under section 45H of that Act, the court is empowered to make an
order for repayment or restoration against a person if the applicant (in this
case the liquidator) makes out a prima facie case against such person unless
the said person proves that he is not liable to make repayment or restoration
either wholly or in part. Under section 45F entries in the books of accounts
and other documents of a banking company may be proved by the production of
account books or other documents in which those entries are contained, and all
such entries are as against the directors of a banking company declared to be
prima facie evidence of the truth of all matters purported to be recorded in
those entries.
It will be
noticed that every respondent has taken up the stand that the averments in the
liquidator's main application are vague and general in character and that no
specific allegation is made against any one of them. It is also contended on
behalf of the directors that no prima facie case at all is made out in the main
application. It has been pointed out in their written statements themselves
that making out a prima facie case means establishing a prima facie case by
legally admissible evidence. Of course, evidence may be either in the shape of
oral evidence or by proof of relevant documents or by production of affidavits.
Oral evidence or statements in affidavits can be made only by persons who have
personal knowledge of the facts deposed to orally or set out in the affidavits.
The application in this case is in the form of a report which reads like a
verified petition. There is, however, annexed thereto a short affidavit by the
applicant-liquidator. As I have already stated, in that affidavit the liquidator
merely stated that the averments in his application or report are taken from
reports (meaning apparently exhibits A-1, A-2, A-3, A-4, A-9 and A-21).
proceedings of courts including those relating to winding up and the records of
the company, and that the inferences as stated by him are bona fide drawn from
the said material and believed to be true by him. The said reports, therefore,
as already stated, must be taken to have been incorporated in the pleadings. I
have also pointed out that although the Reserve Bank's reports, exhibits A-1 to
A-3, and Wagle's report, exhibit A- 21, were undoubtedly available to the
directors and a copy of D.D. Joshi's report was furnished to them under the
order of this court with a direction to submit their explanation, the Reserve
Bank's report, exhibit A-4, on which considerable reliance is placed by the
liquidator had not been made available to them before the filing of this
application. In fact, they complained that in the absence of a copy of that
report they were unable to plead to some of the statements made in the main
application based on that report, exhibit A-4.
In the light
of these circumstances, and with a view to see that the respondents are in
possession of a fairly full picture of the liquidator's case and that the
liquidator makes out a prima facie case by legal evidence against the
respondents before they are called upon to enter upon their defence, I deferred
the formulation of the points for consideration until after exhibit A-4 was
produced and the main features thereof spoken to by P.W. 1, Bhatia, on oath,
and the specific allegations regarding the main features of the alleged
defalcation are spoken to and the report, exhibit A-9, formally proved by
examining D.D. Joshi.
The
examination of P.W. 1 was completed on December 12, 1962.
On December
13, 1962, Mr. Srinivasa Iyengar for the liquidator wanted to examine Wagle, but
his examination could not be proceeded with for the reason that his original
report was then not available having been filed in some other court. Hence D.D.
Joshi was examined as P.W. 2 on that date and his examination was completed on
December 17, 1962. Further hearing had to be adjourned for enabling the
liquidator to get the original report to Wagle. When the trial was taken up again
on March 4, 1963, I asked Mr. Srinivasa Iyengar whether, apart from what
appears from his client's petition and the evidence of the first two witnesses
in proof of exhibits A-4 and A-9 on which he relies, he was in a position to
particularise his case against individual respondents. He once again stated
that his client's case was principally based on those reports and that in the
light of those reports and the evidence he had already led then and was going
to lead, it was ultimately for the court to decide whether and if so which of
the respondents could be held responsible and to what extent.
Taking the
view that on the evidence of P.Ws. 1 and 2 on record there was a case for the
respondents to meet, of course taking advantage of whatever defects or deficiency
there might be in the said case, I heard Mr. Srinivasa Iyengar for the
liquidator and Mr. Karanth for the respondents and formulated the following to
be the principal points for consideration in the application :
"1. Whether the
official liquidator proves that on the date the company closed its business,
viz., on November 27, 1954, there was shortage in cash and, if so, in what sum
?
2. Whether the liquidator
proves that loss was occasioned to the company by misapplication of cash or
funds shown to have been credited to the accounts of the company with the other
banks but not so actually credited ?
3. Whether and, if so,
which of the respondents is or are liable to made good the shortage in cash and
loss occasioned to the company; if found liable, are the respondents so liable
jointly and severally and, if severally, to what extent in the case of each of
them ?
4. Whether the application
is barred by limitation and, therefore, liable to be dismissed as having been
filed beyond the time allowed by law ?
5. Whether the official
liquidator has any right of recourse against the legal representatives of the
deceased respondents ?
Of these,
points, Nos 4 and 5 are in the nature of preliminary points. Point No. 5 raises
a pure question of law. I shall, therefore, dispose of these two points first.
So far as the
fifth point is concerned, the legal position has been considered to be well
settled for nearly a century and hardly admits of any doubt.
Section 235 of
the Indian Companies Act of 1913 (now re-enacted as section 543 of the
Companies Act of 1956) is copied from section 165 of the English Companies Act
of 1862. The earliest decision interpreting the effect of that section is in In
re East of England Bank : Feltom's Executors case (1865) 1 Eq. Cas. 219. 224
Sir Kindersley V.C. in that case held that the language of the section applies
only to the person expressly named therein and is inapplicable to the case of
executors or administrators. His Lordship placed some reliance upon the
expression "compel him to pay" occurring in the section which is
different from the expression "order payment of" occurring in other
sections, and observed that a company court cannot compel an executor or an
administrator to make payment because that was the power of court administering
the estate of a deceased person. Dealing with the argument that the
construction proposed by him was a narrow one, his Lordship observed :
"That is
true in this senses, that it is a narrower construction than might have been
given to the section if it had been couched in different language : but the
court has no right to stretch the powers intended to be conferred by the
Legislature."
This view of
Kindersley V.C. was followed by Selwyn L.J. in In re United English and
Scottish Assurance Company : Ex parte Hawkins (1867) 3 ch. APP 787, 791: and
was accepted as settled law in In re British Guardian Life Assurance Company
(1880) 14 Ch. D 335.
It will be
noticed that this interpretation of the section proceeds upon the language of
the section. That section empowers the company court to examine into the
conduct of the persons named therein viz. promoter, director, manager,
liquidator or officer, in relation to the affairs of the company and comply
him, i.e. such person to repay or restore the money or property or to
contribute such sum to the assets of the company by way of compensation as the
court thinks just. the ultimate source of the liability is traceable to the
conduct of the particular person in relation to the affairs of the company, to
the extent it presents a departure from the standard of care and rectitude
expected of him while occupying the position of promoter, director, manager,
liquidator or officer of the company. I may also add that the nature of the
proof evidence or defence in the proceedings instituted under this section is
conditioned to a considerable extent by the fact that the person whose conduct
is under investigation may himself be expected to be in the know of material
facts or information bearing on the subject of inquiry . It will also be
noticed that in the real sense the loss is occasioned to the company as an
entity and, in normal circumstances, it will be the company that can be said to
have a right of action for the recovery of such loss. But the statute confers the
right to institute these proceedings on any creditor or contributory or the
liquidator of the company. The ultimate order which the court may pass therein
is also an order for repayment or restoration of the money or property
misapplied or to contribute a certain sum to the assets of the company by way
of compensation. Having regard to all these circumstances, the proceeding under
the section commonly described as misfeasance proceedings are of a special
nature and are available only against the persons expressly mentioned therein
as the persons whose conduct may be investigated into by the court on an
application made pursuant to that section.
The above view
of English courts has been consistently followed in India on the accepted
principle that when the India legislature copied almost verbatim a section of
the English Act it may be expected to have accepted the interpretation thereof
according to the rulings of the English courts. The important case decided by
the Indian High Courts are Billimoria v. Mary De Souza [1927] I L R 8 Lah.549;
AIR 1926 Lah.624. Officer Liquidator v.
Jugal Kishore 2 [1938] 8 Comp. Cas. 300; I L R [1939] All. 6. Manilal
Brijlal v. Vendravandas [1944] 14 Comp. Cas 147; I L R [1944] Bom. 284. Sankara
Nambiar v. Kottayam Bank I L R [1946] Mad. 507. and In re Peerdan Juharmal Bank
[1958] Comp. cas 546.
There is in
some of these cases a discussion whether the provisions of section 306 of the
Indian Succession Act or whether the legal Representatives Suits Act [Central
Act XII of 1855] or Order XXII of the First Schedule to the Code of Civil
Procedure would make any difference to the principles settled by English
decisions. It is pointed out that none of these statutory provisions in India
can be availed of for continuing misfeasance proceedings against the legal
representatives of a deceased promoter, director, manager liquidator or officer
of the company. The action thereunder being purely personal as against the said
named persons which does not survive their death, it is not possible, the
decisions point out, to invoke any of the statutory provisions mentioned above.
Mr. Nagaraja
Rao, learned counsel who appeared for the liquidator during the later stages of
the trial, cited a decision of the Madhya Pradesh High Court in Prabhakar v
Vikram Sugar Mills AIR 1963 M.P..120. In that case the person that died during
the pendency of the proceeding was not a respondent whose conduct was being
investigated into, but a creditor who had made the application, and the High
court held that the legal representatives of the creditor could continue the
application. It may be pointed out that if the debt remains unpaid, the legal
representatives of creditors could themselves become creditors of the company
in the place of deceased creditors having the same rights as deceased creditors
had. But the liability to be proceeded against under section 235 of the Indian
companies Act of 1913 is a personal one and does not survive the death of the
parson proceeded against. There are no doubt general observations in that
decision to the effect that in the absence of any special rules made under the
Companies Act, the proceedings therein are governed by the provisions of the
Code of Civil Procedure. But, as already pointed out, the provisions of the
Code of Civil Procedure enabling the imploding of legal representatives apply
only when the right to sue or the liability to be sued survives the death of
the plaintiff or the defendants, as the case may be. The decision of the Madhya
Pradesh High Court therefore is of no assistance to the liquidator and does
not, in my opinion, militate against the well established principle of law
settled by the various decisions mentioned above.
My answer
therefor to the fifth point formulated for consideration is that the liquidator
cannot continue these proceedings in I.A. No. I. against the legal
representatives of the respondents who died during the pendency of the
application. Whether he has any other right of recourse against them in regard
to any of the matters covered by this application, it is unnecessary for me to
decide in this case and I express no opinion on it.
Consequently
I.A. No. I has to be and is hereby dismissed against the legal representatives
of the deceased first respondent, Pant Balkekundri, fourth respondent,
Angolikar and the eleventh respondent, Deshpande. Company Application Nos. 42
and 43 of 1963 to implied the legal representatives of the deceased fourteenth
respondent, D. B. Kulkarni, and to appoint a guardian as item for the minors
amount them are also dismissed.
On the
question of limitation covered by the fourth point, the relevant dates and
facts are not in dispute. As already stated, the petition to wind up the
company was presented to the Bombay High Court on 13th March 1956, and on the
same date the court liquidator was appointed as the provisional liquidator. The
company was ordered to be wound up on 16th April 1956, on which date the
provisional liquidator was appointed as the official liquidator of the company.
The present application, IA No. I, was presented on 27th August, 1960. Whether
the date of the first appointment of the liquidator is taken to be 13th of
March 1956, or 16th April 1956, the application has been presented more than
three years but less than five years from the date of the first appointment of
the liquidator. It is also clear from the summary of pleadings already given
and the submissions made on behalf of the liquidator that he is not in a
position to point to any specific or particular act of misapplication,
retainer, misfeasance or breach of trust, but that he relies generally on the
alleged gross neglect on the part of the directors and also on the alleged
fraudulent conduct on the part of the managing director leading to such
mismanagement of the affairs of the company or to the adoption of such
irregular methods in the management of its affairs as to enable or render
possible misapplication or misappropriation of the funds of the company
resulting in loss to the company to the tune of over four lakh of rupees.
Hence, the question of limitation has been argued on the footing that the
starting point for computation is the date of the first appointment of the
liquidator, the controversy between the parties being whether the period of
limitation is three years prescribed in section 235 of the Indian Companies Act
[VII of 1913] or five years prescribed in sub-section (2) of section 45-O of
the Banking Companies Act.
That this
application is made under and is governed by section 235 of the Indian
Companies Act of 1913 and not by section 543 of the Companies Act of 1956 is
indisputable for the following reasons.
As already
stated, the winding up proceedings in this case had already commenced before
the coming into force of the Companies Act of 1956. All provisions of the 1956
Act except those mentioned in section 647 of that Act, with reference to
winding up contained in the new act do not therefore apply, but the company has
to be wound up in the same manner and with the same incidents as if the 1956
Act had not been passed. Section 543 of the 1956 Act, which corresponds to
section 235 of the 1913 Act, is not one of the excepted sections. A misfeasance
application, for which provision is made in section 235 of the 1913 Act and
section 543 of the 1956 Act, is undoubtedly one of the incidents of winding up.
Hence it is clear that the present application is governed by section 235 of
the 1913 Act and not by section 543 of the 1956 Act which prescribes a period
of five years for limitation.
Section 235 of
the 1913 Act reads as follows :
" 235.
Power of court to assess damages against delinquent directors. etc. - (i)
Where, in the course of winding up a company, it appears that any person who
has taken part in the formation or promotion of the company, or any past or
present director, manager or liquidator, or any officer of the company has
misapplied or retained or become liable or accountable for any money or
property of the Company, or been guilty of any misfeasance or breach of trust
in relation to the company, the court may, on the application of the
liquidator, or of any creditor or contributory made within three years from the
date of the first appointment of a liquidator in the winding up or of the
misapplication, retainer, misfeasance or breach of trust, as the case may be,
whichever is longer, examine into the conduct of the promoter, director,
manager, liquidator or officer , and compel him to repay or restore the money
or property or any part thereof respectively with interest at such rate as the
court tanks just or to contribute such sum to the assets of the company by way
of compensation in respect of the misapplication, retainer, misfeasance or
breach of trust as the court thinks just.
(2) This
section shall apply notwithstanding that the offence is one for which the
offender may be criminally responsible."
The portion in
sub-section (1) prescribing limitation was inserted by section 109 of the
amending Act XXII of 1936. As the wounding up proceeding in this case commenced
long after this amendment was give effect to, it is unnecessary to make any
reference to the position in law in regard to limitation obtaining prior to the
said amendment.
This being a
banking company, it is governed also by the provisions of the Banking Companies
Act of 1949. The main provisions of that Act were first enacted as part X - A
of the Indian companies act of 1913, consisting of sections 277F to 277N by the
amending Act XXII of 1936. They were later deleted from the Companies Act and a
new Act called the Banking Companies Act (X of 1949) was enacted. According to
section 2 of that Act, the provisions thereof were to be read in addition to,
and not, save as expressly provided therein, in derogation of the Companies Act
or any other law for the time being in force. The Banking companies Act underwent
several amendments. By amending Act XX of 1950, which came into force on March
18, 1950, part III A was introduced in the act making special provisions for
speedy disposal of winding up of banking companies. That part consisted of
sections 45A to 45H section 45F read as follows:
" 45F
Special period of limitation - Notwithstanding anything to the contrary
contained in the Indian Limitation Act, 1908 (IX of 1908) or in any other law
for the time being in force, in computing the period of limitation prescribed
for any suit or application by a banking company the period of one year
immediately preceding the date of the order for the winding up of the banking
company shall be excluded".
In 1953, the
act was further amended by Act No. LII of 1953, which came into force on
December 30, 1953. That act substituted part III A of the Principal Act by a
fresh part bearing the same No, IIIA consisting of sections 45A to 45X, The
special provisions regarding limitation were enacted in section 45-O which read
as follows :
45-O Special
period of limitation (1) Notwithstanding anything to the contrary contained in
the Indian limitation Act, 1908 (IX of 1908), or in any other law for the time
being in force, in computing the period of limitation prescribed for a suit or
application by a banking company which is being wound up the period commencing
from the date of the presentation of the petition for the winding up on the
banking company shall be excluded.
(2)
Notwithstanding anything to the contrary contained in the Indian Limitation
Act, 1908 (IX of 1913), or section 235 of the Indian Companies Act, 1913 (VII
of 1913), or in any other law for the time being in force, there shall be no
period of limitation for the recovery of arrears of calls from any director of
a banking company which is being wound up or for the enforcement by the banking
company against any of its director of any claim based on a contract, express
or implied, and in respect of all other claims by the banking company against
its directors, the period of limitation shall be twelve years from the date of
the accrual of such claims.
(3) The
provisions of this section, in so far as they relate to banking companies being
wound up, shall also apply to a banking company in respect of which a petition
for the winding up has been presented before the commencement of the Banking
Companies Amendment Act, 1953."
It will be
noticed that sub-section (1) re-enacts the old section 45F with modifications
and the other two sub sections are new. Thereafter, by Act XXXIII of 1959,
which was brought into force on 1St. October, 1959, further amendments were
effected of which the amendment relevant to out present purpose is the one
which added the following words at the end of sub-section (2) of section 45-O
" 45-O
(2) .... or five years from the date of the first appointment of the
liquidator, whichever is longer "
There can be
no doubt that in this matter is governed only by section 235 of the Indian
Companies Act of 1913. The application would be barred by time. The only
question, therefore, is to what extent and in what manner the liquidator can
avail himself of the provisions of section 45-O of the Banking Companies Act.
Two
alternative positions have been taken up on behalf of the liquidator by his
learned counsel, viz.:
(1) That the expression
" all other claims" appearing in sub-section (2) of section 45-O
includes a claim for repayment, restoration or compensation under section 235
of the Indian Companies Act., of 1913 or section 543 of the Companies Act of
1956, and that an application, if within time against directors, must be held
to be equally within time against others; and
(2) that if an application
does not fall within sub-section (2) it would necessarily fall under sub
section (1) and that, therefore, the entire period commencing from the date of
the presentation of the petition to wind up the company should be excluded.
I do not find
much difficulty in accepting the argument that the expression all other claims
occurring in sub-section (2) would include a claim for repayment, restoration
or compensation made in a misfeasance application. That subsection deals with
three categories of claims viz.:
(1) a claim
for recovery of calls on shares,
(2) a claim
based on contract, express or implied; and
(3) all other
claims.
The third
category is a residuary category which in the contest must comprise every type
of claim which does not fall within the first two categories. A claim
etymologically means a demand for something as due, a right or title to a
thing, a right to make a demand on a person. In a misfeasance application the
applicant undoubtedly makes a demand on the person impleaded as a respondent
that the said person be directed to make repayment or restoration or
compensation. If the applicant makes out that the respondent is liable to make
repayment, restoration or compensation, the court can compel him to do so.
Hence a demand made by the applicant in misfeasance application has the
essential features of claim as normally understood viz, the right to make
demand on the part of a litigant and the power of the court to enforce that
demand. The same meaning was attached to the expression in Bank of Meenachil v.
Chacko [1962] 32 Comp. 953; A.I.R. 1962 Ker. 333, 334 and Jwala Prasad v.
Official Liquidator A.I.R. 1962 All. 486, 496.
I hold
therefore that a misfeasance application comes within the expression all other
claims appearing in sub section (2) of section 45-O of the Banking Companies
Act.
That
sub-section (2), however, by its very language deals with three categories of
claims mentioned therein only so far as they are made against directors of a
banking company which is being wound up. With reference to every one of them,
the sub section describes the claim to be one by the banking company against any
of its directors. In other words, sub-section (2) of section 45-O enacts a
special rule of limitation governing the claims by a banking company which is
being wound up against any of its directors.
If the claim
falls within the first two categories, it is not governed by any rule of
limitation. In regard to the claims falling within the residuary category the
period of limitation prescribed in this sub section governed them
notwithstanding anything contained in the Limitation Act or section 235 of the
Indian Companies Act of 1913 (later substituted by section 543 of the Companies
Act of 1956] or any other law for the time being in force. This sub section
therefore must be read as an express provision within the meaning of section 2
of the Banking Companies Act. Hence, according to that section, this express
provision alone must be read in derogation of the Companies Act. For the rest,
the provisions of the Companies Act remain, those of the Banking Companies Act
being read only in addition thereto.
The position
is that the rule of limitation prescribed in section 235 of the Indian
Companies Act of 1913 stands, except in regard to cases for which express
provision is made in sub-section (2) of section 45-O of the Banking Companies
Act.
The next
question is whether the learned counsel for the liquidator is right in his
contention that sub-section (1) of section 45-O of the Banking Companies Act
governs misfeasance applications other than those against directors which are
specially governed by sub section (2) thereof.
There are two
difficulties against excepting this view, one stemming from the language of
section 2 of the Banking Companies Act and the other from the language of sub
section 1 of section 45-O itself.
According to
section 2, the provisions of the Banking Companies Act may be read in
derogation of those of the Companies Act only when the former expressly
provides for a particular thing. Now an express provision in regard to the
period of limitation governing a misfeasance application made by banking
companies is the one contained in sub-section (2) of section 45-O which in its
language is limited to applications against directors. That is so not merely
because the expression all other claims should be held to include misfeasance
applications but also because it expressly mentions section 235 of the Indian
Companies Act of 1913 (later substituted by section 543 of the companies act of
1956) as one of the provisions of law, notwithstanding which the provision so
sub section (2) of section 45-O will operate.
So far as sub
section (1) of section 45-O is itself concerned it does not repeal or do away
with the period of limitation prescribed by either the Limitation Act or any
other law for the time being in force. On the contrary, it maintains the period
of limitation prescribed by the Limitation Act or any other law for a suit or
an application by a banking company which is being wound up, but provides that
in computing that period the period commencing from the date of the
presentation of the petition for winding up shall be excluded. Secondly, the
provision for exclusion of a period of time from the computation of another
period of time necessarily assumes that the latter period has commenced,
because no question of exclusion can arise unless occasion has arisen for
computation and no question of computation can arise unless the period to be
computed has commenced. It follows therefore that the period to be excluded
should be one which commences after the period to be computed has commenced.
The period to be excluded under sub-section (1) of section 45-O is one which
commences from the date of the presentation of the winding up petition. Hence
the period to be computed must necessarily be one which commenced prior
thereto. Therefore, the suit or application mentioned in sub-section (1) of
section 45-O must necessarily relate to cause, the right to sue or the right to
make an application in respect of which accrued before the date of presentation
of the winding up petition. It is obvious that the right to make a misfeasance
application which could be made only in the course of winding up of a company
arises only after a winding up order is made which in necessarily subsequent to
the presentation of the winding up petition. It following therefore that an application
referred to in sub-section (1) of section 45-O can never be a misfeasance
application.
To the same
effect as above are the ruling in Brahmayya and Co. v. Mohammed [1959] 29 Comp.
cas. 291. , Sarkar Dutta Roy and Co. v. Shree Bank Limited [1960] 30 Comp. Cas.
416. and Bank of Meenachil v. Chacko [1962]32 Comp. Cas. 953.
Before
concluding the discussion on this point, I must refer to section 45- O of the
Banking companies Act which reads as follows :
" 45A
part III-A to override other laws- The provisions of this part and the rules
made thereunder shall have effect notwithstanding anything inconsistent
therewith contained in the Indian Companies Act, 1913 (VII of 1913], or the
Code of Civil Procedure, 1908 (V of 1908), or the code of Criminal Procedure
1898 (Act V of 1889) or any other law for the time being in force or any
instrument having effect by virtue of any such law but the provisions of any
such law or instrument in so far as the same are not varied by, or inconsistent
with, the provisions of this part or rules made thereunder shall apply to all
proceedings under this part."
It will be
noticed that the overriding effect given to Part III-A by this section over the
provisions of the Companies Act is only to the extent to which the latter are
inconsistent the provisions of Part III-A. To the extent they are not so
inconsistent, the provision of the Companies Act will continue to apply. The
inconsistency between section 235 of the 1913 act and section 45-O of the
Banking Companies Act as pointed out by me above, arises only in respect of the
period of limitation governing misfeasance applications against the directors.
The net result
of this discussion is that his misfeasance application, in so far as it relate
to the directors, must be held to be governed by the rule of limitation
prescribed in section 45-O (2) of the Banking Companies Act, and in so far as
it relates to others, must be held to be governed by the provisions of section
235 of the Indian Companies Act of 1913.
So far as the
directors are concerned one other aspect must now be mentioned. The concluding
words of sub-section (2) of section 45-O prescribing an alternative period of
limitation of five years computed from the date of the first appointment of a
liquidator were added in 1959 before this application was made. At the time the
application was made, the liquidator therefore had the choice of the longer of
the two alternative periods. If therefore the period of 12 years from the date
of accrual of the claim should happen to be shorter than the period of five
years from the date of the first appointment of the liquidator, then the
liquidator would undoubtedly be entitled to the latter period being the longer
one.
My finding on
point No.4 therefore is that this application in barred by time as against
respondent Nos. 8 to 14 who are not directors but is within time as against the
other respondents who are directors.
The
application therefore as against respondent Nos. 8 to 14 should be and is
hereby dismissed as barred by time.
In this view,
the contention on behalf of some among respondents nos. 8 to 13 that they are
not officers within the meaning of the Act and therefore not liable to be
proceeded against under section 235 of the Companies Act of 1913 need not be
considered.
I must add
that the dismissal of this application as against the respondents who are not
directors cannot and does not affect the rights or remedies of the liquidator
which may be available to him otherwise than by way of misfeasance application
in winding up.
Consequent
upon my findings on points Nos. 4 and 5 resulting in the dismissal of the
application against the respondents who are not directors and the legal
impossibility or continuance of these proceedings against the legal
representatives of deceased persons, the respondent who are interested in the
remaining points Nos. 1 to 3 are only directors who are still alive, viz. the
second respondent, S. K. Samant, the managing director, and the other
directors, Tendolkar, Ajgaonkar, Porwal and Kalghatgi, Respondent Nos. 3,5,6
and 7 respectively.
Points Nos. I
and 2 involve only questions of fact while the third point raises a mixed
question of law and fact. Although, as I shall later point out, the liability
or responsibility of any individual director must ultimately be traced to the
actual facts and circumstances proved by evidence and his conduct in relation
thereto, the general principles of liability are a matter of law.
Many decisions
have been cited both of English and Indian Court. It is, however, unnecessary,
in my opinion to discuss each one of them in detail because the essential
principles of law governing cases of this nature are well known and well
established. By way of a general statement of principles I can do no better
than refer to certain passages in the judgment of Romer J in In re city
Equitable Fire Insurance Company Limited [1925] 1 Ch. 407, which has been
regarded as classical in this branch of company law. His lordship has
considered in that judgment several earlier decisions cited and relied upon Mr.
Karanth for respondents Nos. 3, 5, and 7. The passage which I propose to refer
to are at pages 426 to 430 of the report.
After pointing
out that is not quite accurate to describe a director as a trustee, his
lordship proceeds to state as follows at page 426 to 428:
It is indeed
impossible to described the duty of directors in general terms, whether by way
of analogy or otherwise. The position of a director of a company carrying on
shall retail business is very different from that of a director of a railway
company. The duties of a bank director may differ widely from those of an
insurance director, and the duties of a director of one insurance company may
differ from those of a director of another. In one company, for instance, matters
may normally be attended to by the manager or other members of the staff that
in another company are tended to by the directors themselves. The larger the
business carried on by the company the more numerous, and the more important,
the matters that must of necessity be left to the managers, the accountants and
the rest of the staff. the manner in which the work of the company is to be
distributed between the board of directors and the staff is in truth a business
matter to be decided on business lines......
In order,
therefore, to ascertain the duties that a person appointed to the board of an
established company undertakes to perform, it is necessary to consider not only
the nature of the company's business, but also the manner in which the work of
the company is in fact distributed between the directors and the other
officials of the company, provided always that this distribution is a
reasonable one in the circumstances, and is not inconsistent with any express
provisions of the articles of association. In discharging the duties of his
portion thus ascertained a director must, of course, act honestly; but he must
also exercise some degree of both skill and diligence. To the question of what
is the particular degree of skill and diligence required of him, the
authorities do not, I think , give any very clear answer. It has been laid down
that so long as a director acts honestly he cannot be made responsible in
damages unless guilty of gross or culpable negligence in a business sense. But
as pointed out by Neville J. In re Brazilian rubber Plantations and Estates
Limited [1911] 1 Ch. 425, 437, one cannot say whether a man has been guilty of
negligence, gross or otherwise, unless one can determine what is the extent of
the duty which he is alleged to have neglected......The care that he is bound
to take has been described by Neville J. in the case referred to above as
reasonable care to be measured by the care an ordinary man might be expected to
take in the circumstances on his own behalf. In saying this Neville J. was only
following what was laid down in overhand and Gurney Company v. Gibbs (1870)
L.R. 5 H.L. 480, 486 as being the proper test to apply, namely.... whether or
not the directors exceeds the powers entrusted to them, or whether if they did
not so exceed their powers they were cognisant of circumstances of such a
character, so plain, so manifest, and so simple of appreciation, that no men
with any ordinary degree of prudence, acting on their own behalf, would have
entered into such a transaction as they entered into ?
AT page 428 to
430 his lordship Romer J, laid down certain propositions, flowing from earlier
decided cases. They are the following.
(1) A director need not
exhibit in the performance of his duties a greater degree of skill than may reasonable
be expected from a person of his knowledge and experience.
His Lordship
referred to the judgment of Lindley M. R. in Lagunas Nitrate Company v. Lagunas
Syndicate [1899] 2 Ch. 292, where it was held that directors, acting within
their powers with care reasonably to be expected from them having regard to
their knowledge and experience and acting honestly for the benefit of the
company, should be regarded as having discharged their duty. Romer J. points
out that the said proposition meant no more than this, viz, that directors are
not liable for mere errors of judgment.
(2) A director is not bound
to give continuous attention to the affairs of his company. His duties are of
an intermittent nature to be performed at periodical board meetings, and at
meetings of any committee of the board upon which he happens to be placed. He
is not, however bound to attend all such meetings, though he ought to attend
whenever, in the circumstances, he is reasonably to do so.
(3) In respect of all
duties that, having regard to the exigencies of business and the articles of
association, may properly be left to some other official, a director is, in the
absence of grounds for suspicion, justified in trusting that official to
perform such duties honestly.
Romer J. refer
to the judgment of the court of appeal in In re National Bank of Wales Limited
affirmed by the House of Lords in Dovey v. Cory. In the judgment of the court
of appeal is pointed out that business cannot be carried on upon principles of
distrust and that care and prudence do not involve distrust. In the House of
Lords, lord, Davery observed that the director in that case was entitled to
rely upon the judgment, information and advice of the chairman and the general
manager as to whose integrity, skill and competence he had no reason for
suspicion. Romer J. also refers to the judgment of Sir Geroge Jessel in
Hallmarks case and to the judgment of Chitty J. In re Denham and Company and
agreed with the opinion stated therein to the effect that directors are not
bound to examine entries in the company books of accounts.
Mr. Karanth
particularly relied upon the judgment of Chitty J. In Denham case the fact of
which were that one Denham who was in supreme control of the company in that
case was a man of such extraordinary capacity and consummate skill that it was
almost impossible for ordinary persons to discover or even suspect that he was
acting fraudulently.
The Indian
cases cited by Mr. Karanth like Doss v. Connel and Lobo. In the matter of Vijai
Laxmi Sugar Mills Ltd. do not add much to the statement of general principles.
Mr. Karanth relies particularly on the last mentioned case to emphasise the
distinction between the position of managing director and that of other
directors.
On behalf of
the liquidator, Mr. Nagaraja Rao stated generally that in support of his
client's case he could rely on the principles and the propositions formulated
by Romer J. and point out how they could apply to the facts of this case. He
referred to the ruling of the Bombay High Court in New Fleming Spinning and
Weaving Company Limited v. Kessowjinaik in which it was held that the directors
are responsible for the management of their company where, by the articles of
association, the business is to be conducted by the board with the assistance
of an agent, that they cannot divest themselves of their responsibility by
delegating the whole management to the agent and abstaining from all inquiry,
and that if he proves unfaithful under such circumstances, the liability is
theirs just as much as if they themselves had been unfaithful, to the judgment
of the Kerala High Court in Popular Bank Limited v. Krishna Kamath, where it is
pointed out that though ordinarily directors are entitled to rely upon the
skill and integrity of the members of the staff, they would be guilty of
misfeasance if even after becoming aware of the fact that the staff had been
acting in disregard of directions and resolutions of the directors, they the
directors continue to place blind and complete reliance and turst on the
members of the staff and also to the decision of the Madras High Court in
Malayalee Bank Limited v. Mannadiar, in which some of the acts of misfeasance
consisted in the diverting of large sums of money to accommodate some of the
directors, their relatives and friends or concerns and individuals in which the
directors were interested and in making advances to weak and imaginary parties.
Mr. Nagaraja
Rao also referred to the decision reported in Khairul Bashar v. Thannu Lal in
which an attempt has been made to define the term misfeasance. As pointed out
by Sir Raymond Evershed M.R. in In re B Johnson and Co. Builders Limited facts
and circumstance very so largely from case to case that no judge in any case
has made may attempt at any precise difinition of what does and does not fall
within the expression Misfeasance. Further, while examining the individual
responsibility of different directors with reference to or against the
background of distribution of work and responsibility in managing the affairs of
a company, it is well to remember the following observation of lord Macnaghten
in Dovey v. Cory.
I do not think
it desirable for any tribunal to do that which Parliament has abstained from
doing, that is, to formulate precise rules for the guidance or embarrassment of
businessmen in the conduct of business affairs. There never has been and I
think there will never be, much difficulty in dealing with any particular case
on its own facts and circumstances, and speaking for myself, I rather doubt the
wisdom of attempting to do more."
From the above
discussion of the principles it follows that while the general principle may
briefly be stated to be that a director should always act honestly and that the
standared of care expected of him is to take such care as in the circumstances
of the case and having regard to his knowledge and experience and his
association with the affairs of the company may be described as reasonable, the
nature of the duty resting on him and the extent of care expected of him must depend
upon the facts and circumstances of each case. I may here point out that
section 281 of the Indian Companies Act of 1913 and the corresponding section
633 of the Companies Act of 1956, which empower the court to relief a director
of any liability which he may incur under the law, clearly state that before so
relieving him the court should be satisfied not only that he has acted honestly
buy also that he has acted reasonably and that having regard to all the
circumstances of the case including those connected with his appointment, he
ought fairly to be excused.
While it has
always been recognised that having regard to the nature, magnitude or
complexity of the business and affairs of the company, delegation of powers to
and the distribution of responsibility between the directors and members of the
supervisory staff is permissible and while it is further recognised that so
long as there is no room for suspicion a director may rely upon the competence,
honesty, judgment and advise of other directors like managing director or other
specially charged with duties of a particular category, or of any member of the
supervisory staff, no case had held that it is open to a director totally to
divest himself of all his responsibilities or to claim total immunity from the
duty to take care which the law imposed upon him , whatever may be the nature
and extent of the duty having regard to the circumstances peculiar to the
company and to his association with the affairs of the company.
It is in the
light of these principles that the evidence in this case has to be examined.
Before proceeding to do so, it is necessary to make a few general observations
regarding the nature of the evidence in this case.
The official
liquidator has naturally no personal knowledge of the details of acts and
events which led to the company incurring the loss for which he seeks to make
the directors liable. His case, as stated by the learned counsel on his behalf
rests upon the actual facts of loss having occurred and the inference said to be
available from certain circumstances observed and recorded in the reports,
exhibits A-1, A-2, A-3, A-4, A-9 and A-21 and other facts including the conduct
of the directors proved by other evidence both documentary and oral. The
counsel on his behalf has also stated that the material placed on record
including the reports mentioned above recording the result of investigation by
the auditors and men of experience is not in itself sufficient to particularise
separately the responsibility of any indiviudal directior in the sense that
such director may be held to have retained or misapplied any specified or
ascertainable sum of money. While the counsel for the respondents directos,
particularly, Mr. Karanth for respondent Nos. 3,5, and 7 have contended that the
material itself is too vague and of such a character as to make it difficult
for them to put forward a specific defence and for the court to come to any
definite conclusions. Mr. Nagaraja Rao for the liquidator has argued that the
power of the court under section 235 is not limited to making an order for
repayment of any specified sum of money or restoration of any specified item of
property, but extends also to making an order directing the delinquent
directors to contribute to the assets of the company in liquidation by way of
compensation such sum as the court considers just in the circumstances of the
case and also further to apportion that sum between the several persons held
liable in such proportion as may be just.
The nature of
the evidence in this case is also to some extent influenced by the following
circumstances:
A set of books
called the rough cash books, as to the existence of which up to the time D. D.
Joshi P.W. 2 conducted his investigation resulting in his reports, exhibit A-9
there can be little doubt, have since been lost and are not available. The
original balance sheets signed by the directors of the company have been
missing for a long time, and they have not been produced. But printed balance
sheets have been marked by consent as exhibit A-8 series. The liquidator did
not produce the original minute books recording the minutes of the meetings of
the company or its directors, but produced three books, exhibits B-15, B-16 and
B-17, as the rough minute books, late in the course of the trial, it was stated
by one of the learned counsel that some of the original minute books had been
produced in some other proceedings pending in subordinate courts, but the exact
position has not been made clear. There is evidence to the effect that the liquidator
appointed by the Bombay High Court or some representative of his had once sold
by auction at Belgaum some of the papers belonging to the company. Though
Tendolkar, one of the directors, stated in his evidence that the papers sold
were only useless papers, one cannot, be sure in the absence of clear material,
whether or not the papers sold included some at least of some importance and
value Mr. Joshi his report, exhibit A-9 as well as in the course of his
evidence has stated that books and papers were stored in great disorder both at
the head office of the company and at the office of the liquidator at Bombay.
In the course of the long pendency of this, case, papers have moved form
Belgaum to Bombay, Bombay to Belgaum and then from Belgaum to this court, In
this court papers relating to the moratrium applications including the several
reports said to have been made by P.W. 4, Kotbagi to the Bombay High court have
been missing and have not been traced till now.
I have also
pointed out already that in the matter of defence, there has been a clear
distinction between the stand taken up by the second respondent, S L Samant,
managing director, on the one hand, and Mr. Karanths clients, respondents Nos.
3,5,and 7 on the other, the latter trying to fix the blame exclusively on the
former, and the former trying to make out that the latter cannot so escape
liability by placing blame on him alone.
I have also
pointed out that the objections or written statements of Mr. Karanth's clients
as well as that of the deceased fourth respondent, Angolkar, follow closely the
lines of that of the first respoondent, pant Balakudri, the chairman who, it
may bestated, was himself a lawyer. Mr. Albal has contended, not without force,
that the written statements of all these diectors were settled by pant
Balekundri himself.
The said
written statements indicate that the directors subscribing to those written
statement proceeded upon the footing that the burden of proof rests entirely on
the liquidator as if these proceedings are quasi criminal in nature. Even when
they refer to the provisions of section 45H of the Banking Companies Act which
makes an appreciable difference to the nature of proof and the burden of proof,
the contention is that there can be no prima facie case unless the same is
established by legal evidence. Obviously the written statements have overlooked
the provisions of section 45F of the Banking Companies Act and the total effect
in law of the provisions of the two sections 45H and 45F, which is explained by
Sarjoo Prosad C.J. in Vastulal Pareek v. Official Liquidator. As his Lordship
has pointed out in the said case, the statute has taken, note of the fact that
in ordinary circumstances the liquidator is not likely to have personal
knowledge of the affairs of a banking company which is being wound up and that
its directors may be expected to be in possession of much information relevant
to the points under investigation and that therefore it calls upon the
liquidator only to make out a prima facie case and places upon the directors
the burden of proving facts necessary to exonerate them from the liability.
It is in view
of these circumstances and the provisions of law that i deferred the fomulation
of the points for consideration till after P.Ws. 1 and 2 were examined and also
gave the fullest opportunity to all the respondents to inspect whatever books
and papers they would like to in possession of the liquidator and to have them
marked in evidence.
I, however,
noticed that the directors in the matter of leading evidence were apparently
acting on not quite an accurate view of the burden resting upon them. Hence,
after the four witnesses for the liquidator and four on behalf of the
respondents had been examined, I considered the advisability of ordering that
the remaining directors who had not then given evidence as well as the auditor
should appear and give evidence. At the time I made that order, I contented
myself with stating that interests of justice required the making of that order
with a view to ensure as full a clarification of matters in doubt as possible
in the circumstances of the case and with a view to see that no party suffers
any prejudice by reason of the evidence till then given or not given by the
other parties. I did not state further seasons for fear of embarrassing of the
parties in the subsequent stage of the trial. In making the order, I had in
mind three principal circumstances viz, the necessity, in the interests of
doing complete justice between the parties, of all of them placing before court
such evidence as would assist me in resolving the controversy between the
managing director on the one hand and the rest of the directors on the other,
the need I felt of protecting the director them selves against their acting on
what appeared to me to be a mistaken view as to the burden of proof resting on
them, and finally my own duty as company judge of protecting the interest of
depositors and other creditors of the company who in the nature of things
cannot themselves take any active part in these proceedings.
In the course
of the argument I heard before making the said order, the one general objection
was that the court had no power to make an order of the type that I was
proposing to make. In addition, Mr. Karanth for respondent Nos. 3, 5 and 7 contended
that the order would operate to the prejudice of his clients by permitting the
liquidator to fill up the lacunae, if any, in his case and thus deprive his
clients of the benefit of a fair trial Mr. Albal for the second respondent
stated that his client having been already arrayed as an accused in a criminal
trial, relating to some of the facts under investigation in this application he
might be running a grave risk by giving evidence in this case. So far as the
existence or otherwise of the power is concerned, it is now not necessary for
me to discuss the position, because the Appellate Bench after examining the
relevant provisions and principles of law, has held in favour of the of the
existence of such a power. The simple answer to Mr. Albal’s objection is that
misfeasance proceedings in the course of winding up of a company are
independent of whether or not the person proceeded against may be criminally
responsible for any offense disclosed by the facts of the case and that for
assessing the civil liability of his client under section 235 of the Indian
Companies Act 1913, it is unnecessary for me to consider or express any opinion
on the question whether he may also be criminally liable and what is more, a
company court, while examining the case of an alleged misfeasance is not to be
deterred by the possibility of the person whose conduct it is investigating
rendering himself liable for criminal prosecution also. Mr. Karanth's argument
that compelling directors to give evidence is likely to prejudice what he calls
a fair trial, proceeds, in my opinion, on the view that misfeasance proceedings
are in all respects same as, and not in any respect different from, an ordinary
civil trial. In the latter case there are only two contending parties or two sets
of contending parties before the court and each party or each set may be
expected in its own interest to place before the court such evidence as it
considers necessary in support of its case. But in proceedings for misfeasance
the interests involved are not merely those of the parties actually present
before the court but of many others who are not before the court. The
liquidator who is very often an applicant in such cases is not conducting the
trial for his personal benefit but is discharging a statutory duty. In the even
to the applicant being a creditor or a contributory, he is representing the
interests of other creditors or contributories also. The possibility of the
personal interests of the parties actually present being in some respects or to
some extent adverse to those of the absent parties, or the parties actually
present not being in a position to place all material that may be relevant,
cannot always be ruled out. Indeed, when it becomes apparent that the parties,
present, particularly those whose conduct is under investigation of relevant
details, refrain from placing such details before the court, it is, in my
opinion, the duty of the court to compel them to give evidence so that the
ultimate decision may, as far as it is humanly possible, be a fair and just
decision open the facts in controversy.
Before,
however, my last mentioned order which I made on 21st March, 1963, could be
given effect to, the summer vacation intervened and some of the directors
affected by it viz. respondent Nos. 3,5 and 7 took it up on appeal , and I
thought it prudent not to proceed with the trial until the appeal was disposed
of. It was dismissed by the appellate bench of this court on 28th June, 1963.
By then, the fourteenth respondent the auditor had died. It was, therefore, not
possible to record the evidence of the auditor which I thought would be of
considerable value.
Subsequently,
three director, viz. S K Samant Managing director, and Tendolkar and Kalghatgi
Respondent Nos. 3 and 7 gave evidence.
Thus, every
party that is likely to be affected personally by the ultimate order that I may
make in these proceedings has had the full opportunity of placing before the
court, not only by himself giving evidence but also by eliciting information
from every other party by cross-examination, such material as he considers
necessary in support of his case , and the possibility of any one of them being
placed in a position of advantage or disadvantage by either not giving evidence
or giving evidence, has been to the extent possible obviated.
[His Lordship
proceeded to consider the evidence].
I have
therefore no hesitation in holding that there has been such lack of supervision
and control by the persons responsible for providing for management of affairs
of the company leading to actual dishonest dealings with the company’s moneys
that those responsible for providing for management of the affairs of the
company cannot but be held to have grossly negligent.
Prima facie,
those responsible for management of the affairs of a company are the board of
directors. Although it does not of course mean that every detail of
administration should be attended to by the directors themselves, the accepted
position is that the ultimate responsibility for making provisions for due
administration of the affairs of the company does rest on the directors
themselves. That is the normal position in law. That is also the position
stated in article 124 of the articles of association of this company, which
states that “The management of the business of the company shall be vested in
the directors who in addition to the powers and authorities by these presents
or otherwise expressly conferred upon them, may exercise all such powers and do
all such acts and things as may be exercised or done by the company and are not
hereby or by statute expressly directed or required to be exercised or done by
the company in general meeting.” Article 125 also enumerates specific powers of
the directors without prejudice to the general powers conferred by article 124.
The argument
on behalf of the directors, other than the managing director, however, is that
so far as the day to day administration of the affairs of the company and all
details pertaining thereto are concerned, the primary responsibility is that of
the managing director. The rely on articles 108 and 109 (a) of the company’s
articles of association which read as follows:
"108 The
business of the company shall, subject to the control of the board, be carried
on by the managing director or the assistant managing director in the name of
the company and all contracts, matters and things, which shall be entered into,
executed, taken or done by him, on behalf of the company and all receipts and
discharges signed by him as such shall be good and sufficient to all intents
and purposes and binding on the company.
109(a) The
managing director shall out of the money received by the company make all
necessary and proper disbursements in carrying on the business of the company
and shall cause proper accounts to be kept of all transactions of the company
and shall once in every year, settle and adjust such accounts with the board
and auditors and shall make out the balance sheet and profit and loss account
and all the returns and statements required by the Acts, to be audited and
singed,"
It is their
case that they having appointed the second respondent as the managing director
with the sanction of the general body of shareholders about whose competence
and integrity they were satisfied at the time of appointment and as to whose
competence or integrity they had no cause for suspicion till about a week
before, the company was obliged to close down business, and the auditor of the
company, the fourteenth respondent, who was the company's auditor from the
commencement, having at no time brought to their notice any irregularity in the
working of the company, they, the other directors, cannot in law be held
responsible for whatever loss the company is now shown to have sustained, and
that the responsibility, if any, therefore is exclusively that of the managing
director. They also add that the conduct of the managing director, Second,
respondent, and certain admissions made by him during November December 1954 go
to show that he alone is responsible for the loss caused to the company and not
the rest of the directors.
I do not think
that the provisions of the articles of association in themselves without regard
to the factual position can be taken as decisive of the existence or otherwise
of the responsibility of the directors for the loss actually sustained by the
company. Primarily the provisions of the articles relating to the management of
affairs of a company are intended to indicate the general lines on which and
the limitations subject to which the responsibility for proper management of
affairs should be distributed or allocated between the directors and the
officers of the Company. They do not and cannot, in my opinion, be read as
constituting sufficient basis for either the board of directors as a whole or
any one on the directors to disclaim all responsibility. The rulings of English
and Indian courts which I have already referred to do not, as pointed out,
support the view that no duty at all rests upon a director in the matter of
administering the affairs of a company. Every case, it will be noticed, has
examined the position from the point of view of determining whether on the
facts of the case and particularly those peculiar to the position of the
directors vis-a- vis the company. the director in question can be said to have
discharged his responsibility. In determining that question I am clearly of the
opinion that the opinion of the court should be guided and governed by the
principles indicated by the legislature itself in section 281 of the Indian
Companies Act, 1913 and section 633 of the Companies Act of 1956.
In the present
case, all that can be said on the basis of the articles of association is that
they do authorise the board of directors to entrust the day to day
administration to one of them appointed as a managing director. The articles do
not, however, say that the mere appointment of a managing director discharges
the board of directors of its ultimate responsibility for providing for the
management of the company which in express terms is vested in them. The
managing director is to work under their supervision. Supervision involves not
only the initial formulation of duties and responsibilities of a person whose
work is to be supervised but also subsequent scrutiny of the manner in which he
performs his duties and discharges his responsibilities by periodical
inspection and review of his work with a view to see that he obeys and observes
the instructions originally or from time to time issued to him and generally
conducts himself in the matter of his work properly, honestly and efficiently.
It is no doubt
a well established proposition of law that directors are entitled to rely upon
the skill and integrity of a managing director or other principle officers of a
company exercising supervisory functions provided of course that before
appointing a managing director or officer, they are satisfied about the honesty
and general competence of the appointee. If, however, circumstances come to
their notice which raise reasonable doubt or suspicion about either the integrity
or the competence of the person placed in charge of the affairs, it is their
plain duty to examine the position and take such steps as may be reasonable in
the circumstances. It these circumstances are of such character, so plain, so
manifest and so simple of appreciation, that no man with any degree of prudence
acting on his own behalf would have omitted to take corrective action it is no
longer, in my opinion, open to the directors to say that they continued to rely
on the honesty and integrity of the managing director or other officer or to
rely upon any principle of law in support of an argument that they have
discharged the duty or responsibility which the law places upon them.
The question,
therefore, which requires to be investigated in this case is two fold: Whether
the board of directors did in the first instance pass or adopt any resolution
or resolutions indicating or defining the duties of the managing director and
providing for the mode or manner of supervising his work, and, secondly,
whether the directors are right in their contention that they never had any
notice of any circumstance casting any doubt or suspicion on either the
integrity or the competence of the managing director.
On the first
question the directors in this case have case done nothing, beyond relying upon
the provisions of articles 108 and 109 (a) as well as on article 112 which
gives a list of powers of the managing director. Mr. Karanth has complained
that the liquidator having in spite of notices and requests failed to cause
production of the original minutes books, his clients are considerably
handicapped in the matter of bringing to the notice of the court the
resolutions, if any, relating to the definition or allocation of powers of
functions to the managing director. It seems to me that even a negative value
which one could attach to this circumstance on behalf of the ordinary directors
has been to a considerable extent reduced, if not actually destroyed by the
type of evidence given by the ordinary directors and the line of cross
examination pursued against the managing director. Both Tendolkar and Ajgaonkar
took up a constant and invariable attitude that having appointed Samant who,
having regard to his position in the business, world at that time, was considered
to be a competent person as managing director, they relied upon him completely
in all respects and that as managing director it was his exclusive
responsibility to see that every thing about the working of the company was in
proper order. Neither of them has at any time during the course of their
deposition stated either that there were resolutions adopted by the board
touching the duties and responsibilities of the managing director or that there
was at any time any system of periodical review of his work, unless one could
say that the approval by the board of directors of the loans sanctioned by the
managing director and the signing of annual balance sheets with the auditors,
report may be described as such reviews. Even the fact that Pant Balekundri and
Tendolkar on behalf of the board of directors had executed a power of attorney
in favour of Samant was not mention by Tendolkar, until the power of attorney
was put to him by Mr. Nagaraja Rao on behalf of the liquidator and marked
exhibit A-39. Samant himself made some reference to a discussion among the
directors, though not according to his recollection actually recorded in the
form of a resolution, relating to organization of work at the head office and
distribution thereof between the members of the staff. On this point, the
cross-examination by Mr. karanth was directed towards discrediting this
evidence of Samant. Obviously, the attempt was to make out that the allocation
of work among the staff was left entirely to the managing director and that the
board of directors gave him no directions or instructions in that regard.
Samant also referred to a resolution of the board of directors authorizing four
persons, viz., Pant Balekundri, himself, Deshpande and Nadgauda to operate bank
accounts of the company, any two among them signing the cheques. Even in this
regard, the cross-examination by Mr. Karanti was to question the accuracy of
Samant's recollection of this resolution. Mr. Mandagi on behalf of respondent
Nos. 8 to 10 and the legal representatives of the deceased respondent No. 11,
who had with him copies of the relevant resolutions (which being
unauthenticated copies could not be marked as exhibits in evidence) put certain
dates to Samant as the ones on which the resolutions relating to operation of bank
accounts had been passed by the board of directors. So far as the directors,
Porwal and Kalghatgi, are concerned, they have not deposed definitely to any
fact material to the question now in controversy, taking up the position that
on account of their recent appointments as directors and little opportunity
they had to acquaint themselves with the details of the company's working, they
are not aware of any important details or any other details at all.
On the other
side of the picture, Mr. Albal on behalf of the second respondent has brought
out in evidence that the board of directors used to meet fairly frequently at
intervals of a month or less, that at such meetings the board not merely
sanctioned loans or approved the loans already sanctioned by the managing
director but also concerned itself with smaller details of administration like
the appointment and salaries of the members of the staff, sanctioning payment
of bills for small amounts like advertisement charges, etc., and also general
review of the progress and work of the company.
Upon the
whole, it seems to me that so far as this matter is concerned, the case of the
directors on their own showing is that there never was any formal resolution
defining the functions and responsibility of the managing director or
indicating the extent to which he can, on his own and independently of the
board, exercise powers in relation to the management of the affairs of the
company or providing for the manner in which the board should exercise
supervision over the work of the managing director. The general effect of the
evidence appears to be that to a large extent the directors proceeded on a
footing of mutual trust and that many details were settled by informal
discussions rather than by formal resolutions.
Among the
other circumstances which are of relevance to this topic is the extent and
nature of the business operations of this company.
An examination
of the balance-sheets produced and marked exhibit A-6 series discloses that in
earlier years the total resources of the company were less than a couple of
lakhs. It was only in the year 1942 that they rose to about five lakhs of
rupees and in 1943 approached 10 lakhs of rupees. In 1946 when the second
respondent became the managing director, the total resources were about 17 1/2
lakhs of rupees. Thereafter, for some time they were above 20 lakhs of rupees,
but at no time did they exceed 22 lakhs of rupees. The balance-sheets for 1952
and 1953 which are the latest show that the total resources were less than 20 lakhs
of rupees.
It is also
noticed that among the advances, as already pointed out, about 50 per cent,
were unsecured and the secured advances were either gold loans or goods loans.
It appears
from the evidence that such of the directors as were businessmen were availing
themselves of large limits for what appear to be loans on the security of
merchandise or stock-in-trade. It also appears from the evidence that when they
first became directors of this company, their trade resources or amounts
invested in trade were not large or considerable and that their turnover in
trade appeared to increase in later years. It has been suggested to them in the
course of their cross-examination on behalf of the liquidator that they
prospered mainly because they could, as directors of the company, command large
credit limits from the company. They have of course denied these suggestions.
It has also been argued on their behalf that availing themselves of the loan
facilities from the company may not in itself be a matter for reproach, and
that they have repaid their loans.
The importance
of this circumstance, however, lies not in the bare fact of the directors
having obtained loans or advances from the company. What is of importance and
relevance to the present discussion is the manner in which these loans were
availed of, the influence which their conduct in relation to these loans may be
said to have had on the discipline and integrity of the staff and the
inferences available there from as to the acquaintance which the directors
themselves may be said to have had with the details of the working of the
company or, at any rate, with the general features of its working.
** ** **
It should,
however, be stated that the allegations of actual dishonesty on the part of the
directors are vague and proceed upon suspicion rather than upon any fact proved
by the evidence. All that can be said to have been established by the evidence
is that businessmen among the directors were availing themselves of large
limits for loans and advances, and that in the matter of sanction or scrutiny
of those loans no strict or proper procedure was adhered to. As I have already
stated, the making of loans and advances to the directors may not in itself be
irregular or dishonest, provided that no difference is made in the matter of
procedure and scrutiny between the loans to directors and loans to other
persons. If certain preferences or concessions are made in favour of the
directors including the omission to adopt proper procedure and scrutiny, it is
a legitimate criticism to make that the directors have taken undue advantage of
their position as directors which undoubtedly is a departure from the standard
of care and rectitude expected of them. As I have already observed, if men at
the top are guilty of departure from proper conduct, the place themselves in a
position which makes it difficult, if not impossible, for them to correct their
subordinates. There is, therefore, force in the argument that this particular
situation in which the directors found themselves might be one of the reasons
for not taking stern action against dishonest members of the staff. This
circumstance is enough,in may opinion, to disentitles the directors from saying
that their only fault was honest error of judgment or that they have acted
reasonably in the circumstances of this case.
I hold
therefore that the directors, other than the managing director, are also liable
for the loss because they must be held to have failed in their duty of
providing for good and efficient management of the affairs of the company and
because they cannot in the circumstances claim that they were entitled to rely
upon either the managing director or any members of the supervisory staff.
All the
directors therefore including the managing director must be held to be jointly
and severally responsible to contribute Rs. 2,50,000 to the assets of the
company. I must add that this will render unenforceable exhibits A-26 and A-27
against Samant. But exhibits B-49 and B-50 will continue to be enforceable
because I have considered them to be prima facie realisable while assessing the
los attributable to the discrepancy in bank accounts.
It has been
argued on behalf of Porwal and Kalghatgi, respondents NOs. 6 and 7
respectively, that what is stated above may not apply in all respects in their
case as it might be said to apply in the case of directors like Tendolkar and
Ajgaonkar. In regard to Kalghatgi it is stated that he became a director only
in July, 1953, and that, therefore, it could not be said either that he was in
any sense responsible for things which had already taken place before he became
a director or that after he became a director he had any particular opportunity
of setting things right. In regard to Porwal, it has been stated that though he
became a director in 1951, he had attend only about 3 or 4 meetings of the
board of directors and that he was not fully acquainted with all the defects.
He also states that if only he had any idea of the defects, he would not have
became a director at all.
It is true
that neither of these directors can be said to have had such close association
with the affairs of the company as Tendolkar and Ajgaonkar may be said to have
had. But it is difficult to believe that they were wholly unaware of the
situation. Kalghatgi has not only denied even simple facts which he need not
have denied but also has made common cause with the directors like Pant
Balekundri, Tendolkar, Ajgaonkar and Angolkar, and filed a written statement in
all respects same as or similar to the written statements of these directors.
Porwal has, for a reason which I am unable to guess, omitted to mention that he
had along with Tendolkar signed Ajrekar's certification of the actual cash,
viz., exhibit A-46, on the closing date. It is therefore not quite possible for
me to held that they were wholly unaware of the situation. It is also obvious
that, as a matter of law, they, as members of the board of directors, have the
ultimate responsibility of providing for proper management of the affairs of the
company and have to bear the burden of exonerating themselves from the prima
facie case made by the liquidator on the evidence placed on recorded.
The question
is whether they can be said to have acted honestly and reasonably in the
circumstances of the case including their association or nature of association
with the affairs of the company and their position on the board of directors.
No suggestions
of dishonest conduct has been made against them. They are not even borrowers
from the company. They say that they dependent upon the senior directors of the
company who both by their experience and their longer and more intimate
association with the affairs of the company may be expected to be better
equipped to take the necessary corrective steps. On the evidence there is no
reason totally to discard this defence put forward on their behalf. They cannot
be found fault with for placing reliance on these senior directors. It is also
not impossible that in their position and with their experience in the affairs
of the company they themselves might not have been in a position to make any
definite proposals or take any effective steps. In that view it is not possible
to reject the argument on their behalf that they may be said to have acted not
merely honestly but also reasonably.
But there is
one circumstance which makes if difficult for me to exonerate them wholly or
unconditionally. When Porwal joined the doctorate in 1951, the first inspection
by the Reserve Bank had already taken place and he was on the board when the
subsequent inspections took place. Nevertheless, according to his own evidence,
he took no steps to inform himself about the correct position or to dissociate
himself from the management if he thought that it was beyond his capacity or
capabilities to do anything useful as a director. Kalghatgi was equally
indifferent and took up the position as a director as if it meant nothing to
him. The attitude displayed by these two directors actually comes to this,
viz., that taking up the position of director of a banking company is a matter
of no consequence. It should be remembered that the confidence which the public
reposes in banking institutions is to not inconsiderable extent dependent on
the reputation for integrity and sense of duty which the members of the board
of directors may enjoy. Members of the public deposit their moneys with banks
out of the confidence in the institutions and that confidence is sometimes
influenced by the fact that a person whom they know to be honest and
conscientious is on the board of directors taking the view that such a person
cannot be expected to associate himself with an institution if he thinks that
it is not running on honest and correct lines. To excuse, therefore, totally
persons who become directors with the attitude of mind which these tow
directors have displayed is fraught with dangerous consequences. I am not,
therefore, inclined totally to exonerate either of these two directors.
In the result,
I make an order directing Respondent No. 2, B. K. Samant, respondent No. 3, P A
Tendolkar, respondent No. 5, L S Ajgaonkar, respondent No. 6, R W Porwal, and
the seventh respondent, R.N. Kalghatgi, to contribute jointly and severally a
sum of Rs. 2,50,000 to the assets of the company in winding up with interest thereon
at six per cent per annum thereon from to day till payment. If R W Porwal
contributes a sum of Rs. 15,000 within three months from today with interest at
six per cent per annum from today till payment, he will be relieved of further
liability under this order. If R.N. Kalghatgi contributes Rs. 15,000 within
three months from this day with interest thereon at six per cent per annum from
today till payment, he will be relived of further liability under this order.
If either of them fails to make payment of the said sum of Rs. 15,000 with
interest thereon a six per cent per annum within three months from today, he
will forfeit the relief granted to him.
The liquidator
is authorised to meet the expenses of these proceedings from out of the estate.
Regarding the rest of the parties, the only proper order to pass regarding
costs, in the circumstances of this case, is to direct them to bear their own
costs.
I order
accordingly.
Order accordingly.
[1970] 40 COMP. CAS. 664 (ALL)
v.
M. H. BEG, J.
MARCH 11, 1970
B.L. Gupta
and Maziuddin for the petitioner.
J.N. Tewari
and S.C. Khare for the opposite parties.
This
application under section 633(2) of the Companies Act, 1956, (hereinafter
referred to as the Act), by three directors of Radha Govind Industries Ltd.,
Kosi Kalan, Mathura, sets out a history of the company concerned. It mentions
that the chairman of the board of directors of the company, Rai Saheb Govind
Das Bhargava, had died on June 19, 1965, and that his eldest son, G. D.
Bhargava, the first of the three applicants, was a patient of high blood
pressure, who had also suffered a heart attack. It states that the relations
between the sons of the deceased, Rai Saheb Govind Das Bhargava, became
strained so that L. D. Bhargava, I.A.S., demanded the return of the entire sum
of money loaned by him to the company. A winding up application made by L. D.
Bhargava in this court, with the result that the money lent by him was paid
back to him, as well as an investigation instituted by the Company Law Board,
early in 1963, into the affairs of the company, are mentioned, presumably to
show the hostility of L.D. Bhargava to the applicants. I am unable to
appreciate the bearing of this background on the merits of the application
before me. If the object was to suggest that the Registrar of Companies or the
police at Mathura have acted as a result of anything done by L. D. Bhargava,
the suggestion is totally unsupported by any assertion which could give rise to
that inference. Moreover, an applicant for relief whether under either section
633(1), for which he can only apply to the court in which a proceeding
mentioned there has been instituted or is pending, or, under section 633(2),
against apprehended proceedings against him, must show his own honesty and
reasonableness so as to establish that he "ought fairly to be
excused". Motives of other persons or authorities in taking action against
him are not really relevant there at all.
Certain
allegations against the applicants in a complaint made to the Superintendent of
Police, Mathura, by means of a registered A. D. letter, by the Registrar of
Companies, are revealed by annexure I to a counter-affidavit filed by Rabhubir
Sahai Bhatnagar, Station Officer of police station Kosi Kalan, district
Mathura, and by annexure "D" to an affidavit of Shri P. R.
Mukhopadhyay, the present Registrar of Companies, filed on December 22, 1969.
The Station Officer's counter-affidavit also discloses the contents of a first
information report (annexure II) against the applicants lodged at the police
station Kosi Kalan by Shri S. C. Bharadwaj, who was formerly the Registrar of
Companies, although its date is not mentioned. The counter-affidavits, together
with the annexed documents mentioned above, indicate that the police has been
investigating into certain alleged offences by the directors said to be
punishable not only under the Companies Act but also under sections 420 and 471
of the Indian Penal Code. Therefore, the petitioners seek relief against
possible apprehended proceedings against them.
The
applicants state that the accounts of the company are duly audited every year
and that the auditors' reports are given in a set form every year which is
given in paragraph 5 of the petition. The accounts for the year ending March
31, 1965, are said to have been audited as usual but are admitted not to have
been signed by the auditors, although the accounts of the Kosi Electric Supply
Co., which is said to be the chief business of the company, were said to have
been audited and signed by the auditors of the company as well as by the
auditors sent by the Government. The auditors, it is alleged, kept postponing
signing the audit reports "on one pretext or the other". The unsigned
balance sheet and a suppositious auditors ' report was printed and placed
before a general meeting of the shareholders of the company on September 30,
1965, and passed by a resolution (annexure "A" to the applicant's
affidavit) in the following terms :
"Shri Rabhunath Das Bhargava
proposed that the directors' report, the auditors' report and the audited
balance sheet and the profit and loss account of the company for the year ended
31st March, 1965, be approved and adopted.
The motion was seconded by Shri
Lalta Prasad Bhargava and was carried unanimously".
G. D.
Bhargava, director and secretary of the company, even filed the printed copy of
the balance sheet with the Registrar of Companies some time about November 29,
1965. The excuse is that he thought "that the auditors would sign and give
their report as in the past". In other words, although the balance sheet
and the auditors' report had not been signed, they were printed as though
signed and then passed and then filed before the Registrar presumably with the
knowledge that the original documents had not been signed at all by the
auditors. It is stated, in paragraph 9 of the application, that, as soon as
Gokul Das Bhargava realised his mistake, he immediately informed the auditors
and wrote to the Registrar of Companies with his explanation on September 19,
1966. The Registrar then served a notice dated October 14, 1966 (annexure
"C" to the applicants' affidavit), asking him to show cause why
action should not be taken against officers of the company under section 628 of
the Act. On October 31, 1966, the auditors gave their version to the Registrar
(annexure "E" to the affidavit in support of the application) showing
that, although the company was fully apprised of the reasons for the refusal of
the auditors to sign the report, yet, it filed the papers with the Registrar
without obtaining the auditors' signatures. On November 12, 1966, G. D.
Bhargava gave an explanation (annexure "D" to the affidavit in
support of the application) in answer to the show cause notice. Here, he
expressed his regret for the mistake he had committed in submitting the balance
sheet" thinking that the auditors would eventually sign the same". It
is asserted there that the general meeting of the company which considered the
matter was aware of the whole position. The explanation ends with a request to
excuse the "lapses this time and to condone the mistake". Another
letter, dated January 21, 1967 (annexure "F" to the affidavit in
support of the application), tries to justify the stand of the directors on the
differences between the company and the auditors about certain items of
expenditure. It is said that another general meeting was held on April 28,
1967, after the auditors had given and signed their report and that it was
approved and adopted. It was then stated that the applicants acted honestly and
reasonably. A medical certificate was also filed to show that G.D. Bhargava was
a patient of high blood pressure and had a heart attack. The Registrar's interpretation
of admitted facts differs from that of the applicants and the correctness and
relevance of some of the assertions made on behalf on the applicants is also
denied by the Registrar.
The question
of law which arises is whether, upon the above-mentioned state of facts, this
court can or should interfere under section 633(2) of the Act with an
apprehended proceeding. The whole of the section 633 may usefully be set out
here.
"633. Power of court to
grant relief in certain cases.—(1) If in any proceeding for negligence,
default, breach of duty, misfeasance or breach of trust against an officer of a
company, it appears to the court hearing the case that he is or may be liable
in respect of the negligence, default, breach of duty, misfeasance or breach cf
trust, but that he has acted honestly and reasonably, and that having regard to
all the circumstances of the case, including those connected with his
appointment, he ought fairly to be excused, the court may relieve him, either
wholly or partly, from his liability on such terms as it may think fit:
Provided that in a criminal
proceeding under this sub-section, the court shall have no power to grant
relief from any civil liability which may attach to an officer in respect of
such negligence, default, breach of duty, misfeasance, or breach of trust.
(2) Where any such officer has
reason to apprehend that any proceeding will or might be brought against him in
respect of any negligence, default, breach of duty, misfeasance or breach of
trust, he may apply to the High Court for relief and the High Court on such
application shall have the same power to relieve him as it would have had if it
had been a court before which a proceeding against that officer for negligence,
default, breach of duty, misfeasance or breach of trust had been brought under
subsection (1).
(3) No court shall grant any
relief to any officer under sub-section (1) or sub-section (2) unless it has,
by notice served in the manner specified by it, required the Registrar and such
other person, if any, as it thinks necessary, to show cause why such relief
should not be granted."
It is
submitted on behalf of the Registrar of Companies and the Superintendent of
Police, Mathura, that the provisions of section 633 are intended only for
technical lapses and defaults but not for deliberate criminal or dishonest acts
involving commission of fraud. It is contended that, in the instant case, not
merely the provisions of sections 210 to 216 and 219 to 221 of the Act appear
to have been violated, so that liabilities to penalties provided by sections
218 and 628 of the Act may have been incurred, but offences under the
provisions of sections 420 and 471 of the Indian Penal Code are also alleged.
It is urged that action either under section 633 (1) or section 633(2) are
confined to cases of negligence, default, breach of duty, misfeasance, or
breach of trust, but this case goes beyond this list. It is pointed out that
the power of this court to relieve an officer of a company under section 633(2)
would be subject to the same conditions as that of a court before which a
proceeding for negligence, default, breach of duty, misfeasance, or breach of
trust had been brought. This means, it is submitted, that the applicants must
show that they acted honestly and reasonably so that they ought fairly to be
excused.
It does
appear to me that, on the principle laid down in Gilt Edge Safety Glass Ltd.,
In re,
with regard to similar powers of courts in England, that the power to relieve
under section 633 should only be exercised where the alleged offence is, on the
face of it, either purely technical or due to causes over which the alleged
offender had no reasonable means of control so that the violations of the law
ought "fairly to be excused".
So far as the
investigation into alleged offences under section 420 or section 471 of the
Indian Penal Code is concerned, I am afraid no direction can be issued under
section 633(2) of the Act either to the Registrar of Companies or to the
Superintendent of Police, Mathura, in respect of this investigation whether the
allegations are well-founded or ill-founded. An alleged offence of using a
forged document, known to the offender to be forged, as genuine, punishable
under section 471 of the Indian Penal Code, falls entirely outside the ambit of
section 633 of the Act. Similarly, an alleged offence punishable under section
420 of the Indian Penal Code is outside its purview. Where this is so, this
court has no jurisdiction to interfere at all under section 633(2) of the Act
even if an investigation or a prosecution for an alleged offence is mala fide
or erroneous. A person who suffers any wrong or injury due to any malicious or
baseless criminal proceeding or prosecution falling outside section 633 of the
Act has other means of redress open to him under the law. Section 633 of the
Act is restricted to cases mentioned therein.
Even where an
alleged lapse or offence falls completely within the scope of section 633(2),
the power of this court to interfere is obviously discretionary. The word
"shall have power", used with reference to the jurisdiction of this
court under section 633(2), only invests this court with the jurisdiction to
interfere, but it imposes no obligation upon it to do so. The discretionary
power, which has to be exercised on judicially sound grounds, cannot reasonably
be exercised at all where it is not possible, as it is not in the case before
me, to extricate facts alleged to constitute lapses or offences falling within
the purview of section 633 from those relied upon or offences falling outside
its scope.
There is no
doubt that this court has the same power to relieve under section 633(1) as a
trial court in a proceeding to which section 633(1) could be applied. This
means that the condition precedent to its exercise under both sub-sections of
section 633 are the same. It follows that for applying either section 633(1) or
section 633(2) three conditions must be satisfied: firstly, the alleged lapse
or offence must be one of the kinds mentioned in section 633 ; and, secondly,
the applicant must be shown to have acted "honestly and reasonably";
and, thirdly, the court should be able to con clude that "having regard to
all the circumstances of the case he ought fairly to be excused". It is in
the application of the second and third conditions that a court trying
offences, after proceedings have been instituted, is in a more advantageous
position than this court when it deals with an application under section 633(2)
against an apprehended proceeding. The trial court, where charges for offences
falling both within and outside the purview of section 633 of the Act may have
been joined, can take and examine detailed oral and documentary evidence so as
to be able even to view them separately and to take appropriate action under
section 633(1) with regard to some allegations or some particular officer or
officers but this court cannot satisfactorily do so as it is not a court of
trial for an alleged offence or offences when acting under section 633(2) of
the Act. It can reasonably exercise its discretionary power to interfere under
section 633(2) only on the strength of admitted or patent facts when it can
come to definite conclusions, on the materials before it, with regard to the
second and third conditions, set out above, even in those cases where alleged
facts may constitute only lapses or offences mentioned in section 633 or are
easily separable. In the case before me, it is not possible, on the material on
record, to arrive at satisfactory conclusions with regard to the knowledge or
complicity or honesty or reasonableness of the action of any one of the three
of the applicants before me or with regard to the fairness of the claim of any
of them to be excused for any lapse or offence. These matters can only be
decided satisfactorily after a fuller probe into all the facts and
circumstances alleged against each applicant separately. I, therefore, decline
to interfere under section 633(2) of the Act with whatever may be apprehended
or anticipated by the applicants who are, however, left free to apply under
section 633(1) of the Act if and when a proceeding, if any, is instituted
against any or all of them as a result of the investigations pending against them.
This
application is dismissed with costs. The interim order is vacated.
Application dismissed.
[1998] 92 COMP CAS 818
(PAT.)
HIGH COURT OF PATNA
v.
Registrar of Companies
S.N. JHA J.
FEBRUARY 7, 1997
K.K. Mandal
for the respondent.
JUDGMENT
S.N. Jha
J.—This company petition under section 633(2) read with sections 159, 166, 210
and 220 of the Companies Act has been filed (i) seeking a restraint order
against the Registrar of Companies, Bihar, from initiating any criminal
proceeding against the petitioners as the directors of Bihar Cotton Mills
Limited, Phulwarisharif, Patna, for having committed default in preparation and
filing of the balance-sheet, profit and loss accounts of the company for the
year ending on December 31, 1982, and onwards, (ii) extending the time for
holding the annual general meeting and filing the balance-sheet and profit and
loss accounts for the years in question and (iii) directing the Bihar State
Financial Corporation, which has in the meantime taken over the assets of the
company, to allow the petitioners access to the registers and books of account
lying in their office so that the petitioners may get the balance-sheet and
profit and loss accounts prepared and filed.
This
petition, for the reasons mentioned hereinafter, is fit to be dismissed.
Sub-section (1) of section 633 of the Companies Act provides that in any
proceeding for negligence, default, breach of duty, misfeasance or breach of
trust against an officer of the company, if it appears to the court that the
officer is or may be liable in respect of his acts of negligence, default,
breach of duty, misfeasance or breach of trust, but that he has acted honestly
and reasonably, the court may excuse him either wholly or partly from his
liability on such terms as it thinks fit. Sub-section (2) of section 633 of the
Act provides that where the officer has reasons to apprehend that any
proceeding will or might be brought against him in respect of any such alleged
act, he may apply for being excused from the liability. This provision in other
words contemplates, what may be called, an "anticipatory" order of
the nature envisaged under section 633(1).
The provision
of section 633(2) has to be read in the context of the proceeding contemplated
under section 633(1). There cannot be any doubt that such proceeding can be
filed only where the act of negligence, default, breach of duty, misfeasance or
breach of trust, as the case may be, has occasioned or resulted in any loss to
the company, it is only in such a situation that the proceeding is to be filed
for determining the liability of the officers. In terms of section 633(1) it is
open to the officer to plead bona fides and seek an excuse.
In the
present case there is no allegation that the acts of non-preparation and
non-submission of the balance-sheet, annual profit and loss accounts has
resulted any loss to the company. Mr. K.K. Mandal, learned standing counsel for
the Central Government appearing for the Registrar of Companies very fairly
pointed out that the petitioners has merely been informed by the Registrar of
Companies to submit the annual return, balance-sheet and annual statement of
profit and loss accounts along with late fees as per the provision of the
Companies Act against which no grievance should be made.
Another
aspect of the matter is that as indicated above, the petitioners basically seek
protection from anticipated prosecution. Section 633, however, envisages a
proceeding in which the civil liability of the defaulting officer is to be
determined. It does not refer to any criminal proceeding. The High Court under
this provision has power to relieve the officer from his civil liability only.
I may in this connection notice the other submission of Mr. Mandal to the
effect that the impugned notice was issued to the petitioners more than 13
years ago in 1983 but till today no prosecution has been launched. He stated
that the petitioners may even now submit the returns, etc., along with late
fine as per the provisions of the Companies Act.
In the above
premises, this petition is dismissed.
[2002]
38 scl 95 (mad.)
High Court of Madras
v.
Board for Industrial & Financial Reconstruction
E.
Padmanabhan, J.
December
5, 2001
Section 633, read with section 628, of the
Companies Act, 1956 - Court - Power of, to grant relief - Respondent-BIFR found
from annual report that petitioners had violated some mandatory statutory
provisions of the Companies Act - In reply to show-cause notice petitioners explained
that no violation had been made - Petitioners thereafter filed instant petition
praying to court to relieve them from any proceeding that might be instituted
by respondent by way of criminal complaints, to prosecute them in respect of
alleged violations under section 628, as violation of any provision of
Companies Act was not made wilfully or dishonestly - Whether since violations
were violations of statutory provisions and some of them were mandatory in
nature, question of bona fides or not
being wilful or dishonest had no bearing at all - Held, yes - Whether exercise
of power under section 633 is discretionary on facts of case and in light of
imputations set out in inspection report, read with show-cause notice, High
Court could exercise its discretion in
favour of applicants - Held, yes - Whether this was a fit case where court
would be justified to relieve petitioner by exercising its discretionary
jurisdiction under section 633 - Held, no
Facts
The books of account and register of the
petitioner-company were made under section 209A and the inspection report was
submitted. According to report, certain violation of mandatory provisions of
the Companies Act and the rules had been pointed out and the returns were not
in accordance with the requirements and, therefore, there was a violation of
section 161(2)/(9). On receipt of the show-cause notice, an explanation was
offered by the petitioners contending that there was no violation of section
628. The company had also filed revised return incorporating the details and
particulars, besides remitting normal and additional fees for the same.
Thereafter, a show-cause notice was issued to the petitioners to show cause as
to why penal action should not be taken against them. After giving explanation,
the petitioners filed the instant petitions praying the High Court to relieve
them from any proceedings that might be instituted by the respondent-BIFR by
way of criminal complaints, to prosecute them in respect of alleged violations
under section 628, on such terms and conditions as the Court might deem fit.
Held
The power under section 633 is discretionary
and such power the court can be called upon to exercise only when it is
satisfied that the defaulting officer has acted honestly and reasonably and
having regard to all the circumstances of the case, he ought to be excused;
only then the court could relieve him. The court has to satisfy itself after a
serious and careful consideration of the whole question that the officer has
acted honestly and reasonably and having regard to the circumstances of the
case, he ought fairly to be excused.
The court has to examine such applications at
the appropriate stage. When it has to examine as to whether an offence has been
made out or not, based on the evidence adduced through examination of
witnesses, except when affidavit evidence is permissible, the very show-cause
notice already issued read with inspection report, with respect to which the
company and its directors were called upon to state its objectives, would show that
this is not a fit case where the court would be justified in entertaining the
application under section 633.
Though an application could be maintained even
at the stage of apprehension of any criminal proceedings, yet the court has to
come to the conclusion that there is prima facie material that offence has been
made out and a direction should be given.
Under section 633(2), the court has the power
to grant relief as a trial court, provided the conditions laid down under
section 633(1) are satisfied and the offence/s being,
(a) the lapse or offence alleged must be one
of the kinds mentioned in section 633(1).
(b) the applicant must be shown to have
acted honestly and reasonably,
(c) the court is in a position to conclude or render the finding
with regard to all the circumstances of the case that the officer ought to be
excused fairly.
Exercise of power under section 633(2) is
discretionary.
On the facts of the instant case and in the
light of the imputations set out in the inspection report, read with the
show-cause notice, the court was not inclined to exercise its discretion in
favour of the applicants. As the violations, as pointed out in the inspection
report, were violations of the statutory provisions and some of them were
mandatory in nature and in respect of such mandatory provisions, the question
of bona fides or not being wilful or dishonest might not have a bearing at all.
That apart, for the purpose of disposal of the petition and when the same being
taken as a finding, the court would be justified in proceeding on the basis
that the petitioners had not acted honestly or reasonably, having regard to the
facts and circumstances of the instant case.
Unless the Court came to the conclusion that
the petitioner had acted honestly or reasonably, the court would not be
justified in going to the rescue of the applicants. The only other alternative
open to the petitioners was to contest the proceedings before the Judicial
Magistrate before whom the complaint was instituted.
On a consideration of the show-cause notice
read with the inspection report, this was not a fit case where the court would
be justified to relieve the petitioners by exercising its discretionary
jurisdiction under section 633. It was clear that any observation or finding
recorded in the order was only for the limited purpose of this company petition
and the criminal court before whom the complaints might be made would decide
the complaints on the merits and on the evidence that might be let in without
reference to any observations or findings, if any, recorded by the court for
the purpose of the instant petition.
With the above observations, the company
petition was to be dismissed.
Cases referred to
Hindustan Steel Ltd. v. State of Orissa [1972]
83 ITR 26 (SC), Rabindra Chamaria v. Registrar of Companies AIR 1992 SC 398 and
Amara Pictures (P.) Ltd., In re [1970] 40 Comp. Cas. 130.
Arvind D. Datar, R. Senthil Kumar, C.R.
Muralidharan and P.V.
Rajiv Kumar for the Petitioner.
Judgment
E. Padmanabhan, J. - This company petition has been filed by two
of the directors of First Leasing Co. of India Ltd., under section 633(1) of
the Companies Act, 1956 (‘the Act’), read with rule 11(a)(23) of the Companies
(Court) Rules, 1959 praying this Court to relieve the petitioners herein from
any proceedings that may be instituted by the respondents by way of criminal
complaints, to prosecute the petitioners herein in respect of the alleged
violations under section 628 of the Act, in pursuance of the show-cause notice
of the first respondent herein in No. 6423/CI/209A/628/2001, dated 27-7-2001,
on such terms and conditions as this Court may deem fit.
2. The
petitioners’ case is that the first petitioner is the managing director of the
first leasing Co. of India Ltd. and the second petitioner was formerly the
company secretary of the said company between 4-10-1994 and 15-11-2001. The
books of account and registers of first leasing Co. of India, hereinafter
called ‘the company’, were made under section 209A of the Act and the
inspection report was submitted on 1-5-2000. According to the report, certain
violations of mandatory provisions of the Companies Act and the rules have been
pointed out and the returns were not in accordance with the requirements and,
therefore, there is a violation of section 161(2)(9) of the Act. The nature of
the violations has been pointed out in the said report.
3. On
receipt of the show-cause notice, an explanation was offered by the
petitioners, contending that there was no violation of section 628, invocation
of section 628 is misconceived and the entire action is not maintainable in the
absence of essential requirements of the said section. That apart, the above
company had filed a revised return incorporating the details and particulars,
besides remitting normal and additional fees for the same.
4. According
to the petitioners, though section 628 provides for penalty for false
statements, there could be penal action only if there is deliberate violation
and not for inadvertent mistake. If not, there is no scope for prosecution. In
the absence of minimum imputation of deliberate or wilful omission or any
wilful negligence or dishonest act on their part or any mala fide or want of
good faith, no prosecution could be maintained or continued. Having regard to
the facts of the case, it is pointed out by the applicants that they ought to
be excused from any prosecution that may be launched against them, since there
are inadvertent mistakes which will not attract prosecution. It is contended
that for such inadvertent mistakes or technical or venial breach of provision,
and the mere acts of inadvertence not being deliberate or dishonest or
misconceived, no prosecution could be launched or continued and, therefore, the
petitioners should be relieved by orders of this Court.
5. Heard
Mr. Arvind Dattar, the learned counsel, for Mr. R. Senthil Kumar. The learned
counsel addressed arguments elaborately, besides relying upon the decision of
the Apex Court in Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26. The
Apex Court held that in the absence of mala fides or deliberate defiance of law
or the fact that the petitioner was guilty of conduct contumacious or dishonest
or acted in conscious disregard of its obligation, no criminal action could be
initiated.
6. The
material portion of the inspection report would show a number of
contraventions/non-compliance and irregularities such as :
(1) failure to mention transaction in respect of loans and
advances to the directors to the tune of Rs. 2,93,392 in violation of Part I,
Schedule VI, read with section 211 of the Act.
(2) Failure to maintain loan register. Without exercising the
powers, by passing the board resolution, as provided under section 292(1)(c),
intercorporate borrowings have been made and intercorporate deposits have been
received.
(3) Violation of section 292(1)(e), namely, advancing innumerable
number of loans without passing a resolution of the board on 30-11-1996,
30-11-1997, 30-11-1998, 30-11-1999.
(4) Violation of section 370 in that loans exceeded 30 per cent of
the aggregate of the paid up capital and free reserves and they are not
authorized by special resolution, besides no prior approval of the Central
Government has been secured and it is violation of section 370(1).
(5) Violation of Part II, Schedule VI read with section 211.
(6) Non-disclosure of authorized capital properly in the
balance-sheet as on 30-11-1997 to 30-11-1999.
(7) Sale of unquoted investments to the chairman of the company at
Rs. 20 per share and shares have been sold or transferred, overlooking the
lock-in period, besides the balance-sheet as on 30-11-1999, does not show true
and fair view as required, within the meaning of section 211.
(8) Investments in the capital of First India Asset Management Co.
Ltd. in violation of section 211.
(9) Violation of the provisions of section 217, read with the
Companies (Particulars of Employees) Rules, 1975.
(10) Appointment of Mrs. Farah Bakshy, daughter of Mr. Farouk Irani,
managing director, as assistant manager marketing on a gross salary of Rs.
6,000 (increased to Rs. 9,000) and sanction of consumer loan of Rs. 70,000 at
17.50 per cent per annum on 30-3-1996), in violation of section 292 of the Act.
(11) Loans and advances include assets due from managing director to
the tune of Rs. 8,15,850.
(12) Annual return made as on 4-5-1998 and 7-5-1999, by furnishing
incorrect information regarding indebtedness of the company.
(13) Violation of Part I, Schedule VI to the Act.
(14) Violation of section 125(4)(a) read with section 128 of the Act.
(15) Violation of section 113 for non-issue of debenture certificate
to Dhanalakshmi Bank Ltd.
(16) Satisfaction of charges in Form No. 17, in violation of section
138 of the Act.
(17) Donation to MAC Charities under the provisions of section
293(1)(e)/293A of the Act.
(18) Loans and advances to staff shares in violation of section 77 of
the Act and financial irregularity.
(19) Remuneration of managing director and other amenities provided,
in violation of sections 198 and 309, read with Schedule XIII to the Act.
(20) Non-compliance with the provisions of section 138 in regard to
satisfaction of the charges.
7. While
setting out those violations, the petitioners herein and six others were served
with the show-cause notice to the same, the company has sent an explanation,
running to several pages.
8. Thereafter,
a show-cause notice was issued to the two applicants herein, to show cause as
to why penal action should not be taken against both of them under section 628
of the Act and a portion of the show-cause notice reads thus :
“Whereas as per the provisions of section 628
of the Companies Act, 1956 (hereinafter referred to as ‘the Act’). ‘If in any
return, report, certificate, balance-sheet, prospectus, statement or other
document required by or for the purposes of any of the provisions of this Act,
any person makes a statement,
(a) which is false in any material particular,
knowing it to be false; or
(b) which omits any material fact, knowing it to be material; he
shall, save as otherwise expressly provided in this Act, be punishable with
imprisonment for a term which may extend to two years, and shall also be liable
to fine.’
Whereas it was observed from the records of
the company under section 209A of the Act that the annual returns for the years
1997, 1998 and 1999 signed by the managing director and the company secretary,
contain a statement under Part VII with regard to the company’s indebtedness,
which is false in material particulars, attracting the provisions of section
628 of the Act.”
9. To
the said show-cause notice, explanation has been submitted by the first
applicant on 7-9-2001. At this stage, the present company petition has been
filed under section 633(2).
10. Though
attractive contentions were advanced by the learned senior counsels, besides
pointing out that at any time the petitioners could come before this Court,
this Court is not persuaded to exercise its jurisdiction on the facts of the
case in favour of the applicants at this juncture.
11. Section
633 confers powers on the company court to grant relief in certain cases. Even
in terms of section 633, the court when it declines to grant the relief against
violation of any statutory duties, as in such cases, it could not be said that
the officer has acted honestly and reasonably.
12. The
power under section 633 is discretionary and such power the court can be called
upon to exercise only when it is satisfied that the defaulting officer has
acted honestly and reasonably and having regard to all the circumstances of the
case, he ought to be excused, only then the court could relieve him. This Court
has to satisfy itself after a serious and careful consideration of the whole
question that the officer has acted honestly and reasonably and having regard
to the circumstances of the case, he ought fairly to be excused.
13. This
Court has to examine such applications at the appropriate stage. When it has to
examine as to whether an offence has been made out or not, based on the
evidence adduced through examination of witnesses, except when affidavit evidence
is permissible, the very show-cause notice already issued read with inspection
report, with respect to which the company and its directors were called upon to
state its objectives, would show that this is not a fit case where this court
would be justified in entertaining the application under section 633.
14. Though an
application could be maintained even at the stage of apprehension of any
criminal proceedings, yet this Court has to come to the conclusion that there
is prima facie material that offence has been made out and a direction should
be given.
15. Under
section 633(2), this Court has the power to grant relief as a trial court,
provided the conditions laid down under section 633(1) are satisfied and the
offence/s being,
(a) the lapse or offence alleged must be one
of the kinds mentioned in section 633(1).
(b) The applicant must be shown to have
acted honestly and reasonably.
(c) The court is in a position to conclude or render the finding
with regard to all the circumstances of the case, that the officer ought to be
excused fairly.
16. Exercise
of power under section 633(2) is discretionary. On the facts of the case and in
the light of the imputations set out in the inspection report, read with the
show-cause notice, this Court is not inclined to exercise its discretion in
favour of the applicants. As in my view, the violations, as pointed out in the
inspection report, are violations of the statutory provisions and some of them
are mandatory in nature and in respect of such mandatory provisions, the
question of bona fides or not being wilful or dishonest may not have a bearing
at all. That apart, for the purpose of disposal of this petition and when the
same being taken as a finding, this Court will be justified in proceeding on
the basis that the applicants have not acted honestly or reasonably, having
regard to the facts and circumstances of the case.
17. In
Rabindra Chamaria v. Registrar of Companies AIR 1992 SC 398, their Lordships of
the Apex Court had an occasion to consider the scope of section 633 and held
that sub-section (2) of section 633 is intended to restrict its operation only
to the proceedings arising out of the default, breach of trust, misfeasance or
breach of duty in respect of the duties prescribed under the provisions of the
Act. Unless this Court comes to the conclusion that the applicants have acted
honestly or reasonably, this Court will not be justified in going to the rescue
of the applicants. The only other alternative open to the applicants is to
contest the proceedings before the judicial magistrate before whom the
complaint is instituted.
18. The
material question for consideration is whether the applicants have acted
honestly or in good faith or whether the applicants have any justifiable reason
to escape from liability, in such cases, criminal intention is irrelevant as
has been held by this Court in Amara Pictures (P.) Ltd., In re [1970] 40 Comp.
Cas. 130.
19. On
a consideration of the show-cause notice read with the inspection report, this
is not a fit case where this Court would be justified to relieve the
petitioners by exercising its discretionary jurisdiction under section 633. It
is made clear that any observation or finding recorded in this order is only
for the limited purpose of this company petition and the criminal court before
whom the complaints may be made, against the petitioners herein, shall decide
the complaints on the merits and on the evidence that may be let in without
reference to any observations or findings, if any, recorded by this Court for
the purpose of this petition.
20. With the above observations, the company petition is dismissed.
[2002] 108 COMP CAS 1 (MAD.)
HIGH COURT OF
MADRAS
v.
E.
PADMANABHAN, J.
company petition no. 252 of 1999
November 9, 2001
Arvind P. Datar and K. Ramaswamy for the Petitioner.
T. Sridhar and T. Arunan for the Respondent.
E. Padmanabhan, J.—This company petition has been moved by the
petitioner, the ex-chairman of M/s. Elnet Technologies Limited, a Government of
Tamil Nadu company, under section 633(2) of the Companies Act, 1956, to relieve
the petitioner from such proceedings as may be initiated against him the
respondent herein.
This court ordered notice to the
respondent on August 24, 1999. The respondent has been served and the
respondent also filed a counter-affidavit.
Heard Arvind P. Datar, learned
senior counsel appearing for the petitioner and Mr. K. Sridhar, Senior Central
Government Standing Counsel, appearing respondent.
Case of the petitioner:
The petitioner is an ex officio
chairman of M/s. Elnet Technologies Limited, a company registered under the
Companies Act, 1956. The said company is promoted by M/s. Electronics
Corporation of Tamil Nadu (ELCOT), an undertaking of the State Government and
New Era Technologies Pvt. Ltd., a company promoted and owned by Thiagaraj S.
Chettiar. According to the petitioner the affairs of the company were managed
by the then director in charge, Thiagaraj S. Ghettiar from its inception till
the date of his removal from the directorship. At the instance of ELCOT. A
management audit was conducted during November/December,1996, which disclosed
several irregularities and the company initiated civil and criminal proceedings
against the said Thiagaraj S. Chettiar. The petitioner was served with
show-cause notices under sections 299, 301, 211, 292(1)(c), 113,193(b), 17 and
58A(2) of the Companies Act. The violations alleged were said to have been
committed during the period, when the affairs of the company were managed by
the said Thiagaraj S. Chettiar who was completely in charge of and responsible
for the day-to-day management and affairs of the said company) The said
Thiagaraj S. Chettiar was also in charge of M/s. New Era Technologies Ltd.,
which holds 25 per cent, of the equity shares of M/s. Elnet Technologies Ltd.,
and the balance shares are held by the public and 26 per cent, is held by
ELCOT.
It is alleged that without the
knowledge of the board the said Thiagaraj S. Chettiar committed large scale
irregularities and when the gigantic fraud came to light, he absconded for some
months and was finally traced and arrested at Trivandrum. The individual was
also released on bail subsequently. The petitioner who became the chairman by
virtue of the fact that ELCOT had 26 per cent, shares in Elnet Technologies
Ltd., and which was entitled to nominate certain directors in the latter's
board. The petitioner was the chairman who was completely in the dark about the
irregularities and there was neither an occasion nor was there any chance, nor
was there a provocation for the petitioner to probe or look into. In fact, with
effect from February 19, 1999, the Government of Tamil Nadu directed Shri K.
Gnanadesikan, I.A.S., to be the chairman and managing director of ELCOT and he
is the ex officio chairman of Elnet with effect from April 13,1999. As a
consequence the petitioner has resigned from the board of directors of Elnet
Technologies Ltd.
According to the petitioner the
chairman of ELCOT is an ex officio appointment. The petitioner submits that he
has been the chairman of Elnet Technologies Ltd., only in an ex officio
capacity; the chairman and managing director of ELCOT will normally occupy the
post of chairman, Elnet Technologies Ltd., as per the memorandum of
understanding. The board of directors resolved and conferred substantial powers
of management on the said Thiagaraj S. Chettiar and he became the managing
director in terms of section 2(26) of the Companies Act. Once, there was
managing director, he along with the whole-time directors and other persons
mentioned under section 5 of the said Act. will become the officers in default
and other non-whole-time directors could be made liable for violations, if any.
Further, the notices issued are based on highly technical and procedural irregularities,
which can fasten liability only on those officers who were in charge of the
company at the time when they were alleged to have been committed.
According to the petitioner the
respondent should have ascertained the officers in default in respect of those
irregularities during the material period and those in charge are only liable
and the ex officio nominee directors cannot be made liable. The petitioner is
not responsible for any of the acts mentioned in the notice and, therefore, he
must be relieved from liability in respect of the alleged violations on such
terms as this court may deem fit.
Pursuant to the notice, the
Registrar of Companies may proceed against the petitioner for alleged
negligence, default, breach of duty, misfeasance or breach of trust on the
basis of the show-cause notices. Assuming without admitting that the
allegations set out in the notices are true, no action could be initiated
against the petitioner as they have been committed without his knowledge and he
was not a party to any of those irregularities. The petitioner was not involved
in the day-to-day activities of the company and only attended the board
meetings intermittently. Hence the present petition.
Case of the respondent:
The respondent, while denying the
allegations and averments set out in the company petition, stated that the
petitioner was a director of the company with effect from June 27, 1996, as
seen from the filing of Form No. 32. In the balance-sheet as on September 31,
1996, March 31, 1997, the petitioner has been shown as the chairman of the
company. The respondent further states that Thiagaraj S. Chettiar was the
director of the company from the date of incorporation and as per Form No. 32
filed on June 28, 1997, which directorship he had vacated with effect from June
14, 1997, under section 2S3(1)(g) of the Companies Act Show-cause notices for
violations of sections 297,299,301,211,292(1)(c),113,193(b), 17 and 58A were
issued to the petitioner as he was a director of the company at the time of
default. As regards the averment that he was in charge of M/s. New Era
Technologies Pvt. Ltd. The Registrar's office > information since the said
company had not filed any returns after 31, 1992. The petitioner was the
director of the company with effect June 27, 1996. The respondent is not aware
of the board's resolution; by the company conferring substantial powers of
management on the Thiagaraj S. Chettiar as he was not shown as the managing
director of the company as per the records maintained by the respondent. The
said Thiagaraj S. Chettiar vacated the directorship with effect from June 14,
1997. The petitioner to be prosecuted for the violations pointed out as he was
director company at the relevant point of time of the default Hence the
respondent has prayed this court to dismiss the company petition as devoid of
merit.
This court has to examine as to
whether the petitioner is entitled to an order under sub-section (2) of section
633 of the Companies Act, relieving him from being prosecuted for alleged negligence,
default, breach of duty, misfeasance or breach of trust as detailed in the
show-cause notices issued by the respondent?
The petitioner a member of the
Indian Administrative Service was the Secretary to the Government during the
material point of time. The company being a joint venture company, the State
Government had nominated him to be the ex officio director of the company. The
petitioner was the chairman/ managing director of M/s. Elnet Technologies Ltd.,
between June 27, 1996, and April 13, 1999, as seen from the statutory returns
filed by the company to the respondent-Registrar. The petitioner was also the
chairman of the said company as seen from the balance-sheets as on March 31,
1996, March 31, 1997 and March 31, 1998. In all nine show-cause notices were
issued to the petitioner calling upon the petitioner to show cause as to why
prosecution shall not be launched against him under section 299 of the
Companies Act, besides intimating that the offences for which action is being
taken are compoundable under section. 621A of the Companies Act, 1956. The
petitioner submitted a consolidated explanation on April 3,1999, for all the
show-cause notices dated February 24, 1999. The respondent once again advised
the petitioner through the company to file an application for composition of
the offences in respect of the show-cause notices. At that stage, the present
company petition has been filed under section 633(2).
This court called upon the
respondent to detail the materials based on which the respondent had issued
various show-cause notices on February 24, 1999, since it was represented that
the petitioner was not even a director of M/s. Elnet Technologies Ltd., during
the material period. The respondent filed a report. The report reads thus:
"2. In this connection it is submitted that Sri
Madhavan Nambiar was the chairman/director of M/s. Elnet Technologies Ltd.
(hereinafter referred to as 'the company7) from June 27, 1996, to April 13,
1999, as per the statutory returns filed by the company in the office of the
respondent. He was shown as the chairman of the company in the balance-sheets
as at March 31, 1996, March 31, 1997 and March 31, 1998. Copies of Form 32
filed in the office of the respondent, relating to his appointment as director
of the company and the copies of balance-sheets as at March 31, 1996, March 31,
1997 and March 31, 1998, wherein he had been shown as the chairman are
enclosed.
3. That the company was inspected under section
209A of the Companies Act. 1956 (hereinafter referred to as 'the Act'), by an
officer authorised by the Central Government in this regard, during
July-August, 1998. During the course of
the inspection the Inspecting Officer, had observed that the company had
violated the provisions of sections 193, 292(1)(c), 297,299, 301(1), 17 read
with 291, 211, 58A(2) and 113 of the Act.
4. That the Regional Director, Department of
Company Affairs, Southern Region, Chennai, in his letter dated November 16,
1998, directed the office of the respondent to issue show-cause notices for the
above-said violations and to file prosecutions, keeping in mind the fact that
the board of directors of the company were nominees of the Government of Tamil
Nadu.
5. That at the time of the said inspection the
company was managed by the board of directors consisting of (1) Shri Madhavan
Nambiar, (2) Shri Ramesh Chand Meena and (3) Shri Neeraj Mitral.
6. That show cause notices were issued for the
violation of the provisions of the Act mentioned below, to the company and the
following officers of the company in February, 1999:
(1) The
company—sections 58A, 17 read with 291, 113, 211, 297, 301 and 299.
(2) Sri
Madhavan Nambiar—sections 58A, 17 read with 291, 113, 211, 297, 301 and 299.
(3) Sri
J. Suresh, Secretary—sections 17 read with 291, 113, 297, 301.
(4) Sri
Ramesh Chand Meena—section 299.
(5) Sri
Neeraj Mittal—section 299.
7. That it can be seen from the copies of the
show-cause notices issued to the above mentioned persons, that the offences
relating to section 58A of the Act relate to the financial years March 31,
1996, and March 31, 1997, section 17 read with section 291 relate to the
financial years 1995-96 and 1996-97, section 113 relates to January 1998, to
March 1998, section 211 relates to the financial year ending with March 31, 1997,
and sections 297, 299 and 301 relate to the financial year ending with March
31, 1997.
8. That Sri Madhavan Nambiar was the
chairman-cum-director of the company during the relevant period as mentioned
above and hence show cause notices were issued to the company and the
petitioner herein."
With respect to the case of the
petitioner and the respondent and the report submitted by the respondent, the
following points arise for consideration:
A. Whether the petitioner is entitled to a
direction under section 633(2) of the Companies Act for being relieved from the
proceedings initiated by the respondent for alleged violations of sections 58A,
17 read with 291, 113, 211, 301 and 299 of the Companies Act?
B. Whether the petitioner's claim that he
is an ex officio director/chair-and, therefore, he is not liable to be
proceeded against for one or more of alleged violation is sustainable.
In respect of the very same
show-cause notices and in respect of the same relating to the said company on
the earlier occasion Mr. Ramesh Chand Meena, director, filed C. P. No. 172 and
Mr. Neeraj Mittal, director filed C P. No. 1S3 of 1999. The said two directors
were sought to be proceeded against for the alleged violations under section
299 of the Companies Act. By order dated August 11, 2000, made in C.P. Nos. 172
and 183 of 1999, R. Jayasimha Babu J., granted the benefit of section 633(2) of
the Companies Act and relieved them with respect to the alleged violation of
section 301 of the Act on the view that on the material date those two were not
the directors, that the said two directors acted bona fide and have not shown
any negligence as it could not be reasonably expected of them to hold an
enquiry into all the past transactions, to which the company was a party. The
said order is being relied upon by counsel for the petitioner in support of the
substantial portion of the alleged violations as during the material point of
time in respect of those alleged violations the petitioner, a director who has
enjoyed certain benefits as director and status as a director, privilege as a
director cannot contend that he will receive only garlands and sitting fees,
but he is not expected to discharge the functions of a director for omissions
or commissions, etc, on his part, he must be prepared to receive the brickbats
as well.
It may be that the petitioner may
not be a whole-time director, but that -does not mean he cannot of the
statutory, obligations which are imposed under the Act and the rules and the
contend that he is an ex officio director and, therefore, he cannot be held
responsible. There is substance in the contention advanced by Mr. Sridhar,
learned counsel since the petitioner a member of the Indian Administrative
Service and in the cadre of Secretary to Government when appointed as a
director on the orders of the Government to a Government company or a joint
venture company, he is expected not only to discharge his usual functions, but
also take such diligent care as a director of the company as it is expected of
him not only to take care of the interest of the Government, but also to see
that the company complies with the provisions of the Companies Act and the
rules framed there under. Therefore, the second contention-that the petitioner
cannot be proceeded against at all as he is only a nominee or appointed
director by the State Government, cannot be sustained in law. A director either
full time or part time, either elected or appointed or nominated is bound to
discharge the functions of a director and should have taken all the diligent
steps and taken in the affairs of the company.
In the matter of proceedings for
negligence, default, breach of duty, feasance or breach of trust or violation
of the statutory provisions of the Act and the rules, there is no difference or
distinction between the whole-time or part time director or nominated or
co-opted director and the liability for such acts or commission or omission is
equal] So also the treatment for such violations as stipulated in the Companies
Act, 1956. rightly pointed out that the director in charge Thiagaraj S.
Chettiar had not disclosed to the board that he was interested in the
transaction. That apart the petitioner was not a director during the relevant
point of time. Hence there could be no action against the petitioner under
section 301(4).
Taking up the next violation,
viz., violation of section 113(1) it relates to delay in the despatch of share
certificates to three of the shareholders, and the threatened action under
section 113(2) it is rightly pointed out that the petitioner was not a director
during the relevant time, nor was he a director in charge of the company. It
may be that there is some delay in forwarding a few share certificates, but as
the petitioner was not a director during the material point of time, he cannot
be proceeded against under section 113 of the Act
'In respect of the alleged
violation of section 193(1A), which is punishable under section 193(6), the
petitioner was not a director during the relevant time and he was not a
director in charge of the company as seen from the facts. Hence he cannot be
proceeded against. So also in respect of the alleged violation under sections
301(1), 291, 297(1) and 299 as the petitioner was not a director at all during
the material point of time and, therefore, he cannot be proceeded against at
all. Thus, excepting the two alleged violations in respect of the other
omissions or violations of the statutory provisions, the petitioner, not being
a director during the material point of time, is not liable to be proceeded
against.
-Even in respect of the two
contentions advanced, they deserve to be sustained. That apart, the petitioner
had acted bona fide and there is nothing to show that he was negligent as it
could not be reasonably expected of him to hold an enquiry into the past
transactions to which the company was a party or have the registers written on
the basis of such enquiry or information or investigation. As already pointed
out it is the director who was on the board alone who could be proceeded against,
if at all. In respect of the substantial number of violations as already
pointed out there could be no proceedings against the petitioner. Even in
respect of the two there is neither negligence nor wilful omission or
commission on the part of the petitioner since it is not even the case of the
respondent that the petitioner was aware of it or with full knowledge he had
allowed the violations to continue or persist. It could not be reasonably
expected of the petitioner to hold an enquiry in respect of each transaction as
there was full time director who is in charge as per the company's resolution
and the petitioner was only a member of the board who has to attend the company
board meetings. That apart there 4s a company secretary for the company who
looks into the affairs of the company with respect to the compliance with the
statutory provisions of the companies Act. The violation if any had not been
brought to the notice of the petitioner, nor was the petitioner made aware of
those omissions or failures or violations.
The petitioner being a part time
director in my considered view should be relieved from the liability as there
is no imputation at all that he had exercised control in any matter, much less
with full knowledge or information or deliberately.
In Ravindra Chamaria v. Registrar
of Companies [1992] 73 Comp Cas 257; ! B [1992] Suppl. 2 SCC 10, their
Lordships of the apex court held thus (page 264):
"Under the Companies Act of
1956 (similarly under the old Act of 1913), various duties and liabilities have
been imposed; equally offences have been created for the non-performance of
such duties. These offences are offences in relation to the performance of
certain duties under the Act The various offences are mentioned under sections
59, 62, 63, 68, 142, 162, 207, 218, 272, 374, 420, 423, 538 to 545 and 606.
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 is 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.
We are also of the view while
referring to any proceeding under sub-section (2) Parliament intended to
restrict it only to the proceedings arising out of negligence, default, breach
of trust, misfeasance or breach of duty in respect of the duties prescribed
under the provisions of the Companies Act. Further examining the sub-section
with reference to the context and the placement of the sub-section the only
conclusion that is possible is the proceedings for which relief under this
sub-section could be claimed are the proceedings against the officer of a
company for breach of the provisions of the Companies Act. Sub-section (2)
cannot apply to proceedings instituted against the officer of the company to
enforce the liability arising out of violation of provisions of other statutes.
Reference could also be made to sub-section (3) where notice is required to be
given to the Registrar of Companies. This is an indication that the powers
under sub-section (2) must be restricted in respect of proceedings arising out
of the violation of the Companies Act."
In Kenji Tamiya, In re [1990] 68
Comp Cas 142, the Bombay High Court relieved the Japanese directors who were
not connected with the day-to-day affairs of the company and they were
directors by virtue of shareholding of their parent company.
The relief under section 633 may
also be sought for by approaching this court When it is apprehended that the
respondent is likely to initiate action and in this case me respondent had
already called upon the petitioner to compound though the violations are
compoundable, it may have far reaching consequences in so far as the petitioner
is concerned, which may even reflect on his career as a member of the Indian
Administrative Service.
Taking into consideration the
totality of the circumstances, there being no negligence, there being no want
of bona fides, there being no deliberate inaction, there being no wilful
omission or commission on the part of the petitioner, who is a full time
Government servant in the cadre of Secretary to the Government, this court is
of the considered view, on the facts that he is entitled to a direction as
prayed for. Mere technicalities alone shall not be allowed to prevail and it is
the totality of the circumstances and the bona fide conduct which has to be
taken into consideration in all such matters. In the circumstances, the company
petition is allowed and consequently the petitioner is relieved from the
threatened proceedings by the respondents under section 633(2) of the Companies
Act in respect of the two show-cause notices issued by the respondent/Registrar
of Companies.
The company petition is allowed.
The parties shall bear their respective costs.
[1970] 40 COMP. CAS. 130 (MAD)
HIGH COURT OF MADRAS
Amara Pictures (P.) Ltd., In re
v.
KRISHNASWAMY REDDY, J.
SPECIAL APPEAL (CRIMINAL) NO. 296 OF 1967
APRIL 1, 1969
V. S.
Ramakrishna for the appellant.
Vedantam Srinivasan
for the respondent.
JUDGMENT
Krishnaswamy
Reddy, J.—This appeal has
been filed by the Public Prosecutor; Government of Pondicherry, against the
order of acquittal by the First Class Magistrate No. 2, Pondicherry, of the two
respondents in C.C. No. 397 of 1966, on the private complaint filed by the
Registrar of Companies, Pondicherry, against them under section 208D(2),
208E(3) and 244(3) of the Indian Companies Act, 1913 (hereinafter called
"the Act"). The second respondent is since dead.
The prosecution
case is briefly this : Amara Pictures Private Ltd. was incorporated on or about
October 26, 1949, as a private company under the Indian Companies Act, 1913. It
had its registered office at No. 61, St. Therese Street, Pondicherry. By a
special resolution passed by the members of the company on May 15, 1963, the
company was required to be wound up voluntarily and the two respondents were
appointed as liquidators of the company. The respondents had notified their
appointment as the liquidators on June 20, 1963. By a letter dated November 7,
1963, the respondents on behalf of the company informed the Registrar of
Companies that they have held the final meeting of winding up in accordance
with section 208E of Indian Companies Act, 1913, on October 30, 1963, and that
they have prepared all returns already and requested for a few days' time to
file the returns with the complainant. In spite of several letters and
reminders sent by the Registrar of Companies, Pondicherry, the respondents did
not send returns; nor did they care to reply or take steps to comply with the
requirements of the provisions of the Indian Companies Act. The two respondents
have failed and neglected to file returns for the period from May 15, 1963, to
March 14, 1964, and March 15, 1964, to March 14, 1965. Thereupon, a final
notice was issued to the respondents on April 19, 1966, explaining therein the
implications and stating that, unless they comply with the requirements, they
would be prosecuted. They were also given 15 days' time for filing the returns.
The second respondent by his letter dated May 6, 1966, explained the reasons
for the delay and requested for a fortnight's time for filing returns. As they
had failed to submit the returns they were again reminded of the expiry of the
time of 14 days granted to them. The respondents have not taken further steps.
Hence the complaint was filed under sections 208D(2), 208E(3) and 244(3) of the
Act.
Section
208D(1) of the Act provides that in the event of the winding up continuing for
more than one year, the liquidator shall summon a general meeting of the
company at the end of the first year from the commencement of the winding up
and of each succeeding year, as soon thereafter as may be convenient within
ninety days of the close of the year, and shall lay before the meeting an
account of the preceding year and a statement in the prescribed form containing
the prescribed particulars with respect to the position of the liquidation.
Section 208D(2) provides for a penalty of not exceeding Rs. 100 if the
liquidator fails to comply with the section. It is the case of the prosecution
that the pendency of winding up has exceeded more than a year and the company
has not called for a general meeting as required by section 208D of the Act
and, in spite of the letter by the Registrar dated January 20, 1966, and a
reminder issued thereafter, the liquidators have not taken action. Under
section 208E(3), the liquidator, within one week after the meeting, shall send
to the Registrar a copy of the accounts, and shall make a return to him of the
holding of the meeting and of its date, and if the copy is not sent or the
return is not made as required, he shall be liable to a fine not exceeding
fifty rupees for every day during which the default continues. Under section
244(1) of the Act, if the winding up is not completed within one year from the
date of its commencement, the liquidator shall submit a statement in the
prescribed form and containing the prescribed particulars with respect to the
proceedings in, and the position of, the liquidation, to the Registrar of
Companies every year during the tenure of such liquidator.
Sri
Krishnamurthy, the Registrar of Companies, and Sri Sethuraman, Upper Uivison
Clerk in the office of the Registrar of Companies, were examined as prosecution
witnesses to support the facts spoken to in the complaint.
When the
respondents were questioned, the first respondent stated that he was in the
hospital and, as he was not doing well, he could not submit returns in time.
The second respondent stated that he could not submit returns as the account
books were with the first respondent and as he was unwell.
The learned
First Class Magistrate acquitted the respondents on two grounds, namely, (1)
that the Companies Act of 1913 was not in force on the date of the alleged
contraventions as the Companies Act, 1956, had come into force by then and
that, therefore, the prosecution under the Act of 1913 was unsustainable; and
(2) that even assuming that the prosecution was sustainable, the respondents have
to be relieved from their liability as they had no criminal intention in having
contravened the provisions of the Act, by virtue of section 633 of the
Companies Act, 1956.
The learned
Public Prosecutor contended that both the reasons given by the learned
Magistrate for acquitting the respondents are incorrect and submitted that the
prosecution under the provisions of the Companies Act, 1913, was saved by the
repealing Act of 1956 and that, therefore, the prosecution was sustainable and
he further submitted that section 633 of the Companies Act, 1956, gives relief
to those persons who acted honestly and reasonably while they may be liable in
respect of negligence, default, breach of duty, misfeasance or breach of trust.
To appreciate the submissions made by the learned Public Prosecutor, it is
necessary to note the following facts:
Pondicherry
was a French territory till October, 1954. By virtue of the merger agreement
dated October 21, 1954, there was a de facto transfer of Pondicherry territory
to the Indian Union on November 1, 1954, which was followed up by the Treaty of
Cession dated May 28, 1956. Before October, 1954, the Code of French laws,
civil and criminal, based upon the continental system of jurisprudence
prevailed in the courts of Pondicherry. On November 1, 1954, which is the date
of de facto merger, by the promulgation of the French Establishments
(Application of Laws) Order, 1954, certain Acts mentioned in the Schedule
therein came into force in Pondicherry. The Indian Companies Act (Act VII of
1913), by virtue of the said Regulation, came into force on November 1, 1954.
Act VII of
1913 was repealed and re-enacted by Parliament in Act I of 1956 (The Companies
Act, 1956). The de jure transfer of Pondicherry territory took effect on August
16, 1962, which is known as the "appointed day". Act 49 of 1962 came
into effect on December 5, 1962,and on December 28, 1962, the Fourteenth
Amendment to the Constitution became effective, and the territory of
Pondicherry was classified as a Union Territory, included as the 9th item in
Part II of the First Schedule. By virtue of Regulation No. 7 of 1963 (The
Pondicherry (Laws) Regulation 1963) promulgated by the President of the
Republic, in exercise of the powers conferred under article 240 of the
Constitution, the Acts mentioned in the Schedule to the Regulation including
the Indian Companies Act, 1956, came into force in Pondicherry Territory on
October 1, 1963. Before Act I of 1956 came into force in the Pondicherry
territory, the company was wound up voluntarily on May 15, 1963, and the
respondents were appointed liquidators on June 20, 1963. After the Act came
into force in Pondicherry, the final meeting was held as required under section
208E(1) on October 30, 1963. As the winding up and the appointment of the
respondents as liquidators were before Act I of 1956 came into force in
Pondicherry territory, the prosecution was launched under the provisions of Act
VII of 1913.
The question,
therefore, that arises now is whether after Act 1 of 1956 came into force in
Pondicherry on October 1, 1963, the prosecution against the respondents is
saved ?
We have,
therefore, to note the relevant provisions of repeals and savings in Act I of
1956 (hereinafter called "the Act"). Under section 644 of the Act,
the enactments mentioned in Schedule XII were repealed. Section 645 saves
orders, rules, etc., in force at the commencement of the Act. Section 646 saves
the operation of section 138 of Act VII of 1913 as respects inspectors and the
continuation of an inspection begun by inspectors, appointed before the
commencement of the Act. Section 646 saves pending proceedings for winding up.
Section 648, which is the relevant section in respect of our discussion, is as
follows :
"Saving of prosecutions instituted by liquidator
or court under section 237 of Act VII
of 1913.—Nothing in this Act shall affect any prosecution instituted or ordered
by the court to be instituted under section 237 of the Indian Companies Act,
1913 (VII of 1913), and the court shall have the same power of directing how
any costs, charges, and expenses properly incurred in any such prosecution are
to be defrayed as it would have had, if this Act had not been passed."
Sections 650
to 657 also deal with savings which it may not be necessary to consider in
detail. The next relevant section with which we are concerned is section 658,
which reads thus :
"Section 6 of the General Clauses Act, 1897 (X
of 1897), to apply in addition to
sections 645 to 657 of Act.—The mention of particular matters in sections 645
to 657 or in any other provision of this Act shall not prejudice the general
application of section 6 of the General Clauses Act, 1897 (X of 1897), with
respect to the effect of repeals."
The learned
Public Prosecutor, Pondicherry, relies upon section 658 and submits that if the
prosecution in respect of things that occurred before Act I of 1956 came into
force was not saved by virtue of section 648 of the Act, it would be saved by
section 658 of the Act by which the provisions of the General Clauses Act could
be applied, in addition to the savings provided in the Act in sections 645 to
657. It is clear that section 648 of the Act saves only those prosecutions
instituted by a liquidator or ordered by the court to be instituted under
section 237 of the Indian Companies Act, 1913, before the commencement of Act I
of 1956 and pending at its commencement and that such prosecutions alone could
continue after the commencement of the Act. But this section will not apply to
prosecutions not instituted or not ordered by the court before the commencement
of the Act. It is not the case of the prosecution that, in the present, case,
the prosecution was instituted by the liquidator before the commencement of Act
I of 1956. The prosecution was instituted in respect of offences under Act VII
of 1913 on August 6, 1966, long after Act I of 1956 came into force in the
Pondicherry territory and, therefore, the present prosecution is not saved by
section 648 of the Act. If section 6 of the General Clauses Act is applied, by
virtue of clause (c) of the same section, the repeal of any Act shall not
affect any right, privilege, obligation or liability acquired, accrued or
incurred under any enactment so repealed and, by virtue of clause (e) of the
same section, any legal proceeding or remedy in respect of any such right,
liability, etc., are saved unless a different intention appears. We have to
consider, in view of the specific savings in respect of prosecution
provided under section 648 of the Act, whether section 6 of the General Clauses
Act can be invoked in respect of the present prosecution. It is a
well-established principle that in applying the principle in respect of section
6 of the General Clauses Act and the savings sections of any special enactment,
the line of enquiry should be not whether the new Act expressly keeps alive the
old rights and liabilities but whether it manifests an intention to destroy
them. It has to be ascertained whether there is any contrary intention in
respect of savings in the new legislation. As already noted, section 648 of the
Act specifically saved the prosecutions instituted by the liquidator or ordered
by the court. This gives the indication that Parliament had specifically
considered as to what should be saved and excluded the saving of the prosecution
of any liability incurred before the commencement of the Act. The contrary
intention is clearly expressed by specifically including only the proceedings
which had resulted in prosecution. The pending prosecutions alone are saved and
not the liability incurred leading to a prosecution and such liability is
destroyed. The general principle under section 6 of the General Clauses Act
"unless a different intention appears" can also be considered in view
of the specific savings made in respect of the things mentioned therein in
sections 645 to 657 of the Act.
In Brihan Maharashtra Sugar Syndicate v. J R.
Kulkarni the Supreme Court held that
section 153C of the Companies Act, 1913, and the continuance of proceedings in
respect thereof are saved by the application of section 6 of the General
Clauses Act as provided under section 658 of Act I of 1956, in that section 647
of the Companies Act of 1956 does not indicate any intention that the rights
created by section 153C of the Act of 1913 shall be destroyed. It is made clear
in this decision that section 6 of the General Clauses Act will apply unless a
different intention could be gathered from the new enactment.
In Raja Narayanlall Bansilal v. Maneck Phiror: Mistry
, the Supreme Court, again, in considering the scope of sections 645 to 647 of
Act I of 1956 and the effect of the provisions of section 6 of the General
Clauses Act as provided under section 658 of the Act, in dealing with the
savings in respect of section 138 of Act VII of 1913 as provided in the savings
section 645 of Act I of 1956, observed that sections 645 to 648 are the savings
sections, and ordinarily and, in the absence of any indication to the contrary,
these savings clauses should be read as independent of, and in addition to, and
not as providing exceptions to, one another. On this view, section 648 should
be construed as an additional saving provision. Applying this principle in this
additional saving provision under section 648, the contrary intention clearly
appears in respect of the savings of any legal liability not resulting in
prosecution. I am, therefore, of the view that neither section 648 nor the
application of section 6 of the General Clauses Act as provided in section 658
of the Act saves the present prosecution. In the result, I find that the
prosecution is unsustainable.
In respect of the second point, the learned
Magistrate was clearly in error. Section 633 of the Act confers power on the
court to grant relief in certain cases and section 633(1) reads thus :
"If in any proceeding for negligence, default,
breach of duty, misfeasance or breach of trust against an officer of a company,
it appears to the court hearing the case that he is or may be liable in respect
of the negligence, default, breach of duty, misfeasance or breach of trust, but
that he has acted honestly and reasonably, and that having regard to all the
circumstances of the case, including those connected with his appointment, he
ought fairly to be excused, the court may relieve him, either wholly or partly,
from his liability on such terms as it may think fit."
Under this provision, it is not the criminal
intention which is required for consideration. Obviously, negligence and
default mentioned in section 633(1) will not involve criminal intention on the
part of the person who is proceeded against for negligence or default. This
section gives a discretion to the court to relieve the person proceeded against
for those acts mentioned therein, provided the court finds that that person has
acted honestly and reasonably and also the other circumstances of the case
including the circumstances leading to the appointment of such person and, in
doing so, he could relieve him either wholly or partly from his liability on
such terms as it may think fit. To deal with a person under this provision, the
absence of criminal intention is irrelevant. But what is relevant is whether he
acted honestly, namely, in good faith and whether he had any justifiable reason
to escape from the liability. This section cannot be equated with a discharge or
acquittal provided under the Criminal Procedure Code. This section will apply
to all legal proceedings, civil or criminal or otherwise, instituted under this
Act.
In the result, the appeal is dismissed.
[1934] 4 COMP. CAS. 196 (CD)
CHANCERY DIVISION
MAUGHAM, J.
OCTOBER 16, 1933
W.G.
Brown, for the petitioner.
T.D.D. Divine, for the Company.
judgment
Maugham, J.—This petition is of a somewhat unusual character. I believe it to be the first to be presented under Section 372 of the Companies Act, 1929, which, I think, is a repetition of Section 279 of the Companies (Consolidation) Act, 1908. I accede to the view, which has been put forward on behalf of the petitioner, that Section 372, sub-section 1 of the Companies Act, 1929, applies (inter alia) to a proceeding against an officer of a company under Section 275—the misfeasance section. It is beyond doubt that it applies also where proceedings are being taken in a Court of summary jurisdiction to recover one of the penalties imposed on directors and others under the Act and, accordingly, it includes power to relieve against the penalty imposed under Section 141 of the Act on directors who act as such without having obtained their qualification shares within two months of their appointment as directors, or within such shorter time as may be fixed by the articles of association. I also accept the contention that Section 372, sub-Section 2 gives power to the Court to grant relief in cases where application is made for it by a director who, although no proceedings such as are described in Sub-Section 1 are being taken against him, apprehends that a claim may be made against him under that sub-section. A director apprehending such a claim may apply to the Court for relief and, in my opinion, the Court, upon such an application, is given, in the words of sub-Section 2, "the same power to relieve him as under this section it would have had if it had been a Court before which proceedings against that person for negligence, default, breach of duty or breach of trust had been brought." On the other hand, it is quite clear that there is a wide difference between proceedings before a Court of summary jurisdiction for a fine or penalty and proceedings either by a company to recover moneys due to the company as a going concern from one of its officers or by a liquidator or shareholder for misfeasance. In the case of police Court proceedings, prima facie no doubt, some informer applies to the Court for the fine or penalty, the relevant section being Section 365 (which makes provision for fines or penalties and defines the expreission "officer in default"), Section 366 (which deals with the prosecution of offences punishable by fine), and Section 367 (which deals with the application of fines). It will be observed that under Section 367, "the Court imposing any fine under this Act may direct that the whole or any part thereof shall be applied in or towards payment of the costs of the proceedings, or in or towards the rewarding the person on whose information or at whose suit the fine is recovered, and subject to any such direction all fines under this Act shall, notwithstanding anything in any other Act, be paid into the Exchequer." Where proceedings are in the nature of a claim by the company or the liquidator with regard to something which a director may be made to pay to the company or something which may be directed under Section 276 (which gives to the Court power to assess damages against delinquent directors, managers, liquidators or officers) to be contributed to the company's assets by way of compensation, the Exchequer is not, at any rate, directly concerned, and the sum is, prima facie, to go to benefit shareholders if the company is solvent, or creditors if it is insolvent. Section 372, sub-section 2 of the Companies Act, 1929, says nothing about the parties who ought to be present when an application for relief under the section is made, or about the circumstances in which the Court is to relieve an officer of a company from liability to the company, or to an order under Section 276, and, in my opinion, although as I have said, I think that there is jurisdiction under Section 372, that jurisdiction ought to be exercised with great care.
In the present case the petitioner has, in my opinion, acted honestly and reasonably, notwithstanding that there was a certain negligence in his not ascertaining that the articles of association required him to obtain his qualification of five hundred ordinary shares within two months after his appointment as a director. The circumstances set out in the petition show that the negligence was not of a very serious character, and with regard to the fine not exceeding £5 to which the petitioner is liable "... for every day during which the default, . . . continues . . . . " I have no hesitation in coming to the conclusion that I ought to relieve him wholly from his liability to that fine, a liability of a penal character which I think that he ought not, in the circumstances, to be made to undergo.
Under Section 372, sub-Section 2, however, the position seems to be different. In the present case, I have no evidence of the view taken by the shareholders or by the petitioner's brother directors as to the petitioner's liability to repay to the company the whole of the remuneration which he received as a director while de jure he was not a director. It does not seem to me that the Court ought to be willing to exercise its jurisdiction under sub-Section 2 without clear evidence as to the opinions held on the subject by the persons concerned. If, for example a director, by reason of an incautious vote, has made himself liable to pay moneys to a company by reason of a contract entered into, it would not be right for the Court to render proceedings by the company or its liquidator abortive without information as to the views of the creditors or shareholders. In the present case the company is solvent, and it may be that the shareholders would be unwilling to direct proceedings to be brought against the petitioner in respect of sums paid to him as a director to which he was not entitled. But I have no information with regard to that matter and, accordingly, while granting relief under the first part of the prayer of the petition and relieving him from any liability for fines or penalties incurred by his having acted as a director without being qualified, I do not propose to grant him relief under the second part of the prayer in respect of his having drawn or received remuneration while so acting as a director.
Madras
High Court
Companies
Act
[2004]
54 scl 118 (Mad.)
High Court of Madras
v.
Registrar of
Companies
Ramamurthi,
J.
C.P.
Nos. 159 to 162 of 2002
and
C.A. nos. 236, 237 and 934 of 2002
March 24,
2003
Section 633, read with section 207, of the
Companies Act, 1956 - Court - Power of, to grant relief - Whether if persons
concerned with company have reason to apprehend that any proceedings under
section 207 will be taken against them for any negligence, default, breach of
duty, misfeasance or breach of trust, they may apply to company court for
relief and company court can grant relief taking into consideration overall
circumstances of case - Held, yes - Regional Director, Department of Company
Affairs (respondent), on a complaint made by a shareholder that dividend
warrant was sent to him by company with a delay of ten days, filed complaints
under section 207 against some of directors of company on 19-6-2002 and process
was issued on 21-6-2002, but it was served only on 31-7-2002 - In meantime,
petitioners, who were directors of company, filed company petitions under
section 633(2) on 24-7-2002 to relieve them from prosecution launched by
respondent - No material was on record to show that persons against whom
prosecution was launched were in-charge of day-to-day affairs of company and
were aware of delay - Whether since even before service of notice from criminal
court petitioners had filed company petitions, they had established that they
were entitled to invoke section 633 - Held, yes - Whether since respondent had
not launched prosecution against all persons concerned without any specific
reason, it was clear that respondent
had not acted bona fide - Held, yes - Whether since petitioners had acted bona
fide and reasonably and moreover, they had remedied contravention even before
launching of prosecution by respondents, prosecution was absolutely unnecessary
and petitioners against whom prosecution had been launched deserved to be
relieved from prosecution - Held, yes
Facts
One ‘A’ was a
shareholder of a company. The company in the annual general meeting, declared
equity dividend at 30 per cent as per section 207. The dividend warrants should
be sent to all the shareholders within thirty days from the date of annual
general meeting, but it was sent to ‘A’
with a delay of ten days. ‘A’, therefore, filed a complaint against the
company before the Regional Director, Department of Company Affairs (the
respondent). The respondent filed complaints under section 207 against some of
the directors of the company on 19-6-2002 and process was issued on 21-6-2002,
but it was served only on 31-7-2002.
In the
meantime, on 24-7-2002, the petitioners, who were directors of the company,
filed company petitions under section 633(2) to relieve them from the
prosecution launched by the respondent.
Held
It is clear
from the provisions of section 633(2) that if the petitioners had reason to
apprehend that any proceedings would be taken against them by the respondent
for any negligence, default, breach of duty, misfeasance or breach of trust,
they might apply to the company court for relief and the company court can
grant the relief taking into consideration the overall circumstances of the
case. It was clear from the facts that even before service of notice from the
criminal court, the petitioners had filed the company petitions and as such
prima facie, they had established that they were entitled to invoke section
633(2). [Para 19]
The prosecution
had not been launched against all the persons concerned. No specific reason had
been given by the respondent for not filing prosecution against two whole-time
former directors of the company. It, therefore, followed that the respondent
had acted only against some of the directors and left some of them. [Para 20]
The respondent
had not acted bona fide and he had adopted the policy of likes and dislikes and
selected some of them to be prosecuted and omitted some of them without any
valid reason. There was absolutely no material to come to the conclusion that
the persons against whom the prosecution was launched were aware of the delay
and with their knowledge only, the delay had been caused. Further, there was
nothing on record to show that each one of the persons against whom complaint
was filed was in-charge of the day-to-day affairs of the company. [Para 21]
It was
evidently clear that the petitioners had acted bona fide and reasonably and
there was no material to come to the conclusion that they had got knowledge
about the delay. Moreover, those company petitions had been filed even before
receiving any notice from the criminal court and in the circumstances, the
company court was entitled to interfere in such cases. Moreover, the
petitioners had remedied the contravention even before the launching of the
prosecution by the respondent and in that state of affairs, the prosecution was
absolutely unnecessary and, hence, the petitioners, against whom the
prosecution had been launched, deserved to be relieved and they should be
condoned or excused. [Para 27]
Therefore, the
company petitions were allowed and the petitioners were relieved from the
prosecution launched by the respondent. [Para 28]
Cases referred to
G.M. Mohan v.
Registrar of Companies [1983] 56 Comp. Cas. 265 (Kar.) (para 22), Prahlad Bai
Lath v. Registrar of Companies [1979] 49 Comp. Cas. 317 (Ori.) (para 23), M.
Meyyappan v. Registrar of Companies [2003] 112 Comp. Cas. 450/42 SCL 758 (Mad.)
(para 24), Y.R. Chaturvedi v. Hope Textile Ltd. [1988] 68 Comp. Cas. 713 (MP)
(para 25) and Prestolite of India Ltd., In re [1989] 69 Comp. Cas. 556 (Punj.
& Har.) (para 26).
Arvind P.
Datar, V. John Acquinas and T.K. Baskar for the Petitioner. M.T.
Arunan for the Respondent.
Judgment
1. These petitions
are filed by the respective petitioners under section 633(2) of the Companies
Act, 1956 (hereinafter referred to as ‘the Act’) to relieve them wholly or
partly from the alleged liability on such terms as the court may deem fit and
proper under the circumstances of the case pursuant to show-cause notice, dated
26th March, 2002, 10th April, 2002 and 12th July, 2002 issued by the
respondent.
2. The case in brief
is as follows : The company was originally incorporated under the name of
Pentagon Consultancy & Agency (P.) Ltd. on 5th May, 1976. The said company
is now known as Pentafour Software & Exports Ltd. and the certificate of
incorporation was changed to that effect by the respondent on 24th February,
2000. The registered office of the company is situated at No. 1, First Main
Road, United India Colony, Kodambakkam, Chennai. The authorised capital of the
company is Rs. 75 crores. The object for which the company is incorporated is
to carry on business pertaining to or connected with and involving development
of system software, application software, enterprise resource planning,
internet net linking, multimedia, entertainment and any other software
development in any area including communication, information technology in
India or any part of the world, and such other objects as let out in the
memorandum and articles of association of the company.
3. The respondent
pointed out in the show cause notice that Mr. Ashok Kumar Verma, Patna, alleged
in his letter dated 17th September, 2001 that he has not received dividend for
the year ending 31st March, 2001. The company, in the annual general meeting,
held on 20th July, 2001, declared equity dividend at 30 per cent as per section
207 of the Act. The dividend warrants should be sent to all the shareholders
within thirty days from the date of annual general meeting and the dividend
warrant was sent to Mr. Ashok Kumar Verma on 27th September, 2001 with a delay
of ten days. The show cause notices were sent to the petitioners by the
respondent as to why they should not be prosecuted under section 207. They have
reason to believe that the respondent
is proceeding to launch prosecution as against them for the alleged violation
of section 207.
4. Under section
633(2) of the Act, it is provided that where they had reasonable apprehension
that any proceeding will or may likely to be brought against them in respect of
negligence, default, breach of duty, misfeasance or breach of trust, they may
apply to this court for relief. In spite of the reply sent to the show cause
notice, the petitioners apprehend that the respondent would launch prosecution
for alleged violation of section 207 of the Act and, therefore, they have filed
the above petitions. No offence under section 207 is deemed to have been
committed if for one or other reasons set out in the proviso to section 207 of
the Act. They have enquired with the company and ensured that the company
remedied the contraventions and the payment has been made to the shareholders
with interest for the delay also. They had acted reasonably and fairly to avoid
contravention of section 207. Hence the above petitions.
5. The respondent
filed a common counter affidavit and denied various averments. The petitioners
have filed company applications and this court, by order dated 25th July, 2002,
restrained the respondent from initiating and conducting the prosecution as
against the applicants for alleged offence under section 207 of the Act. The
company, at the annual general meeting, held on 20th July, 2001, declared an
equity dividend at 30 per cent. Shri Ashok Kumar Verma is holding 100 equity
shares in the above company. Under section 207, dividend warrants should be
sent to the shareholders within thirty days from the date of annual general
meeting. In this case, dividend warrant was sent to Mr. Ashok Kumar Verma on
27th September, 2001 with a delay of ten days. The provision of section 207 has
been contravened.
6. The show cause
notice was issued pursuant to the direction of the Regional Director,
Department of Company Affairs. The office has
filed prosecution in EOCC No. 574 of 2002 on 19th June, 2002 against the company, Sri V. Chandrasekaran, S.
Ranganathan, S. Ramani and T.K. Sheshadri, petitioners in the above company
petitions, for the default and notice in the prosecution was served on them.
However, no prosecution has been filed against Sri K. Srinivasan, the
petitioner in CP No. 162 of 2002 and Sri S. Ramasamy, secretary of the company
and second petitioner in CP No. 160 of 2002.
7. The petitioners
have not placed any material as to how they have acted honestly and reasonably
under the circumstances of the case. The complaint dated 17th September, 2001
received from Shri Ashok Kumar Verma was forwarded by the Regional Director on
3rd December, 2001. The company was asked to send a reply on the complaint and
since no reply was received, a reminder was issued to the company on 10th
April, 2002. The company furnished a reply dated 25th April, 2002 informing
that they have paid the dividend and also paid interest for the delay in
payment of the dividend. However, the company had not furnished the particulars
as to the date of payment. The petitioners, as directors of the company, have
duty to see that the company has complied with the provisions of section 207.
They have not stated what steps have been taken to comply with the provisions
of the Act.
8. Section 207 of the
Act is a legislation passed to protect the interest of the investors and to act
as a deterrent to directors to ensure the compliance of the provisions of the
Act. It is the duty of the directors to ensure that the company complies with
the provisions of the sections properly. Having failed to take suitable steps
to ensure the compliance, there is no gain in simply saying that they have
acted reasonably. The show cause notice was issued based on the observation of
the inspecting officer that the company had transferred the unclaimed dividend
amount after the expiry of 49 days to dividend account and thus contravened the
provisions of section 207. The company had declared dividend for the financial
year ending 31st March, 1999 on 16th June, 1999.
9. However, the
dividend amount was transferred after expiry of 49 days from the date of
declaration. The dividend pertaining to the promoters was transferred on 11th
September, 1999. The interest for the delayed period was paid as per the
requirement. The promoters have decided to take the dividend at a later stage
due to cash constraints faced by the company at that time. They have not placed
any material as to why they should be excused and how they are entitled for the
relief sought for in the circumstances of the case and as such, the petitions
are liable to be dismissed.
10. The petitioners in
CP Nos. 159 to 162 of 2002 are directors in the company. The issue involved in
all the company petitions is one and the same and as such a common order is
pronounced.
11. Heard learned counsel appearing for
the parties.
12. The points that arise for
consideration are :
(i) Whether the petitioners have made out a
case for interference under section 633(2) of the Act ?
(ii) Whether the objection raised by the
respondent are sustainable under law ?
(iii) To what relief ?
13. It is admitted that
the petitioner in CP No. 159 of 2002 is a former non-executive director and
practising advocate. The first petitioner in CP No. 160 of 2002 is Chairman and
CEO. However, the second petitioner, Ramasamy, is not prosecuted by the
respondent. Similarly, the petitioner S. Ramani in CP No. 161 of 2002 is a
non-executive director. The second petitioner, S. Ranganathan, is a former
whole-time director. The petitioner in CP No. 162 of 2002 K. Srinivasan is a
former whole-time director and he was not prosecuted by the respondent. It is,
therefore, evidently clear that the second petitioner in CP No. 160 of 2002 and
the petitioner in CP No. 162 of 2002 have not been prosecuted before the
criminal court by the respondent for alleged offence of section 207 of the Act.
14. The respondent had
sent show cause notice to the petitioners on 6th March, 2002, respondent also
sent a letter on 10th April, 2002 reminding them to send a reply. The company
sent a reply on 16th April, 2002 and another reply on 25th April, 2002. It
appears that Ashok Kumar Verma had sent a complaint on 17th September, 2001
that he has not received the dividend for the year ending with 31st March, 2001
from the company. Admittedly, the company in annual general meeting held on
20th July, 2001 declared the equity dividend at 30 per cent. Ashok Kumar Verma
is holding 100 equity shares in the company, and the dividend warrant should be
sent to all the shareholders within 30 days from the date of annual general
meeting; and, in the present case, dividend warrant was sent to Ashok Kumar
Verma on 27th September, 2001 and there was a delay of ten days in posting the
dividend to the shareholders. Because of this only, the respondent sent a show
cause notice that the petitioners have violated section 207 of the Act.
15. The petitioners
have filed the present petitions under section 633(2) of the Act. Learned
counsel for the petitioners stated that the petitioners have acted bona fide
and reasonably. They apprehend that the respondent is likely to take action by
filing prosecution before the criminal court, and as such, they should be
relieved or excused since they have not want only or negligently delayed in
sending the dividend. No doubt, there is a delay of ten days in sending the
dividend, but even for the delay, interest has been paid and, under the
circumstances, they should be excused.
16. Learned Central
Government counsel contended that the show cause notice was sent to the
petitioner and, in the reply, they have simply stated that the demand of the
complaint was complied with. However, it is not stated as to when the dividend
was paid and as to why the delay was caused. Under section 207 of the Act, the
dividend has to be paid within a particular period and in view of the complaint
received, the show cause notice was sent to the directors of the company. The
promoters were also paid belatedly, but they have not given any complaint.
Simply because interest has been paid for the delayed payment to the
complainant, the petitioners cannot escape from the prosecution already
launched against most of petitioners excepting two. The respondent had filed
prosecution in EOCC Nos. 574 of 2002 on 19th June, 2002. Once the prosecution
had been launched, the only course open for the petitioners is to face the
trial. There is no valid and sufficient cause for interference by this court by
invoking section 633(2) of the Act.
17. It is clear from
section 207 of the Act, which provides penalty for failure to distribute
dividends within forty two days from the date of declaration to any
shareholders entitled to the payment of dividend, every director of the company
shall, if he is knowingly party to the default, be punishable with simple
imprisonment for the term which may extend to seven days and shall also be
liable to fine; proviso(s) (a) to (e) also provide circumstances under which no
offence can be said to have been committed and it cannot be said that the case
of petitioners fall under any of these provisos. However, it has to be
established whether the petitioners are knowingly a party to the default, then
only, they are liable to be punished.
18. Section 633(2) of the Act reads as follows
:
“(2) Where any such officer has reason to
apprehend that any proceeding will or might be brought against him in respect
of any negligence, default, breach of duty, misfeasance or breach of trust, he
may apply to the High Court for relief; and the High Court on such application
shall have the same power to relieve him as it would have had if it had been a
court before which a proceeding against that officer for negligence, default,
breach of duty, misfeasance or breach of trust had been brought under
sub-section (1).”
19. It is, therefore,
clear that if the petitioners have reason to apprehend that any proceedings
will be taken against them by the respondent for any negligence, default,
breach of duty, misfeasance or breach of trust, they may apply to this court
for relief and this court can grant the relief taking into consideration the
overall circumstances of the case. It is pertinent to point out that,
admittedly, the dividend has been paid to Mr. Ashok Kumar Verma with a delay of
ten days and even for the delay, interest has been paid. The show cause notice
was issued on 21st March, 2002 and the reply was sent by the petitioners on
16th April, 2002. The complaint had been filed by the respondent on 19th June,
2002 and process was issued on 21st June, 2002. But it was served on the
petitioners only on 31st July, 2002. Even before that, i.e., on 24th July,
2002, the company petitions have been filed by these petitioners. The first
date of hearing in the criminal court was on 12th August, 2002. It is,
therefore, evidently clear that even before service of notice from the criminal
court, the petitioners had filed the company petitions and, as such, prima
facie, they have established that they are entitled to invoke section 633(2) of
the Act.
20. It is also
necessary to point out that the prosecution has not been launched against all
the persons concerned, and as per the counter affidavit, no prosecution has
been launched against the petitioner in CP No. 162 of 2002 who is a former
whole-time director in the company. Similarly, the second petitioner in CP No.
160 of 2002 is also a former secretary and no prosecution was filed by the
respondent against him. No specific reason has been given by the respondent for
not filing prosecution against these two persons. It therefore, follows that
the respondent had acted only against some of the directors and left some of
them.
21. It is evidently
clear that the respondent had not acted bona fide, and he has adopted the
policy of likes and dislikes and selected some of them to be prosecuted and
omitted some of them without any valid reason. There is absolutely no material
to come to the conclusion that the persons against whom the prosecution was
launched were aware of the delay and with their knowledge only, the delay had
been caused. The petitioner Thiru. T.K. Seshadri is former non-executive
director and practising advocate and there is nothing on record to show that
each one of them are in-charge of the day-to-day affairs of the company.
22. Learned counsel
for the petitioners relied on G.M. Mohan v. Registrar of Companies [1983] 56 Comp.
Cas. 265 (Kar.) and it reads as follows :
“The violation of section 58A of the Companies
Act, 1956, is a penal offence made as such in public interest and the companies
cannot commit the offence with impunity, but, where the conduct of the company
and/or its officers is such that any offence which had been committed under the
section has ceased to be an offence by the time of the show-cause notice or the
date of a petition by the company and/or its officers, when there cannot
possibly be any complaint against the company by its depositors under the
Companies (Acceptance of Deposits) Rules, 1975, the court can direct under
section 633(2) the Registrar of Companies to forbear from prosecuting the
company and/or its officers for the offence which, however, would be, in the
circumstances, made out in the case and should not be construed as condoning of
the lapses on the part of the company and/or its officers.” (p. 265)
23. Reliance is also
placed on Prahlad Bai Lath v. Registrar of Companies [1979] 49 Comp. Cas. 317
(Ori.), and it reads as follows :
“Where acts of negligence, default, breech of
duty, misfeasance or breach of trust of an officer of the company appear to the
court not to have occasioned any loss to the company, and the court is
satisfied that the omissions on the part of the officer are not due to any
dishonest or any deliberate remissness or any deliberate attempt to delay the
winding up proceedings, the court can exercise its power under section 633 of
the Act, and can condone the irregularities.” (p. 317)
24. Reliance is also
placed on M. Meyyappan v. Registrar of Companies [2003] 112 Comp. Cas. 450[S1] (Mad.), and it reads as follows :
“Though there is no doubt that the power of
the High Court under section 633(2) of the Companies Act, 1956, to relieve an
officer from his liability in respect of negligence, default, breach of duty,
misfeasance or breach of trust, is the same as that of the court hearing the
case under section 633(1), the power of the High Court can only be exercised
when an apprehension exists which has not yet been transformed into an
actuality. If the apprehended proceeding has already commenced, then the
officer concerned has no other course but to apply to the relevant court under
section 633(1).”
25. Learned counsel
also relied on Y.R. Chaturvedi v. Hope Textile Ltd. [1988] 68 Comp. Cas. 713
(MP) and it reads as follows :
“Since prosecution under the Employees
Provident Funds and Miscellaneous Provision Act and the Employees’ Sate
Insurance Act had already been launched, it was not for the company court but
for the courts before which the prosecution was launched to consider the
grounds taken by the petitioner in his defence.”
26. Reliance is also
placed on Prestolite of India Ltd., In re [1989] 69 Comp. Cas. 556 (Punj. &
Har.) and it reads as follows :
“. . . the court had to be cautious in its
approach before exercising discretion in favour of the delinquent officer
though, no doubt, the discretion had to be a judicial one. Before exercising
any such discretion, the court had to be reasonably satisfied that the
requirements of the section had been met. The petitioners had not satisfied the
court to this effect. . . .” (p. 558)
27. If the principles
aforesaid are applied to the case on hand, it is evidently clear that the
petitioners have acted bona fide and reasonably and there is no material to
come to the conclusion that they have got knowledge about this delay. Moreover,
these company petitions have been filed even before receiving any notice from
the criminal court, and in the circumstances, I am of the view that courts are
entitled to interfere in such cases. Moreover, the petitioners have remedied
the contravention even before the launching of the prosecution by the
respondent and, in this state of affairs, the prosecution is absolutely
unnecessary and, hence, the petitioners against whom the prosecution has been
launched have to be relieved and they should be condoned or excused. The points
are answered accordingly.
28. For the reasons
stated above, the company petitions are allowed and the petitioners-directors
are relieved from the prosecution launched by the respondent. Consequently,
connected CAs are closed.
[1977] 47 COMP. CAS. 291 (KER)
HIGH COURT OF
KERALA
v.
Registrar of Companies
S.K. KADER
J.
B.C. P. NO.
1 OF 1975.
DECEMBER 15, 1975
M.S. Kurien
for the Petitioner.
S.K. Kader
J.—This is a petition tiled
by one. Pylo Luka Muricken, liquidator. Oriental Union Bank Ltd. (in
liquidation), Kaduthuruthy, praying that the order passed by the Registrar of
Companies under section 611(2) of the Companies Act, 1956, directing him to pay
additional fee may be set aside on the ground that there was prosecution
against him for failure to file the statements requird under the Companies Act
in time, that the learned Chief Judicial Magistrate, Ernakulam, who tried the
case, acquitted him, and, therefore, the present order of the Registrar is
"barred by res judicata" and is opposed to article 20(2) of the Constitution
of India. An affidavit has been filed by the Registrar of Companies stating the
facts of the case and the circumstances under which he happened to levy
additional fee under section 611(2) of the Companies Act, 1956, which will
hereinafter be called "the Act". It is not disputed that there was
great delay on the part of the petitioner in filing the statements required to
be filed under the Act. and, therefore, the Registrar filed complaints under
section 551(5) of the Act against the petitioner before the Chief Judicial
Magistrate's Court, Ernakulam, for his failure to file the statements of
accounts for the period from July 15, 1971, to July 15, 1973. After the
institution of this complaint, the petitioner requested the Registrar to grant
time to submit the statements of accounts, on the ground that he was suffering
from asthma. Before the criminal court, the petitioner filed a petition under
section 633(1) of the Act praying for the relief thereunder. No evidence was
adduced on behalf of the petitioner and the learned Magistrate relieved the
petitioner, finding that he has acted honestly and reasonably. It was argued
that this amounted to an acquittal. The judgment in this case has not been
produced on behalf of the petitioner. It cannot be said that the granting of
relief under section 633 of the Act in a trial for failure to file the
statements within time can be equated with an order of discharge or acquittal.
The Registrar in his affidavit has stated that the petitioner was relieved by
the Magistrate only from his liability to pay fine under section 551(5) of the
Act and not from paying filing fee or additional fee on the documents filed
late as required under section 611 of the Act. The imposition of fine under
section 551(5) in a prosecution for failure to file statements as required
under section 551(1) of the Act is a punishment; while the determination of
additional fee under section 611(2) does not partake the nature of a penalty.
The power to levy additional fee, as is clear from the sub-section itself, is
without prejudice to any other liability. Section 611(2) of the Act reads thus
:
"Any
document required or authorised by this Act to be filed or registered, or any
fact required or authorised by this Act to be registered, with the Registrar on
payment of the fee specified therefor in Schedule X, may, without prejudice to
any other liability, be filed or registered after the time, if any, specified
in this Act for its filing or registration on payment of such additional fee
not exceeding ten times the amount of the fee so specified as the Registrar may
determine".
The
additional fee contemplated under this sub-section is not a fine or penalty. It
is only in the nature of a revenue demand. What has to be mainly considered
under section 633(1) of the Act in a criminal prosecution is, whether the
person prosecuted against, has acted honestly and reasonably and he ought
fairly to be excused. The delay as such is not condoned by granting relief
under this section. Under section 637B of the Act, the Central Government alone
has power to condone the delay for reasons to be recorded in writing. Neither
the criminal court nor the Registrar has any power to condone the delay. The
remedy of the petitioner is, therefore, to move the Central Government under
section 63 7B of the Act to get the delay condoned. There is no substance in
the contention of the counsel for the petitioner that the proceedings of the
Registrar under section 611(2) of the Act is in utter violation of article
20(2) of the Constitution and that the finding of the Chief Judicial Magistrate
constitutes res judicata. I have already stated that the decision of the
criminal court under section 633 of the Act is neither discharge nor an
acquittal. I do not understand how the relief granted under section 633(1) of
the Act by the learned Chief Judicial Magistrate would constitute res judicata
and stand in the way of the Registrar proceeding under section 611(2) of the
Act. There are two decisions, of which one is that of the Madras High Court and
the other that of the Allahabad High Court, on the point. In Public Prosecutor,
Government of Pondicherry v. Abdul Aziz Khan (Amara Pictures Private Ltd., In
re) [1970] 40 Comp Cas 130 (Mad.) Krishnaswamy Reddy J. of the Madras High
Court observed that for invoking section 633(1) of the Act, criminal intention
is irrelevant, that what is relevant is whether the accused acted honestly,
namely, in good faith, and whether he had any justifiable reason to escape from
the liability and that this section cannot be equated with a discharge or
acquittal provided under the Criminal Procedure Code. In Hanuman Mills Pvt.
Ltd. v. State [1969] 39 Comp Cas 777 (All) Trivedi J. of the Allahabad High
Court held that the demand for additional fees under section 611(2) is a
revenue demand and is neither a prosecution nor a punishment by a court of law
so as to fall within the mischief of article 20(1) of the Constitution of
India.
Article 20 of
the Constitution deals with certain fundamental principles of criminal
jurisprudence. The fundamental right guaranteed in article 20(2) enunciates the
principle that no citizen should be put in jeopardy of his life or liberty more
than once for the same offence. This article incorporates within its scope the
plea of autrefois convict as known to the British jurisprudence or the plea of
double jeopardy as known to the American Constitution. No one ought to be twice
punished for one offence. (Nemo debet bis puniri pro nno delicto). It is
essential for the application of clause (2) of article 20, that (1) there must
have been a previous prosecution, (2) the accused must have been punished at
that prosecution, (3) subsequent proceeding also must be one for the
prosecution and punishment of the accused, and (4) the proceedings on both
occasions must be in relation to the same offence. In order to attract this
clause, the prosecution must have ended in punishment. The proceedings
contemplated under this article, therefore, are proceedings of a criminal
nature before a court of law or a judicial tribunal. By no stretch of
imagination it can be said that the Registrar is a court of law or a judicial
tribunal while he acts under section 611(2) of the Act. The petitioner has no
case that the learned Magistrate has convicted or punished him. What article 20
prohibits is only a second punishment for the same offence.
This petition has, therefore, no merit and the same
is hereby dismissed.
[1992] 73 COMP. CAS. 257
(SC)
SUPREME COURT OF INDIA
v.
Registrar of Companies,
RANGANATH MISRA CJI, KULDIP SINGH AND S. MOHAN JJ.
Civil
Appeal Nos. 3012, 3117, 3118
and 3738 of
1990 and S.L.P. No. 8081 of 1990
NOVEMBER 19, 1991
K.K. Venugopal, Dr. Shankar Ghosh and Kapil
Sibal, Pramod Dayal, Vivek Gambhir, Surinder Karnail and S.K. Gambhir for the appellants.
Aruneshwar
Gupta and Ms. Sushma Suri for the respondent.
The judgment
of the court was delivered by
S. Mohan
J.—All these matters can be
dealt with under a common judgment since the question which arises for
consideration is the scope of section 633 of the Companies Act, 1956.
It is enough
if we refer to the facts in Civil Appeal No. 3012 of 1990. The short facts are
as follows :
Eastern
Manufacturing Co. Ltd. ("the company" in short) is the owner of a
jute mill in West Bengal. The appellants were appointed directors between April
10, 1981, and June 15, 1984. There was a lock-out in the jute mill on June 2,
1982. By a notification dated October 26, 1983, the Government of West Bengal
declared the said jute mill as a relief undertaking under the provisions of the
West Bengal Relief Undertakings (Special Provisions) Act, 1972. However, on
November 24, 1983, the lock-out was lifted. Thereafter the mill resumed its
manufacturing operations between January 16, 1984, and April 8, 1984. There was
a strike in the jute industry throughout West Bengal. Between March 7, 1985,
and August 3, 1985, there was a lock-out due to labour unrest. As a result of
all these the company defaulted in the payment of the provident fund dues. On
January 28, 1986, a petition was moved on behalf of the appellants under
section 633 of the Companies Act, 1956 (hereinafter referred to as "the
Act") for being relieved of liability for delayed payment as well as
non-payment of the provident fund dues and other ancillary dues. On August 21,
1986, a consent order was passed by the learned single judge allowing the
outstanding provident fund dues to be paid in monthly instalments of Rs. 50,000
commencing from April, 1986, until the entire liability is paid off.
Since this
course was accepted by the provident fund authorities it was not considered
necessary to serve summons on the Registrar of Companies because what was
sought to be recovered were the dues under the Provident Funds Act. It was
further ordered concerning prayer B that an injunction shall issue restraining
the respondents from initiating any criminal proceedings against the appellants
or any of them for non-payment or delayed payment of the provident fund.
Aggrieved by
this order, the first respondent before us, namely, the Regional Provident Fund
Commissioner, filed Appeal No. 286 of 1987. The Division Bench which heard the
matter rendered its impugned judgment on March 13, 1990. The sole point which
came up for determination was, whether the learned single judge was right in granting
relief under section 633 of the Act in respect of offences committed under the
Employees' Provident Funds and Miscellaneous Provisions Act of 1952
(hereinafter referred to as "the Provident Funds Act").
It was argued
on behalf of the appellants that the relief under section 633 of the Act could
be granted only in respect of offences committed under the Companies Act and
not in respect of offences under any other law. It is also submitted that in
respect of violations of the provisions of the Act, it is the Registrar of
Companies or any one authorised on his behalf who could initiate criminal
cases. On the contrary, in respect of offences committed under the Provident
Funds Act the appropriate authority to initiate such action would be the
Regional Provident Fund Commissioner. On an elaborate consideration with
reference to decided cases, it was held that "any proceeding"
referred to in section 633 of the Act would mean only proceedings under the
provisions of the Act.
Reference was also made to section 14A of the
Provident Funds Act inserted by Amending Act 37 of 1953 and it was concluded :
"If the contention that section 633 applied in
respect of liabilities arising also under the provisions of any Act other than
the said Act, is accepted, then and in that case a peculiar situation will
arise, a person who is otherwise liable in view of the provisions of section
14A would be entitled to relief under section 633 if he is employed by or
connected with a company which is covered both by the Provident Funds Act and
the Companies Act but a person shall not be so entitled to such relief if he is
not an employee of a body corporate covered by the Companies Act though he is
an employee of a company within the meaning of the Explanation to section 14A.
Besides if the contention that proceedings would include proceedings under
other Acts also is accepted, all the statutory provisions made for the welfare
of weaker sections of the community stand modified automatically to the extent
specified in section 633 for all time to come, even for all future legislation.
This would frustrate the object of welfare legislations".
Accordingly, it was held that section 633 of the Act
has no application in respect of any liability under any other Act. In the
result, the order of the learned single judge was set aside and the application
under section 633 was dismissed. We do not think it worthwhile to refer to
certain preliminary objections raised before the Division Bench in relation to
maintainability as that is not argued before us. It is against this judgment
that the appeal by special leave has been preferred.
An application was moved before the company court
claiming relief under section 633 and the same was dismissed applying the
judgment in Civil Appeal No. 286 of 1987. A similar application was dismissed
by the learned single judge by order dated April 24, 1988 in Civil Appeals Nos.
3117 and 3118 of 1990. In Civil Appeal No. 3738 of 1990, Company Petition No.
312 of 1989 for relief under section 633 too was dismissed.
In Special Leave Petition No. 8081 of 1990 also the
company petition for similar relief has been dismissed.
Mr. Venugopal, learned counsel for the appellants,
urged that section 633 is very wide in its amplitude and there is no
justification to restrict its application to only proceedings arising under the
Act. He draws our attention to sections 420 and 423 and submits that when
proceedings are taken in relation to breach of trust, for instance, which is an
offence under the Indian Penal Code, against an officer of a company it would
be open to him to go before the concerned Magistrate and plead a defence that
he has acted honestly and reasonably.
In such a case should the court come to a conclusion that he ought fairly to be
excused, the court will relieve him.
While this is
the submission as far as sub-section (1) is concerned, under sub-section (2),
it is maintained to be an anticipatory action. The High Court also exercises a
similar power as that court is exercising power under subsection (1).
Otherwise, if it is restricted only in respect of any liability under the
Companies Act then the protection extended under section 633 is lost.
Under the
Companies Act of 1913, the corresponding provision was section 281. Though
certain categories of persons were catalogued under subsection (3) of the said
section, presently section 633 has employed the words "an officer of a
company", the object being to see that directors or a director who rarely
take part in the affairs of the company are not unduly harassed for offences which
may arise under other acts, of which these directors may not have any knowledge
at all.
He also draws
our attention to section 32 of the Industrial Disputes Act, which talks of
offences by companies under the said Act. That is a sweeping provision where
the burden is upon the person concerned to prove that the offences were
committed without his knowledge or consent and but for that proof, the statute
deems him to be guilty. If under section 633 the protection is not so afforded
against such a provision like section 32 of the Industrial Disputes Act, the
entire purpose of section 633 would be rendered nugatory. The result of the
Division Bench judgment of the Calcutta High Court referred to in the impugned
judgment will be that these directors (the appellants) are exposed to
prosecution ; certainly that could not have been the intention of the law
maker.
Mr. Kapil
Sibal, learned counsel appearing for the appellants in Civil Appeal No. 3117,
refers to section 2(11) of the Act and submits that the definition of
"court" contemplates with respect to any matter relating to a
company. The court having respective jurisdiction as provided under section
2(11) is with respect to any offence under the Act, the Court of the Magistrate
of the first class or, as the case may be, a Presidency Magistrate, having
jurisdiction to try such offence.
This section
will show that where like the appellants they are not working directors, they
cannot be subject to prosecution. That is where section 633 steps in and
affords protection, even if it is a liability arising under any other Act, for
instance, like delayed payment or non-payment of provident fund. In other
respects, he adopts the arguments of Mr. Venugopal.
Learned
counsel for the Regional Provident Fund Commissioner would urge that any
proceeding occurring under section 633 cannot relate to a proceeding other than
one arising out of the Companies Act. If the arguments of the appellants are
accepted, it would amount to treating section 633 as a panacea for all the ills
or offences committed in respect of various other enactments. It might even
include not only the existing enactments but enactments which are yet to come.
In so far as each one of the other Acts not only defines offences but also lays
down the penalty therefor, merely because the appellants are officers of the
company it cannot mean that section 633 could be availed of. This provision is
in pari materia with section 448 of the English Companies Act, 1948. However,
as of today the Companies Act of 1985 has incorporated a similar provision
under section 727. In a leading case reported in [1981] 2 All ER 697 (Customs
and Excise Commissioners v. Hedon Alpha Ltd.), the scope of section 448 of the
1948 Act came up for consideration. It was held that although section 448(1) of
the 1948 Act was expressed in wide terms, in its true construction the only
proceeding for which relief under section 448 could be claimed were proceedings
against a director by, on behalf of or for the benefit of his company for the
breach of his duty to the company as a director or penal proceedings against a
director for breach of the 1948 Act. It was this line of reasoning which found
favour with the Division Bench of the Calcutta High Court which, view is
commended for acceptance by this court. Otherwise, the consequences will be
disastrous. The penal provisions of all other Acts would be rendered
ineffective by the interpretation pressed for acceptance. The further
submission of learned counsel is if one looks at section 14 of the Employees' Provident
Funds and Miscellaneous Provisions Act, 1952, lays down the penalty for the
offences by companies and is dealt with in section 14A. The Explanation to the
said section also talks of what a company would mean for the purpose of this
section. Therefore, where an elaborate procedure is contemplated under those
sections for recovery of these dues and the Provident Funds Act being a social
welfare legislation, that cannot be rendered illusory by extending the benefit
under section 633 of the Companies Act. Similarly under the Employees' State
Insurance Act, section 86 which talks of prosecution and which came to be
introduced by the Amending Act of 1989 also deals with companies. The
Explanation under that section specifically states as to what would be a
company or director for the purpose of that section. Hence it is submitted that
no interference is called for.
Having regard
to the above arguments, the only point that arises for determination is as to
the scope of section 633.
The Companies
Act was enacted in the year 1956. As the preamble itself says it is an Act to
consolidate and amend a law relating to companies and certain other
associations. As to the definition of company, it is found under section 3(1)
which consists of the following :
(i) company,
(ii) existing company,
(iii) private company, and
(iv) public company.
Section 644 of this Act reads as follows :
"The enactments mentioned in Schedule XII are
hereby repealed".
Schedule XII that is referred to under the section
refers to the previous Companies Act of 1913 also and certain other Acts by way
of ordinance or amendments.
Section 281 of the old Act of 1913 which talks of
power of the court to grant relief in certain cases reads as under :
"281. Power of court to grant relief in certain
cases.—(1) If in any proceeding for negligence, default, breach of duty or
breach of trust against a person to whom this section applies, it appears to
the court hearing the case that that person is or may be liable in respect of
the negligence, default, breach of duty or breach of trust, but that he has
acted honestly and reasonably, and that having regard to all the circumstances
of the case, including those connected with his appointment, he ought fairly to
be excused for the negligence, default, breach of duty or breach of trust, that
court may relieve him, either wholly or partly, from his liability on such
terms as the court may think fit.
(2) Where any person to whom this section applies has
reason to apprehend that any claim will or might be made against him in respect
of any negligence, default, breach of duty or breach of trust, he may apply to
the court for relief, and the court on any such application shall have the same
power to relieve him as under this section it would have had if it had been a
court before which proceedings against that person for negligence, default,
breach of duty or breach of trust had been brought.
(3) The persons to whom this section applies are the
following :—
(a) directors of a company ;
(b) managers and managing agents of a company ;
(c) officers of a company ;
(d) persons employed by a company as auditors
whether they are or are not officers of the company".
With this background of law, we will go on to section
633 of the Companies Act, 1956. It reads thus :
"633. Power of court to grant relief in certain
cases.—(1) If in any proceeding for negligence, default, breach of duty,
misfeasance or breach of trust against an officer of a company, it appears to
the court hearing the case that he is or may be liable in respect of the
negligence, default, breach of duty, misfeasance or breach of trust, but that
he has acted honestly and reasonably, and that having regard to all the
circumstances of the case, including those connected with his appointment, he
ought fairly to be excused, the court may relieve him, either wholly or partly,
from his liability on such terms as it may think fit :
Provided that in a criminal proceeding under this
sub-section, the court shall have no power to grant relief from any civil
liability which may attach to an officer in respect of such negligence,
default, breach of duty, misfeasance or breach of trust.
(2) Where any such officer has reason to apprehend
that any proceeding will or might be brought against him in respect of any
negligence, default, breach of duty, misfeasance or breach of trust, he may
apply to the High Court for relief and the High Court on such application shall
have the same power to relieve him as it would have had if it had been a court
before which a proceeding against the officer for negligence, default, breach
of duty, misfeasance or breach of trust had been brought under sub-section (1).
(3) No court shall grant any relief to any officer
under sub-section (1) or sub-section (2) unless it has, by notice served in the
manner specified by it, required the Registrar and such other person, if any,
as it thinks necessary, to show cause why such relief should not be
granted".
On a comparison of the two sections, two important
features emerge to be noticed. The court under section 633 has no power to
grant relief from any civil liability. Under sub-section (3) of section 281,
only four categories of persons were entitled to seek relief while under
section 633 it will be an officer of the company.
Under the Companies Act, 1956 (similarly under the
old Act of 1913), various duties and liabilities have been imposed ; equally
offences have been created for the non-performance of such duties. These
offences are offences in relation to the performance of certain duties under
the Act. The various offences are mentioned under sections 59, 62, 63, 68, 142,
162, 207, 218, 272, 374, 420, 423, 538 to 545 and 606.
The expression "any proceeding" occurring
under 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 is that the penal clauses under the various other Acts would be rendered
ineffective by the 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.
We are also of the view that while referring to any
proceeding under sub-section (2), Parliament intended to restrict it only to
the proceeding arising out of negligence, default, breach of trust, misfeasance
or breach of duty in respect of the duties prescribed under the provisions of
the Companies Act. Further, examining the sub-section, with reference to the
context and the placement of the sub-section, the only conclusion that is
possible is that the proceedings for which relief under this sub-section could
be claimed are the proceedings against the officer of a company for breach of
the provisions of the Companies Act. Sub-section (2) cannot apply to
proceedings instituted against the officer of the company to enforce the
liability arising out of violation of provisions of other statutes. Reference
could also be made to sub-section (3) where notice is required to be given to
the Registrar of Companies. This is an indication that the powers under
sub-section (2) must be restricted in respect of proceedings arising out of the
violation of the Companies Act.
We will now refer to the corresponding provisions in
English law. Section 448 of the Companies Act, 1948, is replaced by section 727
of the Companies Act, 1985. Section 727 reads thus :
"727. Power of court to grant relief in certain
cases.—(1) If in any proceedings for negligence, default, breach of duty or
breach of trust against an officer of a company or a person employed by a
company as auditor (whether he is or is not an officer of the company) it
appears to the court hearing the case that that officer or person is or may be
liable in respect of the negligence, default, breach of duty or breach of
trust, but that he has acted honestly and reasonably, and that having regard to
all the circumstances of the case (including those connected with his
appointment) he ought fairly to be excused for the negligence, default, breach
of duty or breach of trust, that court may relieve him either wholly or partly,
from his liability on such terms as it thinks fit.
(2) If any such officer or person as abovementioned
has reason to apprehend that any claim will or might be made against him in
respect of any negligence, default, breach of duty or breach of trust, he may
apply to the court for relief ; and the court on the application has the same
power to relieve him as under this section it would have had if it had been a
court before which proceedings against that person for negligence, default,
breach of duty or breach of trust had been brought.
(3) Where a case to which sub-section (1) applies is
being tried by a judge with a jury, the judge, after hearing the evidence, may,
if he is satisfied that the defendant or defender ought in pursuance of that
sub-section to be relieved either in whole or in part from the liability sought
to be enforced against him withdraw the case in whole or in part from the jury
and forthwith direct judgment to be entered for the defendant or defender on
such terms as to costs or otherwise as the judge may think proper".
Halsbury's Laws of England, fourth edition, 7(1)
Companies, para 652, on this aspect states as follows :
"Power of court to give relief against
liability.—If in any proceedings for negligence, default, breach of duty or
breach of trust against an officer of a company or a person employed by the
company as auditor (whether or not he is an officer of the company), it appears
to the court hearing the case that that officer or person is or may be liable
in respect of the negligence, default, breach of duty or breach of trust, but
that he has acted honestly and reasonably, and that having regard to all the
circumstances of the case, including those connected with his appointment, he
ought fairly to be excused for the negligence, default, breach of duty or
breach of trust, that court may relieve him, either wholly or partly, from his
liability on such terms as the court thinks fit. The power to grant relief
applies to personal breaches of duty, it does not extend to claims by third
parties.
Where a case within the above provision is being
tried by a judge with a jury, the judge after hearing the evidence, may, if he
is satisfied that the defendant ought to be relieved either in whole or in part
from the liability sought to be enforced against him, withdraw the case in
whole or in part from the jury and forthwith direct judgment to be entered for
the defendant on such terms as to costs or otherwise as the judge may think
proper.
If any such officer or person has reason to apprehend
that any claim will or might be made against him in respect of any negligence,
default, breach of duty or breach of trust, he may apply to the court for
relief ; and the court on any such application has the same power to relieve
him as it would have had if it had been a court before which proceedings
against that person for negligence, default, breach of duty or breach of trust
had been brought.
The application to the court is made by way of
petition. The application is made to the court having jurisdiction to wind up
the company. In cases in the High Court of Justice the proceedings are assigned
to the Chancery Division. The petition and all affidavits, notices and other
documents in the proceedings under it must be entitled in the matter of the
company and in the matter of the Companies Act, 1985".
Under the above provisions a director may be relieved
against liability in respect of a transaction wholly ultra vires the company or
against the penalties imposed by the
Act where he has acted without obtaining or after ceasing to hold his
qualification shares.
The leading
decision on section 448 is reported in Customs and Excise Commissioners v.
Hedon Alpha Ltd. [1981] QB 818 ; [1981] 2 All ER 697 (CA). That related to the
interpretation to be placed on section 448 of the Companies Act of 1948. In
that case a director of a company was carrying on business as a bookmaker. The
liability of the director for general betting duty was not paid by the company.
The director was acting honestly and reasonably, and, therefore, was found not
guilty of misconduct. Under these circumstances, the question arose whether the
director was entitled to relief from a claim to civil liability by a stranger
to the company. A claim to recover betting duty would amount to a default
against director within the meaning of section 448. Stephenson L.J. stated on
this aspect as follows (p. 701 of [1981] 2 All ER) :
"Furthermore,
the language of section 448 was apt to describe the area in which a company
director might be in breach of his duties to the company, and the ambit and
concern, the context or matrix, of the section was company law and the relation
of the officer or auditor of a company to the company and not to third persons.
The proceedings which qualified for the statutory relief were claims made by
companies, or on their behalf or for their benefit by the liquidators, the
Board of Trade, private prosecutors including penal proceedings for the
enforcement of the Companies Act, but not proceedings for the recovery of debts
or the enforcement of civil liability to strangers".
Griffiths
L.J. was of the following view (at p. 704 of [1981] 2 All ER) :
"In my
judgment section 448 has no application to the present claim. Although the
section is expressed in wide language it is in my view clearly intended to
enable the court to give relief to a director who, although he has behaved
reasonably and honestly, has nevertheless failed in some way in the discharge
of his obligations to his company or their shareholders or who has infringed
one of the numerous provisions in the Companies Act that regulate the conduct
of directors".
It requires
to be stated that though Stephenson L.J. referred to Palmer's Company Law, he
also made reference to Pennington's Company Law (fourth edition, 1979, page
548), it is stated thus :
"Under
the statutory provision relief can be given against any of the criminal
penalties imposed by the Companies Acts, 1948, and 1976, but not, it would
seem, against civil liability to anyone other than the company and so
apparently no relief may be given in the rare cases where a member or auditor
of a company has a personal right to sue its directors".
We will now
refer to Palmer's Company Law, 23rd edition, 1982, volume I, page 881. It is
stated thus :
"Statutory
relief (section 448). Section 448 (which is referred to in section 205, proviso
(b)) is a protective section for directors on lines similar to that accorded to
trustees. It provides that in any proceedings against, inter alia, a director
for negligence, default, breach of duty or breach of trust, if a director who
is or may be liable has in the opinion of the court acted honestly and
reasonably, and if, having regard to all the circumstances of the case,
including those connected with his appointment, he ought fairly to be excused,
the court may wholly or partly relieve him from his liability ; the court has a
discretion in the matter, and may impose terms (section 448(1)). In spite of
the wide words of the section it has been held that the section applies only to
actions brought by or on behalf of the company against its directors for breach
of duty and to penal proceedings for the enforcement of the Companies
Act".
The 5th
edition of Pennington's Company Law, 1985, at pages 679 and 680, contains the
following observations :
"However,
if a director is sued for breach of any of his duties, he may apply to the
court for relief from liability, and if the court is satisfied that he acted
honestly and reasonably, and that in all the circumstances he ought fairly to
be excused, it may relieve him from liability, on such terms as it thinks fit.
This provision is identically worded to the provision in the Trustees Act,
1925, which enables the court to relieve defaulting trustees, and the court's
jurisdiction will probably be exercised in the same way as under that Act. The
court is reluctant to relieve remunerated trustees and will only do so if they
show that they have taken all reasonable steps and to make good their breach of
trust, the same criterion has been applied when a defaulting liquidator sought
relief, and it would no doubt also be applied in the case of a director. On the
other hand, the court can give relief, even though the director has used the
company's money for ultra vires purposes, and even though the members oppose
relief being given. ...
Under the
statutory provision, relief can be given against any of the criminal penalties
imposed by the Companies Act, 1985, but not against criminal liability under
any other statute, or against civil liability to anyone other than the company
whether the liability arises by statute or otherwise, and so apparently no
relief may be given in the rare cases when a member or creditor of a company
has a personal right to sue its directors. Reference was made to the Court of
Appeal decision". (emphasis supplied)
Thus we are
clearly of the view that under section 633 of the Act relief cannot be extended
in respect of any liability under any Act other than the Act.
May be the
Industrial Disputes Act under section 32 contains a stringent provision but
that is no answer to hold that section 633 of the Companies Act could be
invoked for offences under section 32 of the Industrial Disputes Act.
We are
dealing with a case arising under the Employees' Provident Funds Act. The total
arrears due from the company are Rs. 1,77,22,000. Section 14 of the Employees'
Provident Funds Act specifically provides for penalties with reference to
contravention of the provisions of the Act. Section 14A speaks of offences by
companies. We will now extract that section :
"14A.
(1) If the person committing an offence under this Act, the Scheme or the
Family Pension Scheme or the Insurance Scheme is a company, every person who at
the time the offence 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 offence 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
any punishment, if he proves that the offence was committed without his
knowledge or that he exercised all due diligence to prevent the commission of
such offence.
(2)
Notwithstanding anything contained in sub-section (1), where an offence under
this Act, the Scheme or the Family Pension Scheme or the Insurance Scheme has
been committed by a company and it is proved that the offence has been
committed with the consent or connivance of, or is attributable to, any neglect
on the part of, any director or manager, secretary or other officer of the
company, such director, manager, secretary or other officer shall be deemed to
be guilty of that offence and shall be liable to be proceeded against and
punished accordingly".
The authority
to take action under the Provident Funds Act as seen from section 14 is a
Commissioner while the procedure so far as the Companies Act is concerned under
section 621 is that on a complaint in writing of the Registrar or of a
shareholder of a company or of an officer authorised by the Central Government
in this behalf, action can be taken. As already noted under sub-section (3) of
section 633, the court has to give notice to the Registrar of Companies or to
such other person, if any, as it thinks necessary. Therefore, giving of notice
is mandatory. That being so, if section 633 is interpreted as including
proceedings under Acts other than the Companies Act it will be open to the
court to give such relief under section 633 without giving notice to the
authority competent to prosecute in respect of liabilities under the other laws
or upon giving notice to others concerned and not the Registrar. Thus the
mandatory requirement of sub-section (3) of section 633 can easily be bypassed.
Then again under section 14A of the Provident Funds Act, officers who are
talked of under this section would be deemed to have committed the offence
because sub-section (1) states that every person who was responsible to the
company as well as the company shall be deemed to be guilty of the offence. If,
therefore, the relief under section 633 is extended, such officers or persons
who are otherwise liable for such offence would get the benefit of section 633
and escape the rigour of section 14A. The Explanation also makes it abundantly
clear that all companies covered by the Companies Act would be companies within
the meaning of the Explanation. On the contrary those companies falling under
the Explanation to section 14A would not be companies under the Companies Act.
To put it in other words, in the case of a company falling under the
Explanation to section 14A of the Provident Funds Act which does not come
within the purview of the Companies Act, the liability of the persons would be
governed only by section 14A(1) and (2) of the Provident Funds Act. They will
not be entitled to any relief under section 633. The benefit available under a
social welfare legislation, namely, the Employees' Provident Funds Act cannot
be defeated in this manner. We may also add that if the interpretation
suggested by the appellants is accepted, it would cover not only the existing
laws but all legislations to be enacted in future.
In the result, we find no merit in this appeal and it
is dismissed.
In view of the dismissal of Appeal No. 3012 of 1990,
the other appeals and the special leave petition where the same questions
arose, are also dismissed.
However, looking to the facts and circumstances of
the case, there will be no order as to costs.
[2002]
38 scl 95 (mad.)
High Court of Madras
v.
Board for Industrial & Financial Reconstruction
E.
Padmanabhan, J.
December
5, 2001
Section 633, read with section 628, of the
Companies Act, 1956 - Court - Power of, to grant relief - Respondent-BIFR found
from annual report that petitioners had violated some mandatory statutory
provisions of the Companies Act - In reply to show-cause notice petitioners
explained that no violation had been made - Petitioners thereafter filed
instant petition praying to court to relieve them from any proceeding that
might be instituted by respondent by way of criminal complaints, to prosecute
them in respect of alleged violations under section 628, as violation of any
provision of Companies Act was not made wilfully or dishonestly - Whether since
violations were violations of statutory provisions and some of them were
mandatory in nature, question of bona
fides or not being wilful or dishonest had no bearing at all - Held, yes -
Whether exercise of power under section 633 is discretionary on facts of case
and in light of imputations set out in inspection report, read with show-cause
notice, High Court could exercise its
discretion in favour of applicants - Held, yes - Whether this was a fit case
where court would be justified to relieve petitioner by exercising its
discretionary jurisdiction under section 633 - Held, no
Facts
The books of account and register of the
petitioner-company were made under section 209A and the inspection report was
submitted. According to report, certain violation of mandatory provisions of
the Companies Act and the rules had been pointed out and the returns were not
in accordance with the requirements and, therefore, there was a violation of
section 161(2)/(9). On receipt of the show-cause notice, an explanation was
offered by the petitioners contending that there was no violation of section
628. The company had also filed revised return incorporating the details and
particulars, besides remitting normal and additional fees for the same.
Thereafter, a show-cause notice was issued to the petitioners to show cause as
to why penal action should not be taken against them. After giving explanation,
the petitioners filed the instant petitions praying the High Court to relieve
them from any proceedings that might be instituted by the respondent-BIFR by
way of criminal complaints, to prosecute them in respect of alleged violations
under section 628, on such terms and conditions as the Court might deem fit.
Held
The power under section 633 is discretionary
and such power the court can be called upon to exercise only when it is
satisfied that the defaulting officer has acted honestly and reasonably and
having regard to all the circumstances of the case, he ought to be excused;
only then the court could relieve him. The court has to satisfy itself after a
serious and careful consideration of the whole question that the officer has
acted honestly and reasonably and having regard to the circumstances of the
case, he ought fairly to be excused.
The court has to examine such applications at
the appropriate stage. When it has to examine as to whether an offence has been
made out or not, based on the evidence adduced through examination of
witnesses, except when affidavit evidence is permissible, the very show-cause
notice already issued read with inspection report, with respect to which the
company and its directors were called upon to state its objectives, would show
that this is not a fit case where the court would be justified in entertaining
the application under section 633.
Though an application could be maintained even
at the stage of apprehension of any criminal proceedings, yet the court has to
come to the conclusion that there is prima facie material that offence has been
made out and a direction should be given.
Under section 633(2), the court has the power
to grant relief as a trial court, provided the conditions laid down under
section 633(1) are satisfied and the offence/s being,
(a) the lapse or offence alleged must be
one of the kinds mentioned in section 633(1).
(b) the applicant must be shown to have
acted honestly and reasonably,
(c) the court is in a position to conclude or render the
finding with regard to all the circumstances of the case that the officer ought
to be excused fairly.
Exercise of power under section 633(2) is
discretionary.
On the facts of the instant case and in the
light of the imputations set out in the inspection report, read with the
show-cause notice, the court was not inclined to exercise its discretion in
favour of the applicants. As the violations, as pointed out in the inspection
report, were violations of the statutory provisions and some of them were
mandatory in nature and in respect of such mandatory provisions, the question
of bona fides or not being wilful or dishonest might not have a bearing at all.
That apart, for the purpose of disposal of the petition and when the same being
taken as a finding, the court would be justified in proceeding on the basis
that the petitioners had not acted honestly or reasonably, having regard to the
facts and circumstances of the instant case.
Unless the Court came to the conclusion that
the petitioner had acted honestly or reasonably, the court would not be
justified in going to the rescue of the applicants. The only other alternative
open to the petitioners was to contest the proceedings before the Judicial
Magistrate before whom the complaint was instituted.
On a consideration of the show-cause notice
read with the inspection report, this was not a fit case where the court would
be justified to relieve the petitioners by exercising its discretionary
jurisdiction under section 633. It was clear that any observation or finding
recorded in the order was only for the limited purpose of this company petition
and the criminal court before whom the complaints might be made would decide
the complaints on the merits and on the evidence that might be let in without
reference to any observations or findings, if any, recorded by the court for
the purpose of the instant petition.
With the above observations, the company
petition was to be dismissed.
Cases referred to
Hindustan Steel Ltd. v. State of Orissa [1972]
83 ITR 26 (SC), Rabindra Chamaria v. Registrar of Companies AIR 1992 SC 398 and
Amara Pictures (P.) Ltd., In re [1970] 40 Comp. Cas. 130.
Arvind D. Datar, R. Senthil Kumar, C.R.
Muralidharan and P.V.
Rajiv Kumar for the Petitioner.
Judgment
E. Padmanabhan, J. - This company petition has been filed by two
of the directors of First Leasing Co. of India Ltd., under section 633(1) of
the Companies Act, 1956 (‘the Act’), read with rule 11(a)(23) of the Companies
(Court) Rules, 1959 praying this Court to relieve the petitioners herein from
any proceedings that may be instituted by the respondents by way of criminal
complaints, to prosecute the petitioners herein in respect of the alleged
violations under section 628 of the Act, in pursuance of the show-cause notice
of the first respondent herein in No. 6423/CI/209A/628/2001, dated 27-7-2001,
on such terms and conditions as this Court may deem fit.
2. The
petitioners’ case is that the first petitioner is the managing director of the
first leasing Co. of India Ltd. and the second petitioner was formerly the
company secretary of the said company between 4-10-1994 and 15-11-2001. The
books of account and registers of first leasing Co. of India, hereinafter
called ‘the company’, were made under section 209A of the Act and the
inspection report was submitted on 1-5-2000. According to the report, certain
violations of mandatory provisions of the Companies Act and the rules have been
pointed out and the returns were not in accordance with the requirements and,
therefore, there is a violation of section 161(2)(9) of the Act. The nature of
the violations has been pointed out in the said report.
3. On
receipt of the show-cause notice, an explanation was offered by the
petitioners, contending that there was no violation of section 628, invocation
of section 628 is misconceived and the entire action is not maintainable in the
absence of essential requirements of the said section. That apart, the above
company had filed a revised return incorporating the details and particulars, besides
remitting normal and additional fees for the same.
4. According
to the petitioners, though section 628 provides for penalty for false
statements, there could be penal action only if there is deliberate violation
and not for inadvertent mistake. If not, there is no scope for prosecution. In
the absence of minimum imputation of deliberate or wilful omission or any
wilful negligence or dishonest act on their part or any mala fide or want of
good faith, no prosecution could be maintained or continued. Having regard to
the facts of the case, it is pointed out by the applicants that they ought to
be excused from any prosecution that may be launched against them, since there
are inadvertent mistakes which will not attract prosecution. It is contended
that for such inadvertent mistakes or technical or venial breach of provision,
and the mere acts of inadvertence not being deliberate or dishonest or
misconceived, no prosecution could be launched or continued and, therefore, the
petitioners should be relieved by orders of this Court.
5. Heard
Mr. Arvind Dattar, the learned counsel, for Mr. R. Senthil Kumar. The learned
counsel addressed arguments elaborately, besides relying upon the decision of
the Apex Court in Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26. The
Apex Court held that in the absence of mala fides or deliberate defiance of law
or the fact that the petitioner was guilty of conduct contumacious or dishonest
or acted in conscious disregard of its obligation, no criminal action could be initiated.
6. The
material portion of the inspection report would show a number of
contraventions/non-compliance and irregularities such as :
(1) failure to mention transaction in respect of loans and
advances to the directors to the tune of Rs. 2,93,392 in violation of Part I,
Schedule VI, read with section 211 of the Act.
(2) Failure to maintain loan register. Without exercising the
powers, by passing the board resolution, as provided under section 292(1)(c),
intercorporate borrowings have been made and intercorporate deposits have been
received.
(3) Violation of section 292(1)(e), namely, advancing
innumerable number of loans without passing a resolution of the board on
30-11-1996, 30-11-1997, 30-11-1998, 30-11-1999.
(4) Violation of section 370 in that loans exceeded 30 per cent of
the aggregate of the paid up capital and free reserves and they are not
authorized by special resolution, besides no prior approval of the Central
Government has been secured and it is violation of section 370(1).
(5) Violation of Part II, Schedule VI read with section 211.
(6) Non-disclosure of authorized capital properly in the
balance-sheet as on 30-11-1997 to 30-11-1999.
(7) Sale of unquoted investments to the chairman of the company at
Rs. 20 per share and shares have been sold or transferred, overlooking the
lock-in period, besides the balance-sheet as on 30-11-1999, does not show true
and fair view as required, within the meaning of section 211.
(8) Investments in the capital of First India Asset Management Co.
Ltd. in violation of section 211.
(9) Violation of the provisions of section 217, read with the
Companies (Particulars of Employees) Rules, 1975.
(10) Appointment of Mrs. Farah Bakshy, daughter of Mr. Farouk Irani,
managing director, as assistant manager marketing on a gross salary of Rs.
6,000 (increased to Rs. 9,000) and sanction of consumer loan of Rs. 70,000 at
17.50 per cent per annum on 30-3-1996), in violation of section 292 of the Act.
(11) Loans and advances include assets due from managing director to
the tune of Rs. 8,15,850.
(12) Annual return made as on 4-5-1998 and 7-5-1999, by furnishing
incorrect information regarding indebtedness of the company.
(13) Violation of Part I, Schedule VI to the Act.
(14) Violation of section 125(4)(a) read with section 128 of the Act.
(15) Violation of section 113 for non-issue of debenture
certificate to Dhanalakshmi Bank Ltd.
(16) Satisfaction of charges in Form No. 17, in violation of section
138 of the Act.
(17) Donation to MAC Charities under the provisions of section
293(1)(e)/293A of the Act.
(18) Loans and advances to staff shares in violation of section 77 of
the Act and financial irregularity.
(19) Remuneration of managing director and other amenities provided,
in violation of sections 198 and 309, read with Schedule XIII to the Act.
(20) Non-compliance with the provisions of section 138 in regard to
satisfaction of the charges.
7. While
setting out those violations, the petitioners herein and six others were served
with the show-cause notice to the same, the company has sent an explanation,
running to several pages.
8. Thereafter,
a show-cause notice was issued to the two applicants herein, to show cause as
to why penal action should not be taken against both of them under section 628
of the Act and a portion of the show-cause notice reads thus :
“Whereas as per the provisions of section 628
of the Companies Act, 1956 (hereinafter referred to as ‘the Act’). ‘If in any
return, report, certificate, balance-sheet, prospectus, statement or other
document required by or for the purposes of any of the provisions of this Act,
any person makes a statement,
(a) which is false in any material particular,
knowing it to be false; or
(b) which omits any material fact, knowing it to be material; he
shall, save as otherwise expressly provided in this Act, be punishable with
imprisonment for a term which may extend to two years, and shall also be liable
to fine.’
Whereas it was observed from the records of
the company under section 209A of the Act that the annual returns for the years
1997, 1998 and 1999 signed by the managing director and the company secretary,
contain a statement under Part VII with regard to the company’s indebtedness,
which is false in material particulars, attracting the provisions of section 628
of the Act.”
9. To
the said show-cause notice, explanation has been submitted by the first
applicant on 7-9-2001. At this stage, the present company petition has been
filed under section 633(2).
10. Though
attractive contentions were advanced by the learned senior counsels, besides
pointing out that at any time the petitioners could come before this Court,
this Court is not persuaded to exercise its jurisdiction on the facts of the
case in favour of the applicants at this juncture.
11. Section
633 confers powers on the company court to grant relief in certain cases. Even
in terms of section 633, the court when it declines to grant the relief against
violation of any statutory duties, as in such cases, it could not be said that
the officer has acted honestly and reasonably.
12. The
power under section 633 is discretionary and such power the court can be called
upon to exercise only when it is satisfied that the defaulting officer has
acted honestly and reasonably and having regard to all the circumstances of the
case, he ought to be excused, only then the court could relieve him. This Court
has to satisfy itself after a serious and careful consideration of the whole
question that the officer has acted honestly and reasonably and having regard
to the circumstances of the case, he ought fairly to be excused.
13. This
Court has to examine such applications at the appropriate stage. When it has to
examine as to whether an offence has been made out or not, based on the
evidence adduced through examination of witnesses, except when affidavit
evidence is permissible, the very show-cause notice already issued read with
inspection report, with respect to which the company and its directors were
called upon to state its objectives, would show that this is not a fit case
where this court would be justified in entertaining the application under
section 633.
14. Though
an application could be maintained even at the stage of apprehension of any
criminal proceedings, yet this Court has to come to the conclusion that there
is prima facie material that offence has been made out and a direction should
be given.
15. Under
section 633(2), this Court has the power to grant relief as a trial court,
provided the conditions laid down under section 633(1) are satisfied and the
offence/s being,
(a) the lapse or offence alleged must be one
of the kinds mentioned in section 633(1).
(b) The applicant must be shown to have
acted honestly and reasonably.
(c) The court is in a position to conclude or render the finding
with regard to all the circumstances of the case, that the officer ought to be
excused fairly.
16. Exercise
of power under section 633(2) is discretionary. On the facts of the case and in
the light of the imputations set out in the inspection report, read with the
show-cause notice, this Court is not inclined to exercise its discretion in
favour of the applicants. As in my view, the violations, as pointed out in the
inspection report, are violations of the statutory provisions and some of them
are mandatory in nature and in respect of such mandatory provisions, the
question of bona fides or not being wilful or dishonest may not have a bearing
at all. That apart, for the purpose of disposal of this petition and when the
same being taken as a finding, this Court will be justified in proceeding on
the basis that the applicants have not acted honestly or reasonably, having
regard to the facts and circumstances of the case.
17. In
Rabindra Chamaria v. Registrar of Companies AIR 1992 SC 398, their Lordships of
the Apex Court had an occasion to consider the scope of section 633 and held
that sub-section (2) of section 633 is intended to restrict its operation only
to the proceedings arising out of the default, breach of trust, misfeasance or
breach of duty in respect of the duties prescribed under the provisions of the
Act. Unless this Court comes to the conclusion that the applicants have acted
honestly or reasonably, this Court will not be justified in going to the rescue
of the applicants. The only other alternative open to the applicants is to
contest the proceedings before the judicial magistrate before whom the
complaint is instituted.
18. The
material question for consideration is whether the applicants have acted
honestly or in good faith or whether the applicants have any justifiable reason
to escape from liability, in such cases, criminal intention is irrelevant as
has been held by this Court in Amara Pictures (P.) Ltd., In re [1970] 40 Comp.
Cas. 130.
19. On
a consideration of the show-cause notice read with the inspection report, this
is not a fit case where this Court would be justified to relieve the
petitioners by exercising its discretionary jurisdiction under section 633. It
is made clear that any observation or finding recorded in this order is only
for the limited purpose of this company petition and the criminal court before
whom the complaints may be made, against the petitioners herein, shall decide
the complaints on the merits and on the evidence that may be let in without
reference to any observations or findings, if any, recorded by this Court for
the purpose of this petition.
20. With the above observations, the company petition is dismissed.
[1998] 92 COMP. CAS. 809
(AP)
HIGH COURT OF ANDHRA PRADESH
v.
S. DASARATHARAMA REDDY J.
JANUARY 20, 1997
S. Ravi for
the petitioner.
P. Innayya
Reddy for the respondent.
S.
Dasaratharama Reddy J.—This
is a petition filed by the managing director and former directors of Mishra
Dhatu Nigam Limited (a Government of India undertaking) under section 633(2) of
the Companies Act, 1956 (for short, "the Act"), for relieving them
from liability, if any, on the ground that they have acted honestly and
reasonably in depositing the surplus funds of the company in SBI Capital
Markets Ltd., and in ANZ Grindlays Bank. In the petition they state that the
Registrar of Companies issued a show-cause notice to the company on May 3,
1995, under sections 49, 211, 292, 292(1)(d) and 292(3) of the Companies Act,
1956, alleging that the meeting of the board of directors held on July 20,
1989, authorised the managing director to deal with the surplus funds without
specifying the total amount up to which they can be invested and the nature of
investments, thus violating section 292(3). It is also alleged that they
contravened section 292(1)(d) in making investments in non-banking institutions
like SBI Capital Markets Ltd., amounting to Rs. 735 lakhs and Rs. 1,965 lakhs
in the years 1990-91 and 1991-92 respectively and Rs. 310.55 lakhs with ANZ
Grindlays Bank, a foreign bank, as against the authorisation of the board of
directors for deploying the funds in short term deposits in public sector
undertakings and financial institutions, and these being investments ought to
have been disclosed under the heading "investment" instead of
"inter-corporate loans and advances" in the balance-sheets, thus
violating section 211 of the Act. There is also an allegation that the alleged
investments which are in the nature of portfolio management scheme were not
kept in the name of the company and physical delivery of documents was not
taken in contravention of section 49(9). Yet another charge is that the
investment in portfolio management scheme was not entered in the prescribed
register violating section 49(7) and also that the company has violated section
292 in investing the surplus funds without the approval of the President of
India as required under articles 85(XII) of the articles.
The company
gave a reply on May 29, 1995, stating that funds were deposited as short-term
deposits for reasonable interest and they cannot be construed as investments
requiring the approval of the President of India, that the deposits were
authorised by resolution of the board of directors on July 20, 1989, that there
was no portfolio management scheme requiring disclosure in the balance-sheets
wherein they were shown under the head "Loans and advances", that the
balance-sheets were prepared following the normal accounting procedure and the
same were audited by statutory auditors and certified by the Comptroller and
Auditor-General under section section 619(2) of the Companies Act, 1956, and
that they never pointed out any objection regarding this method of exhibition.
The petitioners apprehend that the Registrar may launch prosecution under
various provisions of the Act and accordingly seek relief under section 633(2)
on the ground that they acted honestly, reasonably and in the interest of the
company and that no loss has been incurred by the company nor any personal gain
accrued to the petitioners as a result of these transactions.
Notice before
admission was issued and pending admission, stay of prosecution of the
petitioners was granted in C.A. No. 170 of 1995, dated September 7, 1995,
initially till September 22, 1995, and was later extended till further orders.
It may be noticed here that after filing of this petition, the Registrar of
Companies has launched prosecution against the company in S.T.C. Nos. 11 to 14
of 1995, for offences under sections 49(1)(a), 292, 292(1)(d) and 292(3) of the
Companies Act, 1956, and in view of the stay order, the directors were not
impleaded as accused in those cases.
The Registrar
of Companies filed counter-statement that section 292(3) does not distinguish
between short-term deposits and long-term deposits, that the deposits made are
in the nature of investments, and that the petitioners have not acted honestly
or reasonably in investing in SBI Capital Markets Ltd., and ANZ Grindlays Bank.
As these investments are in the nature of portfolio management scheme, approval
of the President of India is required. It is also stated that the Grindlays
Bank showed the amount of Rs. 310.55 lakhs as investment in its books.
Mr. S. Ravi,
learned counsel for the petitioners, contended that:
(1) The deployment of funds in SBI Capital
Markets Ltd., and Grindlays Bank is in the nature of short-term deposit and not
in the nature of portfolio management scheme and hence there is no violation of
the provisions of the Act;
(2) Even assuming that they are investments
in the nature of portfolio management scheme, the offences covered by S.T.C.
Nos. 11 to 14 of 1995, on the file of the Special Judge for Economic Offences,
Hyderabad, launched against the company by the Registrar of Companies, subsequent
to the filing of the company petition, are barred by limitation and hence the
petitioners are entitled to be relieved from the liability;
(3) Even as regards the failure to comply
with section 49(7) for not maintaining proper register and for not taking
physical delivery of documents, the Department cannot now prosecute as the
limitation is over;
(4) Even as regards the offence under
section 211 for non-disclosure of investments in balance-sheets, the
prosecution is barred by limitation;
(5) In any event, the petitioners have acted
honestly and reasonably and in the best interests of the company and hence are
entitled to be relieved of the liability;
Now taking
the second contention first, I have held in Criminal Petitions Nos. 5871 to
5874 of 1995, by separate order, just now pronounced, that the complaints are
barred by limitation and hence the petitioners are entitled to be relieved of
liability from the offences, viz., failure to comply with sections 49(1)(a),
292, 292(1)(d) and 292(3) of the Companies Act, 1956.
As regards
the third contention regarding the offence of failure to maintain proper
register or for not taking physical delivery of the documents, the punishment
is fine up to Rs. 5,000 under section 49(9) of the Act and for the reasons
given in the judgment in Criminal Petitions Nos. 5871 to 5874 of 1995, no
prosecution can be launched against the company for this offence due to expiry
of limitation, namely, six months.
However, regarding the offence
under section 211 which is punishable with imprisonment for a term which may
extend to six months or with fine up to Rs. 1,000 or with both, the limitation
will be one year. Mr. Ravi contends that the receipt of balance-sheets, namely,
October 14, 1991, and October 19, 1992, for the years 1990-91 and 1991-92,
respectively, has to be taken as the date of knowledge. But as already held by
me in Criminal Petitions Nos. 5871 to 5874 of 1995, mere
receipt of balance-sheets does not amount to knowledge of commission of the
offence and the date of knowledge has to be taken as September 19, 1994, when
the Department of Company Affairs would have received, in the normal course,
the reply dated September 16, 1994, sent by the company to the notice dated
August 19, 1994, issued by it prior to issue of prosecution notice. If this
date is taken, time to launch prosecution will be up to September 19, 1995. But
as the petitioners have obtained stay of prosecution on September 7, 1995, and
as the stay is subsisting as on date, that period has to be excluded under
section 470(1) of the Criminal Procedure Code, 1973. Further, the period of
notice of prosecution has to be excluded under section 470(3) of the Criminal
Procedure Code, 1973. The prosecution notice was issued on May 3, 1995, and
reply was given on May 29, 1995. Thus, it cannot be said that the limitation
for launching prosecution under section 211 against the petitioners is over as
on date. So, the contention of Mr. Ravi is accordingly rejected so far as the
offence under this section is concerned.
Now coming to
the first contention, that the deployment of funds is in the nature of
short-term deposit and not in the nature of investment, as rightly pointed out
by Mr. Ramesh, this cannot be decided in these proceedings but can be decided
only on a fullfledged enquiry. This contention is accordingly rejected.
The last plea
of Mr. Ravi, learned counsel for the petitioners, is that in any event, the
petitioners have acted honestly and in good faith which is seen from the fact
that the company has not incurred any loss and the petitioners have not secured
any personal gain. He also submits that accounts have been audited by the
statutory auditors and certified by the Comptroller and Auditor-General. Mr.
Ramesh on the other hand submits that there is no material to hold that the
petitioners have acted reasonably and honestly.
It is
significant to note that the averments in the petition that the company is not
put to loss as a result of the transactions in question and that on the other
hand, the company has gained substantial interest on its surplus funds, and
that the accounts are certified by the Comptroller and Auditor-General are not
denied in the counter. The question whether the deployment of funds is in the
nature of short-term deposit or investment in the nature of portfolio
management scheme is debatable. There is no reason why the averments in the
petition that the petitioners have acted honestly and reasonably and in good
faith in treating the deployment of funds as short-term deposits should not be
accepted, more so, when the company is not put to any loss or the petitioners
have not gained any personal advantage as a result of these transactions. In
view of these circumstances, I hold that the petitioners have acted honestly,
reasonably and in good faith. Accordingly, they are entitled to be relieved of
the offence under section 211 of the Act. The decision of Mr. D.H. Nasir, J. in
C.P. No. 25 of 1993, dated December 6, 1995 (Progressive Aluminium Ltd. v.
Registrar of Companies [1997] 89 Comp Cas 147 (AP)) relied on by Mr. Ravi is
not directly applicable. It was a case of misstatement in prospectus under
section 63 of the Companies Act, 1956, and on the facts of that case it was
held that the directors are entitled to be relieved of their liability.
In the
result, the petitioners are entitled to be relieved of their liability of being
charged for the offences under sections 49(1)(a), 292, 292(1)(d), 292(3), 49(9)
and 211 of the Companies Act, 1956, and the company petition is accordingly
allowed. No costs.
[1989]
65 Comp. Cas. 163 (Guj.)
High Court OF Gujarat
v.
Jaferbhai Mohmedbhai Chhatpar
S. Majmudar J.
Company Application No. 189 of 1985
September 2, 1987
S.N. Soparkar for the applicants.
B.R. Parikh, and Roshan Desai for the respondent.
S.B. Majmudar J.—The present three applicants
have taken out this judge's summons praying for an order that the hearing of
Case No. 374 of 1982 filed in the court of the learned Additional Chief
Metropolitan Magistrate 37th Court, Esplanade, Bombay, be stayed. The
application is filed against opponent No. 1 who is the original complainant in
the said criminal case and also against opponent No. 2 which is the court
committee appointed by this court in the case of Divya Vasundhara Financiers
Private Limited, Ahmedabad.
In order to appreciate the grievance of the
applicants, it is necessary to note a few introductory facts leading to the
present application. Opponent No. 2, Divya Vasundhara Financiers Pvt. Ltd.,
which is a private limited company, was floated with fixed capital of Rs. 1
lakh divided into 1,000 ordinary shares of Rs. 100 each. Its object was to
promote a scheme of chit fund and savings, amongst others. It appears that the
company had accepted deposits from the public under different schemes. The
company gave advances against industrial and residential properties. After some
time, the company ran into difficulties somewhere in April, 1977. At that time,
the public deposits of the company were more than Rs. 6,50,00,000 as stated in
Company Petition No. 18 of 1978 which was moved in this court for sanctioning a
scheme of compromise or arrangement. As the company was in financial difficulties,
the aforesaid scheme of arrangement and compromise was moved under section 391
of the Companies Act. It was registered as Company Petition No. 18 of 1978. In
that company petition, after hearing learned counsel for the concerned
creditors, the scheme was permitted to be put to vote by different classes of
creditors and ultimately, this court (coram: B.K. Mehta J.) sanctioned the said
scheme of compromise and arrangement by its order dated December 28, 1978,
January 12/16, 1979. In the said company petition, Company Application No. 1 79
of 1977 was moved by the said company and its chairman and managing director,
Shri Keshavlal Dhori-bhai Patel, requesting this court to stay the commencement
or continuation of any suit or proceedings against the company and/or its
directors in connection with the affairs of the company on such terms as the
court ultimately thought it fit to impose. B. K. Mehta J. (as he then was), by
his order dated July 28, 1978, stayed the commencement or continuation of suits
or proceedings against the company and/or its directors in connection with the
affairs of the company which were listed in the said application. Various
criminal cases pending in the Chief Metropolitan Magistrate's Court at
Ahmedabad in the Court of the learned Judicial Magistrate, First Class, Surat,
in the Court of the learned Judicial Magistrate,
First Class, Nadiad, and Criminal Case No. 126/W/94 in the court of the
Metropolitan Magistrate Esplanade, Bombay, were stayed, pending finalisation of
the scheme proceedings. Several suits filed by several creditors in different
courts were also stayed. Under the sanctioned scheme, a court committee was
appointed to be the managing committee consisting of nine members whose names
are mentioned in the scheme to do all that is necessary for the working of the
scheme, to supervise the working of the company and to do all acts, deeds and
things necessary or incidental for the working of the company. As chairman of
the company, Shri N.M. Miabhoy, a retired Chief Justice of this court, was
appointed. Eight other members were also appointed in the said committee. Shri
G.R. Mankodi was appointed as the chief executive officer to look after the
day-to-day management of the affairs of the company on behalf of the committee.
The said court committee is functioning from the date of sanction of the scheme
till today. The court committee has been able to realise the money value of
some of the assets of the company and has been able to distribute some
dividends to the creditors of the company.
It is in the
background of the aforesaid facts that the present company application has been
moved by the applicants who are the directors of Divya Vasundhara Financiers P.
Ltd. to stay further proceedings in Criminal Case No. 374 of 1982 as filed by
opponent No. 1 herein in the Court of the Additional Chief Metropolitan
Magistrate, 37th Court, Esplanade, Bombay. It is submitted that the said
complaint was filed by the first opponent on August 2, 1977, at L.N. Marg
Police Station and after making investigation, a charge-sheet was filed against
the applicants in the Metropolitan Magistrate's court at Bombay. The
charge-sheet is filed under section 420, Indian Penal Code, on the ground that
the first opponent was cheated by the applicant-directors of the company and
that he was duped to part with his money. It appears that in the said case, the
learned Magistrate was pleased to pass an order on February 23, 1984, whereby
he declined to frame any charge against the applicants and they were
discharged. The first opponent, therefore, challenged the said order by filing
a revision application, being Revision Application No. 136 of 1984, in the
Court of Session at Bombay and the said court was pleased to set aside the
order of discharge and remand the matter back to the trial court for proceeding
on merit. After the case was sq remanded, the present applicants made an
application on September 6, 1985, before the trial court praying for stay of
the proceedings on the ground that this court had, on July 28, 1978, ordered
stay of proceedings of any suit or proceedings against the company and/or its
directors in connection with the affairs of the company till further orders.
However, the applicants were orally informed by the trial court that no stay of
further proceedings would be granted and that if they wanted to stay the
hearing of the case, they had to obtain a specific order from this court. In
these circumstances, the present application has been moved.
Mr. Soparkar, for the applicants, contended that the
very basis of the scheme of compromise and arrangement is that all proceedings
against the company and its directors pending in different courts, whether
civil or criminal, arising out of the conducting of the affairs of the company
should be stayed so that the court committee can effectively function with the
co-operation of the directors of the company and can realise the assets of the
company in the best possible manner. It was with that end in view that B.K.
Mehta J. passed an order in Company Application No. 10 of 1978 in Company
Petition No. 179 of 1977 on July 28, 1978, staying various suits and criminal
proceedings as mentioned earlier. It is, therefore, in the fitness of things
that the present criminal proceedings also should be stayed. Mr. Soparkar submitted
that when the earlier Application No. 10 of 1978 in Company Petition No. 179 of
1977 was moved for stay of civil and criminal proceedings, the present criminal
case could not be included as the applicant-directors never knew that such a
case was pending against them at Bombay. If they had known it, they would have
certainly included the number of that case also, in Company Application No. 10
of 1978. It was further submitted that if stay of these proceedings is not
granted, the very purpose of the scheme of compromise and arrangement would be
frustrated and the directors will have to suffer unnecessarily and there would
be multiplicity of proceedings. The directors would never have agreed to
surrender all the assets of the company for administration of the court
committee as per the scheme of arrangement and compromise if they were not
assured about stay of all pending civil and criminal proceedings against them,
as directors of the company. It was, therefore, submitted that it is just and
proper to stay the proceedings in the criminal case as prayed for in the
present application.
In this case, earlier, B.K. Mehta J., by his order
dated October 14, 1985, issued rule and granted ad interim directions in terms
of para (A) of the summons. All future proceedings in the criminal case were
stayed pending the hearing of the application. Opponent No. 1, when served with
the rule, appeared through his learned advocate, Mr. B.R. Parikh. He has filed
his affidavit-in-reply. It has been submitted that the criminal complaint has
been filed against the applicant-directors of Divya Vasundhara Financiers P.
Ltd. for an offence under section 420, Indian Penal Code, and a charge is
framed against the applicants as per the remand order of the learned Sessions
Judge at Bombay. The earlier order of the High Court staying various
proceedings does not apply to the present case as no such stay was prayed for
before B.K. Mehta J. in Company Application No. 10 of 1978. He further stated
that the provisions of section 391(6) of the Companies Act are applicable to
suits or other legal proceedings by or against the company and criminal
proceedings are kept outside the purview of the section. It is contended that
if such proceedings are stayed, it would cause irreparable damage to the complainant
as evidence will be lost in the meantime and a possibility may arise when
proceedings may abate on account of possible death in future of the concerned
accused or even the complainant may not be available to give evidence. It was,
therefore, submitted that this application should be rejected and the
applicants must be permitted to face the criminal proceedings filed against
them since 1978 in the competent court.
I have heard Mr. Soparkar for the applicants as well
as Mr. B.R. Parikh for opponent No. 1. Mr. R.M. Desai, for the court committee,
submitted to the order of the court. Mr. Soparkar submitted that if these
criminal proceedings are not stayed, the very spirit underlying the scheme will
be frustrated and that the directors would never have agreed to the scheme if
they were not assured that pending suits and criminal proceedings against them
would be stayed. He further submitted that on the principle of the committee, I
should pass a similar order which was passed by B.K. Mehta J. in Company
Application No. 10 of 1978. Mr. Parikh, for opponent No. 1, on the other hand,
submitted, placing reliance on a judgment of the Bombay High Court in the case
of Uma Investments Pvt. Ltd., In re [1977] 47 Comp Cas 242, that as per section
391(6), proceedings which can be stayed during the currency of an application
under section 391 would only be proceedings of civil nature and that the said
provision would not include criminal proceedings and that such criminal
proceedings against the directors of the company can be commenced or continued
notwithstanding the fact that a scheme for compromise or arrangement has been
initiated under section 391. On merits, it was contended by him that if these
criminal proceedings are stayed indefinitely till the entire scheme is worked
out, there is every possibility of the evidence being lost and the proceedings
getting abated. He contended that the original accused may not be alive or even
the complainant may not be available to give evidence as he might also die
during the pendency of the proceedings.
In the light of the aforesaid rival contentions, the
following points arise for my consideration :
(i) Whether
the criminal proceedings can be stayed in exercise of powers under section
391(6) of the Act;
(ii) If yes, whether this is a fit case for
staying criminal proceedings.
So far as the first point is concerned, the relevant provisions of section 391 will have to be noted at the outset. They provide as under:
"391(1) Where a compromise or arrangement is proposed:—
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them;
the
court may, on the 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 of the
liquidator, order a meeting of the creditors or class of creditors, or of the
members or class of members, as the case may be, to be called, held and
conducted in such manner as the court directs.
(2) If a
majority in number representing three-fourths in value of the creditors, or
class of creditors, or members, or class of members, as the case may be,
present and voting either in person or, where proxies are allowed under the
rules made under section 643, by proxy, at the meeting, agree to any compromise
or arrangement, the compromise or arrangement shall, if sanctioned by the
court, be binding on all the creditors, all the creditors of the class, all the
members, or all the members of the class, as the case may be, and also on the company,
or, in the case of a company which is being wound up, on the liquidator and
contributories of the company:
Provided that no order sanctioning any compromise or
arrangement shall be made by the court unless the court is satisfied that the
company or any other person by whom an application has been made under
subsection (1) has disclosed to the court, by affidavit or otherwise, all
material facts relating to the company, such as the latest financial position
of the company, the latest auditor's report on the accounts of the company, the
pendency of any investigation proceedings in relation to the company under
sections 235 to 251, and the like.
(3) An order made by the court under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar.
(4) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a company not having a memorandum, to every copy so issued of the instrument constituting or defining the constitution of the company.
(5) If default is made in complying with sub-section (4), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to ten rupees for each copy in respect of which default is made.
(6) The court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the court thinks fit, until the application is finally disposed of.
(7) An appeal shall lie from any order made by a court exercising original jurisdiction under this section to the court empowered to hear appeals from the decisions of that court, or if more than one court is so empowered, to the court of inferior jurisdiction.
The provisions of sub-sections (3) to (6) shall apply
in relation to the appellate order and the appeal as they apply in relation to
the original order and the application."
Now, as the wording of sub-section (6) of section
391, it appears clear that the phrase "proceeding" as employed by
sub-section (6) is of wide import. It dogs not include only civil proceedings
as submitted by learned advocate for opponent No. 1. The word
"proceeding" has not been defined by the Companies Act. Therefore, we
have to refer to the general meaning of the term "proceeding" as
gathered from the dictionary and as understood in common parlance. In this
connection, I may refer to a decision of the learned single judge of the Punjab
and Haryana High Court in the case of Workmen of Mjs. Bali Singh v. Management
of M/s. Bali Singh, AIR 1969 P&H 147. The question before the learned
single judge of that court in that case was whether the provisions of section
93 of the Punjab Reorganisation Act, 1966, covered the proceedings pending
before the Labour Court or the Industrial Tribunal under the Industrial
Disputes Act. Section 93 of the said Act provided that "every proceeding
pending immediately before the appointed day before a court (other than a High
Court), Tribunal, authority or officer in any area which on that day falls
within a State or Union Territory shall, if it is a proceeding relating
exclusively to the territories which as from that day are the territories of
another State or Union Territory, stand transferred to the corresponding court,
Tribunal, authority or officer in that other State or Union Territory, as the
case may be." It was contended before the High Court that proceedings
before a Labour Court or an Industrial Tribunal were not to be covered by the
said provision. Repelling that contention, Tek Chand J. observed as under (page
149):
"Even if an inclusive definition was not given
of the word 'proceeding' in section 93, in its general acceptation also, it is
a term of wide amplitude ; and means a prescribed course of action for
enforcing or protecting a legal right and further embracing the requisite steps
to be taken whether procedural or substantive. Proceedings also means forms in
which relief is sought before courts of law or before other bodies or
authorities determining rights and liabilities and in which actions are brought
and defended and the manner of conducting them and the mode of deciding
them."
I respectfully concur with the aforesaid observation
of Tek Chand J. It, therefore, becomes obvious that on the phraseology of
section 391(6) it is not possible to hold, as contended by the learned advocate
for opponent No. 1, that the word "proceeding" would include only civil
proceedings and not criminal proceedings. Further light on this question is
thrown by other different provisions of the Companies Act itself. Section 446
is one of them. It lays down the procedure to be adopted in connection with
suit and proceedings commenced or pending against the company in any court when
winding-up order has been made or official liquidator has been appointed as
provisional liquidator by the company court. Sub-section (3) of section 446
provides that :
"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."
It has now been well settled by a catena of decisions
that the term "suit or other proceeding" as employed in various other
sub-sections of section 446 would cover all types of proceedings against the
company including even criminal proceedings. If any authority were needed to
highlight this proposition, it is supplied by a decision of the Delhi High
Court in the case of Official Liquidator v. R.C. Abrol [1977] 47 Comp Cas 537.
D.K. Kapur J., in that case, held that the High Court had power under section 446(3)
to transfer a pending complaint before the Magistrate for trial to itself.
Having referred to sub-section (3) of section 446, the following observations
were made (at page 542):
"This shows that once a
proceeding by or against a company has become a pending proceeding in any
court, it can be transferred to the court which is winding up a company.
Forinstance, if the present complaint is filed before a Magistrate who takes
cognizance of it, then the case would become a pending case before a Magistrate
and could be transferred to this court under section 446(3), if the court
thought it fit to transfer the same."
Another section which can be usefully referred to in
this connection is section 633 of the Act. It deals with the power of the court
to give relief in certain cases. Section 633(1) and the proviso thereof read as
under :
"633(1). If in any proceeding for negligence,
default, breach of duty, misfeasance or breach of trust against an officer of a
company, it appears to the court hearing the case that he is or may be liable
in respect of the negligence, default, breach of duty, misfeasance or breach of
trust, but that he has acted honestly and reasonably, and that having regard to
all the circumstances of the case, including those connected with his appointment,
he ought fairly to be excused, the court may relieve him, either wholly or
partly, from his liability on such terms as it may think fit:
Provided that in a criminal
proceeding under this sub-section, the court shall have no power to grant
relief from any civil liability which may attach to an officer in respect of
such negligence, default, breach of duty, misfeasance or breach of trust."
It is obvious that under section 633(1), the word
"proceeding" does not indicate that it is confined only to civil
proceedings or that it excludes criminal proceedings. In other words, the word
"proceeding" is used in a comprehensive sense. The proviso makes it
clear that it would include even criminal proceedings. It is, therefore,
obvious that the Legislature, while enacting the Companies Act, referred to
"proceeding" in various sections but did not thereby confine them to
only one type of proceedings, and on the contrary, the proviso to sub-section
(1) of section 633 clearly indicates the legislative intention that the word
"proceeding" would include criminal proceeding. It is, therefore,
impossible to agree with the contention of the learned advocate for opponent
No. 1 that the word "proceeding" employed in section 391(6) would
include only a civil proceeding and not a criminal proceeding. However, the
learned advocate for opponent No. 1 was very sanguine in his contention and in
support of the same, he placed strong reliance on the decision of the learned
single judge of the Bombay High Court in the case of Uma Investments P. Ltd.
[1977J 47 Comp Cas 242. It is true that the learned single judge, Agrawal J.,
in that case took the view that when a scheme of compromise and arrangement is
moved under section 391 before the company court, sub-section (6) of section 391
cannot be utilised for staying criminal proceedings against the company for
which the scheme is proposed and that section 391(6) would include only civil
proceedings. The reasoning which appealed to the learned judge on this count is
that if the intention of the Legislature had been to stay the commencement or
continuation of criminal proceedings, it would have specifically said so. It is
difficult to agree with this reasoning of the learned single judge for the
simple reason that the word "proceeding", as shown above, is a term
of wide import and it would include in its sweep even criminal proceedings as
seen from the settings of various provisions of the Companies Act and even from
the point of view of the general meaning of "proceeding" as understood
in common parlance.
The second reason given by the learned single judge
of the Bombay High Court is that there were three classes of creditors, namely,
(i) creditors who were the subscribers of the terminated chit group; (ii)
creditors who are the subscribers of the existing group; and (iii) other
creditors of the company. In the case before the Bombay High Court, a proposal
was put forward by the company for a compromise or an arrangement. Nothing had
been pointed out to the learned judge that the company's proposal referred to
or covered any criminal proceedings against the company and its officers. The
provisions of sub-sections (1) and (2) of section 391 lay down that if any
proposal is put forth by a company or a creditor or class of creditors or a
member or class of members, the same was required to be considered under the
directions of the court by calling, holding and conducting a meeting or
meetings, and if approved by a majority in number representing three-fourths in
value of the creditors, or class of creditors or members or class of members,
and they agreed to any compromise or arrangement, the compromise or arrangement
shall, if sanctioned by the court, be binding on all concerned. The compromises
or arrangements are about civil liabilities where a creditor will accept a
lesser payment or receive less on distribution or grant time or waive interest
and work out other kindred things. In the opinion of the learned single judge
of the Bombay High Court, it was impossible to take the view that section 391
was meant for freezing criminal proceedings which may be instituted either by a
creditor or a member of a company or by the State either against the company or
its officers. Now, it must be kept in view that the aforesaid reasoning of the
learned single judge, proceeded in the light of the nature of the scheme of
compromise and arrangement suggested by the company and its management. But
even that apart, with respect, it is difficult to appreciate how, during the
consideration of such scheme by the court, criminal proceedings must
necessarily be permitted to be continued against the company and its directors
for their acts as such as taken out by individual creditors as complaints, when
under the proposed scheme, there is impliedly to be a ceasefire on all fronts
so that the court can examine the scheme and grant relief to the concerned
creditors in a comprehensive manner. It goes without saying that if individual
directors are accused of offences committed in their capacity as directors or
accused of offences committed in their individual capacity, the matter would
stand on a different footing. However, if the directors are sought to be
criminally proceeded against for their acts as directors pending consideration
of the scheme of arrangement between the creditors and the directors and if the
creditors have taken out criminal proceedings, they can be stayed by the court
in suitable cases so that the proposed scheme under section 391 can be
effectively considered and implemented. It is, therefore, not possible to agree
with the view of the learned single judge of the Bombay High Court that section
391 is not meant for freezing criminal proceedings which may be instituted
either by a creditor or by a member of the company or by the State either
against the company or its officers. As a general proposition, with respect,
such a conclusion does not flow from the express language of section 391(6).
The third reason which appealed to the learned judge
of the Bombay High Court was that if the officers of the company were to be
held responsible for contravention and infringement of the Income-tax Act or
the Foreign Exchange Regulation Act, can a company, by putting a proposal
before the court, under section 391, seek the protection of the court under
sub-section (6) of section 391 and stay the pending prosecutions or prevent the
authorities under the Income-tax Act or the Enforcement Directorate from
launching prosecution? Now, so far as this difficulty envisaged by the learned
single judge is concerned, it is obvious that in any case, the court may, in
its view, find that there is no case for staying these criminal proceedings. On
the other hand, the court may find that if these proceedings are allowed to go
on, they may jeopardise the smooth working of the scheme. In such an
eventuality, it cannot be said that the court will have no power at all under
the very wide wording of sub-section (6) of section 391 to stay such
proceedings. It is easy to visualise that if criminal proceedings are initiated
against the directors for their individual acts which may make them liable for
criminal actions under the concerned statutes, such proceedings may stand on a
different footing and such proceedings may not be stayed by the court in
exercise of its discretion under section 391(6). But that does not mean that
the court is having no power whatsoever under section 391(6) to stay criminal
proceedings against the directors of the company in appropriate cases. With
respect, the learned single judge of the Bombay High Court practically equated
the question of existence of such power with the question of propriety
underlying the exercise of such powers and has assumed that if, in a given
case, there is no propriety underlying the demand for stay of criminal
proceedings, the power to stay itself would stand affected. It is, therefore,
not possible to agree with the view which has been taken by Aggrawal J. in the
aforesaid Bombay case. On the scheme of the Companies Act and in the light of
the wide wording of sub-section (6) of section 391, it has to be held that in
proper cases, the company court has jurisdiction to stay even criminal
proceedings pending against the directors and the company when the scheme of
compromise and arrangement is moved before the court.
One other aspect of the matter is required to be kept
in view. When a scheme of compromise and arrangement is moved under section
391, there may be a number of civil and criminal proceedings pending against
the directors and the company as taken out by various creditors in different courts.
The court may find that if these proceedings are permitted to go, pending
consideration of the scheme by the court, a situation may arise wherein
individual creditors as complainants may be able to pressurise the directors of
the company who may be accused in the cases to succumb to their demands and
that would not only jeopardise consideration and working of the scheme as a
whole but may even in a given case, amount to undue preference of creditors who
might have filed criminal complaints and to whose pressure the directors may
succumb. Consequently, even from this aspect of the matter, it would be just
and proper to interpret the word "proceeding" as employed by section
391(6) in the widest possible manner so that the scheme of compromise and arrangement
can be effectively examined and can be properly executed. Under section 392 of
the Act, the High Court has power to enforce the compromise and arrangement
from the beginning to the end. The court, at the time of making such order or
at any time thereafter, may give such directions in regard to any matter or
make such modifications in the compromise or arrangement as it may consider
necessary for the proper working of the compromise or arrangement. Armed with
such powers, the court can certainly stay, in a proper case, pending criminal
proceedings against the company or its directors with a view to seeing that the
proposed scheme of compromise and arrangement which may be ultimately
sanctioned, is properly worked out. There is ample power under section
392(1)(b) itself which enables the High Court to give proper directions in
regard to any matter which may also include staying criminal proceedings which
might have been filed against the company and the directors even after
sanctioning of the scheme and before the scheme has been finally worked out. It
has also to be kept in view that the High Court, as a company court, has
inherent power to pass appropriate orders in the interests of justice and the
requirements of the case. Rule 10 of the Companies (Court) Rules clearly brings
out this position that power can be exercised in proper cases, even apart from
sub-section (6) of section 391. Consequently, the first contention canvassed by
the learned advocate for opponent No. 1 has to be rejected. The first point is
answered in the affirmative.
So far as the second point is concerned, it relates
to the merits of the case. It is not possible to agree with Mr. Soparkar for
the applicant that the earlier order passed by B.K. Mehta J. in Company
Application No. 10 of 1978 envisages that all future criminal cases or cases
not covered by the order should, of necessity, be stayed. No such general
direction is spelt out from the order of B.K. Mehta J. Therefore, it is not
possible to agree with Mr. Soparkar for the applicant when he contends that in
the light of the above order, the present case should also be stayed. It is
also not possible to agree with his contention that in view of clauses (2) and
(5) of the sanctioned scheme, these proceedings will have to be, of necessity,
stayed. When we turn to these clauses, it is seen that all that is provided is
that the basis of this scheme is to ensure payment to all the creditors within
a reasonable period, to complete and/or dispose of the outstanding incomplete
projects and realise the dues and to sell the properties and liquidate the
investments and to disburse the amounts recovered from outright sale of certain
properties. So far as clause 6 is concerned, it deals with the powers of the
committee and lays down the procedure to be followed by the court committee for
realising all assets of the company which may be made available for
distributing amongst the creditors. This clause obviously has nothing to do
with the pending criminal cases, or future criminal cases which may be filed by
the creditor-complainants against the concerned directors of the company. It
has to be kept in view that the proposed scheme consisting of various clauses
was put to vote before the board of directors and it has been approved by an
absolute majority but there was no clause in the scheme which suggested that
all pending criminal and civil cases against the company and its directors as
filed by various creditors shall remain stayed till finalisation of the scheme.
As there was no such clause in the scheme, the body of creditors had no
occasion to consider the same and to approve the same by majority. Therefore,
there would remain no occasion for learned advocate for the applicant to submit
that even the present opponent No. 1 would be bound by the decision of the
majority of the creditors who have voted for the scheme. However, the
submission of Mr. Soparkar, that from the point of view of propriety and
convenience even this criminal case should be stayed, requires closer security.
The order passed by B.K. Mehta J. itself shows that he was pleased to stay
various civil proceedings pending between the creditors of the company on the
one hand and the company and its directors on the other pending the working out
of the present scheme by this court and even criminal cases filed by various
creditors against the company and the directors in different courts were stayed
including one criminal case in the Court of the Metropolitan Magistrate,
Bombay. Thus, from the point of view of propriety, it is just and proper for me
to fall in line with the earlier order passed by B.K. Mehta J. in this very
scheme proceeding.
Now remains the question as to whether the
proceedings should be permitted to be stayed wholly or whether limited stay
should be granted. Mr. Parikh, for opponent No. 1, submitted that stay should
be limited; while the learned advocate for the applicant submitted that the
stay should be made absolute and all further proceedings in the criminal case
should be stayed. So far as this question is concerned, in my view, interests
of justice demands that stay should be granted in a modified form. It is not
easy to brush aside the submission of learned advocate for opponent No. 1 that
if these criminal proceedings are indefinitely stayed, a possibility may arise
that evidence may be lost and the proceedings may abate on account of death of
either of the accused or even the complainant. It is easy to visualise that
this scheme was sanctioned years back in 1978 and even after 9 years, the
scheme is not fully worked out and it is anybody's guess as to when the scheme
will be completely worked out. It may take years before that eventuality
happens. It is not proper to hold up even recording of evidence in the
complaint for all these years. I, therefore, deem it fit to grant a partial
stay of the criminal complaint filed by opponent No. 1 in the Bombay Court as
under:
Earlier stay granted shall stand vacated. Instead, it
is clarified and directed that the learned Additional Chief Metropolitan
Magistrate, 37th Court, Esplanade, Bombay, may proceed to hear the complaint
and record evidence of the prosecution and also evidence, if any, offered by
the defence and it is thereafter that the proceedings in the complaint may
remain stayed for sufficient time awaiting further orders from this court. In
the first instance, the present stay in a modified form shall operate for 2
years further, i.e., up to September 30, 1989. If, by that time, the scheme
proceedings are not finalised by this court, it will be open to the applicants
to move this court for extension of stay for a further suitable period. Such
application, when moved, will be decided on merits after hearing the concerned
parties.
Company Application No. 189 of 1985 shall stand
granted to the aforesaid limited extent and prayer (A) in the judge's summons
will also stand granted to this limited extent. There will be no order as to
costs in this application. At the request of Mr. Soparkar, for the applicants, the operation of this order is stayed
for four weeks from today to enable him
to file an appeal against this order.
[1967
37 COMP. CAS. 720 (CAL)
HIGH COURT OF CALCUTTA
P
B MUKHARJI, J.
COMPANY
PETITION NO. 254 OF 1966
MARCH
21, 1967
JUDGMENT
The important
question for determination on this application is, how far the court can call,
hold, conduct or control annual general meetings of the companies, beyond the
time appointed by the Companies Act. I have come to the conclusion that the
courts have no such power under the present law in India.
This is an
application under section 633(2) of the Companies Act, 1956, for an order that
upon the undertaking of the petitioners to hold the annual general meetings of
the Coal Marketing Company of India Private Limited which ought to have been
held on the 12th February, 1961, 12th February, 1962, 12th February, 1963, 12th
February, 1964, 12th February, 1965 and the 31st January, 1966, within six
months from the date of the order the petitioners be relieved wholly from their
liabilities for not holding such annual general meetings. The present
application also seeks to relieve the petitioners for not filing balance-sheets
and profit and loss accounts for the years ending on the 30th June, 1961, 30th
June, 1962, 30th June, 1963, 30th June, 1964 and 30th June, 1965. The
application in presented by Charu Chandra Chatterjee, Balchand Mundra and
Lahoriram Parasar, who described themselves as directors of the Coal Marketing
Company of India Private Limited.
This is an
extraordinary application. To come forward with an application to hold six
annual meetings of 1960, 1961, 1962, 1963, 1964 and 1965, not held at all so
far and to hold them all in 1967 is to make a farce of company law and company
management. How can there be annual general meetings any more of those years?
This is really an application to convert statutory annual general meetings
which must be held annually under the Companies Act into quinquennial meetings,
unknown under the Companies Act. The matter has a history which must be set out
first before proceeding to discuss the law.
The company
was incorporated on or about the 29th July, 1951. From 1963 attempts like the
present have been going on. On the 23rd December, 1963, there was an order of
B. C. Mitra J. relieving the then directors of the company from liability for
not holding the annual general meetings of 1961 and 1962 and for not filing
balance-sheets and profit and loss accounts for 1961, 1962 and 1963 on the
directors' undertaking to do the said acts within six months. The undertaking
was violated by the directors. Although the undertaking expired on the 23rd
June, 1963, the directors did not hold the annual general meetings in terms of
their undertaking to the court. A second attempt was again made and these very
directors obtained another similar order from B. C. Mitra J. for the second
time on the 20th July, 1964, relieving them again from liability for not
holding annual general meetings of 1961, 1962 and 1963 and for not filing
annual returns of 1961, 1962, 1963, and 1964 and balance-sheets and profit and
loss account of 1961, 1962, 1963 and 1964 again upon these directors
undertaking to do the said acts within six months. The directors for the second
time violated this undertaking. This undertaking expired on or about the 20th
January, 1965. No step was taken within that time to hold the annual general
meetings or to file annual returns or the balance-sheets or the profit and loss
accounts. Again these directors for the third time came to this court and
obtained a similar order from A. K.Mukherjee J., relieving the directors from
liability for not holding these annual general meetings, for not filing these
balance- sheets and for not filing the annual returns on the directors, again
undertaking to do the said act within six months. It is extraordinary how the
petitioners describing themselves as the directors could come repeatedly before
this court and get repeatedly such orders from this court in spite of their
repeated violations of solemn undertakings to the court. These orders are not
only irregular, but illegal and beyond the powers and jurisdiction of this
court. The result has been really deplorable.
Now this is
the fourth attempt before me to ask for a similar order. I protest against the
use made of this court in this manner. I shall state briefly the reasons for my
protest and for refusing this application.
In the first
place it is put forward as a ground that because the company's auditors, George
Read and Company, could not complete their job and that their senior partner
died, therefore the meetings could not be held, the annual returns,
balance-sheets, and profit and loss account could not be filed. This ground is
attempted to be supported by a letter from George Read and Company, dated 12th
October, 1965. But then that can be no ground for not holding annual general
meetings or filing balance-sheets or profit and loss accounts or annual returns
in 1961, 1962, 1963 and 1964, long before his death. The death of the senior
partner of George Read and Company in 1965 could not obviously be a reason for
such non-observance of the mandates of the statute; nor could it be a ground
for violating solemn undertakings by these petitioners to this court both under
orders dated 23rd December, 1963, and 20th July, 1964, a year and two years
before the death of the senior partner of George Read and Company.
The second
ground put forward by the applicants is that one Mr. B. Mukherjee, Chartered
Accountant of Messrs N. Sarkar and Company, internal auditors, was supposed to
approach this company for appointment as auditor of the company but again Mr.
B. Mukherjee died. All this was happening on the 12th October, 1965, and 13th
June, 1966. On that date viz., on the 13th June, 1966 one Mr. Ajit Kumar Ghosh,
Chartered Accountant was appointed auditor of the company in place of George
Read and Company. On those facts I consider that the excuse put forward on the
ground of change of auditors or death of auditors is absolutely frivolous and
does not explain non-compliance with the statutory requirements from 1961 to
1964.
Thirdly, it
has been suggested that these annual general meetings could not be held and the
balance-sheets and annual returns could not be filed because the books of
account and other papers of the company were lying in different suits and
proceedings. That also is an utterly frivolous plea. The Registrar of Joint
Stock Companies points out in paragraph 9 of the affidavit of Jethalal Gopaldas
Gatha, Additional Registrar of Companies, West Bengal, that in the Company Petition
No.93 of 1965 heard on the 18th August, 1965, it was stated by this very
applicant, Charu Chandra Chatterjee, on oath before the court of A. K.
Mukherjee J., that the company had got back all the necessary books of account
and documents and further undertook to the court on behalf of himself and the
other directors to file the documents within six months from that date. On that
undertaking he got the relief order dated 12th May, 1965, for the third time.
The excuse is
clearly false also from another point of view. If there was any genuine
difficulty in holding the annual general meetings, filing balance-sheets,
profit and loss accounts and annual returns, then one would expect that the
company and its directors would come before the time and take necessary steps.
A mere glance at the dates will make the point quite clear. After the third
order made on the 12th May, 1965, on the undertaking of these directors to
complete these acts within six months from that date and which expired on the
12th November, 1965, these directors took no steps whatsoever to make either
this application or any other application. They flouted this court's order and
they violated their own undertaking. They did not move the court or any other
authority under the Companies Act, from 12th May, 1965, until the present
application on the 19th December, 1966, which is about a year and a half after
the violation of the undertaking and non-compliance with the order of the
court. I cannot help coming to the conclusion that the company and its
directors have bluffed this court and have repeatedly taken time and have done
nothing.
Indeed, the
Registrar of Companies applied to the Chief Presidency Magistrate, Calcutta, on
the 30th November, 1966, who fined each director of the company Rs.200 for not
filing annual return on January 31, 1966, and for not holding annual general
meeting on 31st December, 1965, and for not filing profit and loss account for
1965 on January 31, 1966. The fine was paid by each director of the company.
Monied directors always flaunt their monies and pay the fine without the least
compunction because the fines are mostly paid out of company's funds in some
shape or other. Fines unless exemplary have little or no deterrent effect to
tone up the present company administration. The idea is growing fast today that
all that the Companies Act does, to punish the recalcitrant directors, who
flagrantly commit breaches of the Companies Act, disobey their own undertakings
to the court repeatedly and who violate orders of the court, is to let them off
on payment of paltry fines and permit them to be easily relieved of their
statutory liabilities and obligations. This is really a travesty of law and
justice.
The power to
grant relief which this court has under section 633(1) and (2) is a
discretionary power. It should be exercised only where the court is satisfied
that the defaulting director has acted honestly and reasonably and that, having
regard to all the circumstances of the case, he ought fairly to be excused. It
is then only that the court may relieve him either wholly or partly from his
liability on such terms as it thinks fit. This satisfaction is not a mere
ritual. It is not met by a mechanical averment in the petition or affidavit.
This satisfaction must be reached after a serious and careful consideration of
the whole question that the director "acted honestly and reasonably and
that having regard to all the circumstances of the case he ought fairly to be
excused." That is the language of section 633(1) which applies to any
pending proceeding for negligence, default, breach of duty, misfeasance or
breach of trust against an officer of a company, which includes directors. It
is under sub-section (2) of section 633 that this application is brought and
that sub-section (2) deals with a case not pending but "where any such
officer has reason to apprehend that any proceeding will or might be brought
against him in respect of negligence, default, breach of duty, misfeasance or
breach of trust." On that apprehension that officer is allowed to apply to
the High Court for relief. The High Court's power to relieve on such
application is the same as it would have if this High Court was the court
before which a proceeding against that officer for negligence, default, breach
of duty, misfeasance or breach of trust had been brought under sub-section (1).
The word
"relieve" in both the sub-sections (1) and (2) of section 633 of the
Companies Act does not in my interpretation include power to extend the time to
hold five successive annual general meetings not held in their respective years
but to hold them all subsequently in the 6th or 7th year. The power under
section 633 is a power to relieve from liability. The expression "relieve
from liability" appears in sub- section (1) and the word
"relieve" in sub-section (2) must be read in that context, specially
when it refers to the court before which a proceeding for such negligence,
default, breach of duty, misfeasance or breach of trust could be brought under
sub-section (1). Relief from liability in this context means relief from the
consequences, namely, fines and penalties, that follow under section 168 of the
Act from the negligence, default, breach of duty, misfeasance or breach of
trust. Relief from liability cannot mean power to suspend operation of the
Companies Act, directing holding of annual general meetings or filing annual
returns, balance-sheets and profit and loss accounts. It cannot be
overemphasised that the words of section 633 of the Companies Act are confined
to relieve "officers" of the company from fines and penalties, and
not the company from calling, holding or conducting annual or even other
meetings of the companies according to this statute and suspending the
operation of the relevant sections of the Companies Act in respect of such
meeting and extend such time. I, therefore, hold that on a proper
interpretation of section 633(2) of the Companies Act this court has no power
by way of relief from liability for the default mentioned therein to extend the
time for holding the annual general meetings, to file statutory annual returns
or balance-sheets or profit and loss accounts.
In any event,
this power of relief is discretionary. I am satisfied on the facts on records
of the directors who are the present applicants before me that no discretion
should be exercised in their favour. In any event, they cannot be granted the
relief which they are now seeking under section 633(2) of the Companies Act to
obtain permission to hold the annual general meetings of 1961, 1962, 1963, 1964
and 1965 in the year 1967.
I am inclined
to accept the views expressed by Shelat J. in In re Tolaram Jalan (In re
Filmistan Private Ltd.) [1959] 29 Comp. Cas.34; A.I.R.1959 Bom.245, on the
point that a petition under sub-section (2) of section 633 of the Companies Act
is for relief against liabilities for fines or penalties to file balance-sheets
and auditor's report, as was the case there, and not for extending the time for
(a) holding annual general meetings, (b) filing annual returns and (c) balance-
sheets after so many years.
It will be
appropriate at this stage to review certain relevant sections of the Companies
Act on the annual general meeting of companies. Section 166 of the Companies
Act demands that every company shall in each year hold, in addition to any
other meetings, a general meeting as its annual general meeting and shall
specify the meeting as such in the notices calling it and not more than fifteen
months shall elapse between the date of one annual general meeting of a company
and that of the next. There are only two provisos under that section, the
proviso permitting a company to hold its first annual general meeting within a
period of not more than 18 months from the date of its incorporation and if
such general meeting is held within that period, it shall not be necessary for
the company to hold any annual general meeting in the year of its incorporation
or in the following year. The other proviso permits the Registrar for any
special reasons to extend the time within which any annual general meeting (not
being the first annual general meeting) shall be held, by a period not
exceeding three months. It is also provided by that section that the first
annual general meeting shall be held within 18 months of the company's
incorporation and that the next annual general meeting of the company shall be
held by it within 9 months after the expiry of the financial year in which the
first annual general meeting was held and thereafter the annual general meeting
shall be held by the company within 9 months after the expiry of each financial
year. This is followed by a proviso permitting the Registrar for any special
reason to extend the time within which the annual general meeting (not being
the first annual general meeting) shall be held by a further period not
exceeding six months. It is also provided in that section that except in the
cases referred to in the proviso which is immediately mentioned, not more than
fifteen months shall elapse between the date of one annual general meeting and
that of the next.
The above is a
fair summary of the provisions of section 166(1) of the Companies Act. It shows
the anxiety of the statute to direct that the annual general meeting is a
meeting of a very special character and it must be held within the time
mentioned in the statute and the only permissible extension is the extension
expressly recognised in the statute and in the provisos just mentioned. The
present application does not come within the time limit or the exemption
provided in the statute, and is plainly beyond them.
The only other
provision is in section 166(2) of the Companies Act which by way of proviso
says: "Provided that the Central Government may exempt any class of
companies from the provisions of this sub-section subject to such conditions as
it may impose." This much is clear that the present application seeking
court's permission to hold past years annual general meetings in the 7th or 8th
year is not covered by section 166(1); nor is it covered by any exemptions with
regard to such time which can only be granted by the Registrar under the
proviso to sub- clause (a) or sub-clause (c) of section 166(1) of the Act, or
by the Central Government under section 166(2) of the Act.
The other
difficulty in the way of the present application is section 167 of the Act
which gives power to the Central Government to call an annual general meeting
in case of a default. That section in substance provides that, if default is
made in holding the annual general meeting in accordance with section 166, the
Central Government may, notwithstanding anything in this Act or in the articles
of the company, on the application of any member of the company, call, or
direct the calling of, a general meeting of the company and give such ancillary
or consequential directions as the Central Government thinks expedient in
relation to the calling, holding and conducting of the meeting. It is provided
there that a general meeting held in pursuance of section 167(1) shall, subject
to any directions of the Central Government, be deemed to be an annual general
meeting of the company under section 167(2) of the Act. This, therefore, is a
clear statutory recognition of what should be done in case there is any default
in holding the annual general meeting within the time required by the statute.
Two things are clear. First, the default can be excused under section 167 of
the Companies Act. Secondly, it can also be excused by the Central Government
which alone has the power under this section to permit calling of such a
meeting, notwithstanding anything contained in the Companies Act. That, in my
judgment, excludes the court's power to extend the time to hold the annual
general meeting for which all statutory time has expired.
If these two
sections are read with section 186 of the Companies Act, the legal position
seems to be quite clear. Section 186 of the Companies Act provides for power of
the court to order a meeting to be called. It is provided there in that section
that if for any reason it is impracticable to call a meeting of the company,
"other than an annual general meeting, in any manner in which meetings of
the company may be called, or to hold or conduct the meeting of the company in
the manner prescribed by this Act or the articles, the court may, either of its
own motion, or on the application of any director of the company, or of any
member of the company who would be entitled to vote at the meeting,-(a) order a
meeting of the company to be called, held and conducted in such manner as the
court thinks fit; and (b) give such ancillary or consequential directions as
the court thinks expedient," including even modifying the operation of the
Act and the company's articles in respect of calling, holding and conducting of
the meeting. Such meeting so called, held and conducted in accordance with any
such order shall, for all purposes, be deemed to be a meeting of the company
duly called held and conducted. The crucial words are "other than an
annual general meeting," in section 186(1) of the Act. This expression makes
it quite clear that Parliament did not want this court to exercise any power
with regard to annual general meeting but granted this power to the court to
order meeting in respect of meetings other than the annual general meeting.
This is express statutory exclusion of annual general meeting from the court's
power to order meetings. The annual general meeting therefore, in case of
default, can only be called by either the directions of the Registrar within
the meaning of the exemption under section 166(1) of the Companies Act or by
the Central Government under section 167 of the Act. I am, therefore,
disinclined to so interpret section 633 of the Companies Act, and sub-section
(2) thereof as to whittle down the clear prohibition upon the court to grant
any extension of time with regard to calling, holding and conducting of an
annual general meeting. I wish to emphasise again that the language of section
633 of the Companies Act is confined to relieve an "officer" of the
company, and not intended to relieve the company from holding its annual
general meetings and suspend the operation of the relevant mandatory provisions
of the Companies Act and extend time to hold annual general meetings. The
analogy of the English law is misleading on this point.
In the 12th
edition of Buckley on the Companies Act, the learned editors at page 319,
commenting on section 131 of the English Companies Act, 1948, state:
"By
section 112(3) of the 1929 Act, the court was for the first time empowered to
convene a meeting in the event of default to hold an annual meeting. This
marked a departure from the principle established under the Acts previously in
force that, since the court would not interfere with the internal management of
companies, it would not convene, or direct the convening of, a meeting for
general purposes, even if it had jurisdiction to do so. The power to convene a
meeting under this section is now transferred from the court to the board of
trade, upon whom a number of ancillary powers are also now conferred."
But even then
section 131(3) of the English Companies Act, 1948, expressly provides that
"where a meeting so held is not held in the year in which the default in
holding the company's annual general meeting occurred, the meeting so held
shall not be treated as the annual general meeting for the year in which it is
held unless at that meeting the company resolves that it shall be so
treated."
Palmer's
Company Law, 20th edition, at page 129 speaks of these provisions under section
131 or 135 of the English Companies Act, 1948, as procedures to break the
deadlock. No doubt they are provisions to resolve the deadlock. But the
provisions being statutory and the company being a creature of the statute, the
deadlock must be resolved only according to the procedure prescribed by the
statute and not otherwise.
The English
provision in section 135 of the English Companies Act, 1948, providing for the
power of the court to order meetings is very different from section 196 of the
Indian Act which expressly excludes annual general meetings. But even then such
provisions as section 135 of the English Act of 1948, and section 186 of the
Indian Companies Act, 1956, require that there must be reason to hold that it
is impracticable to call a meeting of the company in a manner prescribed by the
Act or the articles. I am entirely satisfied on the records and facts of this
case that nothing satisfactory has been shown to me why it was impracticable
for this company to hold its annual general meetings in 1961, 1962, 1963, 1964
and 1965 and to file the statutory returns, profit and loss accounts and
balance-sheets in respect of those years. It follows, therefore, that even if I
had the power, which I hold I have not, I would not exercise that power in
favour of the applicants.
It is
unnecessary for me here to discuss the conflict of views between In re Tolaram
Jalan (In re Filmistan Private Ltd. [1959] 29 Comp. Cas. 34; A.I.R.1959
Bom.245.) and Thakur Dan Singh Bist v. Registrar of Companies [1960] 30 Comp.
Cas.405. or such other decisions as Ram Krishan Dalmia v. Registrar, Joint
Stock Companies [1962] 32 Comp. Cas.341. and Benarsi Dass v. Registrar of
Companies [1963] 33 Comp. Cas. 163.
Mr. Ray
Chowdhury, learned counsel for the petitioners, realised the difficulties in
the way of his clients. He, therefore, submitted that this court should treat
this application as an application to get relief from fines and penalties, on
the line of the application in In re Tolaram Jalan (In re Filmistan Private
Ltd.[1959] 29 Comp. Cas. 34; A.I.R.1959 Bom.245). I am afraid I really cannot
treat this application as such. It is an entirely different application with
different reliefs and prayers. It is an application which openly and expressly
seeks for extension of time to hold annual general meetings, file balance-sheets
and profit and loss accounts and other statutory returns after several years
have elapsed. The penalty for default in complying with sections 166 and 167 of
the Companies Act, as provided in section 168 of the Act, is inter alia that
every officer of the company who is in default shall be punishable with fine
which may extend to Rs. 5,000 and, in case of continuing default, with a
further fine which may extend to Rs. 250 for every day after the first during
which such default continues. The heavy fine indicated in section 168 shows
that, while the statute does not go to the length of saying that this default
would lead to extinction of the company, it does indicate the severity in
penalising the defaulter to the extent mentioned therein. At the Bar, learned
counsel made an interesting reference to a very old decision of this court
under the old Companies Act, viz., In re Brahmanbaria Loan Company Limited,
[1934] 4 Comp. Cas.282; I.L.R. 61 Cal.408 decided by Buckland J. In dealing
with section 76 of the Indian Companies Act of 1913, the learned judge came to
the conclusion that the section was not intended to enable the court to make an
order which will excuse persons responsible for failure to call a general
meeting from the consequences of their omission and the terms of that section
76 of the Indian Companies Act, 1913, were mandatory and made no reference to
the balance-sheets, the preparation of which has nothing to do with the matter.
See the observation of Buckland J., at pages 410 and 411. It will not be
necessary to refer to that decision any more because the Act has changed. It
would also not be necessary in this context to refer to the English decision in
In re El Sombrero Limited. [1958] 28 Comp. Cas. 619; [1958] 3 All E.R.1.
Finally it was
submitted by Mr. Ray Chowdhury, learned counsel for the applicants, that under
rule 7 of the Companies Rules, the court has power to enlarge or abridge time
in any case in which it shall deem fit. In the first place, I do not consider
it to be a case at all fit in which I shall enlarge the time. The matter,
therefore, ends there. In the second place, this power of the court to enlarge
or abridge the time is only confined to the time appointed by this rule or
fixed by an order of the court for doing any act or taking any proceeding. If
the statute and the interpretation of its relevant section show that the court,
itself has no power to extend the time for holding the annual general meeting,
this question does not arise and such an order of the court will then not only
be irregular and outside the court's jurisdiction but illegal being against the
statute.
Mr. Ray
Chowdhury's submission that I should treat this application as an application
to relieve the petitioners of any possible fine that might be imposed in a
possible future proceeding that might be brought does not appeal to me in the
facts of the case. I have already discussed this point. I shall only conclude
by saying that the fine has already been paid by the directors on or about 30th
November, 1966, on the Registrar's complaint to the Chief Presidency Magistrate
for not filing the annual return on 31st January, 1966, and for not holding the
annual general meeting on 31st December, 1965, and for filing profit and loss
account of 1965 on 31st January, 1966. The last of the fines was therefore
paid. I do not see why I should now treat this application as an application to
relieve fines that might be imposed for defaults prior to the defaults
mentioned in the order for fine which is mentioned.
I consider
this application to be devoid of all the merits and frivolous. I, therefore,
dismiss it with costs.
Certified for
counsel.
[1985] 57 COMP. CAS. 037 (ALL.)
High Court OF Allahabad
Mau Cold Storage & Khandsari
Sugar Factory (P.) Ltd.
v.
H. N. Seth, J.
COMPANY
PETITION NO. 6 OF 1983.
July 16, 1984
R.N. Bhalla
and G.N. Singh for the Petitioner.
K.K. Mishra
for the Respondent.
Seth J.—Petitioner No. 1, Mau Cold Storage and
Khandsari Sugar Factory P. Ltd., is a private limited company incorporated
under the Companies Act, 1956 (hereinafter referred to as "the Act"),
and petitioners Nos. 2 to 7 are its directors. On October 4, 1984, respondent
No. 1 Registrar of Companies, U.P., filed a complaint against the petitioners
before respondent No. 2, Chief Metropolitan Magistrate, Kanpur, alleging that
s. 220 of the Act places a statutory obligation on the petitioners to file with
the Registrar of Companies the balance-sheet and the profit and loss account in
the prescribed form duly placed in the annual general meeting of the company,
within thirty days of the annual general meeting and, in case no annual general
meeting is held, within thirty days of the due date of the annual general
meeting. The petitioners were thus required to file, with the Registrar of
Companies, the balance-sheet and the profit and loss account of petitioner No.
1 for the period ending March 31, 1979, latest by October 30, 1979. As the
petitioners failed to file the said balance-sheet and the profit and loss account
within the stipulated time and were knowingly and wilfully continuing the said
default, they were liable to be punished for contravening the provisions of s.
220 of the Act.
The Chief
Metropolitan Magistrate, Kanpur, took cognizance of the complaint and issued
processes for enforcing the presence of the petitioners before him. Aggrieved,
the petitioners have invoked the jurisdiction of this court under s. 633(2) of
the Act, and pray that the complaint filed against them by the Registrar of
Companies as also their prosecution under s. 220 of the Act pending before the
Chief Metropolitan Magistrate, Kanpur (Criminal Case No. 8235 of 1981), be
quashed.
The case of
the petitioners is that due. to some misunderstanding, the income-tax
authorities raided the premises of petitioner No. 1 on February 20, 1979, and
seized its account books and other documents relating to the year 1979. As the
income-tax authorities did not release the account books and other documents
seized by them, the, company was prevented from preparing its profit and loss
account as also its balance-sheet and getting the same audited within time.
They contend that as the petitioners have acted honestly and reasonably and
that, in the circumstances of the case, the default complained of by the
Registrar of Companies deserved to be excused and the court should relieve them
of their liability in respect of non-filing of the company's balance-sheet and
the profit and loss account within time. They also contend that in case the
court relieves the petitioners of the above mentioned liability, the
proceedings for their prosecution which are pending before the Chief
Metropolitan Magistrate, Kanpur, will also fall and will have to be quashed.
Section 633
of the Act invoked by the petitioners runs thus :
"633(1).
If in any proceeding for negligence, default, breach of duty, misfeasance or
breach of trust against an officer of a company, it appears to the court
hearing the case that he is or may be liable in respect of the negligence,
default, breach of duty, misfeasance or breach of trust, but that he has acted
honestly and reasonably, and that having regard to all the circumstances of the
case, including those connected with his appointment, he ought fairly to be
excused, the court may relieve him, either wholly or partly, from his liability
on such terms as it may think fit :
Provided that
in a criminal proceeding under this sub-section, the court shall have no power
to grant relief from any civil liability which may attach to an officer in
respect of such negligence, default, broach of duty, misfeasance or breach of
trust.
(2) Where any
such officer has reason to apprehend that any proceeding will or might be
brought against him in respect of any negligence, default, breach of duty,
misfeasance or breach of trust, he may apply to the High Court for relief and
the High Court on such application shall have the same power to relieve him as
it would have had if it had been a court before which a proceeding against that
officer for negligence, default, breach
of duty, misfeasance or breach of trust had been brought under sub-section (1).
(3) No court
shall grant any relief to any officer under sub-section (1) or sub-section (2)
unless it has, by notice served in the manner specified by it, required the
Registrar and such other person, if any, as it thinks necessary, to show cause
why such relief should not be granted".
A perusal of
the various provisions of the Act reveals that it imposes a number of
obligations upon officers of the company. It also makes provisions for
initiating, before a court of law, proceedings against the officers of the
company for negligence, default, breach of duty, misfeasance or breach of
trust. The object underlying s. 633 of the Act obviously is to avoid hardship
to officers of the company in deserving cases and to relieve them of their
liability in cases where they have been technically guilty if they are able to
convince the court that they had been acting honestly and reasonably and that
having regard to the circumstances of the case, they, in all fairness, ought to
be excused from the charge or charges made against them. The section enables
the concerned officer to apply to the court for making an order relieving him
of the liability incurred by him either after the proceedings have commenced
against him or by way of preventive action before commencement of the
proceedings. Whereas, according to sub-s. (1) of s. 633, in case where the
proceedings have commenced, the application for relief in this regard has to be
made to, and is to be considered by, the court before which the proceedings are
pending, subs. (2) enables the High Court to exercise such jurisdiction in
cases where the proceedings are going to be, or, are likely to be initiated.
This section does not empower the the High Court to grant any relief to any
officer of the company in cases where the proceedings against an officer have
already been initiated and are pending.
It is also
significant to note that sub-ss. (1) and (2) of s. 633 enable the concerned
court and the High Court to grant relief only to officers of the company. The
section does not contemplate any order relieving (he company of any of the
liabilities incurred by it.
In the
instant case, the company, petitioner No. 1, as well as its directors,
petitioners Nos. 2 to 7, have moved this court for relief under s. 633(2) of
the Act after the proceedings in respect of the alleged default made by them
have been initiated and are pending before the Chief Metropolitan Magistrate,
Kanpur. As already explained, the company, that is, petitioner No. 1, is not
entitled to claim any relief under s. 633 of the Act. So far as petitioners
Nos. 2 to 7 are concerned, they can pray for relief under s. 633(1) before the
court before which the criminal proceedings are pending. Inasmuch as the
criminal proceedings have already been initiated against peti tioners Nos. 2 to
7 and are pending before the Chief Metropolitan Magistrate, Kanpur, it is not
open to this court to grant them any relief under s. 633(2) of the Act.
During the course
of his arguments, learned counsel appearing for the petitioners cited the case,
Tolaram Jalan, In re [1959] 29 Comp Cas 34; AIR 1959 Bom 245, wherein it has
been observed as follows (headnote of AIR);
"Whereas
sub-section (1) of section 633 refers to proceedings already commenced,
sub-section (2) contemplates a claim which is anticipated as one which might be
made in future. Under sub-section (1), the important words are ' the court
hearing the case ', which obviously mean the court before which a proceeding is
pending. These words, therefore, mean that it would not be the High Court which
can grant relief under sub-s. (1) but the court before whom the proceeding has
commenced and is pending. Subsection (2), on the other hand, creates a fiction
and provides that in respect of an apprehended claim, the High Court shall have
the same power to grant relief as it would have had under this section if it
had been the court before which proceedings for negligence, default, breach of
duty, misfeasance or breach of trust had been brought".
This decision
instead of supporting the petitioner's case that, in the circumstances of this
case, they are entitled to claim relief under s. 633(2) goes against them and
supports the view taken by me, that in such cases, where the proceedings have
already commenced and are pending before a court of law it is only that court
before which the proceedings are pending which alone can grant the requisite
relief under s. 633(1) of the Act and that, in such cases, the jurisdiction of
the High Court cannot be invoked under sub-s. (2) of s. 633.
Learned
counsel for the petitioners also cited before me a Full Bench decision of the
Andhra Pradesh High Court in the case of Andhra Provincial Potteries Ltd. v.
Registrar of Companies [1969] 39 Comp Cas 1000. In this case, the court
considered the provisions of s. 220 of the Indian Companies Act, as they stood
prior to the amendment made in the year 1977, and ruled that as per unamended
section there was no obligation on the company or its officers to file with the
Registrar, the balance-sheet and the profit and loss account of the company
till an annual general meeting was held. Since, in that case, the annual
general meeting had not been held, no prosecution for not filing the profit and
loss account was maintainable. There is nothing in that decision which runs
counter to the view which is being taken by me in the present case.
In the view
which I am taking, it is not necessary for me to decide as to whether
petitioners Nos. 2 to 7 have made out any case for being relieved against the
default for which they are being prosecuted. It will be open to them to
raise their claim in this regard before the criminal court which will deal with
it in accordance with law.
During the course of the hearing, my attention was
also invited to section 637B of the Act, which empowers the Central Govt. to
condone the delay in filing any document with the Registrar of Companies.
Suffice it to say, the power under s. 637B is that of the Central Govt. and not
of the High Court. The order passed by me will not preclude any of the seven
petitioners from moving the Central Govt. for condonation of delay in filing
the requisite documents under s. 637B of the Act. If and when any such
application is moved, the Central Govt. will be free to dispose of it in
accordance with law.
In view of the aforesaid discussion, I am of the
opinion that the petitioners are neither entitled to the relief claimed by them
nor to invoke the jurisdiction of this court under s. 633(2) of the Act.
In the result, this petition fails and is dismissed
with costs.
[1960]
30 COMP. CAS. 284 (KER.)
RAMAN
NAYAR, J.
B.C.P.NO.
5 OF 1959
AUGUST
4, 1959
RAMAN
NAYAR, J.- The petitioners
are a banking company and its directors, and they seek relief, under they seek
relief, under section 633 of the Companies Act, 1956, from apprehended
prosecution for failure to comply with the provisions of section 159, 166, 210
and 220 of the Act, the failure being punishable under sections 162(1), 168, 210(5)
and 220(3) respectively.
It would
appear from the affidavit filed in support of the petition that, soon after
petitioners I to II became directors of the 12th petitioner company in
pursuance of a scheme of reconstruction sanctioned by this court, the books of
some of the branches of the company were seized by the police in connection
with some criminal cases and are now in court, the cases being still pending.
That being so, it was not possible for the company to prepare its balance sheet
and profit and loss account and get them audited, and this was the reason why
the company could not comply with the provisions referred to. I am satisfied
that the default was due to reasons beyond the control of the company and its
directors. Therefore, it would be hard if they are to suffer criminal liability
on account of default.
Turning next
to the application of section 633, I might at the very outset observe that
under section it is only an officer of the company and not the company itself
that can be relieved. This petition in so far as it relates to the 12th
petitioner company will therefore have to be dismissed, and it is accordingly
dismissed.
Sub-section
(I) of section 633 refers to any proceeding for negligence, default, breach of
duty, misfeasance or breach of trust against an officer of a company, and the
word "Proceeding" there is undoubted;y wide enough to cover a
criminal prosecution. But under that sub-section it is for the court before
which the proceeding is pending and not for this court to grant relief. This
court can grant relief only under sub-section (2) and here the word used is
"Claim" and not "Proceeding", a word which at first sight
certainly seems inappropriate if it is to comprehend a criminal prosecution.
But reading the two sub-sections together, it is obvious that the scope of
sub-section (2) is coextensive with that of sub-section (I), and no intention
is apparent to confine the scope of sub-section (2) to those only of the
proceedings covered by sub-section (I) that can properly be designated as
claims. It would therefore follow that if the word "Proceeding" in
sub-section (I) is wide enough to cover a criminal prosecution , the word
"Claim" in sub-section (2) must be construted as having been used in
a special sense so as to include also a criminal prosecution. In other words
you are to look upon a criminal prosecution as a claim that the offender be
punished in accordance with law. The wording of sub-section (I) and (2) of
section 633 of the Act is, for the present purpose, identical with the wording
of sub-sections (I) and (2) of section 372 of the English Act of 1929, and with
reference to sub- section (2) of that Act, it was held in Barry and Staines
Linoleum Limited, In re, and in Gilt Edge Safety Glass Limited, In re that the
court had the power to relieve against an apprehended prosecution. The same
view was taken by the Orissa High Court in Orissa Jute & Cotton Mills Ltd.,
In re. I therefore hold that sub-section (2) of section 633 is wide enough for
this court to grant relief against an apprehended criminal prosecution.
In the
circumstances of this case I relieve petitioners I to II of criminal liability
on account of the default referred to, but only on condition that the duties
enjoyed by the provisions in question are performed within a period of six
months from this date. If, for some unavoidable reason, this time proves
insufficient, application may be made for further time.
[1978] 48 COMP. CAS. 552
(DELHI)
HIGH COURT OF
DELHI
v.
DALIP K. KAPUR
J.
COMPANY
PETITION NO. 98 OF 1977.
APRIL 4, 1978
Satish
Chandra with Sarat Chandra for the petitioner (liquidator).
V.P. Singhal
for the Respondent (Registrar of Companies).
Dalip K.
Kapur J.—The present
petition under section 633(2) of the Companies Act, 1956, has been moved by
Shri V.P. Nanda, who became a voluntary liquidator of M/s. Shri Chhatarsal
Films & Finance Ltd., in January, 1958, when that company went into
voluntary winding-up as a result of a resolution of the members of the company.
As the winding-up was not completed within three years, this later had to be
treated as a creditors winding-up. The fact of the matter is that the
winding-up is even now not complete though precious little remains to be done
as would be clear from the facts appearing below. As per the statements in the
present petition, the liabilities of the company were about Rs. 2,400 at the
commencement of the winding-up and the assets Were about Rs. 3,300. The losses
amounted to Rs. 87,000 approximately. It is said that out of the assets,
machinery worth Rs. 2,900 was attached by the landlord of the Novelty Cinema,
Khurja, against rent and later this asset was sold. There were thus no assets
for all practical purposes except that Rs. 3,425 were available as uncalled
capital. The voluntary liquidator filed some statements of accounts, but they
were mainly defective and treated as such by the Registrar of Companies. The
petitioner was prosecuted and has been fined a sum of Rs. 900 in various
prosecutions. Now, a number of prosecutions are still pending regarding
subsequent defaults in filing the statement of accounts.
The legal
position of a voluntary liquidator regarding the obligation to file statement
of accounts is contained in section 551 of the Companies Act, 1956. The
provisions of this section have been varied to some extent by rule 327 of the
Companies (Court) Rules, 1959, which prescribes the period for which a
liquidator has to file accounts. He has to file accounts after one year and
thereafter has to file accounts at six monthly intervals. If he defaults in
filing these accounts, he is liable to be prosecuted under section 551(4) of
the Act. The fine may extend to Rs. 500 for every day during which the default
continues. As is apparent from the facts of this case, this was almost a
defunct company, but still the petitioner as voluntary liquidator has
defaulted in filing the statement of accounts and he is facing prosecutions for
this.
It is now necessary to see what is the explanation of
the petitioner for the defaults.
According to him, no assets and no money and in fact
no documents of the company came into his hands. No claim was made to him for
the return of any amount owned by the company and the only creditor, M/s.
Columbia Films & Finance Ltd., has itself gone into liquidation, but it has
not made any claim on the liquidator. Being entirely without funds, the
voluntary liquidator has been unable to have any accounts prepared. In fact,
there is nothing for which accounts had to be prepared as there is no account
other than the account which originally existed. It is stressed by the
petitioner that this obligation to go on filing accounts is an unending matter
and he cannot voluntarily bring this impasse to an end, because he has no
material on which to proceed.
The petitioner has also explained that, shortly after
he became a voluntary liquidator, he had done as much as he could and he had
called a final meeting. This happened in 1963. Unfortunately, no one came to
attend that meeting. I may now refer to the material on record to show that
this meeting was called. There is a copy of the Delhi Gazette dated 17th
January, 1963, in which the notice of the liquidator has been published. The
meeting was called for 16th February, 1963, for considering the final account
and passing a resolution for the dissolution of the company. If this meeting
had been held and the resolution passed, then the company would have been
dissolved. An advertisement published in the newspaper "India Weekly"
has also been filed. In any event, the petitioner says that no one attended
this meeting and hence due to lack of quorum he found himself helpless and has
been forced to continue the liquidation in spite of having nothing to do for
all these years. With regard to the liquidator's position, Mr. Singhal, ex
officio, Assistant Registrar, who represents the Registrar of Companies, has
brought to my notice the provisions of section 509, particularly sub-section
(3) and subsection (4) thereof, which refer to this question. The said provision
reads :
"(3) Within one week after the date of the
meetings, or if the meetings are not held on the same date, after the date of
the later meeting, the liquidator shall send to the Registrar and the official
liquidator a copy each of the account and shall make a return to each of them
of the holding of the meetings and of the date or dates on which they were
held.
If the copy is not so sent or the return is not so
made, the liquidator shall be punishable with fine which may extend to fifty
rupees for every day during which the default continues.
(4) If a quorum (which for the purposes of this
section shall be two persons) is not present at either of such meetings, the
liquidator shall, in lieu of the return referred to in sub-section (3), make a
return that the meeting was duly called and that no quorum was present thereat.
Upon such a return being made within one week after
the date fixed for the meeting, the provisions of sub-section (3) as to the
making of the return shall, in respect of that meeting, be deemed to have been
complied with."
Under sub-section (3), it would appear that when such
a meeting is held, a return has to be sent regarding the holding of the meeting
to the Registrar. If the meeting had in fact been held, then the result would
have either been that the winding-up is to continue or the company has to be
dissolved. As, in this case, no meeting was actually held, we have to turn to
sub-section (4). That sub-section says that if the quorum is not present, then
the return has to state that the meeting was duly called, but no quorum was
present. It is then said that if such a return is made within one week, then
the meeting shall be deemed to have been held. Then the next relevant part of
the section is sub-section (6) which says that on a return being furnished
either under sub-section (3) or sub-section (4) the official liquidator shall
be given facility to scrutinise the books and papers of the company and if he
makes a report to the court that the affairs of the company have not been conducted
in a manner prejudicial to the interests of its members or to public interest,
then from the date of the submission of the return, the company shall be deemed
to be dissolved. Hence, it is pointed out by Mr. Singhal that even if the
quorum was not present, the filing of a return to the Registrar followed by an
inspection by the official liquidator and a subsequent report to the court
would have resulted in this company being dissolved in 1963 or thereabouts,
provided of course, that the report of the official liquidator was to the
effect that the affairs of the company had not been conducted in a manner
prejudicial to the interests of its members or creditors.
This legal position being pointed out to the
petitioner, it clearly appears that he was unaware that he had to follow this
course. He has also admitted before me that the books of the company are not
now available at all. It appears that the persons who were keeping the books on
behalf of the company did not actually hand the same over to the liquidator,
because there was hardly anything in them. As explained to me, the company was
even defunct in 1963, and now the liquidator states that after a period of 15
years, it will be impossible to show the books to the official liquidator for
compliance with section 509(6) of the Act. Any way, this problem will have to
be resolved by the official liquidator as and when that stage is reached,
because we are now concerned with a much earlier stage, which is that in fact no return was sent under sub-section (4),
and, therefore, the provisions of section 509 have not become applicable. This
means that, strictly speaking, the liquidation was continuing and there had to
be compliance with section 551(4) read with section 327 of the Companies Act,
1956.
This brings me
to the question whether the petitioner is entitled to relief under section 633
of the Companies Act, 1956, on account of having acted reasonably and also
there is a subsidiary question whether a voluntary liquidator can be granted
relief under this provision. As clearly appears on the reading of the section,
relief may be granted to officers of a company. The definition of
"officer" as given in section 2(30) on a plain reading does not
include a liquidator. However, there are some decisions which are reported
showing that the relief has been granted to liquidators under this very
section. I have been referred to In re Muktsar Electric Supply Co. Ltd. (In
Liquidation) [1966] 36 Comp Cas 144 (Punj), Om Prakash Khaitan v. Shree
Keshariya Investment Ltd. [1978] 48 Comp Cas 85 (Delhi) and Official
Liquidators, Baroda Batteries Ltd. v. Registrar of Companies, Gujarat State
[1978] 48 Comp Cas 120 (Guj). As two of these cases have only been reported
this year, and the point does not seem to have arisen earlier, I would be
inclined to accept the fact that relief can be granted on the footing that
though a liquidator is not, strictly speaking, an officer of the company
because the definition is so framed that it applied to a running company rather
than a company in winding-up, still when a company has gone into liquidation,
the board of directors is replaced by the liquidator who acts as the manager
and director and is in fact completely in-charge of the affairs of the company.
There may be cases in which a company continues to work or carry on some sort
of business even during the liquidation process and, in such a case, if not
within the strict terms used in the Act, at least in common parlance, a
voluntary liquidator must be considered to be an officer of the company. The
section (section 633) appears to be a section designed to give relief to
persons who have acted honestly and reasonably and who, in spite of this, on
account of the circumstances of the case, are threatened with prosecution or
other proceedings relating to negligence, default, breach of trust, etc.
In the
present case, it is noteworthy that the company is a very small one, the assets
are also extremely small compared to the usual amount available in companies
and a passage of time amounting to almost twenty years has taken place without
any creditor or debtor appearing nor have any shareholders complained about the
inaction of the voluntary liquidator. I am calculating this period of twenty
years from the date of the commencement of the winding-up. At the same time,
this liquidation could have been brought to an end either by the course just
pointed out, or by getting this company dissolved in some other way. In
fact, the learned counsel for the petitioner contends that the company could
have been declared to be defunct under section 560(4). I agree with the counsel
for the petitioner that it could have been declared as defunct, but at the same
time, unless the Registrar of Companies is satisfied about the circumstances,
he cannot waive the defaults of the voluntary liquidator. To read section
560(4) as mandatory would mean that every time the voluntary liquidator fails
to file the return, the company would merely be struck off the register and
this could lead to very serious malpractice and injustice to various
shareholders and creditors. Therefore, possibly, the Registrar has acted
correctly in not declaring the company defunct. Of course, if the facts now
brought to my notice in this petition had been brought to the notice of the
Registrar of Companies he might have been inclined to declare the company as
defunct and then the voluntary liquidator would have been absolved of the
difficulties that he now faces due to the peculiar facts of this case.
Now, turning to what relief can be granted to the
petitioner: the question to be first analysed is whether the petitioner has
acted reasonably and with due diligence, etc., i.e., has he complied with the
necessary requirements entitling him to relief ? As at present advised, the
only default that I can see is the failure by him to fully comprehend the
meaning of section 509 of the Act. As pointed out, till he advertised the
holding of the final meeting, he had proceeded with the winding-up as far as he
could go ; he then called a meeting to bring about dissolution. For some
unknown reason, the members of the company did not choose to attend, so he was
compelled by circumstances outside his control to continue the winding-up,
though he had nothing more to do. Of course, if he had followed the other
course now pointed out to him, all this could have been avoided and possibly in
that case the petitioner would not have been fined a sum of Rs. 900 in various
prosecutions and would also not have had to suffer the inconvenience of
resisting further prosecutions which are even now pending. In the
circumstances, I think, the petitioner is entitled to get relief.
There are a number of prosecutions still pending in
respect of the defaults and the case of the Registrar of Companies is that the
returns filed are invalid and not proper. They are not audited or they have not
been filed at all. As these are pending prosecutions, the law is quite clear
that this court cannot grant relief, but in the light of the facts narrated
above, if the Registrar of Companies can be persuaded not to press these
prosecutions, I think it would be very much in the interest of justice. One
thing has struck me, and that is I fail to understand why the petitioner did
not resign during all this period, but the petitioner does not seem to have
realised that he could resign. In any case, the Registrar cannot be blamed for
the course followed by the petitioner and, therefore, I would allow this
petition and grant the petitioner relief in respect of the default for not
filing the statement of account for the period, ending 29th July, 1977, on
payment of Rs. 100 as costs. The costs to be paid within one month.
As the petitioner has been faced with a number of
doubts as to how he should proceed now, I would indicate that he should now
again call a final meeting and take steps to dissolve the company. The
petitioner need not file any statement for the intervening period, because as
is explained, nothing more has been done in the intervening period. This will,
of course, not affect the pending proceedings.
[1978] 48 COMP. CAS. 120
(GUJ)
HIGH COURT OF
GUJARAT
Official Liquidators, Baroda
Batteries Ltd.
v.
Registrar of Companies, Gujarat
State
A.A. DAVE
J.
FIRST APPEAL NO. 238 OF 1970.
AUGUST 13, 1974
C.K. Patel for the Appellants.
M.B. Shah for the Respondent.
A.A. Dave J.—This appeal is directed against
the order of the learned District Judge, Baroda, rejecting the application made
by the applicants for granting relief for the default under section 244B(7)
read with section 281 of the Indian Companies Act, 1913, hereinafter referred
to as "the old Act".
The facts giving rise to this appeal briefly stated are as under:
The Baroda Batteries Ltd., which was registered as a
company under the Indian Companies Act, was ordered to be wound up under the
supervision of the court before the Companies Act, 1956, hereinafter referred
to as "the new Act", came into force. M/s. S.S. Tambe and C.K. Patel,
practising advocates, in Baroda court were appointed official liquidators. In
the statement of accounts submitted for the year 1962-63 to the Registrar of
Companies, it was found that Rs. 892.73 were lying in the hands of the official
liquidators. According to the Registrar, this amount being in excess of Rs.
500, the liquidators had contravened the provisions of section 244A of the old
Act. He, therefore, demanded penal interest at the rate of 20% from March 31,
1963, to January 17, 1964, from the liquidators. The registrar of Companies
also alleged that a breach of the provisions under section 24 4B of the old Act
was committed by the liquidators inasmuch as unclaimed amount of dividend
amounting to Rs. 952.84 was not deposited by them in the Reserve Bank of India.
According to the Registrar, the aforesaid sum of Rs. 952 84 should have been
deposited by the liquidators immediately after the expiry of six months from
February 20, 1961, that is, after August 20, 1961, according to section 244B of
the old Act and, therefore, under sub-section (7) of section 244B of the old
Act, the liquidators had become liable to pay penal interest on the aforesaid
sum from August 21, 1961, to January 17, 1964, at the rate of 20% per annum.
The applicants, therefore, preferred an application under section 281 of the
old Act for relieving them from the penalty imposed by the Registrar of Companies.
The grounds stated in the application, inter alia, were that the liquidators
were not conversant with the correct position in law and that, on many
occasions, their own money was spent for the purpose of winding-up of the
company. It was pointed out by them that under section 244A of the old Act, the
liquidators were required to pay money received by them into the scheduled bank
as defined in clause (e) of section 2 of the Reserve Bank of India Act, 1934.
Their contention was that the amount of Rs. 892.73 was kept by them on hand
because they had to pay Rs. 700 to M/s. Vakil Shah and Company, the auditors,
and Mr. P.H. Thakore, the accountant. As they could not obtain the order of the
court, the money had remained with them. However, they stated that they had
also spent money from their own pockets which would be clear that, in all, they
had spent about Rs. 1,000 which they got back from the company after a very
long time without any interest. They also contended that though by an order of
the court, they were entitled to a remuneration of Rs. 488, since the company
had no balance, they could receive only Rs. 280 towards their remuneration.
They stated that they had paid Rs. 15 to the Registrar of Companies as filing
fee from their own pockets. They, therefore, contended that by retaining the
balance, they had not made any profit out of the aforesaid amount and they had
not committed any breach of the provisions of section 244A of the old Act and
if at all they had committed the breach, it should be condoned.
So far as the second objection raised by the
Registrar about the amount of unclaimed dividend not being deposited in the
Reserve Bank within six months after the expiry of six months from February 20,
1961, they stated that they were under the bona fide impression of law that the
amount of unclaimed dividend had to be deposited at the time of dissolution of
the company. They had tried their best for a long time to trace and contact the
creditors or claimants under the directions of the court to make their dues
available to them. They admitted that they have acted wrongly but they
contended that they had acted honestly and reasonably in both the matters
complained of. Notice was issued to the Registrar of Companies who resisted the
said application. It was contended by the Registrar that the old Act was
repealed and, therefore, section 281 of the old Act does not survive and the
application given by the applicants under section 281 of the old Act was
misconceived and not tenable in law. In the alternative, it was urged that
assuming that section 281 of the old Act applied, no relief under that section
should be granted to the liquidators because the official liquidator cannot be
said to be an officer of the company and, therefore, no relief should be granted.
The learned judge accepted the contentions of the applicants so far as
retention of the amount in their hands and condoned breach of the provisions of
section 244A of the old Act. The learned judge, however, with regard to the
breach committed under section 244B of the old Act, came to the conclusion that
the official liquidator was not an officer of the company and, therefore,
section 281 of the old Act under which they claimed relief would not apply. The
learned judge, therefore, dismissed the application so far as relief for
default under section 244B(7) of the old Act was concerned. Against that order
rejecting the relief for default under section 244B(7) of the old Act, the
liquidators have preferred the present appeal.
Mr. C.K. Patel, one of the official liquidators
submitted that in the instant case, the learned judge below was clearly in
error in holding that the liquidator was not an officer of the company. He
urged that, for all practical purposes, after the company was ordered to be
wound up, the liquidators represented the company and acted for and on behalf
of the company. The liquidators, therefore, would be the officers of the
company though they had to work under the supervision of the court. Under such
circumstances, Mr. Patel urged that section 281 of the old Act, 1913, would
apply and it was within the powers of the court to grant adequate relief as
prayed for. In support of his submission, he referred to the case of Alexander
Thomson Montgomery v. Registrar of Joint Stock Companies, ILR [1955] 2 Cal 439.
Mr. M.B. Shah, learned Assistant Government Pleader,
who appeared on behalf of the Registrar of Companies on the other hand urged
that the official liquidator could never be said to be an officer of the
company. He was not appointed by the company nor was he under any control of
the company. Mr. Shah urged that the official liquidator was appointed by the
court and was required to work under the supervision of the court. He was,
therefore, an officer of the court and not an officer of the company. He
referred to the definition of the officer of the company as given in section
2(11) of the old Act and urged that the legislature did not intend to include a
liquidator in the categories of persons described as officers of the company.
He also adopted the arguments advanced on behalf of the Registrar of Companies,
that section 281 of the old Act being repealed, no relief could be granted to
the applicants under the provisions of that section.
It may be noted at the outset that once a company is
taken into liquidation whether that liquidation be voluntary, compulsory or
under the supervision of the court, the liquidator appointed to carry out the
purpose of liquidation represents the company during the liquidation
proceedings and acts for and on behalf of the company. It is immaterial whether
the liquidation is voluntary or is carried on under the supervision of the
court. The powers of the liquidator in the ordinary winding up or in the
compulsory winding up would be the same. The moment the company is ordered , to
be wound up and a liquidator is appointed to carry on the liquidation
proceedings, all the powers of the managing agent or directors of the company
would come to an end and it is the liquidator who would look after the affairs
of the company for the purpose of winding it up. It is, therefore, difficult to
agree with the submission made by Mr Shah, learned Assistant Government
Pleader, that the liquidator is not an officer of the company and that he is an
officer of the court. No doubt, the liquidator appointed by the court would be
an officer of the court. He has to carry on liquidation proceedings under the
supervision of the court. All the same, the fact remains that the liquidator
while dealing with the liquidation proceedings represents the company which
does not lose its identity as a company till it is dissolved. The liquidator
alone can act for and on behalf of the company. In my opinion, therefore, the
liquidator can be said to be an officer of the company though not specificially
mentioned in section 2(11) of the old Act or section 2(30) of the new Act of
1956. In the Calcutta case referred to by the learned advocate for the
applicants, Alexander Thomson Montgomery, ILR [1955] 2 Cal 439, the Calcutta
High Court held that section 281(2) applied to a default under section 244B(7)
of the Act. However, from the perusal of the judgment, it transpires that the
Registrar of Companies there had conceded that section 281(2) would apply with
the result that the official liquidator was considered to be an officer of the
company. Mr. Shah, therefore, urged that the Calcutta decision (Alexander Thomson Montgomery v.
Registrar of Joint Stock Companies, ILR [1955] 2 Cal 439) cannot be said
to be laying down a proposition of law. It merely held that the provisions of
section 281(2) applied in view of the concession made by the Registrar. It is
true that the Calcutta High Court applied the provisions of section 281(2) of
the Act because there was no dispute about it. But, in view of the fact that no
dispute was raised by the Registrar of Companies to the effect that the
liquidator cannot be said to be an officer of the company and consequently the
provisions of section 281(2) did not apply, it was not necessary for the court
to independently hold that section 281(2) would not apply. The fact remains
that the Calcutta High Court did apply section 281(2) and condoned the penalty
for default under section 244B of the Act. This point is very succinctly dealt
with by the Kerala High Court in the case of P.C. Pothen, Liquidator of the
Commonwealth Bank Ltd., ILR [1966] 1 Ker 1, wherein it was held :
"Both from the plain meaning of the term 'officer of the company' and from the scope and intendment of section 633, a liquidator is an officer of the company within the meaning of that section. The definition in section 2(3) is an inclusive definition so that, if according to the ordinary meaning of the term a liquidator can be regarded as an officer of the company, the definition cannot have the effect of excluding him. Construing the term 'officer of a company' in its natural sense the liquidator of a company is an officer of the company even if it be that in the case of an official liquidator or a court liquidator he is, at the same time, an officer of the court. A company does not cease to exist when it goes into liquidation. That happens only when it is dissolved. Meanwhile, the person who acts for and on behalf of the company is the liquidator. That a liquidator is an officer can scarcely be doubted and that being so, it would not be doing any violence to the language to say that he is an officer of the company."
With great respect, I am in entire agreement with the
observations made by the Kerala High Court. Similarly, in the case of Official
Liquidator, Mysore Spun Silk Mills Ltd. v. Commissioner of Income-tax [1971] 41
Comp Cas 226 (Mys) it was observed :
"Even after a winding up order is passed, the
company continues to be a 'person' within the meaning of section 4 of the
Income-tax Act, and, therefore, any receipt of income in the course of the
winding up which would attract liability to income-tax under its appropriate
provisions would be liable to income-tax.
The liquidator, on an order for winding up being
made, becomes the 'principal officer' of the company within the meaning of
section 2(35)(a) of the Income-tax Act, 1961.
A company judge has power to require the liquidator
to file returns before the Income-tax Officer. The legal position of the
liquidator, whether he is a liquidator appointed in a voluntary winding up or
under the compulsory winding up by orders of the court, is the same. The
liquidator is an officer of the court employed for the purpose of winding up of
the affairs of the company in liquidation.
The company on the making of an order of compulsory
winding up does not cease to have its corporate existence. During the course of
the winding up, the company is represented by the liquidator who functions as
its agent for the purpose of winding up. One of the duties of the court is to
see that the liabilities of the company are properly met in accordance with the
provisions of the law, and the liability to income-tax is one of such
liabilities."
It will thus be seen, as observed by the Calcutta,
Kerala and Mysore High Courts, that the liquidator of a company in liquidation
is considered an officer the company whether he is a liquidator appointed under
an ordinary winding up or appointed by the court under the compulsory winding
up or under the supervision of the court. He represents the company for all practical
purposes after the winding-up order is passed. As observed earlier, the company
does not cease to be a legal entity merely because a winding up order is
passed. The company would cease only when the final order of dissolution is
passed. Therefore, so long as the liquidation proceedings are going on, the
liquidator is the only person who can represent the company in its dealings and
also would act for and on behalf of the company with regard to the liquidation
proceedings. It is, therefore, too much to say that the liquidator cannot be
said to be an officer of the company though he would represent the company for
all legal and practical purposes. In my opinion, the learned trial judge had
taken a very narrow view of the definition of the officer of the company as
given in section 2(30) of the new Act. It is an inclusive definition and merely
because in the inclusive definition, the name of the liquidator is not
mentioned, it cannot be said that he is not an officer of the company if, in
normal course, the liquidator could be considered as an officer of the company
for all practical and legal purposes. He is the only person who acts for and on
behalf of the company during the liquidation proceedings. Therefore, with
respect, I entirely agree with the observations made by the above High Courts
that the liquidator is an officer of the company. Thus, if the liquidator is
held to be an officer of the company, section 281(2) of the old Act would come
into play and it would be open to the court to give relief for default under
section 244B(7) of the old Act.
Mr. Shah, however, referred to the case of Nandlal
More v. Ramchandiram Mirchandani, AIR 1968 Bom 208 ; [1968] 38 Comp Cas 39,
wherein it was observed:
"The definition of 'officer' in section 2(30) is
merely an inclusive definition and creates a fiction for deeming a partner an
officer. But there is no justification to carry that fiction still further, and
hold, although it is not so specifically provided that every partner of a firm
of managing agents is himself a managing agent of the company within the
meaning of section 2(25).
Further, the word 'firm' is not used in section 2(25)
unnecessarily or redundantly. The presence of the word 'firm' indicates that
when a partnership firm is a managing agent, every partner of that firm
separately is not intended to be treated as a managing agent of the company.
If the legislature intends that for the purposes of
disqualification in section 261(1) every partner of a firm of managing agents
should himself be treated as a managing agent, the Legislature should make
suitable amendments to effectuate that intention".
I fail to understand how this ruling will support Mr.
Shah in his submission that the liquidator would not be an officer of the
company. On the contrary, as observed by the Bombay High Court, the definition
of an officer in section 2(30) is merely an inclusive definition and creates a
fiction for deeming a partner an officer. Therefore, even a partner of a firm
would be deemed to be an officer of the company for the purpose of section
2(30) of the Act. The Bombay High Court negatived the contention that every
partner of the firm of managing agents would be disqualified for the purpose of
section 261(1) because under section 2(25), the firm cumulatively was held
liable and not each partner of the firm. In the light of the definition given
in section 2(25), the court interpreted the liability of the partner of the
firm for the purpose of section 261(1) of the new Act. The Bombay High Court
was not called upon to consider the question whether a liquidator was an
officer of the company or not. In my opinion, the ratio of this case cannot
help in understanding the question which has arisen in the instant case.
Lastly, it was urged by Mr. Shah that section 281(2)
was repealed and, therefore, the provisions of that section cannot help the
applicants. In my opinion, the submissions made by Mr. Shah are devoid of any
merit. The applicants are held liable for default of section 244B(7) of the old
Act. Under the old section 281, it was open to the court to grant suitable
relief if the court was of the view that the liquidators had committed bona
fide mistake and had not made any personal profit out of their error. The
Registrar of Companies wants to hold the applicants liable under the provisions
of the old Act. The old Act admittedly has been repealed but section 641 of the
new Act says that for the purpose of liquidation proceedings which had started
prior to the coming into force of the new Act, the old Act will be deemed to be
continued in force as if the new Act had not been passed. Thus, all the
provisions of the old Act would be applicable to the liquidation proceedings
which had started prior to the coming into force of the new Act. In my opinion,
therefore, section 281 of the old Act would be applicable and it would be open
to the court to grant suitable relief as prayed for. That apart, under the new
Act also, section 633 is a counterpart of the old section 281. Under the new
section, the court has been given power to give suitable relief in case of bona
fide breach committed by the liquidators. In the case of P.C. Pothan, ILR
[1966] 1 Ker 1, therefore, it was observed as under while interpreting section
633 of the Act :
"Now, so far as payment of interest is concerned,
what that clause does is to declare the liability of the liquidator to pay
interest; it makes no special provision for the enforcement of the liability.
It is not as if there is an automatic order for recovery against the liquidator
by reason of the clause, and hence, it is to be assumed that the liability is
to be enforced and recovery effected in the normal course by a proceeding
either in the court or in the ordinary courts. That being so, I should think
that recovery by any such proceeding would be something falling within the
scope of subsection (2) of section 633 and in respect of which this court is
competent to grant relief."
In my opinion, the court is competent to grant relief
under section 281 of the old Act and even under the provisions of section 633
of the new Act. The evidence clearly shows that the liquidators through a bona
fide error of law had not deposited the said amount in the Reserve Bank. But
they had kept the said amount in the scheduled bank. It is thus clear that the
liquidators had not obtained any undue gain or advantage for themselves by not
depositing the amount in the Reserve Bank within the prescribed period. The
evidence shows that the funds of the company in liquidation were so scanty that
even the liquidators could not be paid their remuneration in full. Out of Rs.
480 which they were entitled to receive towards their remuneration, they were
paid Rs. 280 only. The liquidators had also to pay Rs. 15 out of their pockets
for filing of final report with the Registrar or Companies. The evidence also
shows that from time to time, the liquidators had spent Rs. 1,000 from their
pockets which they, with great difficulty, were able to recover from the funds
of the company. Under such circumstances, the learned judge below was not right
in not exercising his discretion under section 281 of the old Act or section
633 of the new Act to grant suitable relief to the applicants for the breach
committed under section 244B(7) of the old Act.
For these reasons, in my opinion, it is not necessary
to charge any penal interest or any penalty under the said section. The order
passed by the learned judge rejecting the relief for default, therefore,
deserves to be set aside.
In the result, I pass the following order :
The appeal is allowed. The application given by the
official liquidators for granting relief for default under section 244B(7) of
the old Act is granted and it is ordered that no penal interest or any penalty
prescribed under that section should be levied from them. In view of the facts of
this case, there will be no order as to costs of this appeal.
[1986] 60 COMP. CAS. 1061 (DELHI)
HIGH COURT OF
DELHI
v.
D. R. KHANNA J.
OCTOBER 19, 1984
Ved Vyas, and L. C. Goyal for the petitioner.
S. N. Gupta, K. S. Bindra and S. L. Hans for the
Respondent.
JUDGMENT
D. R. Khanna J.—The present case somewhat
brings out how clubs which are otherwise places of recreation and relaxation
get converted into hot-beds of group rivalries. Whether they are the result of
one group or the other monopolising their hold over the entire affairs is
difficult to say. In the present case, there are circumstances pointing towards
that, though exaggeration of insignificant matters by the other side is also
there.
This petition under section 633(2) of the Companies
Act was moved by some members of the managing committee of the Chelmsford Club
in which they stated that there were apprehensions that the Registrar of
Companies was likely to prosecute them under various provisions of the
Companies Act and, therefore, he should be restrained from doing so. It was
claimed that there had been no acts of negligence, breach of duty, etc., on
their part and in the circumstances they should not be made to undergo the
rigour of baseless prosecution. This petition was moved on April 7 1983. At the
same time, the petitioners sent a letter to the Registrar that they had moved
this petition and, as such, till its disposal, the prosecution be not started.
The Registrar, however, commenced three criminal cases against the petitioners
on April 13, 1983. One has been under section 209(5), the second under section
211 and the third under section 217 of the Companies Act.
Notice of this petition under section 633(2) of the
Companies Act was issued to the Registrar of Companies who appeared on May 26,
1983, and sought some time to file a reply. In the reply which was later filed,
it was contended that the prosecutions had already been set in motion and,
therefore, the provisions of section 633(1) of the Companies Act came into
operation and the company court could not adjudicate upon the controversies
raised in the petition. Section 633(1) in this regard provides that the only
court which can entertain objections to the prosecution is the one hearing the
criminal case.
Confronted with this position, the petitioners made
reference to Chapter XXXIV of the
Clarifications and Circulars on Company Law issued by the Company Law
Board which provides that prosecution should not be started after application for
relief has been filed by any officer of the company under section 633. The
petitioners, therefore, contend that their right to get relief under
sub-section (2) of section 633 could not be frustrated by the unwarranted act
of the Registrar in launching prosecutions in defiance of the instructions
contained in the said circular. On merits, the Registrar took a non-committal
stand and had nothing to say on one side or the other. In the meanwhile, one
Mr. C. L. Madhok moved a petition under section 633(3) of the Companies Act for
intervention and stated that he has been a member of the club for a fairly long
time and that there existed circumstances which necessitated the filing of the
prosecutions against the petitioners and that as such the company court should
not at this belated stage intervene to quash them.
I have heard the parties and given my due
consideration to all the circumstances. So far as the provisions contained in
section 633(1) of the Companies Act are concerned, they are quite explicit that
once the prosecution has been started by filing of the complaint, the only
court competent to entertain any objection to the propriety thereof is the
court hearing that case. This is also the view of different High Courts in the
cases reported as Tolaram Jalan, In re [1959] 29 Comp Cas 34 ; AIR 1959 Bom
245, Orissa Jute and Cotton Mills Ltd., In re [1956] 26 Comp Cas 218 ; AIR 1956
Orissa 205, Sri Krishna Parshad v.
Registrar of Companies [1978] 48 Comp Cas 397 (Delhi) and In re Auto Link
Financiers P. Ltd. [1971] 41 Comp Cas 63 (Delhi). However, sub-section
(2) of section 633 provides for situations where prosecutions have not been
started and there are only reasons to apprehend that proceedings in that regard
are likely to be brought. The question to be considered is when certain rights
were available to the petitioners under sub-section (2) to get the matter of
alleged negligence, breach of duty, etc., determined by the court, whether the
same could be set at naught by the Registrar by moving the complaints under
sub-section (1) in the meanwhile. This obviously was against the circular of
the Company Law Board as referred to above. This circular though not of
statutory nature, contains one of the policy decisions which the Company Law
Board and the Central Government have formulated. Their operative and binding
character qua the third parties may be quite doubtful. However, so far as the
Registrar of Companies, who is an authority subordinate to the Company Law
Board is concerned, the same did call for respect and adherence. It could not
be that those directions were applied in the case of some of the companies and
ignored with regard to others. When once the petitioners had moved the company
court under sub-section (2) of section 633, he could have waited for the result
of these proceedings or at the most required the court to expeditiously dispose
of them instead of stealing a march over the petitioners and filing the
complaints.
Mr. K.S. Bindra, appearing from the side of the
intervener, has vehemently contended that these circulars have no binding
character and in any case they could not be considered to have any legitimacy
after the coming into force of the new Code of Criminal Procedure, 1973. He has
made reference to the new provisions of the law of limitation introduced and
has pointed out that any delay in the filing of the complaints by the Registrar
would have resulted in the cases getting barred by time and the person holding
offices of the company who had committed misfeasance and other illegal acts
escaping due punishment. It is pointed out that the punishments awardable under
the complaints already lodged could be up to one year and the limitation for
commencing any such prosecution under section 466, Cr. PC, is one year from the
date of the occurrence or the knowledge of the complaint. However, section
470(2), Cr. PC, gives protection to the complainants in such circumstances
inasmuch as the time during which the institution of the prosecution lies
stayed by any order has to be excluded. From the side of the petitioners it has
rather been pointed out that in any case, the period of limitation never
weighed with the Registrar as the complaints were filed on 13th April, 1984,
while the show-cause notices which the Registrar had earlier issued to the petitioners
were in February, 1983. By then, the Registrar, it is contended, had already
known about the alleged misfeasance, breach of duty, etc. I would, not,
however, like to dilate more on this aspect.
Since I have already observed that the rights available
to the petitioners to get their claim under section 633(2) determined could not
be affected by subsequent filing of the complaints under sub-section (1), I
proceed to discuss the contentions raised by the petitioners as to how the
so-called acts of misfeasance and breach of duty, etc., have no basis.
The petitioners have first made reference to the
prosecution instituted under section 217 of the Companies Act. The notice which
was served upon the petitioners by the Assistant Registrar of Companies mentioned
two acts of misfeasance. One was with respect to the non-realisation of the
amounts due on certain government investments and the other was failure to
realise the amounts due from certain ex-employees who had left the service of
the club. About the former, the amount was Rs. 3,500 and the petitioners have
brought out that they had been writing to the concerned government departments
for clearance of the dues but they were not paid in spite of the best efforts
exerted in this regard. Those amounts were not lying with any private party and
were in fact government securities. The amount was also not very high.
Unfortunately, the red tapism that has come to be in most of the government
departments does delay the clearance of the dues. For this purpose, the
petitioners could not be made criminally liable. Their conduct has been bona
fide inasmuch as they have been pursuing the government departments for
realisation of the amounts.
The second amount due from the ex-employees was of
Rs. 400 odd. There were stated to be 7 employees and the break-up was two minor
amounts. Any institution of suits against them for those amounts would
naturally have been penny wise and pound foolish. The prosecution sought to be
launched under section 217 was thus entirely misplaced and, therefore, I have
little hesitation in directing the Registrar not to initiate any such
prosecution and in case, in spite of the pendency of the petition under section
633(2) and in violation of the circular of the Company Law Board, he has commenced
any, the same should be dropped.
The second prosecution is under section 209(5) of the
Companies Act. The allegation under this was that during the course of
inspection, it was noticed that the fixed assets register as required under
section 209 had not been maintained properly by the company and the
quantitative details in respect of the various assets acquired from time to
time had not been entered in the concerned register. The location of the fixed
assets was also stated to have not been entered there.
The petitioners have pointed out that no prescribed
register in any particular form has been laid under the Companies Act or the
Companies (Court) Rules. Rather the club has in fact maintained a fixed assets
register. In case some further details should have been incorporated in the
same, a direction to this effect could have been issued by the Registrar
instead of straightaway proceeding to launch the prosecution. Moreover, the
averments made in this notice were generalised and vague. There was no specific
mention of any particular item.
In any case, as the matter came up for discussion
during arguments, it was felt that such a register should contain the dates of
acquisition of different assets and the places where they have been fixed so
that their identity could be correlated. Mr. Ved Vyas, appearing on behalf of
the petitioners as well as the club, stated that necessary steps in this
direction will be taken forthwith.
There have been no specific instances of
misappropriation or misfeasance with regard to any item. In the circumstances,
the institution of prosecution would not be worth while.
Lastly, I come to the show-cause notice which had
been issued under section 211 of the Companies Act. The same brought out a
number of acts of misfeasance, breach of duty, negligence, etc. The first of
them was with regard to the interest earnings of Rs. 1.52 lakhs and Rs. 2.37
lakhs during 1969 and 1980 from fixed deposits. The background in this regard
is that although the main object of the Chelmsford Club has been recreation and
sports, a country golf club was claimed to have been started and for this
purpose extensive agricultural land was acquired near Qutab. Had the object
been to start the golf club, it could be said that this was an off-shoot
activity of the club. However, what was done under the garb of this golf club
was to start allotting one acre plots to different members for their personal
farm houses, etc. The club appeared to have for this purpose started acting as
land coloniser for its members or a house building society. It is not shown
that the objects and memorandum of the company permitted such a course for the
benefit of the individual members. Be that as it may, nothing more need be said
about this.
The interest which was the subject-matter of this
allegation had accrued to the club from various amounts deposited by the
members for the acquisition of plots by them. It has been pointed out by the
petitioners that the land is at present in the process of acquisition by the
government and is also affected by the Ceiling Act. Some litigation in that
regard is pending and, as such, it is not known if the deposits made by the
members and interest accrued would have to be returned to them on the company
losing the land. It is, as such, pleaded that interest-earning has not been
treated as revenue income.
One of the contentions raised by Mr. Bindra has been
that the handling of the accounts of the company has been such that the
management committee is defrauding the income-tax department and not showing substantial
part of its income as such. I am afraid the company court cannot go into this
aspect. It is for the income-tax authorities to look into the accounts and
ensure that the income otherwise does not escape taxation.
Whether the activity embarked upon by the club with
regard to the acquisition of plots for the members was within the permissible
limits of the objects and memorandum of the company and whether any misfeasance
or breach of duty had been committed by the petitioners or not, I will not express
any opinion. Let the prosecution have its course.
There is next the allegation that the club is
realising 13 months' subscription from members instead of 12 months for every
year, but the excess subscription of one month was not being shown as income but
is credited in the members' reserve fund. This was done as a result of a
resolution of the managing committee and the position has continued for a large
number of years. In case the general body of the club had felt aggrieved by
this resolution of the managing committee, it could have reversed the same or
given any direction in this regard. The fact remains that there has been no
misappropriation or mala fides involved in this. I am, therefore, unable to
sustain the prosecution on this score.
Next item is of excess realisations from the
"tambola". In this connection there is also a resolution of the
Financial Sub-Committee in the year 1970 and the realisations are being
credited to the building reserve account. Again there is nothing to show that
any mala fide or misappropriation was involved. Whether this conduct on the
part of the club violates the provisions of the Gambling Act as contended by
Mr. Bindra is not for me in these proceedings to comment upon. It is for the
administration or any other person feeling aggrieved to take action as may be
permissible under the law. The Registrar need not take action under that Act.
There are some realisations made by the Club from
Diwali Mela Bazars. It is an annual feature and entertainment stalls and booths
are set up. After meeting the expenses, some surplus is left. This, according
to the club, goes to the employees' dispensary fund. From that a dispensary for
the benefit of employees is being operated. The sanction given by the
administration for such a bazar is also subject to this condition. No
exception, therefore, can be taken to the same.
There is another item of complimentary Air India
tickets. The circumstances in which these tickets are given are that Air India
gets some advertisements displayed in the club premises, and instead of paying
for the same, two Air tickets are given to the club every year. The tickets
which are the subject-matter of the prosecution by the Registrar are two in
number and they were utilised by Mr. Venkata Raman, treasurer and Mr. Chopra,
Hon'y Secretary. They, of course, paid 50% of the cash towards those tickets
from their pockets to the credit of club. It is, however, not shown that the
travels undertaken by these officers were in any manner connected with the
affairs of the club. Thus, the benefit which otherwise could have enured to the
club for the display of advertisements by Air India prima facie appeared to
have gone for the personal benefit of two office-bearers. I will not,
therefore, like to interfere in the prosecution on this score. It is for the
petitioners to set up their defence in accordance with the law.
Another allegation is with regard to the
misappropriation effected by staff members in the mineral water stock. About
that a criminal case is already pending against them. That shows that the
managing committee had been vigilant to take action against the defaulting
officers when they noticed bungling on their part. The managing committee,
therefore, cannot be made liable.
Then there is the item of water cooler and bottle
cooler. A plant was purchased in July, 1979. According to the Registrar, the
amounts spent on them were shown as repairs to furniture and fixtures instead
of showing them in capital account. The relevant register was got produced from
the petitioners in court today, and the Registrar has now been satisfied that
it was the capital account which had been debited in that regard. The
prosecution, therefore, would be misplaced.
The Registrar has also referred to the loss of Rs.
45,000 suffered by the club in a fire in the green room. It is alleged that the
club had not shown the amount of loss in its accounts for the year 1980. The
petitioners have, however, pointed out that in this very year, repairs were
carried out and accounted and, as such, the question of the loss being shown in
that year did not arise. In my view, the explanation should be accepted.
Lastly, there is a general allegation that the
accounts of the company for the years 1978, 1979 and 1980 were not true and
fair and did not reflect the affairs of the company correctly. The allegations
in this regard are vague. Had any specific instance been brought out, that
would have been considered. In case they have reference to the above
irregularities, then opinion about them has already been expressed.
The complaint under section 211 of the Companies Act
can, therefore, proceed subject to the observations made above.
Another circumstance to which the parties have made reference is that a suit was instituted against the company and its managing committee which was partially decreed by J.D. Jain J. and a number of strictures were passed with regard to the affairs of the company. At present, an appeal against that judgment is pending before a Division Bench of this court and some stay has been allowed. In my view, the controversy raised in that litigation will receive adjudication in due course. The same could not affect the propriety of determining this petition under section 633(2) of the Companies Act. It has been as such that this order has been made.
The petition is disposed of accordingly.
[1996] 9 SCL 1 (AP)
HIGH COURT OF
ANDHRA PRADESH
Central Bank
Executor & Trustee Co. Ltd.
v.
Magna Hard Temp Ltd.
G. BIKSHAPATHY, J.
COMPANY PETITION NO. 29 OF 1991
NOVEMBER 23, 1995
Section 633 of the Companies
Act, 1956 - Legal proceedings - Power of Court to grant relief in certain cases
- Petitioner was made trustee and agent for debenture-holders in respect of
debentures issued by respondent-company -On latter's failure to execute trust
deed, petitioner sought declaration against liability of loss or consequences
as also direction for payment of remuneration - Whether petitioner not being an
officer of respondent-company, its application under section 633 was not
maintainable - Held, yes - Whether Registrar should ensure that interest of
debenture holders was not put to jeopardy - Held, yes
The
petitioner consented to act as trustees and agents for debenture holders in
respect of certain debentures being issued by the respondent-company. The
respondent agreed to pay an initial sum of Rs. 8,000 to the petitioner for the
said appointment, and thereafter Rs. 10,000 per year. However, it only received
the initial payment. However, as the respondent-company failed to execute the
relevant trust deed and also failed to make the agreed payment, the petitioner
filed a petition under section 633(2) seeking a declaration against its
liability for any loss or consequences and direction for payment of the
remuneration due to it.
A reading of section 633(2) makes it clear that if
any officer of the company has reason to apprehend that any proceedings will or
might be brought against him in respect of any negligence, etc., he may approach
the High Court for relief and the High
Court shall have the power to relieve as if it is a Court before which the
proceedings have been brought under section 633(1). In the instant case, the
application had been filed by the petitioner on the premise that it was an
officer of the company and that it apprehended the proceedings for misfeasance,
breach of duty, etc., and, therefore, sought a declaration under section 633
that he was not liable for any loss or consequences to the respondent or
debenture holders as trustee. In the instant case, debentures had been floated
by the respondent-company and as against one crore anticipated investment, it
had received only Rs. 33 lakhs. Even the said amount was frozen by the Andhra
Bank for various reasons. After careful consideration of the matters, it was
found that the petitioner was not an officer of the company and, therefore,
such an application under section 633(2) was not maintainable.
However, as
the interest of the debenture holders had not been protected as required under
law, the Registrar should take appropriate action to ensure that the interest
of the debenture holders was not put in jeopardy.
L.P.R.
Vittal for the Petitioner. S.
Vani, K. Sridevi and B. Chandrakala for
the
Respondent.
1 . The petition is filed under section
633(2)of the Companies Act, 1956 ('the Act') seeking declaration that the
petitioner is not liable for any loss or consequences to the respondent or the
debenture holders as trustee for the debenture holders, and (b) for a direction
to the respondent to pay a sum of Rs. 40,000 towards remuneration due from 1986
to 1990 with interest at the rate of 12 per cent and for costs.
2. The petitioner is the Central Bank
Executor & Trustee Co. Ltd. having registered office at Bombay. The respondent
sent offer to the petitioner in the year 1985 requesting them to act as
trustees and agents for debenture holders in respect of one lakh debentures of
value of Rs. 100 each which were going to be issued shortly. The petitioner
sent his consent as per his letter dated 25-9-1984. It was informed by the
petitioner that the respondent will give first charge on the fixed assets of
the company and for the proposed debentures. It is also agreed to maintain 1.5
times security to cover the net fixed assets. In the annual general body
meeting held on 3-10-1985, the respondent passed resolution for floating
debentures. It was agreed to pay a sum of Rs. 8,000 initially to the petitioner
for the appointment of the debenture trustees and thereafter it was agreed to
enhance to Rs. 10,000 per year. The respondent paid only Rs. 8,000 on 8-10-1985
and thereafter he failed to make any payment. On 14-11-1985, the respondent
offered the debentures to the public and the issue was closed on 16-12-1985. As
per the offer made by the respondent, it is required to execute the trust deed
and create a charge over its fixed assets within 18 months in favour of
the petitioner. As per the guidelines issued by the Government of India on
14-1-1987 in order to protect the interest of the debenture holders, the
respondent has to create security within 12 months from the date of the issue
of the debentures. But, however, contrary to the terms of the appointment, the
trust deed was not executed by the respondent despite several demands. The
respondent evaded the performance of its obligations on the pretext that the
financial institutions in whose favour the property was charged earlier are not
agreeable for pari passu charge. It is submitted that the debentures were
subscribed to the extent of 33 lakhs only and the company is facing financial
difficulties apart from labour unrest. The petitioner also submit that the
respondent has not paid the interest on debentures also. It also appears to
have made a complaint to the concerned officers in this regard. Since, the
trust deed has not been executed in favour of the petitioner, it would not be
possible for the petitioner to continue as trustees as there was no trust deed
in the eye of law, the petitioner cannot be treated as a trustee. It is submitted
that the petitioner, that it acted honestly and reasonably and it is entitled
to be absolved from all its liabilities which may arise out of their
appointment as trustees and agents. Since the respondent failed to execute the
trust deed, it is seeking declaration that it is not liable for any loss or
consequences and further direction for payment of remuneration from 1986
onwards with interest.
3. A counter-affidavit was filed by the respondent-company
stating that the petition is not maintainable under section 633(2). Further, it
was stated that the petitioner was requested to act as a trustee and agents for
the debenture holders and that it proposed to give the first charge on the
fixed assets of the company. However, since the said promise was subject to the
happening of certain events, it was intending to clear off the liabilities of
the Andhra Bank, A.P.I.D.C, A.P.S.F.C, etc., and minimum amount of Rs.
44,97,000 was required. But the amount received by the company was only Rs. 33
lakhs and the Andhra Bank frozen the amount. Therefore, the respondent submits
that it had discharged all the obligations. It is further stated by the
respondent that the company became sick and a scheme was approved by the Board
for Industrial and Financial Reconstruction and the said rehabilitation scheme
was under implementation. The company is making all out efforts to make the
payment to the debenture holders. Therefore, it is submitted by the respondent
that there are no bona fides in the application filed by the petitioner and the
same is liable to be dismissed.
4. A counter-affidavit is also filed by the Registrar of the
Companies. It is the case of the Registrar that the company has committed
certain irregularities and violated the provisions of the Act for which a
prosecution have been launched. But, however, the learned counsel for the Registrar submitted the petition, as such
filed by the petitioner is not maintainable inasmuch as the petitioner is not a
trustee in the eye of law.
5. On the basis of
the pleadings as set out above, it is to be considered whether the petition is
maintainable under section 633(2).
6. For a proper appreciation of the case, it is necessary to refer to
section 633(2), which is extracted below :
"(2)
Where any such officer has reason to apprehend that any proceeding will or
might be brought against him in respect of any negligence, default, breach of
duty, misfeasance or breach of trust, he may apply to the High Court for relief
and the High Court on such application shall have the same power to relieve him
as it would have had if it had been a Court before which a proceeding against
that officer for negligence, default, breach of duty, misfeasance or breach of
trust had been brought under sub-section (1)."
The word
'officer' has also been defined under section 2(30) of the Act, which reads as
follows :
"(30)
'officer' includes any director, managing agent, secretaries and treasurers,
manager or secretary (or any person in accordance with whose directions or
instructions the board of directors or any one or more of the directors is or
are accustomed to act) and also includes :
(a) where
the managing agent, or the secretaries and treasurers is or are a firm, any
partner in the firm;
(b) where the managing agent or the secretaries
and treasurers is or are a body corporate, any director or manager of the body
corporate;"
Thus, a
reading of sub-section (2) of section 633 goes to show that make it clear that
if any officer of the company has reason to apprehend that any proceedings will
or might be brought against him in respect of any negligence, etc., he may
approach the High Court for relief and this Court shall have the power to
relieve as if it is a Court before which the proceedings have brought under
section 633(1). The primary ingredient that is to be considered in the instant
case is whether that an application has been made to this Court by an officer
of the company. A reading of definition of the word 'officer' shows that the
Directors, Managing Agent, Secretaries, etc., are covered by the said
definition.
7. The learned counsel has not been able to
place any decisions or the provisions under which the petitioner who has agreed
to act as agents and trustees are the officers of the company. Even though, it
is specifically contained in the offer of debentures that the
petitioner-company has agreed to act as a agent and trustee, it could not be
called as an officer of the company. The learned counsel for the petitioner
contend that since the remuneration has been fixed, they are to be treated as
the officer. On the other hand, the learned counsel for the respondent submits,
firstly, the petitioner has no locus standi to file an application under
section 633(2), as he is not an officer. The application is maintainable only
by the officer of the company. Secondly, the trust-deed has not been executed
in favour of the petitioner-company. Therefore, it cannot claim any rights as
if he is a trustee of debentures.
8. The learned counsel for the petitioner also submits that the debenture trustee has heavy responsibility, inasmuch as he is required to protect the interest of the debenture holders and, therefore, by refusing to execute the trust deed, the petitioner-company has exhibited lack of trust towards the debenture holders.
9. I have considered the respective contentions of the learned counsels. The application has been filed on the premise that it is an officer of the company and that it apprehends the proceedings for misfeasance, breach of duty, etc. and, therefore, seeks a declaration under section 633 that he is not liable for any loss or consequences to the respondent or debenture holders as trustee.
10. Before going into the merits of the case, whether the petitioner can seek such a relief it has to be established that the petitioner is an officer until and unless such an issue is decided further probe in the matter would be unnecessary. As per the admitted facts in the instant case, debentures have been floated by the company and as against one crore anticipated investment, it had received only Rs. 33 lakhs. Even the said amount was frozen by the Andhra Bank for various reasons which are not relevant. After careful consideration in the matter, I find that the petitioner is not an officer of the company and, therefore, such an application under section 633(2) is not maintainable. Accordingly, the petition is liable to be dismissed.
11. Accordingly, the petition is dismissed. However, it is a
matter of great concern that the interest of the debenture holders has not been
protected as required under law. That is the reason, the statute provides the
appointment of debenture trustee and execution of trust deed in his favour.
Even according to the company, no trust deed has been executed and thus, there
is a violation of the provisions of the Act. Though the company is expressing
difficulty that on account of certain unforeseen circumstances, pari passu
charge could not be obtained from the other financial institutions and that the
amounts were frozen by the Andhra Bank, it cannot be absolved of its statutory
obligations. The very purpose of creating debenture trust and executing the
trust deed is to safeguard the interest of the debenture holders. Therefore,
the Registrar shall take appropriate action to ensure that the interest of the
debenture holders is not put in jeopardy. There shall be no order as to costs.
[1940]
10 COMP CAS 244 (CH. D)
CHANCERY DIVISION
CROSSMAN, J.
MARCH 5, 6, 1940
Romer, K.C., and Valentine Holmes, for the
Petitioner.
Roberts, K.C., and A.F.M. Berkeley, for the
Company.
Andrewes Uthwatt, for the Board of Trade.
Crossman, J.—These are two petitions which have been heard together, each petition being by a director of a company called Gilt Edge Safety Glass, Ltd., asking for relief under Section 372 of the Companies Act, 1929, from liability by reason of certain events which have happened and for which they may be held liable. The actual prayer in the two petitions is in this form : The first paragraph is, "That your Petitioner," that is Mr. Maurice Gordon Liverman, "may be relieved by this Honourable Court pursuant to Section 372 of the Companies Act 1929 from any liabilities for fines or penalties which he may have incurred under Section 141 of this said Act "—that is the Companies Act, 1929—"or otherwise by reason of his negligence default breach of duty or breach of trust in having acted without being qualified and while disqualified as a director of the company". The second paragraph is: "That your Petitioner may also be relieved by this Honourable Court pursuant to the said section from any liability which he may be under to the company in respect of his negligence defualt breach of duty or breach of trust in drawing or receiving remuneration or otherwise acting as a director of the company without being qualified and while disqualified to act as such".
This company, Gilt Edge Safety Glass, Ltd., was incorporated in the year 1929 under the name "Gilt Edge Safety Glass, Syndicate, Ltd." In 1931 its capital was increased to an amount which has now been reduced, and in 1935 it adopted its present name of Gilt Edge Safety Glass, Ltd. At the beginning of the year 1936 a company known as Lancegaye Safety Glass (1934), Ltd., acquired the whole of the issued share capital of this company, that is to say, 21,294 ordinary shares of £1 each and 17,000 founders shares of 1s. each. On February 26, 1936, those shares were transferred to Lancegaye Safety Glass (1934), Ltd., which company I shall refer to as "Lancegaye". On May 18, 1936, the two petitioners, Mr. Maurice Gordon Liverman and Mr. Charles Walter Latham, who were directors of Lancegaye, were elected directors of Gilt Edge Safety Glass, Ltd., which I shall refer to as "Gilt Edge." Pursuant to the requirements of the articles of "Gilt Edge" ten ordinary shares of £1 each were transferred by "Lancegaye" to each of the petitioners as director's qualification. On February 18, 1937, the petitioner, Charles Walter Latham, was appointed managing director of "Gilt Edge" at a 6alary of £500 per annum, he being already entitled under the articles of "Gilt Edge" to a salary as director, to which Mr. Liverman was also entitled. On April 12, 1937, an order was made confirming the reduction of the capital of "Gilt Edge" from £22,850 to £7,381 6s. 8d., a very drastic reduction. That order and the minute approved by the Court were subsequently registered under Section 68 of the Companies Act, 1929.
The result of the registration of that order and the minute was that the petitioners' ten shares of £1 each became 200 shares of 4d. each and instead of being of the nominal value of £10 they becanie of the nominal value of £3 6s. 8d. The articles of "Gilt Edge" require shares of the nominal value of £10 to be held by each director as director's qualification.
That being the case, as from the registration of the order confirming the reduction and the minute, "Gilt Edge" was left without any director at all, because all the directors were in the same position, each holding only shares of the nominal value of £3 6s. 8d. Then in June, 1939, a company called Triplex Safety Glass, Ltd., acquired practically all the shares in "Lancegaye".
On June 29, 1939, the petitioners purported to resign their directorships—as a matter of fact, they had not any directorships to resign—and as from that date they ceased to act as directors. While they were acting as directors the first petitioner, Mr. Liver-man, had received the sum of £116 15s. 2d. as director's fees, and the other petitioner, Mr. Latham, had received the sum of £1,497 13s. 2d., partly as ordinary director's fees and partly as salary as managing director. On October 6, 1939, a summons was issued based on an information sworn by the secretary of "Gilt Edge", the information alleging that the petitioners acted as directors of "Gilt Edge" on June 29, 1939, after the expiration of two months from the date of their appointment, contrary to Section 141 (5) of the Companies Act, 1929. That information came before the magistrate at the Bow Street Police Court on October 16, 1939, and was adjourned sine die. On October 18, two days after the adjournment of the summons, a claim was made by the solicitors of "Gilt Edge" against the petitioners for repayment by the petitioners of the fees received by them as directors from the date when the reduction of the capital of "Gilt Edge" took effect, that is to say, from the date of the registration of the order confirming the reduction and the minute. On December 13, 1939, the summons at Bow Street Police Court was restored for January 8, 1940, and on January 4, 1940, the petitioners presented these petitions, praying for that relief which I have already read. On January 8, 1940, the summonses at Bow Street were again adjourned pending the hearing of these petitions.
Article 13 of "Gilt Edge" provides: "The qualification of a director shall be the holding of shares of the company of the aggregate nominal value of at least £10, and it shall be his duty to comply with the provisions of Section 73 of the Companies (Consolidation) Act, 1908. A director may act before acquiring his qualification." Section 73 of the Companies (Consolidation) Act, 1908, is the section which is now represented by Section 141 of the Companies Act, 1929. Article 14 provides for the disqualification of directors: "The office of a director shall be vacated,...(2) If he ceases to be a director by virtue of the Companies (Consolidation) Act, 1908, Section 73." That is all that I need read of the articles.
The position was that on the reduction of the capital of "Gilt Edge" taking effect the petitioners had vacated their office; they ceased to be directors. Then sub-section (5) of Section 141 of the Act of 1929 provides: [His Lordship read sub-section (5) and continued:] I have been referred to Section 11 of the Summary Jurisdiction Act, 1848, the effect of which is that the petitioners cannot be proceeded against more than six months from the time at which the offence occurred and, therefore, as the last offence occurred on June 23, 1939, no further proceedings under Section 141(5) of the Act of 1929 can be taken against the petitioners.
Section 372 of the Act, which is the section under which I am asked by the petitioners to exercise jurisdiction, is to this effect: [His Lordship read sub-sections (1) and (2) and continued:] Subsection (4)(a) provides: "The persons to whom this section applies are…….(a) directors of a company", so that the petitioners, who come within that sub-section, are persons to whom the section applies. I think that it follows from the decision of Maugham, J., in Batrie & Siaines Linoleum, Ltd., In re, that the phrase "any claim…….in respect of any negligence, default, breach of duty or breach of trust" in Section 372(2) of the Act of 1929 includes proceedings against the petitioners under Section 141(5), and so includes the proceedings against the petitioners which were commenced last October at Bow Street Police Court, as in that case the learned Judge gave relief under Section 372(2) from prospective liability to fines and penalties under Section 141(5).
But it seems to me that Section 372(1) makes the Court which hears the case the only Court which has jurisdiction to give relief in respect of proceedings which have already been commenced. Sub-section (2), on the other hand, which is the sub-section which was added by this Act, was in my judgment intended to meet the case of proceedings which have not been commenced, but which will or may be commenced, and gives this Court jurisdiction to grant relief from prospective liability.
Sub-section (1) does not, in my opinion, enable me to deal in any way with what the magistrate has done or is doing in the proceedings at Bow Street, and those proceedings will be unaffected by any order which I make here. "The Court hearing the case" in sub-section (1) means, in my judgment, the Court hearing the particular case in which the proceedings are taken, and I think that it is for the magistrate at Bow Street to deal with the summons which is pending there for fines and penalties alleged to have been incurred by these petitioners in respect of their negligence, default, breach of duty or breach of trust. It is true that paragraph 1 of the prayer is not expressly limited to the Bow Street proceedings; but, having regard to the fact that no other proceedings under Section 141 of the Act of 1929 have been commenced, those are by reason of Section 11 of the Summary Jurisdiction Act, 1848, the only proceedings for fines and penalties which can now be taken and therefore 1 cannot make any order on paragraph 1 of the prayer.
Paragraph 2 of the prayer is an entirely different matter. [His Lordship read paragraph 2 and continued:] The question that I have to decide is whether I ought to make an order under that sub-section relieving the petitioners from any apprehended liability. It has been suggested here that the last paragraph of Maugham, J.'s judgment in the case to which I have referred shows that I ought not to make any order where the company is unwilling that an order should be made. I think that neither counsel who appear for "Gilt Edge" now contend that that suggestion is justified. It seems to me that what Maugham, J., is referring to in the last paragraph of his judgment is the importance of the Court having information as to the views of the persons concerned before it comes to a decision as to giving relief under sub-section (2). It does not follow, I think, that because the shareholders oppose the application, therefore the Court ought not to exercise its jurisdiction. The opinion of the shareholders is only one of the circumstances which the Court has to take into account. What I have to consider in this case, having satisfied myself as to the first two conditions of the exercise of the jurisdiction—that is to say, honesty and reasonableness—and I think it is substantially admitted by counsel for "Gilt Edge" that in this case the petitioners acted honestly and reasonably—is whether, having regard to all the circumstances of the case, including those connected with their appointment, the petitioners ought fairly to be excused for whatever the particular default is, negligence, default, breach of duty or breach of trust. Here it is admitted, I think, and I do not think there is any question on the evidence as to this, that the petitioners had no idea that they had ceased to be directors of "Gilt Edge" owing to the reduction of the capital. The solicitor who acted in the matter of the reduction had not realised it; he has given evidence before me and it is quite clear that he had not realised it, and I do not think that even an expert lawyer could fairly be blamed for not having observed that particular result of the reduction. It was a pure accident, I think, that the petitioners became disqualified as directors on the reduction taking place. They never thought about it, and the question is whether their not having thought about it amounts to such negligence or default or breach of trust as to prevent their obtaining relief under Section 372. I think that in a sense it may be that they were negligent, and no doubt, without knowing it, they committed a breach of duty in continuing to act as directors when they were no longer qualified. But this was a purely technical defect which would, if it had been realised, have been put right at once, because they were merely representatives of "Lancegaye" which held the shares in "Gilt Edge", and could have transferred sufficient of the 4d. shares to meet the qualification; and I have no doubt that "Lancegaye" would have done so if it had realised the position. Having regard to that fact and to the fact that their not holding shares of the nominal value of £10 caused "Gilt Edge" no loss and really made no difference whatever to "Gilt Edge", I find it difficult to see how I can come to the conclusion that the petitioners ought not fairly to be excused for what was a purely technical wrongdoing. It has been suggested that the petitioners in some way or other neglected their duty as directors of "Gilt Edge", and that they got more money than they ought to have got. These suggestions, which came out in the cross-examination of one of the witnesses, seem to me to be wholly irrelevant here, even if I accepted them as facts. The fact, if it be the fact, that the Triplex Company has some grievance against the petitioners does not seem to me to justify me in finding that they ought not fairly to be excused for their negligence or default or breach in the circumstances of the case or in refusing to exercise the discretion, which I have under the section, to relieve them from liability for their conduct.
The result is that I think that this is a case in which I ought to exercise my jurisdiction under Section 372 (2) to relieve the petitioners from prospective liability in respect of their conduct. I propose to make an order under paragraph 2 of the prayer in each petition.
There will be no order under paragraph 1.
The applicants must pay the costs of "Gilt Edge" and of the Board of Trade.
[1990] 69 COMP. CAS 556 (P&H)
G.R. MAJITHIA J.
OCTOBER 14, 1988
V.K. Bali,
for the Petitioner.
J.S. Narang,
K.L. Kapur for the Respondent.
JUDGMENT
G.R.
Majithia, J. — Petition
under section 633(2) of the Companies Act, 1958, has been moved by Prestolite
of India Ltd., through its managing director and directors, seeking the
following reliefs :
(a) That the petitioners be excused and
relieved from all proceedings criminal in nature including that of F. I. R. No.
143 of 1981, F. I. R. No. 134 of 1982 and F. I. R. No. 39 of 1983 in respect of
the alleged non- deposit of the contributions of the employees' shares and stay
further proceedings pending in the court of Miss Raj Rani, Judicial Magistrate
1st Class, Faridabad, in respect of the said FIRs ;
(b) stop all other proceedings pending with
the Collector, Faridabad, for recovery of employer's shares of provident
funds/ESI and also stay further proceedings at the hands of Regional Director,
Employees' State Insurance Corporation, for the alleged contravention of the
ESI Act and the Scheme framed thereunder and/or any contravention of the
Income-tax Act with reference to the tax deducted at source in respect of the
company and its employees ;
(c) relieve the petitioners from all pending
actions which are likely to be converted into criminal prosecutions and/or pass
such other orders as may be deemed fit under the facts and circumstances of the
case after giving notice to the Registrar of Companies as required under law.
The facts
briefly stated in the petition are that the company was originally started with
the technical collaboration of Prestolite International, Ohio, U.S.A., in the
year 1962 by the Maharaja of Patiala and since then the company has been
regularly engaged in the manufacture of electrical automobile and electrical part
components. It is a supplier of electrical automobile components to all the
manufacturers of automobiles such as :
(i) Hindustan
Motors Ltd. ;
(ii) Bajaj
Auto Ltd. ;
(iii) Premier Automobiles Ltd. ;
(iv) Mahindra
and Mahindra Ltd.;
(v) Automobile
Products of India Ltd. ;
(vi) Enfield
India Ltd. ;
(vii) Punjab Motors Tractors Ltd.
It is also
catering to the requirement of about 1,400 direct demanding officers, the Army
base workshops, situated in various parts of the country. It is also registered
with the Director-General, Supplies and Disposals, for the annual rate
contract. The present market value of the assets of the company including the
value of the land and buildings would be approximately Rs. 6.25 crores. It had
taken financial assistance from the Union Bank of India through its branch
situate at Faridabad. The company had been doing regular business till 1977. In
June, 1977, a theft was detected in the pledged godown of the company under the
lock and key of the Union Bank of India and goods worth Rs. 5 lakhs were stolen
from there. An F. I. R. was lodged with the local police bearing No. 216 of
1977 and during investigation it was revealed that the then godown keeper of
the Union Bank of India was involved along with one foreman of the company,
namely, Harnam Singh, and during the course of investigation, the godown keeper
and Harnam Singh were arrested. On June 29, 1977, the local police brought
Harnam Singh to the factory premises for spot verification and when he was
passing through the electro-plating department, he quickly swallowed cyanide
and died instantaneously. There was commotion among the workers of the company.
They went on a lightning strike. This was followed by a general strike in the
entire industrial complex of Faridabad. It was rumoured that the officials of
the company had beaten the said Harnam Singh to death. In the spree of false
rumours, a large number of miscreants including outsiders and anti-social
elements set the company building on fire and the administrative block of the
company got completely damaged on account of the fire. The records were
completely burnt. The Government of Haryana appointed a commission of enquiry
headed by Mr. Justice C.G. Suri, who held an enquiry into the matter for a
period of one year and the workers also attended the hearing and they would not
take interest in the production work of the company. The commission ultimately
held that Harnam Singh had died on account of taking a poisonous substance in
the factory premises and none of the officials of the company were involved or
were instrumental in causing his death.
The
commission also found that goods worth Rs. 5 lakhs were stolen from the pledged
godown of the company under the lock and key of the Union Bank of India. On the
basis of the report of the commission, the company filed a suit for recovery of
Rs. 5 lakhs against the Union Bank of India and also impleaded the insurance
company as one of the parties. The action of the company was taken with a pinch
of salt by the Union Bank of India and they created obstacles in the smooth
working of the company. They placed liquidity constraints by squeezing the
working capital and caused hardships in not presenting the documents of title
negotiated through the bank to third parties for realization of the amounts as
per the instructions of the company. Extraordinary margins, unheard of in the
banking history, were imposed by the bank on the company so much so that on an
average sale of goods worth Rs. 100, the bank would retain margin of approximately
35 to 45% which gradually resulted in the choking of the liquidity assets of
the company. The bank stopped releasing the goods lying in the godown at their
pledged value and started making flimsy demands of interest on the pledged
value of the goods in the year 1979.
The company's
imported and other raw material procured for the manufacture of automobile
parts of the value of Rs. 70 lakhs was still lying in the godowns of the bank,
but the bank stopped releasing the goods which created impediments in the
normal smooth production of the company. The company protested against the
abnormal behaviour of the bank. As a measure of counter-blast, the bank filed a
suit against the company for recovery of Rs. 2,27,58,343.70 and the suit is
pending in the Court of the Subordinate Judge, 1st Class, Faridabad. The said
bank also got a suit filed by the consortium, New Bank of India, for recovery
of Rs. 65,00,000 and the said suit is also pending in the Court of the Senior
Sub-Judge, Faridabad. The banks totally stopped their operations with the
company since the year 1980. There was a complete choking of financial
assistance from the two banks and the company faced difficulties in repayments
to other unsecured creditors. Some statutory dues in the form of provident
funds (employees' and employer's share) payable under the Provident Funds and
Miscellaneous Provisions Act could not be deposited despite using due
diligence, care and caution on the part of the managing director, directors and
officials of the company.
The Provident
Funds Inspector from the office of the Regional Provident Funds Commissioner
filed a complaint under sections 406 and 409 of the Indian Penal Code against
the company for not depositing the contributions towards employees' share for
the period November, 1980, to June, 1981, approximately amounting to Rs.
72,000. Another complaint was filed for non-deposit of the employees' share
amounting to Rs. 1,00,168. F. I. Rs. Nos. 143 of 1981 and 134 of 1982 were
registered at police station, Old Faridabad. The local police sought
non-bailable warrants of arrest against all the directors of the company
including the official nominee, namely, Dr. K.S. Balain, and two foreign
directors, namely, Mr. Karion N. Anthonini and Mr. Walter F. Leach. The
directors applied for anticipatory bail which was declined by the Sessions
Judge, Faridabad, and by the High Court. Ultimately, they surrendered before
the Court of the Judicial Magistrate, Faridabad, who enlarged them on bail.
The workers
resorted to illegal strike during the month of May, 1982, which lasted up to
June, 1982, and during this period, the workers did not earn any wages. The
matter has also been referred to the Industrial Tribunal, Haryana, for
adjudication. It was also alleged that the Collector, Faridabad, is constantly
threatening the directors and officials of the company to cause arrest and
detention for non-deposit of employer's share of provident fund, E.S.I. and
other sundry dues. It was also pleaded that the Registrar of Companies has also
launched criminal prosecutions against the company as well as its directors and
officials on the ground that the company has not filed the annual returns. The
failure to file the annual returns was attributed to the failure of the Union
Bank of India and New. Bank of India to supply the statement of accounts to the
company. The accounts could not be squared up and balance-sheets could not be
prepared beyond the year 1980 and, thus, could not be filed before the
Registrar of Companies
The company
was facing difficulties, but since it claims special expertise in the field of
automobile and electrical components, it has vast scope in future years. The
company can have a minimum turnover of Rs. 5 crores per annum considering the
pending orders and in view of the substantial expansion programme of the
automobile industry during the 6th Five Year Plan of the Government of India.
In these circumstances, the indulgence of this court was sought for staying the
proceedings referred to above.
Written
statements have been filed on behalf of respondents Nos. 1, 2, 3 and 4.
Respondent No. 1 took a preliminary objection to the maintainability of the
petition on the ground that no relief can be granted with regard to the
proceedings which have already been launched against the petitioner and are
pending adjudication either in the Court of the Chief Judicial Magistrate or
the Judicial Magistrate, Faridabad. It was further pleaded that the past
performance of the company for non-compliance with the provisions of the
Companies Act, for not filing the statutory returns, such as balance-sheets and
annual returns, disentitle them from the discretionary relief of this court.
The following complaints for delayed filing of balance-sheets have already been
filed :
Sl No
|
Complaint/Prosecution |
For
balance-sheet as at |
In the court of |
|
1. |
Under section 210 |
30-06-1979 |
Chief Judicial
Magistrate |
|
|
|
|
Faridabad. |
|
2 |
do. |
30-061980 |
do. |
|
3 |
do |
30-06-1981 |
do. |
Respondent No.3 in the written statement pleaded that
the bank had filed 32 cases in various courts at Chandigarh, Faridabad and
Calcutta against the petitioner-company for recovery of Rs. 22 crores and 25
lakhs. It pleaded that the applicant company deducted large sums of money from
the wages of its employees. The money was not deposited in accordance with law
and was misappropriated. Cases were registered under sections 406 and 409 of
the Indian Penal Code against the company. They gave the description1s of the
FIRs which are as under :
|
FI.R. No. |
Period |
Amount |
|
|
|
|
|
Rs. |
|
1 |
143/81 |
11/80 to 6/81 |
72,916.50 |
|
2 |
134/82 |
7/81 to 4/82 |
1,00,168.00 |
|
3 |
39/83 |
5/82 to 7/82 |
23,780.75 |
|
4 |
97/83 |
8/82 to 12/82 |
40,217.25 |
Investigation was under progress in the FIRs referred
to above. It also pleaded that 57 complaints have been filed against the
petitioner-company under section 14 of the Employees' Provident Funds and
Miscellaneous Provisions Act, 1952, for non-deposit of provident fund dues
payable by it. The company and the directors were named as accused in the
complaints and they have been summoned.
Respondent
No. 4 in their written statement pleaded that the petitioner defaulted in the
payment of contributions payable under the Employees' State Insurance Act and
the Employees' State Insurance Corporation launched three prosecutions against
Shri Surjit Singh Sahni, managing director of the company, under section 85 of
the Employees' State Insurance Act and these were pending in the Court of the
Chief Judicial Magistrate, Chandigarh, relating to the contribution for the
period January, 1981, to March, 1981, and in the Court of the Chief Judicial
Magistrate, Faridabad, relating to the periods January, 1982, to March, 1982,
respectively, and the accused have been summoned. It was further pleaded that
the Corporation had levied damages under section 85B of the Employees' State
Insurance Act and issued recovery certificates to the Collector for recovery of
Rs. 3,66,017.40 for the period November, 1975, to March, 1982. The
petitioner-company filed a special leave application in the Supreme Court of
India against the levy of damages amounting to Rs. 51,857.40 in respect of the
period July, 1977, to March, 1978, and the Hon'ble Supreme Court allowed the
stay of recovery of the amount on the condition that the company deposits Rs.
30,000 in the court, but the amount was not deposited.
From the
pleadings of the parties, the following issues were framed : —
1. Whether the present petition is maintainable
qua proceedings already initiated in the criminal courts as mentioned in
paragraphs 1 and 2 of the preliminary objections in the written statement of
respondent No. 1, paragraph 14 of the written statement of respondent No. 3,
and paragraph 5 of the written statement of respondent No. 4 ?
2. Whether
the petitioners have reason to apprehend that they are going to be prosecuted
further ?
3. If issue No. 2 is decided in favour of the
petitioners, whether the petition qua such proceedings is not maintainable ?
4. Whether the petitioners have acted honestly and
reasonably in the discharge of their duties ? If so, with what effect ?
5. Relief.
The
petitioner led evidence and in rebuttal the Deputy Insurance Commissioner,
E.S.I. Corporation, Delhi, appeared as RW-1 and Shri Manohar Lai, Provident
Fund Inspector, Haryana, was examined as RW-2. RW-3, Shri V.N. Sharma, appeared
for the Registrar of Companies. Shri Surjit Singh appeared as PW-2 and
practically reiterated the facts stated in the petition.
RW-2 stated
that 58 complaints had been filed against the petitioner-company under section
14 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.
Out of these, 17 were dismissed against which revision petitions are pending in
the High Court and the rest are pending at the trial stage. Out of 57
complaints, 9 were filed after the institution of the instant petition and the
rest prior thereto.
RW-3, Shri
V.N. Sharma, technical assistant in the office of the Registrar of Companies,
New Delhi, stated that the Registrar of Companies had already filed four
criminal complaints against the directors of the petitioner-company and these
complaints were filed under section 210 of the Companies Act for non-adoption
of the annual balance-sheet. Balance-sheet relating to the year 1979-80 has
been filed. No balance-sheets have been filed relating to the years thereafter.
All the complaints were filed before the institution of the present petition
except the one which was filed on December 22, 1983, and the complaints are
still pending.
I have heard
learned counsel for the parties.
Issues Nos. 1
to 4.-Issues Nos. 1 to 4 will be discussed by me together.
Section 633
of the Companies Act (for short, referred to as "the Act") invoked by
the petitioners runs thus : —
"633.
(1) If in any proceedings for negligence, default, breach of duty, misfeasance
or breach of trust against an officer of a company, it appears to the court
hearing the case that he is or may be liable in respect of the negligence,
default, braech of duty, misfeasance or breach of trust, but that he has acted
honestly and reasonably, and that having regard to all the circumstances of the
case, including those connected with his appointment, he ought fairly to be
excused, the court may relieve him, either wholly or partly, from his liability
on such terms as it may think fit:
Provided that
in a criminal proceeding under this sub-section, the court shall have no power
to grant relief from any civil liability which may attach to an officer in
respect of such negligence, default, breach of duty, misfeasance or breach of
trust.
(2) Where any
such officer has reason to apprehend that any proceeding will or might be
brought against him in respect of any negligence, default, breach of duty,
misfeasance or breach of trust, he may apply to the High Court for relief and
the High Court on such application shall have the same power to relieve him as
it would have had if it had been a court before which a proceeding against that
officer for negligence, default, breach of duty, misfeasance or breach of trust
had been brought under sub-section (1).
(3) No court
shall grant any relief to any officer under sub-section (1) or sub-section (2)
unless it has, by notice served in the manner specified by it, required the
Registrar and such other person, if any, as it thinks necessary, to show cause
why such relief should not be granted".
A perusal of
the various provisions of the Act reveals that it imposes a number of
obligations upon the officers of a company. It also makes provisions for
initiating, before a court of law, proceedings against the officers of the
company for negligence, default, breach of duty, misfeasance or breach of
trust. The object underlying section 633 of the Act obviously is to avoid
hardship to officers of the company in deserving cases and to relieve them of
their liability in cases where they are technically guilty if they are able to
convince the court that they had been acting honestly and reasonably and that
having regard to the circumstances of the case, they, in all fairness, ought to
be excused from the charge or charges made against them. This section enables
the concerned officer to apply to the court for making an order relieving him
of the liability incurred by him either after the proceedings have commenced
against him or by way of preventive action before commencement of the
proceedings. Whereas, according to sub-section (1) of section 633, in a case
where the proceedings have commenced, the application for relief in this regard
has to be made to, and is to be considered by the court before which the
proceedings are pending, sub-section (2) enables the High Court to exercise
such jurisdiction in cases where the proceedings are going to be, or are likely
to be, initiated. This section does not empower the High Court to grant any
relief to any officer of the company in a case where the proceedings against
the officer have already been initiated and are pending.
It is not
disputed that the applicants are under an obligation to call a general meeting
in every calendar year and they were under a statutory duty to lay the
balance-sheet and the profit and loss account of the company before that
meeting. The statute further provides that the company and its directors shall
forward copies of the balance-sheet and profit and loss account laid before the
general meeting to the Registrar of Companies within the stated time. Failure
to do either has been made punishable and is treated as a company offence. No
reasonable explanation has been furnished for not holding the annual general
meeting of the company. The averment made in the petition that the bank will
not furnish them with a statement of accounts is no ground for not holding the
meeting of the company. Even if that was so, it could not have prevented the
petitioners from inspecting the documents with the permission of the court. I
am not satisfied that the petitioners took any steps to get the balance-sheet
and the profit and loss account prepared as required by the Companies Act. The
duties attaching to the office of director of a company required him to call an
annual general meeting and to see that the requisite balance-sheet and profit
and loss accounts are prepared and that after being laid before the general
meeting, they are forwarded to the Registrar in accordance with law. The
petitioners were, thus, liable for not complying with the mandatory provisions
of the Companies Act, and they were at fault.
A further
question that requires to be considered in this connection is whether the court
ought to excuse them for their default in exercise of its power under section
633 of the Act. The court has discretion to relieve an officer of the company
from liability if it is satisfied that he has acted honestly and reasonably.
The failure of the applicants to hold the general meeting and to file the
balance-sheet and the profit and loss account with the Registrar within the
prescribed time were acts done in violation of their statutory duties as
directors. They could not, therefore, be said to have acted honestly, that is
bona fide or reasonably, which is the same thing as acting with due care and
diligence expected of a person holding a responsible office.
As regards
the provident fund and the Employees' State Insurance Corporation contribution,
financial stringency was no ground for not complying with the provisions of the
Provident Funds Act, which was a social legislation. In this connection, it
will be useful to refer to the decision of the Supreme Court in Organic
Chemical Industries v. Union of India [1979] 55 FJR 283 ; AIR 1979 SC 1803. In
this case, there was a challenge to the provisions of section 14B of the
Provident Funds Act which authorised the Central Provident Fund Commissioner or
such other officer as might be authorised by the Central Government to recover
damages not exceeding the amount of arrears where the employer made default in
payment of any contribution under the Provident Funds Act. The court repelled
the contention that the provisions of section 14B were unconstitutional. The
court observed that the reason for enacting section 14B was that employers be
deterred and thwarted from making defaults in carrying out statutory
obligations to make payments to the provident fund and that the object and
purpose of the section was to authorise the Regional Provident Fund
Commissioner to impose exemplary and punitive damages and thereby to prevent
employers from making defaults. My Lord Justice Krishna Iyer dealt with the
scheme of the Provident Funds Act and observed as under (at page 287 of 55 FJR)
:
"Briefly
and broadly and lopping off aspects unnecessary for this case, the scheme of
the Act is that each employer and employee in every 'establishment' falling
within the Act do contribute into a statutory fund a tithe, viz., 6¼% of the wages to swell into a large fund
wherewith the workers who toil to produce the nation's wealth during their
physically fit span of life may be provided some retiral benefit which will
'keep the pot boiling' and some source wherefrom loans to face unforeseen needs
may be obtained. This social security measure is a humane homage the State pays
to articles 39 and 41 of the Constitution. The viability of the project depends
on the employer duly deducting the workers' contribution from their wages,
adding his own little and promptly depositing the mickle into the chest
constituted by the Act. The mechanics of the system will suffer paralysis if
the employer fails to perform his function. The dynamics of this beneficial
statute derives its locomotive power from the funds regularly flowing into the
statutory till.
The
pragmatics of the situation is that if the stream of contributions were frozen
by employer's default after due deduction from the wages and diversion for
their own purposes, the scheme would be damnified by traumatic starvation of
the fund, public frustration from the failure of the project and psychic
demoralisation of the miserable beneficiaries when they find their wages
deducted and the employer got away with it even after default in his own
contribution and malversation of the workers' share".
It was
further observed (at page 292) :
"The
measure was enacted for the support of a weaker sector, viz., the working class
during the superannuated winter of their life. The financial reservoir for the
distribution of benefits is filled by the employer collecting, by deducting
from the workers' wages, completing it with his own equal share and duly making
over the gross sums to the fund. If the employer neglects to remit or diverts
the moneys for alien purposes, the fund gets dry and the retirees are denied
the meagre support when they most need it. This prospect of destitution
demoralises the working class and frustrates the hopes of the community itself.
The whole project gets stultified if employers thwart contributory
responsibility and this wider fallout must colour the concept of 'damages' when
the court seeks to define its content in the special setting of the Act. For
judicial interpretation must further the purpose of a statute. In a different
context and considering a fundamental treaty, the European Court of Human
Rights, in the Sunday Times case, observed :
'The court
must interpret them in a way that reconciles them as far as possible and is
most appropriate in order to realise the aim and achieve the object of the
treaty' ".
The only
ground for non-deposit of the statutory funds/duesis attributed to financial
stringency. Financial stringency per se cannot be a ground for non-deposit of
statutory dues. This could be so particularly when it comes to deposit of the
contributions of the employees which had been deducted from their wages.
Non-deposit of the contributions of provident fund as well as Employees' State
Insurance Corporation in respect of each employee every month is a distinct
default in itself and so also non-deposit of the TDS from the salary of an
employee every month is a distinct default. The petitioners will, therefore,
have to explain with regard to each and every default if they have acted
reasonably and honestly, but a general statement that the company is passing
through financial crisis or is a sick industry is certainly no answer. The
court has to relieve the petitioners in respect of each default on its
satisfaction that the petitioners acted honestly and reasonably. The
petitioners gave no particulars and led no evidence for the court to relieve
them of the liability incurred thereby. Further, there are different considerations
for the defaults committed under different Acts.
The
provisions of sub-section (2) of section 633 of the Act are exceptional as
these relieve an officer of the company from the consequences of a default,
whether penal or otherwise, before he is asked to face the proceedings of
either levying penalty or of prosecution. The court has, therefore, to be
cautious in its approach before exercising discretion in favour of the
delinquent officer though, no doubt, the discretion has to be a judicial one.
Before exercising any such discretion, the court has to be reasonably satisfied
that the requirements of the section have been met. In this case, I do not
think that this has been done.
Consequently,
I decide these issues against the petitioners.
Relief. — In
view of my above findings, this petition is dismissed. I, however, leave the
parties to bear their own costs.
[1978] 48 COMP. CAS. 85
(DELHI)
v.
Shree Keshariya Investment Ltd.
H.L. ANAND J.
COMPANY
PETITION NO. 46 OF 1976.
MARCH 1, 1977
N.R. Khaitan,
T.M. Sen and B. Mohan for the Petitioner.
Harish
Chandra for the Regional Provident Fund Commissioner.
H.S. Bhatia
for the Registrar of Companies.
A.P. Gupta
for the Employees' State Insurance Corporation.
H.L. Anand J.—OM Prakash Khaitan, solicitor,
who was a director of Shree Keshariya Investment Ltd. during the material
period, seeks relief under section 633 of the Companies Act, 1956 (for short
"the Act "), from liability arising out of a number of defaults and
breaches committed by the company in relation to its obligations under the
Employees' Provident Funds Act, Sales Tax Act, Employees' State Insurance Act,
Indian Textiles (Control) Order, Essential Commodities Act and the Act, on the
ground that since November 26, 1974, he ceased to be the director of the
company; that he was a director of the company by virtue of being its legal
adviser and never took any active part in the management and the affairs of the
company; that he was on the board of a number of companies as such legal
adviser but has not concerned himself with the day to day affairs of the
company or its management; and that he has always acted honestly and reasonably
and has given proper advice to the management to act in accordance with law in relation
to matters that were brought before the board.
The application is opposed by the various
authorities, including the Registrar of Companies, primarily on the ground that
by virtue of being a director of the company the petitioner was liable for the
various defaults and breaches of which the company was guilty and that if the
petitioner acted honestly or the breaches and defaults were committed in spite
of the efforts of the petitioner to the contrary, the petitioner would be
discharged from obligation in appropriate proceedings and there was, therefore,
no ground to relieve the petitioner of the liability in the present
proceedings.
In his affidavit of February 19, 1977, the petitioner
has given details of the defaults and breaches, which have since become the
subject-matter of prosecutions, pending in the Magistrate's Court in Baroda and
Ahmedabad. In paragraph 8 of the affidavit he has also specified the defaults
and breaches in respect of which he apprehends proceedings. It was not disputed
on behalf of the petitioner that this court has no jurisdiction with regard to
the criminal liability arising out of defaults and breaches which have already
become the subject-matter of prosecution and that for any relief in relation to
such defaults, etc., the proper remedy of the petitioner would be an
application under sub-section (1) of section 633 to the court hearing the
cases. The only question that, therefore, requires consideration is whether
there is a case for the petitioner being excused under sub-section (2) of
section 633 of the Act of liability on account of defaults and breaches of the
company in respect of which proceedings are apprehended.
Section 633 of the Act empowers the court to give
relief where it is satisfied that the officer of a company, even though
technically guilty of negligence, breach of duty, misfeasance or breach of
trust or otherwise liable on account of any default or breach of the company,
has nevertheless acted honestly and reasonably and that, having regard to all
the circumstances of the case, "including those connected with his
appointment", he ought fairly to be excused. The object of the section
appears to be to provide against undue hardship in deserving cases and to give
relief from liability to persons who, though liable in law, ought to be excused
rather than be allowed to be subjected to legal proceedings.
It is true that when a person agrees to be appointed
to the board of directors of a company he is expected to exercise legitimate
control over the management and the affairs of the company and be conscious of
his responsibility as such director. It is also beyond doubt that when persons,
who have distinguished themselves in various fields such as law, audit,
management, financial management or who otherwise represent special interests
on boards such as the representatives of financial institutions, Government or
semi-Government bodies are appointed to the boards, it certainly gives a
favourable projection to the management of the company and holds out a tacit
assurance to all those who would deal with the company, including the
prospective shareholders of the company, that there are independent persons of
eminence having specialised skill on the board of the company and that the
affairs and management of the company would, therefore, be properly conducted
in accordance with law. Unfortunately, however, most of such persons either do
not actively participate in the management of the company and its affairs or
are unable on account of the obvious limitation of the power of a director and
the principle of limited accountability incorporated in the Act, to exercise an
effective control over the management and affairs of the company with the
result that the safeguard built into the corporate system by the institution of
such directors becomes almost illusory. In the circumstances, it is necessary
to make a distinction between the directors who are on the board, purely by
virtue of their technical skill or because they represent certain special
interests and those who are in the effective control of the management and
affairs of the company, whether or not they have any financial stakes in it, in
determining if relief from liability arising out of the breaches and defaults
of the company should be granted or not. It cannot be denied that independent
directors from the professions or from among the financial consultants or those
that represent different interests, such as the financial institutions, have a
salutary effect on the management of a company in spite of the various legal
constraints and limitations and if such a distinction is not made it is likely
to scare such persons away from any possible association with the company as
directors. It is, therefore, unreasonable to fasten liability on directors for
the defaults and breaches of a company where such directors are either the
nominee-directors or are appointed by virtue of their special skill or
expertise. It is also unfortunate that with the limited accountability an
effective control of the management of the affairs of a company by the board is
not possible. While there is a strong case for urgent legislative action, both
in the matter of widening the frontiers of accountability of a company, both to
its board of directors and to the members, as also in relieving the special
category of directors from consequences of default and breaches of the company,
judicial moderation is necessary in the administration of section 633 of the
Act so as to ensure that such categories of directors are not subjected to the
harassment of legal proceedings for breaches and defaults of a company, which
may at times be rather protracted. It would be proper in such cases to relieve
such directors of consequences of the defaults and the breaches unless they are
directly involved in the acts or omission complained of or have otherwise not
acted honestly or reasonably or have financial involvement in the company.
Having regard, therefore, to the fact that the
petitioner has been a director of the company, as indeed of a number of other
companies, by virtue of being a solicitor and did not participate in the
management of the company and had no financial involvement in it, I would
relieve the petitioner of the liability arising out of breaches and defaults on
the basis of which the petitioner apprehends proceedings.
There will be no order as to costs.
[1978] 48 COMP. CAS. 397
(DELHI)
HIGH COURT OF DELHI
v.
Registrar of Companies
D.K. KAPUR J.
C.P. NO. 88 OF 1977.
NOVEMBER 17, 1977
Mohan Behari Lal for the petitioners.
Mrs. S. Jain for the Respondent.
D.K. Kapur J.—Notice of this petition under
section 633(2) of the Companies Act, 1956, was issued to the Registrar of
Companies. No reply has been filed but objection has been taken orally that
this court has no jurisdiction on account of the fact that a complaint had been
filed before a Magistrate having jurisdiction even before the present petition
is filed in this court. I may mention that the petitioners are directors of
M/s. Western U.P. Electric Power & Supply Co. Ltd. and the defaults in
respect of which this petition has been moved for relief are in respect of
holding the annual general meeting for the period ending 31st March, 1976, and
for other consequential defaults. It is unnecessary to deal with the nature of
the default in this petition because the sole question for consideration on the
petition is whether this court has jurisdiction to deal with this petition even
after a complaint has been filed before a Magistrate in respect of the defaults
concerning which relief is sought.
The objection raised is not at all a new one. It has
been dealt with by me in several previous cases but unfortunately they cannot
be traced out readily. I am not even aware if they had been reported. It has
become necessary in view of the nature of the objection and the arguments
addressed before me to deal with this matter in some more detail so as to
clarify the legal position and to avoid unnecessary legal proceedings.
The power of the court to grant relief in respect of
defaults of directors is set out in section 633. Under sub-section (1) of this
section the court hearing a case in respect of alleged negligence, default,
breach of duty, misfeasance, etc, can relieve the director or other officer of
the company if it finds that such negligence, default, breach of duty,
misfeasance, breach of trust or other default has resulted, in spite of the
officer of the company acting honestly and reasonably having regard to all the
circumstances of the case. Thus, if a proceeding of whatsoever nature it might
be, has been initiated against a director or other officer of the company
concerning defaults committed by that officer in the exercise of his duty, be
has as one of the defences open to him, a right to say that he was acting
honestly and reasonably and the default is the result of other circumstances.
In such a case the court dealing with the matter can grant relief to the
officer concerned.
In addition to this power of the court to grant
relief there is another power which has been granted to the High Court under
sub-section (2) of this section. This section is to the effect that if a
director anticipates that a proceeding might be brought against him or will be
brought against him, he can apply to the High Court and say that he was acting
reasonably and honestly in the circumstances of the case and he should be
relieved of that default. In such a case, the High Court has the same power to
grant relief as a court would have if the proceedings in respect of the default
were actually being tried.
The point at issue before me is whether the power of
the High Court is concurrent with the power of the Magistrate trying an offence
under the Companies Act or whether it is non-simultaneous. Obviously, the two
sections have to be read as being anticipatory in the case of the High Court's
jurisdiction and to be exercised as a defence in the case of an actual trial in
respect of the offence complained of. This meaning is brought out by a
reference to the language actually used in section 633(2) which I now proceed
to reproduce. The section reads :
"Where any such officer has reason to apprehend
that any proceeding will or might be brought against him in respect of any
negligence, default……."
The opening words of the section clearly indicate
that, (a) the officer concerned must have an apprehension that a proceeding
will or might be brought. The anticipation or apprehension is about the
possibility of a proceeding being brought. If such an apprehension fructified
into an actual bringing about of the proceedings then it is no longer an
apprehension but becomes an actuality. When an actual proceeding is brought
then there is no apprehension any more and hence recourse has to be had to the
power of the trial court to grant similar relief under section 633(1). The
mistake made in interpreting the section as appears from the contentions of the
counsel for the petitioner is that he submits that the High Court's power is
the same as that of the Magistrate.
Undoubtedly, the power of the High Court is the same
as that of the Magistrate. There is no doubt on this because the subsequent
words in sub-section (2) of section 633 show that the power is the same.
However, the power though it is the same can only be exercised when an
apprehension exists which has not yet been transformed into an actuality. The
learned counsel has referred to G.D.
Bhargava v. Registrar of Companies [1970] 40 Comp Cas 664 (All) and P.C.
Pothen, Liquidator of the Commonwealth Bank Ltd. (In Liquidation), ILR
[1966] 1 Ker 1, in which both courts have held that the powers of the High
Court are the same as that of the Magistrate, As indicated above I am in
perfect agreement with this conclusion. In fact, this is what the section
states. These two cases do not deal with what the power of the High Court is
after a proceeding has been actually initiated in a criminal court. I may also
indicate that the other court covered by section 633(1) need not necessarily be
a criminal court because there may very well be a civil proceeding, criminal
proceeding or even revenue proceeding in respect of which section 633(1) may
apply. In all such cases if a proceeding is anticipated, the officer concerned
can move the High Court at an early stage and get relief in a suitable case.
This has the great advantage of avoiding that other proceeding if the High
Court grants relief. If that other proceeding has commenced then the officer
concerned has no other course open but to apply to the relevant court under
section 633(1) to say that whatever negligence, default, breach of trust, misfeasance,
breach of duty or any other default complained of there may be, he, in fact,
acted reasonably and honestly keeping in view the circumstances of the case.
The court can then grant relief. Thus, the section as it were, operates in two
stages. The High Court can grant anticipatory relief and if a case is actually
initiated, only the court before which the complaint or trial is going on can
grant relief. The preliminary objection has, therefore, to be accepted. I
accordingly dismiss the petition. No costs.
[1968] 38 COMP. cAS.
325 (DEL)
HIGH COURT OF DELHI
S.K.
KAPUR, J.
COMPANY APPLICATION NO. 84 OF 1967
IN COMPANY PETITION NO. 55-D OF 1966
SEPTEMBER 27, 1967
D.D. Sharma for the Petitioner.
Satish Chandra for the Respondent.
JUDGMENT
Kapur, J.—On 20th July, 1966, the petitioners, who are the directors of Swastic Benefits Private Limited (hereafter referred to as "the company") made a petition under section 633(2) of the Companies Act, 1956, being Company Petition No. 55-D of 1966, praying inter alia that they be exonerated of the default under section 220 of the Companies Act. In the said petition it was stated that the books of the company were seized by the police with the result that they were disabled from getting their accounts audited, preparing the balance-sheet and profit and loss account and placing them before the shareholders in the annual general meeting held on 31st March, 1965. For this default the petitioners were prosecuted and sentenced to pay a fine of Rs. 50 each or in default undergo simple imprisonment for ten days. It was further alleged in the petition that since the books continued to be in the custody of the police, the petitioners could not comply with the said provision in spite of their conviction. They, therefore, made the said petition for relief under section 633.
The matter was disposed of on
January 6, 1967, by Khanna J. who condoned the default and allowed three
months' time to the petitioners to comply with the provisions of section 220. The
perusal of Company Petition No. 55-D of 1966 shows that relief was claimed only
with respect to default under section 220 of the said Act which, inter alia,
requires that "after the balance-sheet and the profit and loss account
have been laid before a company at the annual general meeting as aforesaid,
there shall be filed with the Registrar within thirty days from the date on
which the balance-sheet and the profit and loss account were so laid ". No
relief was claimed for default under section 210 which deals with laying of the
balance-sheet etc., before the company at every annual general meeting, but I
am not in this petition concerned with that. The present petition has been made
under rules 7 and 9 of the Companies (Court) Rules, 1959, for further extension
by three months of the time granted by Khanna J. for complying with the
provisions of the Act. This petition was made on 10th April, 1967, and the
learned counsel for the petitioners stated that the petitioners have since
complied with the provisions of the said Act. In the written statement filed by
the Registrar it has been pointed out that the company did file copies of the
balance-sheet and profit and loss account as on September 30, 1964, but they
did not file the auditor's report with the result that there was no proper
filing of the balance-sheet. In the affidavit in rejoinder filed on behalf of
the petitioners it is said that the balance-sheet and the profit and loss
account were filed with the Registrar on July 7, 1967, but inadvertently the
auditor's report was not enclosed and on the Registrar pointing out the said
omission the auditor's report was also filed. It is, however, not disputed that
a complete balance-sheet with profit and loss account and the auditor's report
has since been filed with the Registrar.
The
petitioners have claimed extension of time on the following grounds:
(1) The books of the
company were not returned by the police till January 29, 1967, so that the
petitioners lost about one month out of the three months allowed by this court
by order dated January 6, 1967;
(2) the son-in-law of B.D.
Tandon, petitioner No. 1, and sister's husband of petitioners Nos. 2 and 3
expired on February 2, 1967, and the petitioners, had to look after the
deceased's family and remained busy during the mourning period of 13 days. It
is only after 15th February, 1967, that the petitioners could attend to the
office work ;
(3) the business of the
company had virtually come to a. stand-still in view of the seizure of books
and the entire staff of Delhi office had been retrenched. On receipt of the
books, arrangement had to be made to re- employ an accountant which took
considerable time and in spite of the best efforts of the directors the
accounts, which were extremely lengthy, could not be completed; and
(4) after the completion of
the accounts 21 days' notice had to be given to the shareholders for convening
the meeting.
With respect to the first of the grounds the learned counsel for the petitioners had at the time of the hearing of the first petition stated before this court that the petitioners would inspect the records in police custody and do the needful within three months from that day. The fact that the records remained in police custody till January 29, 1967, would be, in the circumstances, of no consequence unless the petitioners show that between 6th January, 1967 and 29th January, 1967, they made efforts to inspect the records in the police custody. The other grounds, however, convince me that it is a fit case for extension of time. The only serious controversy raised on behalf of the Registrar of Companies was about the competence of this court to extend the time fixed by the order dated January 6, 1967. The learned counsel for the Registrar contended that rules 7 and 9 did not confer jurisdiction on this court to extend time fixed in exercise of powers under section 633 of the said Act. The learned counsel for the petitioners, on the other hand, mainly placed reliance on the said two rules. He, however, adumbrated an additional argument, which he did not develop, that this court has inherent power to extend time. Under section 633, the court may relieve officers of the company wholly or partly from liability on account of defaults on such terms as it may think fit. Acting under section 633 of the said Act the courts grant time within which the default must be redeemed only by way of condition to the grant of relief. The Companies (Court) Rules, 1959, have been framed by the Supreme Court in exercise of powers under section 643. Rule 7 empowers the court to "extend or abridge the time appointed by these Rules or fixed by an order of the court for doing any act or taking any proceeding, upon such terms (if any) as the justice of the case may require........." (1) Rule 9 saves the inherent powers of the court. Sub-section (1) of section 643 reads:
"(1) The Supreme Court, after consulting the High Courts,—
(a) shall make rules providing for all matters relating to the winding up of companies which, by this Act, are to be prescribed ; and may make rules providing for all such matters as may be prescribed, except those reserved to the Central Government by sub-section (5) of section 503, sub section (3) of section 550, section 552 and sub-section (3) of section 555; and
(b) may make rules consistent with the Code of Civil Procedure, 1908,
(i) as to the mode of proceedings to be had for winding up a company in High Courts and in courts subordinate thereto;
(ii) for the voluntary winding up of companies, whether by members or by creditors;
(iii) for the holding of meetings of creditors and members in connection with proceedings under section 391;
(iv) for giving effect to the provisions of this Act as to the reduction of the capital; and
(v) generally for all applications to be made to the court under the provisions of this Act."
The expression "prescribed" has been defined in section 2(33) as under:
"'prescribed' means, as respects the provisions of this Act relating to the winding-up of companies except sub-section (5) of section 503, sub-section (3) of section 550, section 552 and sub-section (3) of section 555, prescribed by rules made by the Supreme Court in consultation with High Courts, and as respects the other provisions of this Act including sub-section (5) of section 503, sub-section (3) of section 550, section 552 and sub-section (3) of section 555, prescribed by rules made by the Central Government."
Sub-section (2) of section 643 need not be read as that does not at all touch upon the subject. Even under sub-section (1) of section 643, the power of the Supreme Court to frame rules is confined to the matters specified therein and extension of time fixed under section 633 as a condition for grant of relief is not one of such matters. Rule 7 of the said Rules must necessarily be construed in the light of the source from which it stems and since the Supreme Court has no power to frame a rule authorising abridgment or extension of time granted under section 633, rule 7 cannot be construed to confer such a power on the High Courts. I am however, of the opinion that section 633 itself confers powers on the High Court to extend the time fixed by it for redeeming the default. The words of section 633 appear to be consistent with the court having power to make fresh orders with regard to the conditions imposed. In Badri Narain v. Sheo Koer, section 549 of the Code of Civil Procedure, 1882, which corresponds to Order 41, rule 10, of the Civil Procedure Code, 1908, fell for consideration. That section reads:
"That the appellate court
may, at its discretion, either before the respondent is called upon to appear
and answer, or afterwards, on the application of the respondent, demand from
the appellant security for the costs of the appeal, and if such security be not
furnished within such time as the court orders, the court shall reject the
appeal."
There was no section corresponding to section 148, Civil Procedure Code, 1908, in the Civil Procedure Code of 1882. The Privy Council held that the court had power to make fresh orders with regard to time within which the security should be furnished and thus alter the time once fixed by the court. In my opinion, that decision applies equally to the construction of section 633. The matter may be looked at from another point of view. If the default is not redeemed within the time allowed by the court, there would be a fresh default of compliance with the provisions of the Act and the court has ample power under section 633 of the said Act to grant relief against that default.
In the result, this application succeeds and is allowed. The time is extended by another three months from 6th January, 1967. There will, however, be no order as to costs.
Petition allowed.
[1984] 56 COMP. CAS. 93
(CAL.)
v.
MANOJ KUMAR MUKHERJEE J.
MARCH 16, 1984
S.N. Chowdhuri and Tapan Kumar Mukherjee for the petitioner.
B.N. Sur as amicus curiae.
S.K. Dasgupta for the State.
R.K. Dev for the complainant.
JUDGMENT
The Assistant Registrar of Companies, West Bengal,
filed a complaint against the four directors of Ganguly Traders (P) Ltd. of 7,
Bipin Behari Ganguli Street, Calcutta, in the court of the learned Chief
Metropolitan Magistrate, Calcutta, alleging commission of an offence under s.
210(5) of the Companies Act, 1956, hereinafter referred to as "the
Act". By his order, dated November 3, 1978, the learned Magistrate took
cognizance upon the same, issued process against the accused and transferred
the case to the learned Metropolitan Magistrate, 11th Court, Calcutta, for
disposal. After entering appearance, one of the accused, Sri Sanatan Ganguly,
filed an application under s. 633(1) of the Act for being relieved of his
liability, as a director of the company, in respect of the offence alleged
against him. In his application he contended, inter alia, that the other
directors were inimically disposed towards him and in spite of his best efforts
he could not persuade them to comply with the requirements of s. 210(1) and (3)
of the Act, for which the prosecution had been launched. Along with the
application he filed some documents in support of his above contention. The
complainant and the other three accused persons refuted the allegations by filing
written objections. After hearing the parties and considering the materials
placed before him, the learned Magistrate rejected the application. Aggrieved
thereby, Sri Ganguly moved this court and obtained the present rule.
At the time of hearing of this rule, a threshold
question as to the legality of the procedure followed by the learned Magistrate
in disposing of the application under s. 633(1) of the Act cropped up. Since it
appeared that the question was of some importance, Mr. Baren Sur, a learned
advocate of this court, was requested to appear as amicus curiae and he
rendered valuable assistance in finding an answer.
At the outset, it will be profitable to refer to s.
633(1) of the Act which reads as under:
"S. 633(1). If in any proceeding for negligence,
default, breach of duty, misfeasance or breach of trust against an officer of a
company, it appears to the court hearing the case that he is or may be liable
in respect of the negligence, default, breach of duty, misfeasance or breach of
trust, but that he has acted honestly and reasonably, and that having regard to
all the circumstances of the case, including those connected with his
appointment, he ought fairly to be excused, the court may relieve him, either
wholly or partly, from his liability on such terms as it may think fit:
Provided that in a criminal proceeding under this
sub-section, the court shall have no power to grant relief from any civil
liability which may attach to an officer in respect of such negligence,
default, breach of duty, misfeasance or breach of trust."
A plain reading of the above section will
unmistakably show that it provides for a special remedy, inter alia, to a
person who is being prosecuted in a criminal court for having committed an
offence under the Act. Normally, when a person is arraigned in a criminal court
for an offence, the proceeding has to end in an order of conviction, acquittal
or discharge; and if the case ends in conviction the accused is liable to be
punished for such conviction unless he is released on probation. Section 633(1)
of the Act makes a departure, and enables a person accused of an offence under
the Act to be relieved of his liability, either wholly or partly, if it appears
to the court during the course of hearing of the case that he is or may be
liable in respect of the negligence, default, breach of duty, misfeasance or
breach of trust for which the prosecution is launched but he has acted honestly
and reasonably. To arrive at such a decision the court has to hold an enquiry
and it has, therefore, to be ascertained how the enquiry is to be conducted.
It appears that neither the Act nor the Rules framed
thereunder has laid down any procedure for such an enquiry. Section 4(2) of the
Code of Criminal Procedure, 1973 ("Code" for short), provides that
all offences under any other law (other than the Indian Penal Code) shall be
investigated, inquired into, tried and otherwise dealt with, according to the
provisions of the Code, but subject to any enactment for the time being in
force regulating the manner or place of investigating, inquiring into, trying
or otherwise dealing with such offences. In the absence of any provision in the
Act or the Rules framed thereunder, the enquiry under s. 633(1) has, therefore,
to be held according to the provisions of the Code. It was, however, contended
that the inquiry contemplated under s. 633(1) of the Act was not an enquiry in
respect of an offence and, therefore, such an enquiry need not be according to
the Code of Criminal Procedure. I am, however, unable to accept this contention
having regard to the language of s. 4(2) of the Code and that of s. 633(1) of
the Act. Under s. 633(1), it has to appear to the court that the officer of the
company in question "is or may be liable in respect of the negligence,
default........." and the court has also to find that "he ought
fairly to be excused" before the court can relieve him of the liability.
It will thus be seen that unless the liability of the person is fixed or, in
other words, the court finds that he is guilty or may be guilty, the court
cannot invoke the said provision. This position has been made abundantly clear
by the words "he ought fairly to be excused". The question of excuse
comes only when a person is found to have committed some wrong. It necessarily means
that the enquiry that is to be held by the court is whether the person has
committed the offence or may have committed the offence and then only the court
can invoke the powers under that section to relieve him of the liability on
being satisfied that he has acted honestly and reasonably. In the ultimate
analysis, therefore, the court has first to enquire into the commission of the
offence and that necessarily will mean invocation of s. 4(2) of the Code of
Criminal Procedure. It must, therefore, be held that the procedure laid down
under the Code is required to be followed in dealing with the application under
s. 633(1) of the Act. The matter can be viewed from another angle.
The power of the court under s. 633(1) of the Act is
a discretionary one and it is to be exercised only when the court is satisfied
that the defaulting officer has acted honestly and reasonably and that having
regard to all the circumstances of the case he ought fairly to be excused. It
is just and desirable, therefore, that this power should not be exercised in a
casual manner and a decision should not be arrived at solely relying upon the
averments made in an application under s. 633(1) and the written objection
thereto. For those considerations the best procedure to be adopted is to
dispose of any application, if filed under s. 633(1) of the Act, along with the
case, on the basis of evidence adduced during trial, including the evidence
that may be adduced by the accused who files the application under s. 633(1) of
the Act. This is all the more necessary as, under the Code, the court's finding
as to whether an offence has been committed or not has to be based on evidence
to be adduced through examination of witnesses, except where provision has been
expressly made in the Code to adduce such evidence through affidavits, namely,
ss. 295 and 296 of the Code.
Since, in the instant case, the application under s.
633(1) of the Act was disposed of only on the basis of the averments made
therein and the objections thereto, I am unable to sustain the order. I,
therefore, set aside the impugned order and direct the learned Magistrate to
dispose of the application under s. 633(1) of the Act in accordance with law
and in the light of the observations made in this judgment. The rule is thus
disposed of.
[1985] 58 Comp. Cas. 870 (Cal.)
HIGH COURT OF
CALCUTTA
v.
Registrar of Companies
N.G. CHAUDHURI, J.
Cr. Rev. No. 1484 of 1980.
February 2,1984
Satyen Deb,
S.K. Deb, S.R. Sinha Roy and R. Chaudhuri for the Petitioner.
Mrs. Uma Sanyal for the Registrar.
Tapas Kr. Middya for the State.
JUDGMENT
N.G. Chaudhuri, J.—This revision petition
under s. 397/401 read with s. 482, Cr PC, is directed against order dated June
27, 1980, passed by the Judicial Magistrate, 9th Court, Alipore, in Case No.
C/813 of 1977 (T. R. No. 496 of 1977) arising out of a petition of complaint
made by the Registrar of Companies, West Bengal, under s. 211 (7) of the
Companies Act, 1956. The petitioners before this court are two directors of a
public limited company, namely, Jagadishpur Co. Ltd.
The principal allegation made against the petitioner
accused in the petition of complaint was to the effect that as per
balance-sheet and profit and loss account for the financial year ending March
31, 1976, and filed in the office of the complainant, it transpired that the
accounts of the company have been drawn up on cash basis; and, as such, the
said accounts without adjustment of the outstanding receipts/payments did not
give a true and fair view of the state of affairs of the company and, as such,
infringement of s. 211 of the Companies Act was made. The learned Magistrate
took cognizance and issued summons. The accused petitioners, after entering
appearance, filed a petition under s. 633 of the Companies Act praying for relieving
them wholly from their liability, if any, as alleged in the petition of
complaint. They alleged that ever since the incorporation of the company in
1953, the company has been keeping books of account in cash system and they
have been filing the balance-sheet and profit and loss account with the
Registrar of Companies every year but no objection was ever taken. When they
received the audit report of the company for the year ending on March 31, 1973,
they noticed from the auditor's report that the company has been keeping its
books of account in cash system and the Registrar of Companies by its letter
dated December 14, 1973, called for a clarification from the company and by a
letter dated December 21, 1973, the company replied to the said letter. No further
instructions were received from the complainant opposite party. The petitioners
alleged that cash system is a recognized and accepted system of accounting and
was followed by the company since its incorporation in 1953 and they have all
along acted honestly and reasonably.
After the above petition was filed, the learned
Magistrate passed the impugned order. The learned Magistrate has observed in
the order that the auditor's report is a qualified one and it is a matter of
evidence if it gives a true and fair view of the financial affairs of the
company. The learned Magistrate proceeded to hold that it could not be said
that there was no prima facie case against the accused at this stage. On that
view, he rejected the prayer of the accused for quashing the proceeding.
Mr. Deb, the learned advocate for the petitioner,
after placing before me the petition of complaint and copies of correspondence,
contends that the learned Magistrate should have held that the accused
petitioners all along acted honestly and reasonably and for that reason they
ought to have been excused by the court and the court would have relieved them
wholly or partly from their liability on such terms as the learned Magistrate
thought fit in terms of s. 633(1) of the Companies Act. Section 633(1) of the
Companies Act is quoted below:
"If in any proceeding for negligence, default,
breach of duty, misfeasance or breach of trust against an officer of a company,
it appears to the court hearing the case that he is or may be liable in respect
of the negligence, default, breach of duty, misfeasance or breach of trust, but
that he has acted honestly and reasonably, and that having regard to all the
circumstances of the case, including those connected with his appointment, he
ought fairly to be excused, the court may relieve him, either wholly or partly
from his liability on such terms as it may think fit:"
Mr. Deb argues that the present proceedings under s.
211of the Companies Act were for alleged negligence, default, breach of duty,
misfeasance or breach of trust against the petitioners who were officers of a
company. He proceeds to argue that from the materials produced by the
petitioners and from the petition under s. 633 of the Companies Act, the
learned Magistrate should have concluded that the petitioners were or might be
liable in respect of the negligence, default, breach of duty, misfeasance or
breach of trust alleged but that they had acted honestly and reasonably.
Mr. Deb proceeds to argue that since it transpired
that the present petitioners were being prosecuted under s. 211 of the Act for
the first time twenty years after the incorporation of the company, the learned
Magistrate should have relieved them of their liability. Mr. Deb proceeds to
argue that the learned Magistrate has not given in the impugned order reasons
for which he thought the petitioners did not act honestly or reasonably. He
contends that it was no case of the petitioners that the complainant had no
prima facie case. He contends that when the learned Magistrate took cognisance
of the offence after the filing of the complaint and issued process, the
conclusion is inescapable that there was a prima facie case against the accused
petitioners. Mr. Deb contends that there is nothing in the impugned order to
show that the learned Magistrate considered the petition of the accused
petitioners, the provisions of s. 633 of the Companies Act and the reasons for
the applicability or non-applicability of the. said section to the facts and
circumstances of the present case.
Mrs. Sanyal, on behalf of the Registrar of Companies,
the complainant opposite party, contends that the petitioners had failed to
satisfy the court below that they had acted honestly and reasonably. She
further contends that the accused petitioners did not produce any evidence to
disprove the prima facie case against them. Her further argument is that on the
basis of a petition under s. 633, prayer for quashing the proceedings could not
be made.
I have already indicated that the case before the
learned Magistrate arose out of a petition of complaint. As soon as the learned
Magistrate by his order dated May 27, 1977, took cognizance under s. 190(1)(a),
Cr PC, and ordered issue of summons, he obviously was satisfied as to the prima
facie case of the opposite party complainant. The proceedings in the instant
case being for violation of s. 211 of the Companies Act, the inescapable
conclusion is that the proceedings were for negligence, default, breach of
duty, misfeasance or breach of trust against the petitioner accused who were
officers of the company. Because of the stand taken in their petition under s.
633 of the Companies Act, the learned Magistrate should have recorded a finding
if it appeared to him that the accused petitioners were liable in respect of
the Act above mentioned but they had acted honestly and reasonably and that
having regard to all the circumstances of the case they ought to be fairly
excused. If the learned Magistrate held that the accused petitioners acted in
an honest and reasonable way and in consideration of the facts and
circumstances they ought to be fairly excused, he could record an order
relieving them wholly or partly of their liability on such terms as he thought
fit. If, on the other hand, the learned Magistrate arrived at a finding that the
accused petitioners had not acted reasonably and honestly or that in view of
the facts and circumstances of the case, the accused petitioners ought not to
be excused, the learned Magistrate could record a finding to that effect. In
the present ease, the learned Magistrate does not appear to have recorded a
finding positive or negative as discussed above. It should be mentioned that
the accused petitioners at the stage when the petition under s. 633 was filed
could not be found not guilty of the offences under s. 211. It should also be
borne in mind as held in M.O. Varghese v. Thomas Stephen and Co. Ltd. [1970] 40
Comp Cas 1131 (Ker); AIR 1971 Ker 223, that under sub-s. (1) of s. 633 of the
Companies Act in order to grant relief to a person against whom a proceeding is
pending, it is not necessary that he should confess or admit his guilt or that
the court must find him guilty. It is sufficient if it appears to the court
" that he is or may be liable ". In other words, the court can
relieve him of the liability in a case in which it appears to the court that he
may be liable. All that is necessary is a reasonable apprehension of a
proceeding referred to in sub-s. (1) of s. 633.
In the present case, the learned Magistrate had after
taking cognizance ordered issue of process. That clearly indicated that there
was a reasonable apprehension of a proceeding against the accused petitioners
as contemplated in the section because of the issue of process and the plea
taken by the accused petitioners in their petition under s. 633 of the Act; it
was for the learned Magistrate to conclude if the accused were or might be
liable in respect of the defaults pleaded in the petition of complaint. If the
learned Magistrate was satisfied on the above point, the learned Magistrate was
to proceed further and to ascertain if the accused petitioners had acted
honestly and reasonably and if the facts and circumstances justified that the
accused be fairly excused. Even if the learned Magistrate arrived at an
affirmative finding on the point noted last, it was for him to relieve the
accused petitioner wholly or partly from their liability and on such terms as
he thought fit. The learned Magistrate does not appear to have considered all
these stages and matters contemplated under s. 633 of the Companies Act in the
order impugned. I am reluctant to quash the
proceediugs straightaway although I am satisfied that the impugned order is
illegal and does not conform to legal requirements.
So the revisional application
will succeed. The order impugned dated June 27, 1980, is set aside. The rule
issued be made absolute. The learned Magistrate is directed to consider the
application of the accused petitioner under s. 633 of the Companies Act filed
before this court on April 21, 1978, in the light of the observations made
above and to record his findings on the points noted. While considering the
above petition, the learned Magistrate will pay his attention to the copies of
correspondence and other documents annexed with the said petition only. The records
be sent down to the court below forthwith with direction to consider and
dispose of the petition under s. 633 of the Companies Act as early as possible.
[1987] 62 Comp. Cas. 571 (Del)
High Court of Delhi
v.
Regional Provident Fund Commissioner
D. P. Wadhwa, J.
March 12, 1987
M.C.
Bhandare, A.N. Parekh and S.N. Aggarwal For the petitioner.
R.C. Chawla for the Regional Provident Fund
Commissioner.
K.N. Kataria for the Employees State Insurance
Corporation.
Satpal and Pawan Behl for the I.T. Department.
JUDGMENT
D.P. Wadhwa, J.—This petition under section
633(2) of the Companies Act, 1956 (for short "the Act"), was filed on
4th September, 1984. Earlier, when the petition was filed, the petitioner
company was known as M/s. Gedore Tools (India) Pvt. Ltd. The name of the
company was changed to M/s. Jhalani Tools (India) Pvt. Ltd. and this new name
was registered under section 23 of the Act. It was stated that the change in
the name would not affect any prosecution sought to be launched by any of the
respondents. In fact, this is what sub-section (3) of section 23 of the Act
says. By an order dated 1st December, 1986, on an application (C.A. No. 2518 of
1986), the name of M/s. Jhalani Tools (India) Pvt. Ltd. was allowed to be
substituted in place of M/s. Gedore Tools (India) Pvt. Ltd.
There are 10 petitioners and respondents are 6 in
number. Respondents Nos. 3, 4 and 6 are Income-tax Officers under the charge of
Commissioner of Income-tax, Rohtak, and Commissioner of Income-tax, Delhi VI,
New Delhi. Respondent No. 1 is the Regional Provident Fund Commissioner
(Haryana) and respondent No. 2 is the Regional Director, Employees' State
Insurance Corporation (ESIC), also of Haryana. Respondent No. 5 is the
Registrar of Companies (Delhi & Haryana) but no relief is sought against
this respondent. It is stated that petitioners Nos. 1 and 2 are not the working
directors of the company and are not responsible for the day to day conduct of
the business of the company. The only working directors of the company are
stated to be petitioners Nos. 3, 4 and 5. Petitioner No. 6 is the nominee
director of the State Industrial and Investment Corporation of Maharashtra, a
financial institution from where the company had taken loan. Petitioners Nos. 7
and 8 are alternate directors nominated by two non-resident German directors of
the company. It is stated that they are on the board by virtue of their
expertise and professional skill. Petitioners Nos. 9 and 10 are respectively
the general manager and senior personnel manager of the company and it is
stated that they are not responsible for the defaults in respect of payments of
statutory dues since they have no authority to make such payments.
The defaults for which the petitioners want to be
excused from prosecution are falling under three different Acts, namely, the
Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (for short
"the Provident Fund Act"), the Employees' State Insurance Act, 1948,
and the Income-tax Act, 1961.
The petitioners state that the company is engaged in
the manufacture and sale of hand tools. It has six manufacturing units, four in
Haryana and two in Maharashtra. There are about 6,000 employees working in the
company. For the last about three years, there was recession of a very serious
nature which affected export-oriented companies including the petitioner
company and the company was also affected by steep rise in steel prices in
India and from February, 1981, steel prices in India were almost double of those
prevailing in the international market. The working conditions of the company
in its factories at Faridabad also remained disturbed for about a year from
March, 1983, to April, 1984, due to inter-union rivalry and this also resulted
in lower production. The factory at Kundli also remained closed from March to
May, 1984. In July, 1981, the Government announced a scheme called
International Price Reimbursement Scheme (IPRS) with a view to pushing up the
export of hand tools. Certain guidelines were laid for providing cash subsidy
to make up the difference between the international and domestic prices to the
exporters of engineering goods retrospectively with effect from 9th February,
1981. Forging quality carbon steel and chrome vanadium steel, the basic raw materials
used by the company for manufacturing hand tools were not covered under the
scheme and the company, therefore, could not claim any benefit thereunder.
However, the matter was represented to the Government by the company and
forging quality carbon steel was included in the scheme with effect from 17th
March, 1982. It is stated that chrome vanadium steel is still not covered under
the scheme. The company represented to the Government for inclusion of forging
quality carbon steel in the scheme with effect from 9th February, 1981, and
various representations were made for the purpose. It is stated that it was on
16th July, 1984, that benefits of IPRS were extended to hand tools made from
chrome vanadium steel as well. It is then claimed that the total subsidy
available to the company for chrome vanadium steel if the scheme is implemented
with effect from 9th February, 1981, would be around Rs. 1 crore and that if
subsidy is provided for forging quality carbon steel from 9th February, 1981,
the total amount of subsidy due to the company would be around Rs. 1,30,00,000.
Then, it is stated that because of recession and high steel prices prevailing
in the country, the company suffered losses during the two years (1981-82,
ending June, 1982, and 1982-83, ending December, 1983), and that after
adjusting depreciation and the export incentive received by the company, the
losses for these two years were respectively Rs. 1.86 crores and Rs. 6.55
crores. It is then stated that the company being labour intensive having about
6,000 employees wanted to protect as many jobs as it could in the national
interest and that with that end in view was trying to manage the situation in
the best possible manner and did not take recourse to retrenchment or closure.
Financial crisis led to defaults in payment of statutory dues. The aforesaid
circumstances, it is claimed, were beyond the control of the petitioners and
that payments under the three Acts mentioned above could not be made after
March, 1982, or could not be deposited in time. It is stated that prior to
February, 1982, the company always deposited the statutory dues within the
specified time. In paragraph 15A of the petition which was added after
amendment of the petition, it was stated that due to continuous decline in production
and rise in cash losses, the T.D.S. (tax deducted at source) for the period
April, 1981, and onwards was deposited late. However, it is stated that no
statutory dues were payable under the Income-tax Act in respect of the head
office of the company at New Delhi up to October, 1984. After October, 1984,
statutory dues under the Income-tax Act again could not be deposited because of
"adverse economic downfall and circumstances beyond their control".
The petitioners, therefore, also seek exemption from prosecution for defaults
regarding non-payment of income-tax (tax deducted at source) in respect of the
head office as mentioned in the paragraph. Then the petitioners add that the
recession is now lifting gradually and conditions in the industry are improving.
This is apart from the fact that the company is trying to persuade the
Government to implement the scheme (International Price Reimbursement Scheme)
retrospectively from 9th February, 1981, and that in case it is done, the
company will be having funds to meet all its liabilities immediately
thereafter. Then the petitioners make the following statement in paragraph 16 :
"In any case, the company
will be in a position to deposit the entire statutory dues within a period of
about two years…………"
The petitioners claim to have acted always honestly
and reasonably and say that, therefore, they are not liable for any
contravention of any provision of law as they have been managing the affairs of
the company in the best possible manner. It is admitted that prosecutions under
sections 406 and 409 of the Indian Penal Code are pending against petitioners
Nos. 1 to 5 on account of non-deposit of employees' share of provident fund for
the period from March, 1982, to February, 1984. There is no such prosecution against
petitioners Nos. 6 to 10 and further that no prosecution is pending against any
of the petitioners in respect of non-deposit of employer's share of provident
fund for the period from March, 1982, onwards. The petitioners thus say that
they apprehend prosecutions by respondents Nos. 1 to 4 and 6. They, therefore,
on these allegations pray to be excused and/or relieved from the prosecutions
likely to be launched against them.
Replies by the Regional Provident Fund Commissioner
(Haryana), Regional Director, ESIC (Haryana) and the Income-tax Department have
been filed.
The Regional Provident Fund Commissioner (RPFC) in
his affidavit in reply dated 15th March, 1985, says that the provident fund
dues in default amount to Rs. 1,07,55,125.97 though as per statement admittedly
filed by the company, the default is to the tune of Rs. 69,38,207.50 only. It
is stated that there is nothing on record to show that the financial position
of the company was so bad that it could not pay even the wages and if the wages
could be paid, the least that could be expected was that employees' share
deducted towards provident fund dues was paid and that this amount deducted
from the employees' wages was in trust with the company and could not be
utilised for its business purpose. It is then said that financial difficulty
per se is no excuse for not discharging the statutory obligations under the
Provident Funds Act and that the company filed no details whatsoever to show
that on any particular date when the provident fund dues were to be paid, it
was not in possession of sufficient funds to discharge its obligations. The
liability of the company and every person who at the time the offence was
committed was in charge of and was responsible to the company for the conduct
of its business is absolute as provided under section 14A of the Provident
Funds Act. RPFC in his affidavit then states that necessary particulars are
lacking in the petition and necessary details to show that the petitioners
acted honestly and fairly have not been shown and that vague and general
statement of financial difficulties was no ground to seek relief from the
discharge of legal obligations. It is denied that the petitioners acted
honestly and reasonably and that as per record available with the RPFC,
petitioners Nos. 1 to 5 were in charge of and in control of the affairs of the
company. In support of this contention, copies of the returns filed by the
company in Form No. 5 under the Provident Funds Act and Rules have been placed
on record.
Somewhat similar is the reply filed by the Regional
Director, ESIC (Haryana). The default is stated to be to the tune of about Rs.
73 lakhs apart from interest at the rate of 6% per annum accruing thereon.
In his affidavit-in-reply, the Inspecting Assistant
Commissioner of Income-tax, Range VIA, has said that the company did not
deposit the amount of tax deducted at source from its employees in its office
in Delhi for the period relevant
to financial years 1981-82 and 1982-83 within the period prescribed and,
therefore, a notice to show cause was issued on 16th January, 1986, as to why
prosecution be not filed under section 276B of the Income-tax Act, 1961. In
reply to this show cause notice, a reply was submitted by the company stating
that it had already filed a petition in this court seeking exemption from
filing prosecution against directors and managers in respect of the defaults of
payment of statutory dues including that of income-tax (TDS). It is further
stated in the affidavit that TDS is the amount deducted by the company from
salaries of its employees at the time of payment of salaries and the TDS is
required to be deposited within 7 days of deduction in terms of rule 30 of the
Income-tax Rules, 1962. It is stated that this amount was in fact Government
money and was lying in trust with the company. The reasons of the company for
not depositing the TDS on the ground that there was recession in the industry
and that the company expected to realise from the Government substantial amount
as steel subsidy have been stated to be of no relevance.
Parties were allowed to lead evidence by means of
affidavits. At the time of admission of the petition, it was directed that no
further prosecutions would be filed. By order dated 15th January, 1986, it was
directed that the current dues as required under the statute should be
regularly paid from January, 1986, onwards without fail and if these were not
paid, the stay would automatically stand vacated. There was some controversy
between the parties whether this order pertained to the dues under the
Provident Funds Act only or under the Employees' State Insurance Act and the
Income-tax Act as well. During the course of these proceedings, it was
submitted by Mr. R. C. Chawla, learned counsel for the Regional Provident Fund
Commissioner, that this order had not been complied with. The petitioners were,
therefore, directed to file a detailed affidavit giving the particulars of the
payments made after 15th January, 1986,
unit-wise and date-wise. An affidavit was also required to be filed in
respect of payments of dues to the Employees' State Insurance Corporation. On
24th November, 1986, the following order was passed :
"I have heard the arguments. Meanwhile, I would
direct the petitioner to file balance-sheets of the company for the subsequent years,
i.e., after 1982-83. The petitioner will also file an affidavit to bring on
record all the payments due to the Regional Provident Fund Commissioner as well
as to the Employees' State Insurance Corporation and to the Income-tax
Department. The petitioner will state as to how it is intended to clear these
arrears inasmuch as it is stated by Mr. Bhandare, learned counsel for the
petitioner, that in pursuance of court's order dated 15th January, 1986, the
payment of provident fund and Employees' State Insurance Corporation's
contribution has been paid though there might be slight delay here and there.
As regards income-tax (TDS) for this year, Mr. Bhandare says that payment will
be made within one week. I will note that Mr. Sat Pal, learned counsel for the
Income-tax Department, has brought on record an affidavit showing the amount of
salary paid to the various employees of the companies including some of the
petitioners and the tax deducted at source for the year 1986. The petitioner
will also indicate in the affidavit if any certificate has been issued to any
of the employees including the petitioners in respect of tax deduct-, ed at
source as provided in section 203 of the Income-tax Act, 1961. The petitioner
will then state if there are entries in the contribution cards of the employees
in respect of both the employer's and employees' contribution to the provident
fund as well as the Employees' State Insurance Corporation and also whether
proper books of accounts in respect of provident fund and Employees' State
Insurance Corporation contributions have been maintained. The affidavit will be
filed within one week from today.
List this case for directions
on 1st December, 1986. If any further arguments are to be heard, another date
will be fixed".
It was stated that the affidavit filed subsequent to
this order by the petitioners was not in terms of the order. Thereafter,
further arguments were heard.
Mr. R. C. Chawla, learned counsel for the RPFC, said
that section 633(2) of the Act would not be applicable to a default of
non-payment of contributions as required under section 6 of the Provident Funds
Act. He doubted the correctness of the decisions of this Court in In re Beejay
Engineers Pvt. Ltd. [1983] 53 Comp Cas 918. This judgment was rendered by the
Division Bench. One of the questions raised therein was if while exercising
powers under section 633 of the Act, the court had jurisdiction to grant relief
against prosecution under other Acts. In that case, a petition had been filed
under section 633(2) of the Act for being relieved/ excused from proceedings
which were likely to be launched for alleged contravention of the Provident
Funds Act, Central Excises and Salt Act, Employees' State Insurance Act, Sales
Tax Act and Income-tax Act with reference to tax deducted at source. The court
held that the section would apply to all legal proceedings, civil, criminal or
otherwise, so long as the liability of an officer of a company arose from
negligence, default, breach of duty, misfeasance or breach of trust and he
could be relieved from such liability on account of his having acted honestly,
namely, in good faith and if he had justifiable reason to escape from such
liability. It was held that the words "any proceeding" appearing in
section 633 were emphatic words and the same ought not to be construed in a
narrow sense. The court observed that the language of the section was clear and
explicit and that effect had to be given to it whatever the consequences. It,
however, struck a note of caution by saying that "we may, at the same
time, make it abundantly clear that if the provisions of any particular statute
under which liability is sought to be fastened on an officer of a company are
in any way inconsistent with or have overriding effect over the provisions of
this section, the court exercising power under this section will have to take
due notice of the same before granting relief from the liability". After
examining the various provisions of the Act and some other Acts, it appears to
me that perhaps this decision needs reconsideration. Section 633 of the Act
cannot be a panacea for all the ills, i.e., defaults/offences committed in
respect of various other enactments, those already in force and those which
came on the statute book at a subsequent date. An act may not have been an
offence when the Companies Act was enforced and it is, therefore, difficult to
see how the Companies Act could become applicable in that case and when
particularly the other Act defining the offence itself provides punishment for
offences/defaults committed by the companies. To illustrate, section 276C was
introduced in Chapter XXII relating to offences and prosecutions in the
Income-tax Act, 1961, with effect from 1st October, 1975. Willful attempt to
evade tax has now been made an offence and is punishable with rigorous
imprisonment for a term which shall not be less than 3 months but which may
extend to 3 years and is also punishable with fine. Section 278B in this
chapter prescribes as to how companies are to be held liable for the offences
committed under the Income-tax Act. Relevant provisions of section 278B are as
under :
"278B. (1) Where an offence under this Act has
been committed by a company, every person who, at the time the offence 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 offence 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 any punishment if he proves that the
offence was committed without his knowledge or that he had exercised all due
diligence to prevent the commission of such offence.
(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 offence has been committed with the consent or connivance of,
or is attributable to any neglect on the part of, any director, manager,
secretary or other officer of the company, such director, manager, secretary or
other officer shall also be deemed to be guilty of that offence and shall be
liable to be proceeded against and punished accordingly".
Similarly, section 17 of the Prevention of Food
Adulteration Act, 1954, deals with offences by companies. So is section 10 of
the Essential Commodities Act, 1955, and also section 14Aof the Provident Funds
Act. The list appears to be endless. If the words "any proceeding"
are of wide amplitude, then perhaps Chapter XXI of the Income-tax Act dealing
with penalties imposable for various defaults committed under that Act would
also be within the ambit of section 633(2) of the Act. This does not stand to
reason. I need not, however, say anything further on the question thus posed by
Mr. Chawla as he himself said that he would proceed on the basis of the law as
laid in the aforesaid decision of this Court and would still submit that the
provisions of section 633(2) of the Act could not apply to a case of default in
depositing the employees' contribution deducted from his wages. In this
connection he referred to Explanation I to section 405 of the Indian Penal Code
which was introduced by Act No. 40 of 1973. Similar Explanation was introduced
with respect to deduction made by an employer from the wages payable to the
employees for credit to the Employees' State Insurance Fund. Section 405 of the
Indian Penal Code with the Explanations added read as under :
"405. Criminal breach of trust. - Whoever, being
in any manner entrusted with property, or with any dominion over property,
dishonestly misappropriates, or converts to his own use that property, or
dishonestly uses or disposes of that property in violation of any direction of
law prescribing the mode in which such trust is to be discharged, or of any
legal contract, express or implied, which he has made touching the discharge of
such trust, or willfully suffers any other person so to do, commits 'criminal
breach of trust'.
Explanation 1.—A person, being an employer, who
deducts the employee's contribution from the wages payable to the employee for
credit to a Provident Fund or Family Pension Fund established by any law for
the time being in force, shall be deemed to have been entrusted with the amount
of the contribution so deducted by him and if he makes default in the payment
of such contribution to the said fund in violation of the said law, shall be
deemed to have dishonestly used the amount of the said contribution in
violation of a direction of law as aforesaid.
Explanation 2.—A person, being an employer, who
deducts the employee's contribution from the wages payable to the employee for
credit to the Employees' State Insurance Fund held and administered by the
Employees' State Insurance Corporation established under the Employees' State
Insurance Act, 1948, shall be deemed to have been entrusted with the amount of
the contribution so deducted by him and if he makes default in the payment of
such contribution to the said fund in violation of the said Act, shall be
deemed to have dishonestly used the amount of the said contribution in
violation of a direction of law as aforesaid".
Mr. Chawla thus said that the liability of the
employer was absolute and he would be deemed to have dishonestly used the
amount of employees' contributions from the wages payable to the employee in
case of non-deposit of the same as required under the Provident Funds Act. The
law presumed that at least the employees' contribution lying with the employer
was in trust with him. I think Mr. Chawla is correct. The Explanations to
section 405 of the Indian Penal Code call for no exceptions. Even otherwise,
the contentions raised by the petitioners that there was terrific recession all
over the world in respect of hand tools manufactured by the company or non-receipt
of subsidy from the Central Government or labour unrest in some of the
manufacturing units of the company and suffering of huge losses by the company
are no answer when it comes to non-deposit of the employees' contributions
deducted from the wages of the employees themselves. Explanations to section
405 of the Indian Penal Code apply with full rigour and it cannot be said that
the petitioners either acted honestly and reasonably.
It was then the submission of Mr. Chawla that
financial stringency was no ground for not complying with the provisions of the
Provident Funds Act which was a social legislation. In this connection, he
referred to a decision of the Supreme Court in Organo Chemical Industries v.
Union of India, [1979] 55 FJR 283; AIR 1979 SC 1803. In this case, there was a
challenge to the provisions of section 14B of the Provident Funds Act which
authorised the Central Provident Fund Commissioner or such other officer as
might be authorised by the Central Government to recover damages not exceeding
the amount of arrears where the employer made default in payment of any
contribution under the Provident Funds Act.
The court repelled the contention that the provisions
of section 14B were unconstitutional. The court observed that the reason for enacting
section 14B was that employers be deterred and thwarted from making defaults in
carrying out statutory obligations to make payments to the provident fund and
that the object and purpose of the section was to authorise the Regional
Provident Fund Commissioner to impose exemplary and punitive damages and
thereby to prevent employers from making defaults. Krishna Iyer, J., dealt with
the scheme of the Provident Funds Act and observed (p. 1804 of 1979 AIR) (p.
287 of 55 FJR) :
"Briefly and broadly and lopping off aspects
unnecessary for this case, the scheme of the Act is that each employer and
employee in every ' establishment' falling within the Act do contribute into a
statutory fund a title, viz., 6¼% of the wages to swell into a large fund
wherewith the workers who toil to produce the nation's wealth during their
physically fit span of life may be provided some retiral benefit which will
'keep the pot boiling' and some source wherefrom loans to face unforeseen needs
may be obtained. This social security measure is a humane homage the State pays
to articles 39 and 41 of the Constitution. The viability of the project depends
on the employer duly deducting the workers' contribution from their wages,
adding his own little and promptly depositing the mickle into the chest
constituted by the Act. The mechanics of the system will suffer paralysis if
the employer fails to perform his function. The dynamics of this beneficial
statute derives its locomotive power from the funds regularly flowing into the
statutory till.
The pragmatics of the situation
is that if the stream of contributions were frozen by employers' defaults after
due deduction from the wages and diversion for their own purposes, the scheme
would be damnified by traumatic starvation of the fund, public frustration from
the failure of the project and psychic demoralisation of the miserable
beneficiaries when they find their wages deducted and the employer got way with
it even after default in his own contribution and malversation of the workers'
share".
Krishna Iyer, J., further observed (p. 1808 of 1979
AIR) (p. 292 of 55 FJR) :
The measure was enacted for the support of a weaker
sector, viz., the working class during the superannuated winter of their life.
The financial reservoir for the distribution of benefits is filled by the
employer collecting, by deducting from the workers' wages, completing it with
his own equal share and duly making over the gross sums to the fund. If the
employer neglects to remit or diverts the moneys for alien purposes, the fund
gets dry and the retirees are denied the meagre support when they most need it.
This prospect of destitution demoralizes the working class and frustrates the
hopes of the community itself. The whole project gets stultified if employers
thwart contributory responsibility and this wider fall-out must colour the
concept of 'damages' when the court seeks to define its content in the special
setting of the Act. For, judicial interpretation must further the purpose of a
statute. In a different context and considering a fundamental treaty, the
European Court of Human Rights, in the Sunday Times case, observed :
'The Court must interpret them in a way that
reconciles them as far as possible and is most appropriate in order to realise
the aim and achieve the object of the treaty'.
It was then contended by Mr. Chawla that the
provident fund dues were payable by the 15th of the next month in relation to
wages/salaries paid to the employees for the preceding month. Admittedly, these
were not paid. He said the petitioners had in any case to show that within that
period of 15 days the financial condition of the company was such that dues
could not be paid and that financial loss in the business of the company shown
at the end of the year had no relevancy and further that financial difficulties
per se were no ground for not depositing the statutory dues under the Provident
Fund Act. By order dated 24th November, 1986, reproduced above, I had directed
the petitioners to file a detailed affidavit. In the affidavit filed in
pursuance thereto it was said that provident fund dues for the two factories at
Faridabad for the period from April, 1982, to December, 1985, and in respect of
the Kundli factory for the period from November, 1983 to December, 1985,
amounted to Rs. 1,17,95,901.10. In respect of Employees' State Insurance dues,
the figure mentioned is Rs. 63,00,359.60. Apart from this, there are no further
details except a general statement that up to date entries in the contribution
cards of the employees in respect of both the employees' and employer's
contributions towards provident fund existed in respect of the units at
Faridabad but contribution cards for the employees working at Kundli factory
were not complete for the period from March, 1984, onwards. Somewhat similar
was the statement with respect to Employees' State Insurance contribution
cards. Defaults are staggering. The Schemes under the Provident Funds Act and
Employees' State Insurance Act are bound to go haywire to the extreme
disadvantage of the employees and such a state of affairs cannot be permitted.
To my mind, non-deposit of contributions in respect of each employee would be a
distinct default and the employer would become liable to punishment. The
default will terminate only when deposit is made. I will have to say more on
this subject when I deal with the defaults committed under the Income-tax Act.
Nevertheless, by order dated 24th November, 1986, I did call upon the
petitioners to indicate as to how they intended to clear the payments under the
Provident Funds Act, Employees' State Insurance Act and the Income-tax Act.
They did not give any positive answer except their assertion that they had
every earnest desire to make the payments. But then, the petitioners themselves
in the petition, which was filed on 4th September, 1984, had said that they
wanted only a period of about two years for them to clear all the statutory
dues. They have defaulted even in payment of current statutory dues regularly
in spite of specific order dated 15th January, 1986.
Mr. K. N. Kataria, learned counsel for Employees'
State Insurance Corporation generally supported the submissions of Mr. Chawla.
He said it was impossible to act on the ESI scheme in the absence of due
contributions from the petitioners and this was all to the detriment of the
workmen. He said the petitioners did not act honestly and reasonably and that
they were not entitled to the relief claimed. He said various benefits have to
be provided to workmen and various hospitals/dispensaries are run under the Scheme
but the Scheme could be put into operation successfully only if contributions
were received on time. He said the commitments made by the petitioners for
payment of arrears of Employees' State Insurance contributions were not met and
as of date an amount of Rs. 72,99,748 was due with interest at the rate of 6%
per annum and further damages were also leviable. The arrears, Mr. Kataria
said, were -from 1982 to 1985 which included the period during which the
present petition had been pending.
Then, it was also the contention of Mr. Satpal,
learned counsel for the Income-tax Department, that the petitioners were not
entitled to any relief for the offences committed under the Income-tax Act.
Under section 192 (falling in Chapter XVII-B) of the Income-tax Act, any person
responsible for paying any income chargeable under the head
"Salaries" shall, at the time of payment, deduct income-tax on the
amount payable. Under section 200, the person deducting any sum in accordance
with the provisions of section 192 is to deposit the same within the prescribed
time to the credit of the Central Government. Under rule 30 of the Income-tax
Rules, 1962, this amount is to be deposited within 7 days from the date of
deduction. It is called tax deducted at source (TDS). Under section 203, every
person so deducting the tax would furnish to the person a certificate for the
tax deducted. Under section 204, "person responsible for paying", in
the case of a company, means the company including the principal officer
thereof. Under section 205, where tax has been deducted under section 192 as
aforesaid from the salary of the employee, he is not to be called upon to pay
the tax himself to the extent to which the tax has been deducted from his
salary. Section 276B in Chapter XXII provides for punishment when there is
failure to deduct or pay tax. It reads as under :—
"276B. Failure to deduct or pay tax.—If a
person, without reasonable cause or excuse, fails to deduct or after deducting,
fails to pay the tax as required by or under the provisions of sub-section (9)
of section 80E or Chapter XVII-B, he shall be punishable,—
(i) in a
case where the amount of tax which he has failed to deduct or pay exceeds one
hundred thousand rupees, with rigorous imprisonment for a term which shall not
be less than six months but which may extend to seven years and with fine;
(ii) in any
other case, with rigorous imprisonment for a term which shall not be less than
three months but which may extend to three years and with fine".
Section 278B of the Income-tax Act, which I have
already reproduced above, provides for offences by companies.
Again, it would appear that when a person responsible
for paying has not paid the tax to the credit of the Central Government as
required by law, he will be deemed to have committed an offence punishable
under section 276B of the Income-tax Act, if non-deposit was without reasonable
cause or excuse. It would appear to be a continuing offence and would terminate
only when the deposit of the tax deducted is made. Non-payment of tax in
accordance with law deducted from the salary of every employee each month would
be a distinct offence. Reference, in this connection, may be made to a decision
of the Supreme Court in Maya Rani Punj
v. Commissioner of Income-tax, [1986] 157 ITR 330.
Reference may now be made to the two affidavits filed
by Mrs. V. Amar, Income-tax Officer, TDS (Salary), Circle I, New Delhi, and the
assessment records of the petitioners Nos. 3 and 4, but before that it may be
noted that under section 80C of the Income-tax Act, in computing the total
income of an assessee, certain deductions are provided in respect of life
insurance premia, contributions to provident fund, etc. Then section 140A of
the Income-tax Act provides for payment of tax on the basis of self-assessment
before furnishing the return of income. Let me reproduce this section in full :
"140A. Self-assessment.—(1) Where any tax is
payable on the basis of any return required to be furnished under section 139
or section 148, after taking into account the amount of tax, if any, already
paid under any provision of this Act, the assessee shall be liable to pay such
tax before furnishing the return and the return shall be accompanied by proof
of payment of such tax.
(2) After a regular assessment under section 143 or
section 144 has been made, any amount paid under sub-section (1) shall be
deemed to have been paid towards such regular assessment.
(2) If any assessee fails to pay the tax or any part
thereof in accordance with the provisions of sub-section (1), the Income-tax
Officer may direct that a sum equal to two per cent. of such tax or part
thereof, as the case may be, shall be recovered from him by way of penalty for
every month during which the default continues :
Provided that before levying any such penalty, the
assessee shall be given a reasonable opportunity of being heard".
For the assessment year 1986-87 (previous year ending
on 31st March, 1986), Prakash Chand Jhalani, petitioner No. 3, filed his return
of income on 22nd October, 1986, showing an income of Rs. 78,428. Along with
the return he filed a certificate dated 16th June, 1986, issued by the company
under the signature of an accountant showing that an amount of Rs. 25,344 had
been deducted at source as income-tax and surcharge and that rebate on the sums
paid by the employee towards provident fund (Rs. 6,240) and life insurance
premia (Rs. 31,927) had been allowed. The certificate would show that Prakash
Chand Jhalani had been paid salary totalling Rs. 78,000, house rent allowance
Rs. 27,300 and was also provided with a car and a driver. Along with the return
of income, Prakash Chand Jhalani filed a statement of total income wherein he
claimed refund of a sum of Rs. 4,722. This was on the basis that as per his
return of income, the amount of tax would be Rs. 22,622 while a sum of Rs.
25,344 had been deducted as tax deducted at source as per the certificate.
Admittedly, tax of Rs. 25,344 stated to have been deducted from the salary of
Prakash Chand Jhalani had not been paid to the credit of the Central
Government. On the basis of the certificate, Prakash Chand Jhalani did not
deposit the self-assessment tax while filing his return of income as required
under section 140A. He also claimed deduction for payment towards provident
fund when the provident fund amount had not been deposited. On top of this, he
is claiming refund of tax stated to have been deposited in excess when in fact
the tax was not deposited as claimed. I think, in the circumstances, this was
the most dishonest thing to do. I will outright reject the argument of Mr.
Bhandare, learned counsel for the petitioners, that deposit of tax was the
responsibility of the company and the petitioners could not be blamed. The
company as well as the principal officer is responsible for deducting the tax
and then paying the same to the credit of the Central Government.
In the case of petitioner, Rajinder Prasad Jhalani,
for the assessment year 1986-87 (previous year ending on 31st March, 1986), he
filed his return of income on 9th October, 1986, showing an income of Rs.
1,12,540. Along with the return he filed a certificate dated 16th June, 1986,
showing that an amount of Rs. 31,044 had been deducted at source as income-tax
and surcharge. Along with the return he also filed a challan showing payment of
Rs. 4,500 towards advance tax on 23rd April, 1986. In the statement of total
income filed along with the return, the income-tax payable was calculated at
Rs. 35,520 while what had been stated to have been deposited as tax was Rs.
31,044 as tax deducted at source—a sum of Rs. 896 towards tax on interest
income and an advance tax of Rs. 4,500, totalling Rs. 36,440. Rajinder Prasad
Jhalani, therefore, claimed a refund of Rs. 920. The certificate dated 16th
June, 1986, also shows that rebate was calculated on the amount of Rs. 6,240
stated to have been paid by the assessee towards provident fund. It could not
be said that Rajinder Prasad Jhalani was unaware of the fact that tax deducted
at source had not been deposited and so also the contribution towards provident
fund. Nevertheless, he claimed benefits and even claimed refund of the tax when
in fact no tax had been deposited. In the affidavit dated 1st February, 1986,
of Prakash Chand Jhalani, it has been mentioned that income-tax dues as regards
Faridabad factories for the period from April 1984, to December, 1985, are Rs.
2,68,402 and in respect of head office, the income-tax arrears are Rs.
1,08,256. There are, however, no particulars as to how these figures have been
arrived at. Argument as given by Mr. Chawla in the case of provident fund
contributions would also apply in respect of income-tax deductions and the
petitioners must show in respect of each and every employee as to why the tax
which had been deducted could not be deposited in accordance with law. A
general submission that the company was facing financial crisis is no answer as
tax is deducted when salaries are paid as provided in section 192 of the
Income-tax Act.
The question that now arises is, if the petitioners
acted honestly and reasonably, and, having regard to all the circumstances of
the case, they ought fairly to be excused. It is said that Rooplal Chaganlal
Sohani (petitioner No. 6), V. Sagar (petitioner No. 7) and R. K. Talwar
(petitioner No. 8) are in no way connected with the day to day functioning of
the company and are not responsible for the conduct of the affairs of the
company in any way. Sohani is the nominee director of the State Industrial and
Investment Corporation of Maharashtra while Sagar and Talwar are the alternate
directors nominated on the board by the two non-resident German directors. I do
not find any denial of this averment in the affidavits filed by any of the
respondents. They cannot, therefore, be saddled with any liability for any
default under any of the three Acts, namely, the Provident Funds Act,
Employees' State Insurance Act and the Income-tax Act. They are, therefore, to
be relieved wholly from any liability arising for any defaults under those
Acts. I order accordingly. But this cannot be said about the other petitioners.
The words "honestly and reasonably" are words of common use and have
to be understood as such. To be relieved of their liability it has to be seen
whether the petitioners are not lying or cheating or hiding facts and have
acted sensibly. There should be no element of deception in their conduct and
then the court has to see whether it is just and right that they be relieved of
the liability in respect of the defaults committed by them. For non-payment of
statutory dues, the petitioners have said that the company became sick for
reasons beyond their control because of recession, high prices of steel, high
overhead costs and late/inadequate reimbursement under International Price
Reimbursement Scheme. They also say that the Ministry of Commerce in one of
their reports have said that the company is a sick industrial company and is
under process of rehabilitation. It is also said that the Reserve Bank of India
has issued guidelines laying certain parameters for providing reliefs and
concessions to the sick industrial companies by the banks and other concerned
agencies of the Central Government and the State Governments and the guidelines
include deferment of payment of outstanding statutory dues like provident fund,
Employees' State Insurance Corporation contributions, income-tax, waiver of
penalties and collection of statutory dues after suitably rephasing the
industrial unit. An affidavit of P. C. Jhalani was also filed on 5th August,
1985, by way of evidence. In this it is said that earlier there were 7,334
employees in the company as on 1st January, 1981, and the staff situation as on
30th November, 1984, was that there were 5,650 employees working and that the
reduction was mainly on the strength of two factories at Faridabad and one at
Aurangabad. It is also stated that the company could not pay even the
carry-home wages to the workers in time during the relevant period and that the
actual wages were either paid in installments or delayed, but then there are no
particulars whatsoever. In this affidavit it is said that it is the Engineering
Export Promotion Council (EEPC) which suggested in its report dated 10th June,
1985, submitted to the Ministry of Commerce that there should be a moratorium
of three years to enable the company to clear backlog of statutory dues. It is
also said on affidavit that there is no default of statutory dues under the
Income-tax Act as on date. Obviously, this is a wrong statement. What EEPC said
in its report is now sought to be projected as having been said by the Ministry
of Commerce and the Reserve Bank of India.
But, that is not material for the case in hand. Mr.
Bhandare said that the petitioners admitted defaults but he pleaded that
"cake" had to be distributed according to the priorities, these being
payment of wages and salaries, buying of raw material, payment of electricity
bills, freight, etc. He said that the basic thing was that the company should
run and that was ultimately for the benefit of the industry and the workers and
thus for the country. He also said that provident fund dues of the workers
would become due to them after many years as the average age of the workers of
the company was 38 years, the retirement age being 58 years. There is, thus, no
denying the fact that the contributions to the provident fund both of employees
and employer and also contribution to the Employees' State Insurance
Corporation and the amounts of income-tax deducted at source have been used by
the company for its business purposes. If the argument of Mr. Bhandare is to be
accepted, it is difficult to comprehend how any legislation for the benefit of
the workers can be successfully put into operation and how even a Government
can run starved of its revenue if the payments of the provident fund, ESIC
contribution and the income-tax dues are to be dependent on the financial
condition of a company. Rather the argument of Mr. Bhandare would show that the
act of non-deposit of these statutory dues was deliberate. The petitioners
cannot, therefore, be heard to say that they acted honestly and reasonably when
knowingly they violated the provisions of law to the detriment of the workers
and to the State revenue. The argument of Mr. Bhandare, therefore, lacks
substance. There was no justification for wholesale non-deposit of statutory
dues for years together though entries were being made in the records of the
company showing deduction of the statutory dues from the wages of the workers.
If the petitioners were honest and were acting reasonably, the least that was
expected of them was to deposit some dues from time to time. Even today the
petitioners have no clear cut answer and cannot make a positive statement as to
when the statutory dues would be deposited when all this time they are
utilising the money for the business of the company. With the affidavit dated
5th August, 1985 of Prakash Chand Jhalani (petitioner No. 3), a statement of
receipts and expenditure of the company for the period from 1982 to 1984 has
been filed to show that except for a short period from January to June, 1984, when
the company made some profits, it has been running into deficit. There are
various heads of receipts shown in this statement and these would include sale
proceeds, sale of scrap, cash assistance and duty drawback, steel subsidy,
other miscellaneous receipts and loans/limits/deposits/packing credits.
Similarly, there are many heads of expenditure as well. Thus, while the company
has income and is also incurring expenditure on the basis of the priorities set
by the petitioners, the casualty is the statutory dues which it is duty bound
to pay. In the circumstances, therefore, the petitioners cannot escape penalty
for the defaults committed by them. I agree with Mr. Chawla, learned counsel
for the Regional Provident Fund Commissioner, that financial stringency per se
cannot be a ground for non-deposit of statutory dues. This would be so
particularly when it comes to deposit of the contributions of the employees
which had been deducted from their wages and the tax deducted at source from
the salaries of the employees of the company. As I have observed above,
non-deposit of the contributions of provident fund as well as Employees' State
Insurance Corporation contribution in respect of each employee every month is a
distinct default in itself and so also non-deposit of the TDS from the salary
of an employee every month is a distinct default. The petitioners will,
therefore, have to explain with reference to each and every default if they
acted honestly and reasonably and a general statement that the company is passing
through financial crisis or is a sick industry is certainly no answer. The
court has to relieve the petitioners in respect of each default on its
satisfaction that the petitioners acted honestly and reasonably. The
petitioners gave no particulars and led no evidence for the court to relieve
them of the liability incurred thereby. Further, there are different
considerations for the defaults committed under different Acts. As regards the
Provident Fund and the Employees' State Insurance Corporation, I have already
reproduced some observations of the Supreme Court in Organo Chemical
Industries, AIR 1979 SC 1803; 55 FJR 283. As regards income-tax, it is a
revenue of the State. Payment of tax deducted at source cannot be withheld by
advancing a plea that the company is expecting some subsidy from a
retrospective date or is passing through bad days. It is not the case of the
petitioners that tax was not deducted from the salaries of the employees of the
company.
Provisions of section 633(2) of the Act are exceptional
as these relieve an officer of the company from the consequences of a default,
whether penal or otherwise, before he is asked to face the proceedings of
either levying penalty or of prosecution. The court, therefore, has to be
cautious in its approach before exercising discretion in favour of the
delinquent officer though no doubt the discretion has to be a judicial one.
Before exercising any such discretion, the court has to be reasonably satisfied
that the requirements of the section have been met. In this case, I do not
think that this has been done. Petitioners Nos. 9 and 10 are the senior
officers of the company as their designation in the title of the petition would
show. These petitioners have merely stated that they are not responsible for the
defaults in payment of certain statutory dues since "they have no
authority to make such payments". This is too general a statement. No
evidence has been brought on record to show as to what are their duties. It is
also not stated if any notice was ever issued to these petitioners Nos. 9 and
10 in respect of any default under any of the three enactments mentioned above.
That being so, I cannot exercise my discretion in their favour as well. I see
no reason, however, as to why the authorities should prosecute them or levy any
penalty if they are not to perform any functions under either of the three Acts
which are the subject-matter of these proceedings.
I would, therefore, hold that the petitioners, except petitioners Nos. 6, 7 and 8, have not acted honestly and reasonably and rather the facts of the case point to the contrary. These petitioners want to use the process of the court to perpetuate their defaults. I have already mentioned above as to how the benefits have been availed of under the provisions of sections 80C and 140A of the Income-tax Act without depositing provident fund dues and the income-tax (tax deducted at source) and not only that, refund has been claimed from the Government for excess deposit of tax when admittedly no tax (tax deduction at source) was deposited. I would, therefore, relieve the petitioners, Rooplal Choganlal Sohani, V. Sagar and R. K. Talwar (petitioners Nos. 6, 7 and 8 respectively), of any liability that they might have to incur in respect of the defaults under the Provident Funds Act, Employees' State Insurance Act and the Income-tax Act as mentioned in the petition, and as regards the other petitioners, the petition is dismissed with costs. Counsel's fee Rs. 1,000 each for the Regional Provident Fund Commissioner, Employees' State Insurance Corporation and the Income-tax Department.
[1996] 86 COMP. CAS 366 (MP)
HIGH COURT OF MADHYA PRADESH
v.
Mangalchand Hukmichand Industries
(M.P.) Pvt. Ltd.
A.R. TIWARI AND N.K. JAIN JJ.
FEBRUARY 12, 1996
S.L. Garg and
S.S. Garg for the Appellants.
Ravi Waghmare
for the Respondent.
A.R. Tiwari
J.—The unsuccessful
appellants have filed this appeal under section 483 of the Companies Act, 1956
(for short "the Act") against the order dated August. 17, 1984,
passed by the learned company judge in Company Petition No. 1 of 1973.
Briefly
stated, the facts of the case are that the appellants, some of the directors of
the company, filed the petition under section 633 of the Act before the company
court with a prayer that they may be relieved from any liability on account of
non-filing of the balance-sheet, profit and loss account and annual returns of
the company known as Mangalchand Hukmichand Industries (M.P.) Pvt. Ltd.
(respondent No. 1). Respondent No. 1 is a private limited company incorporated
under the Act. Prior to August 9, 1967, respondent No. 2 and Laxmiben Chimanlal
were the directors. But on retirement of Laxmiben, respondent No. 3 was
appointed as a director in her place. Later the appellants and respondents Nos.
2 and 3 became the directors of respondent No. 1. The appellants filed the
aforesaid petition on the ground that the company had entered into certain
contracts with the Government of the Union of Soviet Socialist Republic for supply
of ready made garments. Respondent No. 1 could not execute the contracts.
Respondents Nos. 2 and 3 approached the appellants and requested them to assist
in carrying out the contracts. Respondent No. 1 and the appellants thus entered
into the two agreements dated July 5, 1966, and obtained irrevocable power of
attorney on July 7, 1966. The appellants were thus appointed directors of
respondent No. 1 in or about July, 1966. The appellants were thus acted as
directors only to the extent of execution of the Russian contracts. In 1967,
some disputes arose between the appellants and respondent No. 1 and respondents
Nos. 2 and 3 which resulted in institution of C.O.S. No. 6255 of 1967, in the
City Civil Court at Bombay. Eventually this suit was compromised by the
appellants and respondents Nos. 2 and 3. A compromise decree was passed.
Respondents Nos. 2 and 3 had taken the responsibility of complying with the
provisions of the Companies Act. They, however, neglected to file with
respondent No. 4 the balance-sheet and profit and loss account of respondent
No. 1 for the years 1967 to 1969. Respondent No. 4, therefore, initiated steps.
The appellants contended that they were not liable in view of the compromise
decree. Respondent No. 4, however, did not accept the contention and lodged
complaints against respondents Nos. 2 and 3 as well as the appellants at
Gwalior. The appellants and respondents Nos. 2 and 3 pleaded guilty and were
visited with the fine of Rs. 60 each. They were also directed by the court to
submit the relevant documents within two months. They did not comply with this
direction. In view of the non-compliance, prosecution under section 614A(2) of
the Companies Act was launched. This is how the appellants faced another
prosecution. They maintained that respondents Nos. 2 and 3, being in actual
management, were alone liable to comply with the provisions of the Act. To
safeguard their interest, they filed the aforesaid company petition for grant
of reliefs covered under sub-paras (a) to (g) of para 11 of the company
petition. One of the reliefs was that the appellants be relieved fully from
further liability under the Act. Respondents Nos. 2 and 3 filed the reply in
oppugnation. Respondent No. 4 also opposed the prayer. The petitioners filed
the rejoinder to the reply filed by respondents Nos. 2 and 3. After hearing the
parties, the learned company judge dismissed the petition. Against that order
dated August 17, 1984, the appellants have filed this appeal.
We have heard
Shri S.L. Garg, learned senior counsel with Ku. Rekha Shrivastava, for the
appellants and Shri Ravi Waghmare, learned counsel for respondents Nos. 2 and
3. None appeared for respondents Nos. 1 and 4.
The learned
company judge dismissed the petition on the conclusion contained in para 14 of the
order under challenge, which we extract below:
"In the
present case, the Registrar of Companies has opposed the petition by showing
good cause. It is not the case of the petitioners that they have ceased to be
the directors of the company in any manner. Consequently, in my opinion, so
long as the petitioners continue to be the directors of the company, as
directors they are expected to comply with the provisions of the Companies Act
and if they have any grievance they should approach the Magistrate concerned
for that relief land not to this court, which can grant such a relief only in
exceptional and strong cases relating to an officer of the company which also
includes a director, though a director has also been separately defined under
the said Act. Such relief can be granted against undue hardship in deserving
cases which would in turn depend on the facts of each case. To deal with a
person under section 633, the absence of criminal intention is not relevant.
The power under this section is discretionary and has to be exercised only
where the court is satisfied that the defaulting officer has acted honestly and
reasonably and that having regard to the circumstances of the case he ought to
be excused. It is then that the court may relieve him."
We deem it
proper to observe that this appeal was required to be registered as company
appeal instead of a Letters Patent Appeal.
We are in
general agreement with the conclusion of the company court. In such a
situation, we are not required to restate the facts or defects, if any. In
Girijanandini Devi v. Bijendra Narain Choudhary, AIR 1967 SC 1124, it is held
that:
"It is
not the duty of the appellate court when it agrees with the view of the trial
court on the evidence either to restate the effect of the evidence or to
reiterate the reasons given by the trial court. Expression of general agreement
with reasons given by the court decision of which is under appeal would
ordinarily suffice."
Logically and
legally, the appellants, as directors of respondent No. 1, have rights and
responsibilities as contained in the Act. The learned company judge exercised
discretion in saying "no" to the prayer. Discretion, as stated by
Lord Mansfield in John Wilke's case [1770] 4 Burr 2528, has to be sound and not
arbitrary. No unsoundness or arbitrariness is pointed out in this appeals. We
also notice that the appellants are granted liberty to approach the Magistrate
concerned for the requested relief. We thus find no infirmity in the order. The
order is manifestly fault-free.
If the appellants,
however, maintain that the compromise decree, the linchpin of the petition,
offers rescue or protective umbrella, we leave them free to resort to
appropriate proceedings, if permissible under the law. But so far as this
appeal is concerned, we find it devoid of substance and thus fit for dismissal.
Accordingly,
we dismiss this appeal with no orders as to costs. But we reiterate once again
that this order shall not preclude the appellants to resort to any other remedy
as may be available under the law.
[1996] 86 COMP. CAS. 453
(GUJ)
HIGH COURT OF
GUJARAT
v.
Gita Fabrics (P.) Ltd.
S.M. SONI AND R.R. JAIN JJ.
MISCELLANEOUS
CIVIL APPLICATION NO. 82 OF 1986.
SEPTEMBER 19, 1995
S.N. Soparkar
for the Petitioner.
S.M. Soni
J.—This petition is
filed under the Contempt of Courts Act to take necessary action against the
respondents, as they have not honoured the promise and undertaking given by
them in Company Petition No. 152 of 1985. The promise is as per the consent
terms. The undertaking is given by one J.P. Patel and P.J. Patel to the effect
that in case the company fails to pay the amount agreed as per the consent
terms, they agree to make them personally liable to pay the same. It is the
case of the petitioner that in view of the promise and undertaking, they were
made to withdraw Company Petition No. 152 of 1985 with a liberty to revive and
that the respondents by not complying with the consent terms and the
undertaking, have committed wilful breach of the same. It is, therefore, prayed
for taking action under the Contempt of Courts Act.
If one reads
the consent terms, it is clear that the company has agreed to pay the principal
amount by way of 12 monthly instalments. By undertaking, one J.P. Patel and
P.J. Patel, respondents Nos. 2 and 3 herein, have personally undertaken the
liability to pay the same if the company does not pay the amount agreed to
therein on account of its being wound up or otherwise. This is an order passed
by the company court in terms of the consent terms and undertaking.
Section 634
of the Companies Act, 1956, provides for enforcement of orders of the courts,
which reads as under:
"Any
order made by a court under this Act may be enforced in the same manner as a
decree made by the court in a suit pending therein."
So, the
consent terms and undertaking could have been enforced by the petitioner, as if
it is a decree and by way of execution under the provisions of the Civil
Procedure Code.
In the case
of Alhar Co-operative Credit Service Society v. Sham Lai (Civil Appeal No. 2050
of 1990 arising out of S.L.P. (C) No. 1770 of 1990), the Supreme Court has
observed as under:
"Contempt
proceedings are again not intended to be a substitute of the execution process
and, therefore, care should have been taken before entertaining the contempt
petition to examine the maintainability of such action."
Therefore, it
is clear from the Supreme Court judgment that contempt proceedings are not a
substitute for the execution process. Section 634 of the Companies Act, 1956,
referred to above, provides for treating the order of the company court as a
decree and if it is a decree, the same can be executed under the provisions of
the Civil Procedure Code, vide Order 21. In view of this Act, when the
petitioner could have executed the order passed by the company court, contempt
proceedings, being not a substitute much less not intended to be a substitute,
this petition cannot be entertained.
Any wilful
breach of an undertaking given to a court is a civil contempt as per the
definition of "civil contempt" in section 2(b) of the Contempt of
Courts Act. It is alleged by the petitioner that respondents Nos. 2 and 3 have
not respected or honoured their undertaking given before the company court and
they have, therefore, committed contempt of the company court. If one reads the
undertaking, it is clear that what they have undertaken is the liability of the
company, if the same is not discharged by it on account of its being wound up
or otherwise. There is nothing on record to show why the company could not
discharge its liability. There is nothing on record even by way of an averment
to show that the company has not discharged its liability on account of its
being wound up or otherwise. In the absence of any such fact, situation arising
out of the undertaking does not become operative. Hence, there is no question
of breach of undertaking, much less wilful breach thereof. If one reads the
undertaking, it is suggestive that the consent terms, if can be executed, can
be executed against them. This apart, in case of failure to implement the
consent terms, the right of the petitioner is not lost. The petitioner is given
liberty to revive the petition. Thus, in the instant case, the consent terms
are simply an arrangement to resolve the dispute. If the said arrangement goes
through, the dispute stands resolved. If it does not, the dispute revives from
the stage where it was stopped because of the consent terms. Hence, there is no
case made out against respondents Nos. 2 and 3 under the Contempt of Courts
Act.
In view of
the above reasons, this petition is not maintainable as it could not be
entertained and is liable to be dismissed. Hence, the petition is dismissed.
Rule discharged. No costs.
[1995] 5 SCL 212 (KAR.)
HIGH COURT OF
KARNATAKA
v.
RAJENDRA BABU, J.
MARCH 20, 1995
Section 637B of the Companies Act, 1956 read with article 226 of the Constitution of India - Condonation of delays in certain cases - Whether exercise of discretion by CLB in granting condonation of delay in filing appeal by respondent could be interfered with in a proceeding under article 226 -Held, no
Section
111 of the Companies Act, 1956 - Register of members - Rectification of - Board
of directors of petitioner-company declined to register certain shares acquired
by respondent - CLB allowed respondents appeals on grounds, Inter alia, that
(a) shares were fully paid up; (b) price paid by transferees was not higher
than price paid in respect of certain forfeited shares; (c) payment of higher
price was not to detriment to company - Whether CLB was justified - Held, yes -
Whether company could exercise no power other than available under articles of
association or Act - Held, yes - Whether even assuming that there was residuary
power either in Act or articles, when company found reasons for its refusal to
register transfer of shares that reason alone would have to be examined as good
or bad and CLB had done that in instant case -Held, yes
FACTS
The petitioner-company at the Board of Directors'
meeting decided not to register certain shares said to have been acquired by
the first respondent on the ground that one RP had been making attempts to
corner the shares by offering exorbitant price therefor. The CLB held that the
petitioner had not made out a case to establish that the respondents were
undesirable persons warranting refusal of registration of transfer of shares in
their names and that the high consideration paid for the transfer was not
justifiable ground for refusing to register the shares. According to the CLB,
the company should not feel aggrieved because of any particular amount being
mentioned as consideration in the instrument of transfer since such
consideration amount was of no significance insofar as the finances or the
paid-up capital of the company were concerned. They also took the view that
there was no material to hold that the respondent was acting at the instance of
RP. The CLB accordingly allowed the respondents' appeal after condoning the
short delay in filing the same.
On writ:
HELD
Section 111(4) enables a transferee who has purchased
shares and applies for registration to prefer an appeal on intimation of
refusal by a company as provided therein within a period of two months thereof.
Such an appeal will have to be filed before the Central Government. At the
relevant time the Central Government delegated the power under section 111 to
be exercised by the CLB subsequently. Hence, in these circumstances appeals
were filed before the CLB. Thus, all the powers which vested with the Central
Government in the matter of an appeal under section 111 could be exercised by
the CLB in that regard. Therefore, if power under section 637B was available to
the Central Government, the same power was available to the CLB as well In that
view of the matter, there was no substance in the contention urged on behalf of
the petitioner that in these cases section 637B could not be applied.
Condonation of delay in section 637B is with reference to an application. An
appeal could be filed by a memorandum or a petition or an application or in any
other manner. If an application could be understood in a generic sense as a
prayer made to an authority for some relief to set aside an order of another
authority and such an application is under the statute, it would amount to an
appeal. Section 637B squarely applies to the proceedings before the CLB. If
that provision is applicable, the exercise of discretion by the Board in that
regard could not be interfered with because it had given certain cogent reasons
such as the shortness of delay and advancing cause of justice by removing
hardship that might arise, if delay was not condoned. Thus, such an order could
not be interfered with in a proceeding under article 226 of the Constitution.
Further in
the instant case, the reasons given by the Board of Directors were that the
shares had been sold at a high price and, therefore, it would not be in the
interest of the company to allow the transfer. Possibly what lurked in their
minds was that RP had been behind the sales but that was not spelt out in any
of the resolutions. All that was stated in the resolutions was that in view of
the legal opinion tendered it would not be appropriate to transfer the shares
and the legal opinion tendered had been considered in detail by the CLB, i.e.,
that the transaction could not be considered to be genuine in view of the high
price paid for the shares. It was not at all stated that high price for the
shares were given by RP for and on behalf of the transferees and transferees
were holding the same benami That was not the case put forth by them at the
time when the Board of Directors passed the resolutions. Therefore, in the
instant case, when reasons were set out by the company for refusal to transfer
the shares, the question of placing further material before the CLB might not
arise because reasons had already been disclosed by them. If reasons had not
been disclosed, perhaps the CLB would have called upon them to disclose the
reasons or company itself could have disclosed the reasons. However, the
material sought to be placed before the CLB had also been considered by the
CLB.
The CLB took
note of the following circumstances: shares were fully paid up, the price paid
by the transferees was not higher than the price paid in respect of certain
forfeited shares. The payment of higher price was not to the detriment of the
company. No material was placed that the transfer of shares had taken place at
the instance of RP and even if it were held that they were held benami, it
could not allow the transaction. None of these reasons could be said to be not
based on material on records; it could not be said that the CLB's decision was
not based on irrelevant material or had any relevant material eschewed from
consideration. In that view of the matter, the view taken by the CLB in this
regard was not incorrect. The company cannot exercise any power other than
available under articles or Act. Neither the Act nor articles gives any power
which is residuary in character. Even assuming that there is residuary power,
when the company was found reasons for its refusal to register transfer of
shares, that reason alone will have to be examined as good or bad. That was
exactly what the CLB had done in this case. Hence, the petitions were to be
dismissed.
CASES REFERRED TO
Lingamma v.
State of Karnataka AIR 1982 Kar. 18, Nagendranath Dey v. Suresh Chandra Dey AIR
1932 PC 165, Naveen Kumar v. Jaganjiva Hegde [Appeal No. 6 (SR) of 1986], Ossor
Estates v. Union of India [W.A. No. 1335 of 1988 dated 9-1-1991], Coalport
China Company (John Rose & Co.) Ltd., In re [1895-9] All E.R. Rep. 2021,
Weinbergers. Inglis [1918-19] All E.R. Rep. 1263, Smith & Fawcett
Ltd., In re [1942-l] All E.R. 542, Charles Forte Investments Ltd v. Amanda
[1963-2] All E.R. 940, Luxmi Tea Co. Ltd v. Pradip Kumar Sarkar [1990] 67 Comp.
Cas. 518 (SC) and Bajaj Auto Ltd. v.
N.K. Firodia AIR 1971 SC 321.
S.G. Sundaraswamy and Naganand for the
Petitioner. T.K. Seshadri and K.A. Ariga for the Respondent.
ORDER
1. These petitions are directed against an order made by the
Company Law Board (hereinafter referred to as 'CLB') in appeals filed before it
under section 111 of the Companies Act, 1956 (for short the Act) against the
decision of the Board of Directors of the petitioner-company (hereinafter
referred to as BOD of 'Company') declining to register certain shares of the
company said to have been acquired by the first respondent in each of these
cases.
2. Before the CLB the petitioner contended that the appeals
filed by first respondent in each of these cases before it were barred by
limitation, as the same were not filed within a period of two months from the
date of receipt of the petitioner's letter regarding refusal to transfer shares.
On this aspect of the matter, the Board classified the appeals into three
categories :
(i) that there are certain appeals in which there was no delay at all;
(ii) certain
appeals in which there was delay; and
(iii) certain other appeals have been forwarded to the Board within
the prescribed time, but reached the Board a little late.
On an overall consideration of the matter it held
that in order to avoid undue hardship to the appellants before it, the CLB was
inclined to condone the 'short delay'.
3. Attacking this finding, the learned
counsel for the petitioner urged that there is no specific provision for
condonation of delay in the matter of an appeal filed under section 111 of the
Act on any ground including one of hardship. Elaborating his submission, the
learned counsel for the petitioner stated that section 111 provides for power
to refuse registration and also the appeal that could be filed against such
refusal. The decision as to refusal of registration of transfer of any share
should be communicated within two months from the date of delivery of
intimation of such refusal and if there is any default in complying with the
aforesaid provision, the company and every officer of the company would be
punishable with fine, which may extend to Rs. 50 per day during the period of
default continues. He invited my attention to section 111(4) thereof. It
provides that in case an appeal is filed against such refusal to transfer the
shares, the same should be made within a period of two months from the date of
receipt of the notice of refusal. In the present case it is submitted that at
the relevant time there was no provision made in the Rules framed by the
Central Government for the conduct of the business of the CLB empowering them
to condone the delay. It is also submitted that under section 637 of the Act
there should be a specific delegation of powers to the CLB by the Central
Government to exercise such powers. Neither section 111 nor section 637B is
subject-matter of delegation. Rules framed under section 642 do not provide for
condonation of such delay. It is therefore submitted that there is no scope for
condoning the delay at all in the case of the appeals which are filed beyond
the time fixed in section 111(4) of the Act. He further contended relying upon
a decision of this Court in Lingamma v. State of Karnataka AIR 1982 Kar. 18,
that when there is no specific power conferred upon an authority functioning
under a special statute no inherent power is available for condonation of
delay, however hard the circumstances in a given case may be.
4. The learned counsel for the first respondent in each of these cases submitted that this is a case where CLB had exercised its powers squarely under section 637B of the Act, which opens with a non obstante clause and has overriding effect on all other provisions of the Act and that the power that is exercised by the CLB is that of the Central Government itself in the matter of entertaining an appeal and therefore that provision would be attracted. He explained that section 637B of the Act though refers to an application includes an appeal and for that purpose relied upon a decision in Nagendranath Dey v. Suresh Chandra Dey AIR 1932 PC 165. He further submitted that there is only one case in which there is one day's delay, that is M. Naveen Kumar v. Jaganjiva Hegde [Appeal No. 6 (SR) 1986], and all appeals were filed in time or communication in that regard had already been despatched by the party within the time prescribed under law and in that context relied upon a decision of this Court in Ossor Estates v. Union of India [W.A. No. 1335 of 1988, dated 9-1-1991], wherein this Court held that what is required in the relevant provision is to make an appeal and not actual presentation of an appeal. The moment the party concerned despatches such an appeal by post, it must be deemed that such an appeal has been made. Based on that principle enunciated by this Court, the learned counsel contended that in these cases there is no difficulty at all in coming to the conclusion that appeals had been made within that time.
5. Since at least in one of the cases I have to decide that question as to whether an appeal is in time or not, I need not embark upon a discussion on the aspect as to when an appeal is said to have been filed. I would rest content by referring to the provisions of the Act to find out in cases of time barred appeals whether any delay in filing them could be condoned.
6. Section 111(4) of the Act enables a transferee who has purchased shares and applies for registration and on intimation of refusal by a company can prefer an appeal as provided therein within a period of two months thereof. Such an appeal will have to be filed before the Central Government. At the relevant time the Central Government delegated the power under section 111 to be exercised by the CLB subsequently. Hence, in these circumstances appeals were filed before CLB. Thus, all the powers which vested with the Central Government in the matter of an appeal under section 111 of the Act could be exercised by the CLB in that regard. Therefore, if power under section 637B was available to Central Government, the same power was available to the CLB as well. In that view of the matter, I think there is no substance in the contention urged on behalf of the petitioner that in these cases section 637B could not be applied. Condonation of delay in section 637B is with reference to an application. An appeal could be filed by a memorandum or a petition or an application or in any other manner. If an application could be understood in a generic sense as a prayer made to an authority for some relief to set aside an order of another authority and such an application is under the statute, would amount to an appeal. The Privy Council considered this very question as to whether an application could be understood as an appeal in Nagendranath Dey's case (supra) and stated that in the absence of definition of an appeal or an application, there cannot be a doubt that an application would include an appeal asking the Appellate Court to set aside an order made by any authority and, therefore, the ordinary connotation of the expression application would include an appeal. Hence, I am of the view that section 637B squarely applies to the proceedings before the CLB. If that provision is applicable, the exercise of discretion by the Board in that regard cannot be interfered with by this Court because it has given certain cogent reasons such as the shortness of delay and advancing cause of justice by removing hardship that may arise, if delay is not condoned. I do not think that such an order could be interfered with in a proceeding under article 226 of the Constitution. Hence, I reject the first contention advanced on behalf of the petitioner.
7. The next contention urged on behalf of the petitioner is one touching upon the merits of the matter.
8. It is the contention of the petitioner that one
Ratnavarma Padival had been making attempts to corner the shares and was
offering exorbitant price thereto and therefore the company considered after
obtaining legal advice that it was not in the interest of the company to allow
the transfer of shares; that as long as reasons had been assigned by the
authority concerned and those reasons are germane to the refusal of the
transfer of the shares and such exercise of power is bona fide, it would not at
all be open to the CLB to interfere with such a matter and in this context
relied upon the following decisions :
(1) Coalport China Company (John Rose & Co.) Ltd., In re [1895-9] All E.R. Rep. 2021;
(2) Weinberger v. Inglis [1918-19] All E.R. Rep. 1263;
(3) Smith & Fawcett Ltd., In re [1942-1] All E.R. 542;
(4) Charles Forte Investments Ltd. v. Amanda [1963-2] All E.R. 940
that it was not at all open to the CLB to substitute
its views to that of the BODs of 'Company' who had ample authority under the
Articles of Association to refuse to transfer the shares and such power as long
as exercised by them in a proper manner could not be interfered with by any
authority; that the CLB had misdirected itself in wrongly casting the burden
upon the petitioner that it should prove that its decision was valid, while it
should have placed such onus upon the transferee; that a commercial reality is
within the knowledge of BODs and not of the CLB; that in this context referred
to the object behind article 15 of the Articles of Association, which restrict
the extent of holding of shares of the company and also referred to section 182
of the Act; that the CLB could not have ignored the material placed by them in
the matter of non-suitability or desirability of not transferring the shares in
favour of the first respondent in each of these cases though not disclosed in
the resolution, which was not within its purview at the time when it decided
the matter.
9. The learned counsel for the first respondent in each of
these cases submitted that in the light of the decision of the Supreme Court in
Luxmi Tea Co. Ltd. v. Pradip Kumar Sarkar [1990] 67 Comp. Cas. 518 it is no
longer open to any party to contend that in the matter of transfer of shares of
a Public Limited Company the Board of Directors could refuse to transfer the
shares unless such power is traced either under the Act or under any particular
provision in Articles of Association; that in the present case, the only
provision that could be pointed out was Article 20 of Table-A of Companies Act,
1913, as it was applicable to the company in question when it was incorporated;
that in the case where shares had been fully paid up, the question is only one
of want of suitability of the person and no other question would arise in such
a case; that in a case where lien is held in respect of shares it is open to
the company to refuse to register the shares; that except in these two
circumstances, in no other circumstances it is open to the BODs of 'Company' to
refuse to transfer the shares. He also explained the scope of powers of the CLB
to refuse to transfer the shares by reference to Bajaj Auto Ltd. v. N.K.
Firodia AIR 1971 SC 321 and W.P. No. 776/78 and connected matters, disposed of
by the Madras High Court, wherein the situation was almost identical. He
further brought to my notice certain observations made by this Court in Ossor
Estates' case (supra) particularly in the context of the contention advanced on
behalf of the petitioner that one Ratnavarma Padival wanted to corner all the
shares and the transferees are merely holding those shares benami on his behalf
or on its associates. He also pointed out that the only material before the
BODs of 'Company' on the relevant date when they refused to transfer the shares
was that certain shares had been sold at an exorbitant price, but he countered
the same by pointing out that there was enough material to show that the
company itself has sold certain shares at Rs. 1,000 while the shares
transferred was only of the value of Rs. 950 and thus contended that the
interference by the CLB in this regard was perfectly in order.
10. The CLB in this case after referring to article 20 of
Table-A of Companies Act, 1913 held that the petitioner had not made out a case
to establish that the first respondent in each of these cases are undesirable
persons warranting refusal of registration of transfer of shares in their name.
They noticed that the reason given in the letter of refusal is that the
consideration of transfer is high. They went through the legal opinion placed
before them also. They were of the opinion that the high consideration paid for
the transfer is not justifiable ground for refusing to register the shares.
They referred to the forfeited shares having been issued by the company at a
high price of Rs. 1,000 per share and also its earlier decision in Appeal No.
9/77 that it is not for the company or its management to sit in judgment as to
in the shares of which company and in what price an investor should invest his
funds. The company should not feel aggrieved because of any particular amount
being mentioned as consideration in the instruction of transfer since such
consideration amount is of no significance in so far as the finances or the
paid-up capital of the company are concerned. They took the view that there was
no material to hold that the first respondent in each of these cases was acting
at the instance of the said Ratnavarma Padival. That the emphasis in such
matters is on the personal objections to the transferee and not to the
transferor on the ground that the transferee is the nominee of someone whom
they consider objectionable. They also referred to certain legal proceedings
between Ratnavarma Padival and others against the company and the same was
found to be irrelevant to the case on hand. They took note of the scope of
article 15 of the Articles of Association that no member can hold shares
exceeding 1/10th of the total number of shares and the contention of the
counsel for the company was on the assumption that the shares were not held for
and on behalf of the said Padival. On that basis they rejected the stand of the
company and allowed the appeals.
11. The parameters of the powers of a company in the matter of
transfer of shares is available in Bajaj Auto Ltd.'s case (supra). The Supreme
Court noticed that if the articles permit the Directors to decline to register
transfer of shares without stating the reasons, the Court would not draw
unfavourable inferences against the Directors because they did not give
reasons. On the other hand, the Court would assume in such cases that the
Directors acted reasonably and bona fide and those who allege to the contrary
would have to prove and establish the same by evidence. Where however the
Directors gave reasons the Court would consider whether they were legitimate
and whether the Directors proceeded on a right or wrong principle.
12. Further, I may refer to another decision of the Supreme Court in Luxmi Tea Co. Ltd.'s case (supra), wherein the entire scope of the provisions relating to transfer of shares in a Public Limited Company has been considered by the Supreme Court. It was noticed therein that a shareholder has a right to transfer his share correspondingly in the absence of any impediment in this behalf. The transferee of a share can get the transfer effected and that right of the transferee cannot be defeated by the company or by its Directors except in pursuance of power vested in them in this behalf, which is specifically provided for - it may be residuary, but it should be provided for and traceable to some provision either in the Act or in the Articles of Association of the company. The registration of a transferred share cannot be refused arbitrarily or for any collateral purpose and can be refused only for a bona fide reason in the interest of the company and the general interest of the shareholders. If neither a specific nor residuary power of refusal has been so provided, such power cannot be exercised on the basis of the so-called undeclared inherent power to refuse registration. In view of the declaration of law made by the Supreme Court in these cases it is not necessary to refer to the decisions relied upon by the learned counsel for the petitioner in any detail.
13. In the present case, the reason given by the BODs is that
the shares had been sold at a high price and therefore it would not be in the
interest of the company to allow the transfer. Possibly what lurked in their
minds was that Ratnavarma Padival had been behind the sales but that was not
spelt out in any of the resolutions. All that was stated in the resolutions was
in view of the legal opinion tendered it would not be appropriate to transfer
the shares and the legal opinion tendered had been considered in detail by the
CLB that the transaction could not be considered to be genuine in view of the
high price paid for the shares. It was not at all stated that the high price
for the shares were given by Ratnavarma Padival for and on behalf of the
transferees and transferees were holding the same benami. That was not the case
put forth by them at the time when the BODs passed the resolutions. Therefore,
in the present case when reasons are set out by the company for refusal to
transfer the shares, the question of placing further material before the CLB
may not arise because reasons had already been disclosed by them. If reasons
had not been disclosed, perhaps the CLB would have called upon them to disclose
the reasons or company itself could have disclosed the reasons. However, the
material sought to be placed before the CLB has also been considered by the
CLB. The learned counsel for the petitioner contended that the valuation given
by the Chartered Accountant on 3-10-1987 should be taken note of. However the
said valuation was not and could have been in contemplation of the company as
it decided refusal to grant registration long prior to the date of the said
valuation. The CLB felt, the mere circumstances that the shares are likely to
be held benami would not itself be a circumstance to refuse to transfer the
shares. That view finds support in the decision of this Court in Ossor Estates'
case (supra).
14. The
CLB took note of the following circumstances :
(1) Shares were fully paid up.
(2) The price paid by the transferees was not higher than the price paid in respect of certain forfeited shares.
(3) The payment of higher price was not to the detriment of the company.
(4) No material was placed that the transfer of shares had taken place at the instance of Padival.
(5) Even if it were held that they were held benami, it could not allow the transaction.
None of these reasons could be said to be not based
on material on records, it is not based on irrelevant material or has any
relevant material eschewed from consideration. In that view of the matter, I do
not think the learned counsel for the petitioner can contend that the view
taken by the CLB in this regard is in any way is incorrect.
15. The contention advanced on behalf of the petitioner that
the CLB could not have decided the matter sitting in the arm chair of the BODs
of 'Company' since commercial reality is not within their knowledge, but that
of the Company. I do not think this argument has any substance because the CLB
considered the scope of article 20 and was of the view that unless it could
have held that except in case of matters personal to the transferees, on no
other ground could they have refused to transfer the shares, particularly when
there are fully paid up shares. However, learned counsel for the petitioner
wanted me to read article 20 in a different manner. He wanted me to split the
article into two categories :
The Directors may decline to
register :
(a) any
transfer of shares, not being fully paid shares, to a person to whom they do
not approve.
or
(b) any
transfer of shares on which the company has a lien.
Contention of this nature is futile. Even on the
basis of the argument of the learned counsel, the language of article 20, the
company could not have refused to register transfer of shares, firstly that the
shares are fully paid up and company has no lien. Thus neither first para nor
second para is applicable as argued by the learned counsel for the petitioner.
In view of the law declared by the Supreme Court in Luxmi Tea Co. Ltd.'s case
(supra) and Bajaj Auto Ltd.'s case (supra), the company could not exercise any
power other than available under articles or Act. Neither the Act nor Articles
give any power which is residuary in character. Even assuming that there is
residuary power, when the company find reasons for its refusal to register
transfer of shares, that reason alone will have to be examined as good or bad.
That is exactly what the CLB has done in this case. Hence, I find no merit in
any of the contentions of the learned counsel for the petitioner.
16. The other submission raised is that a proceeding arising under Companies Act is pending for rectification of registers and hence this matter could not be decided. I do not think I can put off consideration of this matter for in no proceeding arising under Companies Act can correctness of the order of CLB be examined. If that is so, it would be proper to decide this matter now.
17. Thus, I find no substance in these petitions. Petitions are therefore dismissed. Rule discharged.
18. In the circumstances, the company will have to comply with the order of the CLB within a period of two weeks from today.
Calcutta High Court
[2004]
50 scl 283 (cal.)
High Court of
Calcutta
v.
Registrar of Companies
Ashim
Kumar Banerjee, J.
C.A.
No. 87 of 2003
and
C.P. No. 76 of 2003
April 24,
2003
Section 166, read with section 633, of the
Companies Act, 1956 - Meetings and proceedings - Annual general meeting -
Company ‘C’ entered into a memorandum of understanding with State Government by
which a portion of tea estate, where registered office of company ‘C’ was
situated, was transferred to a new company for setting up a satellite township
- Such decision gave rise to an industrial dispute and labour unrest - There
had been intensive agitations by workers causing casualty to one of workmen in
police firing - Situation was so grave that directors and other executives were
prevented to enter into premises of registered office - As company could not
hold its annual general body meeting for year 2001-02, it applied to respondent
for extension of time which was allowed upto 31-12-2002 - Annual general body
meeting was held on 31-1-2003 and all documents were filed on 19-2-2003 -
Whether on facts it could be said that there had been bona fide reasons for not
holding annual general body meeting as well as complying with statutory
requirements by company and for such default petitioner-director should be
excused - Held, yes - Whether relief available could be prayed by one of
directors on behalf of other directors in representative capacity - Held, no
Cases referred to
East India
Hotels Ltd., In re [1980] 50 Comp. Cas. 381 (Cal.) (para 5), G.M. Mohan v.
Registrar of Companies [1984] 56 Comp. Cas. 276 (Kar.) (para 5), P. Raman Rao
v. Secretary to Government [1998] 93 Comp. Cas. 486 (AP) (para 5), Filmistan
(P.) Ltd., In re [1959] 29 Comp. Cas. 34 (Bom.) (para 5), M. Meyyappan v.
Registrar of Companies [2002] 112 Comp.Cas. 450/[2003] 42 SCL 758 (Mad.) (para 5),
S.L. Kapur v. Registrar of Companies [1964] 1 Comp. LJ 211 (Ori.) (para 5),
Coal Marketing Co. of India (P.) Ltd., In re [1967] 37 Comp. Cas. 720 (Cal.)
(para 7) and Sanatan Ganguly v. State [1984] 56 Comp. Cas. 93 (Cal.) (para 7).
D. Basak
for the Petitioner. S.S. Sarkar for the Respondent.
Judgment
1. Chandmani Tea
Company Limited (hereinafter referred to as the “said company”) is having its
principal undertaking being Chandmani Tea Estate situated in the district of
Jalpaiguri. The registered office of the said company is also situated within
the tea estate. The said company entered into a memorandum of understanding
with the Government of West Bengal by which a portion of the tea estate was
transferred to a new company namely Lakshmi Township Limited which was
incorporated for the purpose of building a satellite township in joint venture
with the Government of West Bengal. By virtue of such memorandum of
understanding a portion of the tea estate was converted in a vacant land for
the purpose of building such township. Such decision of the company as well as
the Government of West Bengal gave rise to an industrial dispute and labour
unrest. There had been intensive agitations by the workers of the said estate
causing casualty to one of the workmen in a police firing. The situation was so
grave that the directors and the other executives of the company were prevented
from entering into the said tea estate as well as the registered office.
2. In view of such
unfortunate incidents the said company could not hold its annual general
meeting for the year 2001-02 within the stipulated date. The company duly
applied to the Registrar of Companies for extension of time to hold the annual
general meeting. The Registrar of Companies considering the facts and circumstances
extended the time till December 31, 2002. Even then the company could not hold
such annual general meeting by December 31, 2002.
3. The present
application had been made by one of the directors of the said company asking
for condonation of delay in holding the annual general meeting as well as for
an order of restraint against the Registrar of Companies from drawing up any
criminal proceedings on account of such default.
During the
pendency of the application the company held its annual general meeting for the
year 2001-02 on January 31, 2003, and filed appropriate return and documents
with the Registrar of Companies on February 19, 2003. Xerox copy of the receipt
of such filing was filed in the Court in the course of hearing.
4. Mr. D. Basak, learned
counsel appearing for the applicant submitted that in view of the facts and
circumstances as explained in detail in the petition it would ex facie show
that the reason for not holding the annual general meeting within the
stipulated date was beyond the control of the directors of the said company
including the applicant. Mr. Basak further submitted that the said meeting
could not be held despite bona fide attempts on the part of the directors of
the company including the applicant. Hence, the applicant should be relieved of
such responsibility under section 633 of the Companies Act, 1956.
5. In support of his contention, Mr.
Basak relied on the following decisions :
(i) East India Hotels Ltd., In re [1980] 50
Comp. Cas. 381 (Cal.);
(ii) G.M. Mohan v. Registrar of Companies
[1984] 56 Comp. Cas. 276 (Kar.);
(iii) P. Vaman Rao v. Secretary to Government
[1998] 93 Comp. Cas. 486 (AP);
(iv) Filmistan (P.) Ltd., In re [1959] 29
Comp. Cas. 34 (Bom.);
(v) M. Meyyappan v. Registrar of Companies
[2002] 112 Comp. Cas. 450[S2] (Mad.);
(vi) S.L. Kapur v. Registrar of Companies
[1964] 1 Comp. LJ 211 (Ori.).
6. Relying upon the
aforesaid decisions Mr. Basak submitted that since the applicant acted honestly
and reasonably the applicant should be excused for such default and/or breach
of duty by not holding the annual general meeting within the time so
stipulated.
7. Opposing the
application Mr. S.S. Sarkar, learned counsel appearing for the respondent,
submitted that the reason for not holding the annual general meeting within the
time so stipulated in the statute was consi-dered by the Registrar of Companies
and the Registrar of Companies duly extended the time till December 31, 2002.
Hence, the company ought to have held the annual general meeting within the
time so extended by the Registrar of Companies. He further submitted that this
Court had no power to extend the time to convene the annual general meeting, as
prayed for, by the applicant. Mr. Sarkar lastly contended that the
circumstances explained in the petition were not sufficient enough to condone
the delay and excuse the applicant for such default. Mr. Sarkar relied on two
decisions in Coal Marketing Co. of India (P.) Ltd., In re [1967] 37 Comp. Cas.
720 (Cal.) and Santan Ganguly v. State [1984] 56 Comp. Cas. 93 (Cal.). Relying
on the aforesaid two decisions Mr. Sarkar submitted that this Court should
dismiss the petition for want of adequate explanation.
To decide the issue may I first deal with the cases cited by the parties.
(i) Coal Marketing of India (P.) Ltd.’s
case (supra) :
In the said case the
company did not hold any annual general meeting for six years. Initially on an
earlier application for the default committed by the company for two years for
non-filing of balance-sheet, profit and loss account as well as for not holding
the annual general meeting this Court condoned the delay on an undertaking
given by the directors that they would hold the annual general meeting and
comply with the statutory requirements within six months. Such undertaking was
violated by the directors. This Court on a second application being made
condoned the delay on a similar undertaking. The directors violated the
undertaking for the second time. Similarly on a third application the delay was
condoned by this Court. When fourth attempt was made before this Court by the
said judgment this Court dismissed the petition. While dismissing the petition
P.B. Mukherjee, J. held that the Court had no power to relieve the directors
from liability for the default or to extend the time for holding the annual
general meeting or to file statutory requirement or balance-sheet and/or profit
and loss account. His Lordship was further pleased to observe that the default
could be excused under section 167 of the Companies Act and the Central
Government had power to permit calling of such a meeting on an extended date.
His Lordship further held that under section 633, the Court could relieve
officers of the company from fines and penalties and not the company from
calling or holding or conducting the annual general meeting.
(ii) Filmistan (P.) Ltd.’s case (supra) :
In this case
there had been a default in submitting the balance-sheet and profit and loss
account. The Bombay High Court held that the Court had power to condone the
delay on an appropriate explanation given by the applicants. The Court
considering the facts and circumstances condoned the delay and directed the
Registrar of Companies not to initiate any proceeding for such default.
(iii) S.L. Kapur’s case (supra) :
The Orissa High
Court considering the facts and circumstances held that delay in holding the
annual general meeting and placing the balance-sheet before the said meeting
and forwarding copies thereof to the members was due to unavoidable reasons and
caused by circumstances beyond their control. Hence, the default should be
excused under section 633(2).
(iv) Sanatan Ganguly’s case (supra) :
In a criminal
revision proceeding Manoj Kumar Mukherjee, J. was pleased to hold that the
power of the Court under section 633(1) was a discretionary one and discretion
had to be exercised when the Court was satisfied that the defaulting officer
had acted honestly and reasonably and having regard to the facts and
circumstances of the case he ought fairly to be excused.
(v) East India Hotels Ltd.’s case (supra) :
In this case
there had been a violation of section 58A. The company although belatedly
complied with the requirement as directed by the Reserve Bank of India and no
objection to the said effect was ever made by the depositors. Hence, the Court
held that the petitioners acted reasonably and honestly and they ought to be
granted relief.
(vi) G.M. Mohan’s case (supra) :
In this case
there had been violation of section 58A of the said Act, Karnataka High Court
considering the facts and circumstances granted relief to the officers of the
company under section 633(2).
(vii) P. Vaman Rao’s case (supra) :
In this case the
company was before the BIFR where a reference was being held. During the
pendency of the said proceeding the Company Law Board directed cost audit to be
done. The company could not comply with such direction within the stipulated
time. There were other circumstances for which the company asked for exemption
to have cost audit done. In this backdrop the directors applied for being
relieved of the responsibility under section 633(2). The Court upon considering
the facts and circumstances of the case allowed the application.
(viii) M. Meyyappan’s case (supra) :
The company
could not have the cost audit done within the stipulated period. The Central
Government also did not pass any formal order on the application for extension
of time to file the cost audit report. There had been labour unrest in the
company. The Madras High Court considering the facts and circumstances held
that the petitioner had acted honestly and diligently and properly explained
the delay in submitting the cost audit report and as such the petitioner was
excused for such default.
Considering the
aforesaid cases cited by the parties my understanding of the section being
section 633(2) is as follows :
(i) If there is any
statutory default on the part of an individual while acting on behalf of the
company the Court is empowered to consider the application for excusing the
said person from such responsibility and/or liability.
(ii) While considering the
application made under section 633(2), the Court will have to come to a
conclusion that the applicant had acted honestly and fairly and even after his
honest and fair act the default was committed for some unavoidable
circumstances.
(iii) Non-compliance with such
statutory requirements by the applicant was caused due to incident beyond his
control.
(iv) The Court is neither
empowered to extend the time to hold annual general meeting or to comply with
the statutory requirements nor empowered to relieve the company from such
responsibility and/or liability.
8. The facts and
circumstances as explained by the petitioner in the instant application as
briefly recorded by me hereinbefore would show that there had been bona fide
reason for not holding the annual general meeting as well as for complying with
the statutory requirement by the company and/or its directors within the
extended period. The newspaper reporting annexed to the petition would show
that the situation prevalent at the said tea estate at the relevant point of
time was too grave. The Registrar of Companies considered all those aspects and
extended the time till December 31, 2002. The company and/or its directors even
then could not hold the said meeting by December 31, 2002, and ultimately held
the meeting on January 31, 2003. From the aforesaid facts I am convinced that
the company and/or directors could not have held the meeting and complied with
the statutory requirement within the stipulated period as also within the
extended period. Hence, for such default the petitioner being a director of the
said company, in my view, should be excused. I was told by learned counsel
appearing for the company who had drawn my attention to the xerox copy of the
receipt granted by the Registrar of Companies that all the statutory
requirements were complied with by the company and its directors on February
19, 2003, by filing necessary annual report, balance-sheet and other related
documents required in law with the Registrar of Companies on the said date.
9. In the case of
Coal Marketing of India (P.) Ltd. (supra), the Court dismissed the application
on the fourth attempt as the Court was not satisfied with the explanation given
by the directors of the said company. Moreover, in the said case there had been
continuous defaults despite repeated undertakings given before this Court.
Considering such facts and circumstances of the case, P.B. Mukherjee, J.
dismissed the application. I do not find any scope to apply the said decision
in the instant case.
10. Similarly, in the
case of Sanatan Ganguly (supra), this Court observed that the magistrate while
considering the application under section 633(1) ought to have come to a
finding that the petitioner acted honestly and fairly and without coming to a
finding the learned magistrate should not have granted relief under section
633(1). I am unable to find any scope of application of the ratio decided in
this case.
11. The petitioner
herein prayed for relief on his behalf as well as on behalf of the other
directors. In my view, the statute requires application to be made by the
person seeking relief under this section. For the defaults committed by the
directors of the company the directors are individually responsible and are
liable for conviction and hence the petitioner is not entitled to make this
application in representative capacity.
12. Hence, the
application succeeds in part. The Registrar of Companies, West Bengal, is
directed not to take any punitive step against the applicant for non-compliance
with the provision of section 166 of the Companies Act for not holding the
annual general meeting within the stipulated date and also for non-filing of
the statutory documents with the Registrar of Companies within the stipulated
period for the year ended March 31, 2002. The application being C.P. No. 76 of
2003 is disposed of accordingly. The Registrar of Companies, West Bengal,
would, however, be entitled to costs of this application assessed at Rs. 1,700
to be paid by the petitioner within a week from the date.
[1961] 31 COMP. CAS. 262 (PUNJ.)
FALSHAW
J.
MARCH 18, 1960
FALSHAW J. - This is an application by the company, Asia Udyog Private Limited, under section 633 of the Companies Act for relieving the company and its directors and officers from liability for default in complying with the provisions of sections 210, 220 and 159 of the Act in not having the accounts audited and the balance sheet and profit and loss account for the financial year ending July 31, 1958, prepared and laid before the shareholders in the annual general meeting of the company held on April 28, 1959, as required by section 210 and copies thereof filed with the Registrar under section 220 and also for not having an annual return prepared and filed with the Registrar as required by section 159.
The grounds on
which the petition is based are that in November, 1953, the Special Police
Establishment took possession of all the account books of the company under a
warrant issued by the District Magistrate, Delhi, and that in spite of the best
efforts of the company to secure the return of the books they have still not been
returned. In the absence of the books it was not possible for the company to
have the accounts regularly audited and a proper balance sheet and profit and
loss account prepared for the period which was current at the time of the
seizure of the account books, and consequently these processes have also been
impossible for subsequent years. It appears that in fact similar petitions have
previously been filed and dealt with by the learned District Judge and a
similar application relating to the previous year’s accounts was allowed by the
learned District Judge by his order dated November 6, 1959.
The petition
was opposed by the Registrar on certain technical grounds, which have either
been remedied or not pressed and also on the merits. It was not, however,
seriously contended that the account books of the company were not seized in
1958 and have since been withheld and that the books are even now lying in the
custody of the Commission of Inquiry presided over by Mr. Vivian Bose, which
had been appointed by the Government to enquire into the affairs of certain
companies including the petitioner company, or that in the absence of a proper
audit and preparation of balance sheet and profit and loss account for the year
current when the books were seized there could be a proper audit or preparation
of these documents for subsequent years. It was, however, suggested that at
least the company could file a statement of its income and expenditure and a
statement of its receipts and payments based on the account books which are
admittedly now being maintained.
The learned
Government Solicitor, however, drew a distinction between the default under
sections 210 and 220 and the default under section 159, which requires an
annual return to be made by the company within 42 days of the annual general
meeting containing the particulars specified in Part I of Schedule V, and it is
contended that at any rate these particulars could be filed which relate to
such matters as the registered office, the register of members and debenture
holders and on this point I am rather inclined to agree, although it may not be
possible to furnish all the particulars set out in the form in Part II of
Schedule V. However, section 159(2) provides that the said return shall be in
the form set out in Part II of Schedule V or as near thereto as circumstances
admit.
In the
circumstances, I accept the application and grant the company and its directors
and officers relief from liability for default in complying with sections
210/220 and 159 of the Act provided that within two months statements of income
and expenditure and receipts and payments for the year ending July 31, 1958,
based on the accounts now maintained by the company are furnished, and also a
statement of the particulars required under section 159 of the Act as nearly as
possible in conformity with the form set out in Part II of Schedule V of the
Act. The parties will bear their own costs on the application.
Petition
allowed.
[1995] 82 COMP. CAS.
651 (RAJ.)
v.
Registrar of
Companies, Jaipur
I.
S. ISRANI, J.
S.B.
CIVIL COMPANY PETITION NO. 14 OF 1991
MARCH
6, 1992
I. S.
ISRANI J. - This company
petition has been filed under section 633(2) of the Companies Act, 1956, in
which it has been prayed that the petitioner may be relieved from his liability
in the matter of non-compliance with the requirements of section 210 and 220 of
the companies Act and the respondent, Registrar of Companies, may be directed
not to initiate criminal proceedings against the petitioner or the company in
the matter.
A reply to
this petition has been filed by Shri U. D. Sharma, learned counsel for the
Registrar of Companies.
It is
submitted by Shri Kuhad, learned counsel, that the industry was declared to be
a sick industry within the provisions of section 3(1)(o) of the Sick Industrial
Companies (Special provisions) Act, 1985 (for brevity “the Act, 1985”). It is
submitted that the company was declared to be sick, vide order dated October 3,
1989 (annexure 1), and the company was closed from April, 1987. It is further
submitted that the final order of the Board for Industrial and Financial
reconstruction to wind up the company was passed on June 14, 1990 (annexure 2).
An appeal under section 25 of the Act mentioned above was filed and has been
admitted on December 7, 1990 (annexure 5). An order staying the operation of
order, annexure 2, was also passed on the same day, which is still under
operation. It is submitted that the appellate authority, where the appeal is
pending, directed the petitioner-company to prepare the accounts and police
help was also given to enable the personnel of the company to enter the factory
premises. However, in spite of police help as mentioned in para 9 of the
petition, they were not able to enter the premises for preparation of the
accounts, etc. It is submitted that in these circumstances, the
petitioner-company is not to do so from 1989 onwards. It is, therefore, prayed
that a suitable order regarding this may be given to enable the company to
prepare the accounts and records for filing before the Register of Companies.
It is submitted by learned counsel, that, in these circumstances, it is
apprehended that the managing director of the company and other directors might
be prosecuted under sections 210 and 220 of the Companies Act, 1956.
I have heard
both the parties and gone through the petition and the reply filed. In the
circumstances stated above, I deem it appropriate that after the company is
revived, it shall file the necessary records within six months including the
audited balance-sheet as required under the provisions of section 220 of the
Companies Act, 1956. Till then no prosecution may be launched against it
directors under section 210/220 of the Companies Act, 1956.
The petition
is disposed of as above.
[1937] 7 Comp Cas 429 (MAD)
v.
C.P. Connell
Leach, C.J., and
Varadachariar, J.
August, 12, 1937
K. Krishnaswami Iyengar, E. Antony Lobo, S.R. Subramaniam, K.C. Subramanian Chettiar, O. Rajavelu Chetty and A. Ramaswami for the Appellants.
A. Westmoreland Wood for the Respondents.
Leach, C.J. — This appeal and appeals Nos. 27 of 1937 and 28 of 1937 arise out of a misfeasance summons taken out by the Official Liquidators of the General Banking Corporation, Limited against the directors of that Company. The appeals have been heard together and it will be convenient to deal with them in one judgment.
The company was registered on the 11th May, 1933, for the purpose inter alia of doing all kinds of banking business. The promoter was one P.K. Nair, a barrister-at-law, who was at the time and has since remained an undischarged insolvent. Nair, who was the ninth respondent in the proceedings before the learned trial Judge, arranged that he should be appointed legal adviser to the company and the "advisory director". A prospectus was prepared, but fortunately there was no general application made to the public to subscribe shares. There were eight other directors, who were respondents 1 to 8. Two of them, respondents 3 and 5, (B. Gulabchand Sowcar and M.L. Ranganayakulu) were not served and they took no part in the proceedings. The fourth respondent A. Madhava Rao, who was the chairman of the company, and Nair absconded before the proceedings commenced. The Official Liquidators sought to make all the respondents, except respondents 3 and 5, liable under S. 235 of the Indian Companies Act, 1913, for (i) a sum of Rs. 4,988-7-2, which has been misappropriated by Nair, and (ii) a sum of Rs. 6,331-9-3, representing liabilities incurred by the company from the date it started business until the date it closed its doors. The certificate permitting business to be started was issued on the 4th September, 1933, and business was actually commenced on the 7th of that month. The bank's doors were closed on the 16th February, 1934; a petition for winding up was presented on the 5th March of that year and on the 6th April, 1934, a compulsory winding up order was passed.
Mr.
Justice Gentle before whom the case came held that respondents 1, 2 and 4 (Rao
Bahadur M.C. Rajah, V. Venkateswara Sastrulu and A. Madhava Rao) were each
liable to pay the sum of Rs. 4,988-7-2 claimed as the first item and
respondents 2, 4 and 6 (the sixth respondent being D. Doss) were each
responsible for the payment of the sum of Rs. 6,331-9-3 the second item
claimed. He also held that in respect of the sum of Rs. 6,331-9-3, the first
respondent was liable to pay Rs. 2,833-9-9, and the seventh respondent Rs.
5,408, these sums being calculated in accordance with the dates on which they
resigned from the board of directors. Appeal No. 26 is the appeal of the sixth
respondent in respect of the sum of Rs. 6,331-9-3. Appeal No. 27 is by the
seventh respondent in respect of the sum of Rs. 5,408, and Appeal No. 28
embraces the appeals of the first and second respondents in respect of the sum
of Rs. 4,988-7-2, that of the first respondent in respect of the sum of Rs.
2,833-9-9 and that of the second respondent in respect of the sum of Rs.
6,331-9-3. The fourth respondent has not appealed and the order of the learned
judge has become final as against him.
The nominal capital of the company was Rs. 1,00,000 divided into 2,000 shares of Rs. 50 each. Of the Rs. 50 payable on each share, Rs. 10 was payable on application, Rs. 15 on allotment and the balance in five equal instalments. The articles of association provided that the business of the company might be commenced as soon as 50 shares, that is Rs. 2,500, had been subscribed. Before the company was incorporated a draft agreement had been prepared under which the company was to advance to Nair a sum of Rs. 10,000 on the security of his interest in the assets of the Indian Law Times Limited and a life policy of Rs. 10,000. The Indian Law Times Limited has been acquired by Nair and his insolvency arose in connection with this business. The arrangement was that of the loan of Rs. 10,000, Rs. 5,000 should be paid to Nair for the purpose of enabling him to redeem the assets of the Indian Law Times Limited from the hands of the Official Assignee. After the incorporation of the company the agreement was executed and in due course Nair executed the requisite mortgage deed. Although business was not started until the 7th September, 1933, advertisements were inserted by Nair in the local press on the 21st June and 15th July, 1933, calling for applications for posts on the staff of the company. It was intimated that the successful candidates would be required to deposit security for the proper performance of their duties. Applications were received in the course of July and August and a number of appointments was made, the persons appointed furnishing security in the aggregate sum of Rs. 10,720.. I should mention that article 63 of the articles of association provided that the chairman should have the power of appointing, promoting, reducing, suspending and removing all officers of the bank, subject to the approval of the board of directors, and should have the power to fix all remunerations, salaries, and wages to be paid by the company. Subscriptions were received for only sixty-five shares. The subscriptions by the respondents were as follows:
|
Respondent No. |
|
No. of shares. |
|
1 |
… |
5 |
|
2 |
… |
5 |
|
3 |
… |
20 |
|
4 |
… |
10 |
|
5 |
… |
5 |
|
6 |
… |
5 |
|
7 |
… |
5 |
|
8 |
… |
5 |
Respondents 1, 2, 4 and 6 paid nothing in respect of their shares. The third respondent paid Rs. 250 on account of the Rs. 1,000 owed by him in respect of his 20 shares, and the seventh respondent paid Rs. 30 on account of the Rs. 250 owed by him in respect of his five shares. Respondents 5 and 8 appear to have paid for their shares in full. The actual capital which the company had when it started business was Rs. 780.
The first item of the claim viz., the sum of Rs. 4,988-7-2 represents security deposits provided by the employees which Nair put into his own pocket. The company had no right to utilise these moneys for its own purposes and the fact that Nair misappropriated them is common ground. The learned judge held that respondents 1, 2 and 4 were responsible for this sum, because they had not used reasonable care in carrying out their duties. He considered that it was incumbent on them to see that the company's moneys were in a proper state of investment and that Nair being an undischarged insolvent should not have been allowed to take charge of the security deposits of the employees. The learned judge held as a fact that the second and fourth respondents had knowledge of Nair's insolvency, but he was not satisfied that the first respondent had such knowledge. He, however, held that they were all liable as they took no steps to see that a responsible person was attending to the company's finances. They had all failed to carry out their duties, and were guilty of the grossest negligence. The position with regard to this sum of Rs. 4,988-7-2 is altogether different from the position with regard to the sum of Rs. 6,331-9-3, which I will deal with separately.
With regard to the first sum, the learned advocate for respondents 1 and 2 (appellants here) contends that the learned trial judge has misconceived the law with regard to the duties of directors. He says that on the authorities it must be shown that the directors had knowledge of the facts and that they acted wilfully despite their knowledge. Before passing to the authorities I should refer to Article 95 of the articles of association. This article had been very badly drafted, but it is intended to comprise the usual indemnity to directors for anything done by them, except where loss has been incurred as the result of wilful neglect or wilful default on their part, and it is accepted by both sides, that it has this effect. The duties of directors and what is meant by wilful negligence were dealt with at length by Romer, J., in the case of City Equitable Fire Insurance Co. Ltd. The learned judge who discussed the authorities there pointed out that in order to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company's business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the, company, provided always that this distribution is a reasonable one in the circumstances, and is not inconsistent with any express provisions of the articles of association. In discharging the duties of his position thus ascertained a director must, of course, act honestly; and he must also exercise some degree of both skill and diligence. The learned Judge however pointed out that (1) a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience; (2) he is not bound to give continuous attention to the affairs of the company, his duties being of an intermittent nature to be performed at periodical meetings; and (3) in respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. Dealing with the question of wilful negligence, the learned judge observed (page 434 of the report):
"An act, or an omission to do an act is wilful where the person of whom we are speaking knows what he is doing and intends to do what he is doing. But if that act or omission amounts to a breach of his duty, and therefore to negligence, is the person guilty of wilful negligence? In my opinion that question must be answered in the negative unless he knows that he is committing, and intends to commit a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty."
This view was affirmed by the Court of Appeal consisting of Pollock, M.R., Warrington, L.J., and Sargant, L.J. With regard to the question whether a director is justified in trusting the officials of the company I would also refer to the observations of Lindley, M.R., in the case of the National Bank of Wales Ltd :
"Business cannot be carried on upon principles of distrust. Men on responsible positions must be trusted by those above them, as well as those below them, until there is reason to distrust them. We agree that care and prudence do not involve distrust; but for a director acting honestly himself to be held legally liable for negligence, in trusting the officers under him not to conceal from him what they ought to report to him, appears to us to be laying too heavy a burden on honest business men."
This case was taken to the House of Lords, Dovey v. Cory. Lord Davey there said (page 492 of 1901 AC.):
"I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information, and advice of the chairman and general manager, as to whose integrity, skill, and competence he had no reason for suspicion. I agree with what was said by Sir George Jessel in Hallmark's Case, and by Chitty, J., in In re Denham & Co. that directors are not bound to examine entries in the company's books. It was the duty of the general manager and (possibly) of the chairman to go carefully through the returns from the branches, and to bring before the board any matter requiring their consideration ; but the respondent was not, in my opinion, guilty of negligence in not examining them for himself, notwithstanding that they were laid on the table of the board for reference."
Now what is the position here ? As I have pointed out, the matter of the appointment of the staff was in the hands of the chairman. It is not suggested that respondents 1 and 2 had any reason whatsoever to suspect the integrity of the chairman. It is also not suggested, apart from his insolvency, that they had any reason to suspect the integrity of Nair. It is true that Nair was an undischarged insolvent, but insolvency does not necessarily mean that a man is a dishonest man. There is here an entire absence of anything which would point the finger of suspicion to either the chairman or to Nair in the matter of these appointments. There was certainly no reason for any of the directors to suspect that Nair would utilise the security deposits for his own purposes, and there is no reason to suspect that the chairman knew that he was so doing. It is abundantly clear from the minutes that when it was discovered that Nair had utilised these security deposits for his own purposes the matter was immediately taken up by the directors and he was called upon to repay. Nair appears to have utilised Rs. 4,500 of the deposits towards the Rs. 5,000 which was to be paid to him under the mortgage for the purposes of redeeming the assets of the Indian Law Times Limited, but instead of redeeming those assets he stuck to the money. But nobody knew about this until afterwards. The authorities show that where there is an indemnity clause of the kind we have here, not only must a director be guilty of negligence, but he must know that he is committing a breach of duty or is recklessly careless in the matter. Romer, J., at page 468 of the report of the City Equitable Fire Insurance Co.'s case emphasised this. It seems to us that respondents 1 and 2 were justified in trusting the chairman and Nair to deal properly with the employees and therefore it cannot be said that they were guilty of wilful negligence in so doing. In these circumstances we consider that the appeal so for as it relates to the sum of Rs. 4,988-7-2 must be allowed.
But entirely different considerations arise with regard to the sum of Rs. 6,331-9-3. In this connection it is necessary to refer to Sec. 103 of the Indian Companies Act. This section provides that a company shall not commence any business or exercise any borrowing powers unless (a) shares held subject to the payment of the whole amount thereof in cash have been allotted to an amount not less in the whole than the minimum subscription; and (b) every director of the company has paid to the company on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash, a proportion equal to the proportion payable on application and allotment on shares offered for public subscription or, in the case of a company which does not issue a prospectus inviting the public to subscribe for its shares, on the shares payable in cash ; and (c) there has been filed with the registrar a duly verified declaration by the secretary or one of the directors, in the prescribed form, that these conditions have been complied with. In this case the minimum subscription had been subscribed, but the amounts due on them by the directors had not all been paid and the certificate permitting the company to commence business had been obtained as the result of a false declaration made by Nair. The learned Judge found that all the respondents knew of the obtaining of this certificate and that they were fully aware that the company had started business on the 7th September, 1933. They therefore all wilfully permitted the company to carry on business on the strength of a certificate obtained by a false declaration. We have no doubt that the respondents 2, 6 and 7 had knowledge of the obtaining of the certificate and of the fact that business commenced on the 7th September, 1933. With regard to the first respondent it is said that he was actually in Madras only on the 26th, 27th and 28th of July and between the 13th and 18th of August. But it is clear on his own evidence that he returned to Madras on the 28th September. We have no doubt that he was fully aware by that date, if not before, that the certificate, had been obtained and that business was being carried on. We are also satisfied that these four respondents were fully aware that the directors had not paid what was due in respect of their respective shares and that they knew that the company had no right to commence business. In any event they must be deemed to know the law. In Burton v. Bevan which was also a case of misfeasance, Meville, J. remarked:
"I think it is immaterial
whether the director had knowledge of the law or not. I think he is bound to
know what the law is, and the only question is, did he know the facts which
made the act complained of a contravention of the statute?"
In the present case the learned trial judge has held that they did know and we are in entire agreement with him. This means that the directors allowed this company to open its doors and keep them open for months knowing full well that Sec. 103 had not been complied with, that the company had no capital with which to carry on business and that deposits made by customers in current and other accounts were being utilised by the management for the payment of wages and current expenses without any likelihood of the company being able to pay back such moneys. In other words they knew that the bank was utilising its customers moneys dishonestly. As the result of the company having obtained by means of a false declaration a certificate allowing it to carry on business and as the result of the respondents having allowed the company to keep open its doors the company has suffered loss to the extent of Rs. 6,331-9-3. We are of opinion that respondents 1 and 2, 6 and 7 have been guilty of wilful negligence and that they are liable to make re-payment under Sec. 235 of the Indian Companies Act. We therefore agree with the finding of the learned trial judge on the second part of the case.
We have been asked to relieve these respondents from the consequences of their wilful negligence, under the provisions of Sec. 281 of the Indian Companies Act. That section provides that if in a proceeding for negligence, default, breach of duty or breach of trust it appears to the court hearing the case that the person may be liable but has acted honestly and reasonably and ought fairly to be excused, the court may relieve him wholly or in part from his liability. This power to relieve is placed in the hands of the court when it is convinced that a person has acted honestly and reasonably. In this case even if it be said that these* respondents acted honestly, it cannot be said that they acted reasonably and we are unable to grant them any relief under this section. The order of the learned judge against the respondents 1, 2, 6 and 7 in respect of the second item of the claim will therefore stand. As the appellants have succeeded in part and failed in part, we do not propose to make any order as to costs. The liquidators will have their costs out of the assets of the company.
[1937]
7 COMP. CAS. 212 (PAT.)
HIGH COURT OF PATNA
Peninsular
Locomotive Co., Ltd.
v.
H. Langham Reed.
WORT, J.
NOVEMBER 10,1936
Netai Chandra Ghosh—for Applicant.
Sultan Ahmed and S.N. Bose—for Opposite Parties.
JUDGMENT
Wort, J.—This is an application by the Official Liquidator of the Peninsular Locomotive Co., Ltd., under S. 235, Companies Act, for compensation for damages suffered by the company by the payment of the sum of £6000 during the winding up which payment was void under S. 227 of the Act and which was a misfeasance or breach of trust and a sum which the directors became "liable" to re-pay to the Company within the meaning of S. 235. The defence of the director against whom the summons has been taken out is that he was not guilty of any misfeasance or breach of trust nor liable to re-pay the sum and that in any event he having acted honestly and reasonably he ought fairly to be excused under S. 281. Further the application is barred by limitation.
The Peninsular Locomotive Company was incorporated in the year 1921 for the purpose of the manufacture of locomotive engines, The Company was started in pursuance of a policy of the Government of India at that time, for encouraging the manufacture of locomotives in India. However, after it became manifest that the business of the nature for which the Company was incorporated was not forthcoming, the Company engaged for a time in the manufacture of railway wagons, and it is said that a profit of two or three lakhs of rupees was made during the short time this wagon business lasted. Ultimately Government purchased the works of the Company for twenty lakhs of rupees. This was on 14th July 1927, and on 21st May 1928, by a resolution of the Board a sum of six lakhs of the capital was returned to the shareholders by payment of Rs. 20 per share. The authorized capital, it should have been stated, was 60 lakhs of rupees, and the issued capital 28 lakhs rupees in shares of Rs. 100 each. Of the 28 lakhs of rupees Messrs. Kerr Stuart & Co., Ltd., the Managing Agents, held Rs. 11,50,000, Mr. Langham Reed, the Chairman of the Board, Rupees 8,52,200, Sir George Buchanan of the directors Rs. 15,000, Mr. T. Gordon, director, Rs. 22,500, Mr. F.E. Dinshaw Rs. 5,00,000 on behalf of himself but principally as nominee for the Maharaja of Gwalior, and the balance by persons in India and England who were either friends or employees of Messrs. Kerr Stuart & Co., Ltd. It was a private Company with 22 share holders in all. No application was made to me in this case to order pleadings nor to take evidence orally, which might have been done, but the facts do not seem to be seriously disputed and sufficiently appear from those letters and documents which have been exhibited in the case annexed to the various affidavits.
The registered office of the Company up till 6th December 1921 was in Bombay but after that date was transferred to Jamshedpur in the jurisdiction of this Court. On 10th January 1930 Mr. F.E. Dinshaw, who had resigned from the Board in 1927, filed a petition in the High Court at Bombay to wind up the Company. The registered office having been removed to this Province, the petition was withdrawn and on 5th June 1930, a petition was filed in this Court. On 30th June 1930 the winding up order was made and a liquidator was eventually appointed although the order for winding up bore date 3rd July 1930. On 13th March 1931, the orders were set aside owing to irregularities as regards advertisement of the petition, but on nth May 1931 after due advertisement a winding up order was made on the ground that the company had ceased to do business and the substratum of the company had gone. This sum of £6000 was paid on or about 20th June 1930 and it is not disputed that the payment was made after the commencement of the winding up and therefore was void under sub-s. 2 of S. 227, Companies Act. This Court declined to validate the disposition on 13th September 1932, an application having been made by the liquidator to the Court for certain directions in the winding up. The facts relating to the payment of £6000 are as follows: In 1927 it appears that the directors, the chairman of whom was Mr. Ladgham Reed, considered the advisability of purchasing the works of Calmoni Engineering Co., Ltd,, and negotiations appear to have been commenced through Messrs. Kerr, Stuart & Co., Ltd., who were the Managing Agents of the Peninsular Locomotive Company, and a company known as Low & Co., Ltd., who represented the debenture holders of the Indian Company, the Calmoni Engineering Co., Ltd. (in liquidation). A meeting of the Board of Directors appears to have taken place in Bombay on 15th July 1927; the minute of that meeting is annexed to the liquidator's affidavit and marked Ex. H. There were present Sir Fazulbhoy Currimbhoy, Sir Purshotamdas Thakurdas, Mr. F.E. Dinshaw and Mr. Manu Subedar, the respondent. It is convenient to state here that at times material to this application the directors were Mr. Langham Reed, Sir George Buchanan, Mr. Charles T. Gordon and Mr. Manu Subedar of whom Mr. Subedar alone was living in India (Bombay). It was agreed that a cable should be sent to the chairman in London to this effect:
Calmoni Engineering Company Mr. F.E. Dinshaw says no time to consult Gwalior Darbar. If Gwalior Darbar does not support Gwalior Darbar will have to be returned money proportionately. Subject to this directors agree to purchase Calmoni Engineering Company.
Mr. Langham Reed cabled to Manu Subedar (the respondent) on 21st July to the effect that they had agreed to purchase the Calmoni Engineering Works and paid 10 per cent. deposit for an option to complete in ten weeks. It is by no means certain what happened in the meantime. But on 21st May 1928 Mr. Subedar cabled to Mr. Reed:
Calmoni Engineering Works. Board of Directors are opposed to purchase at any price. Much prefer reasonable settlement without our taking over works.
Mr. Langham Reed cabled on 23rd July:
Calmoni Engineering Works. Regret Board's decision. Kerr, Stuart & Co., will probably make arrangements to purchase themselves.
Kerr Stuart & Co. and Low & Co. were in London. There was another Board meeting on 31st May 1928 of the Indian directors the minute of which stated that with regard to the cable of 25th May the directors had considered the offer of Messrs. Low & Co. to reduce the price of the Calmoni Engineering Works from Rs. 2,50,000. But in view of difficulties in organizing a large foundry business on a remunerative basis owing to the breakdown of Messrs. Tata Iron and Steel Co., Ltd., the Directors had stated that they could not entertain any offer involving taking over the works of the company. Mr. Manu Subedar was authorized to send a cable to this effect. In 1927 it appears that two sums had been paid by the Directors to Low & Co., Ltd., with regard to this option, one of £500 and the other of £2,125. Now we come to the year 1929. Mr. Subedar informed Mr. Langham Reed on 1st October by cable that Mr. Dinshaw who had by that time resigned from the Board was preparing a petition to the Court for winding up the company. He (Mr. Subedar) asked for instructions and the chairman of the directors in London cabled to Mr. Subedar that "winding up proceedings will be very prejudicial to the company". Mr. Subedar on 3rd October 1929 wrote to Mr. Langham Reed in London discussing the threatened winding up proceedings pointing out that if the petition was filed it could have to be filed in the High Court of Bihar and at the same time discussing the possible points which could be put forward as a defence to Mr. Dinshaw's petition. He also asked for authority from the Directors in London for the necessary power to defend the proceedings in the High Court. This matter was mentioned again on 27th December 1929 when Mr. Subedar wrote to Mr. Langham Reed. Then we come the year 1930 in which . on nth January a cable was sent by Mr. Langham Reed to Mr. Subedar to the effect that the representatives of the debenture-holders of the Calmoni Engineering Company were prepared to sell their property for £6000 cash and £10,000 two years' six per cent. debentures". On 13th Mr. Subedar cabled in reply that owing to the unsettled conditions he would much prefer to make a further payment to extend the option to purchase the Calmoni Works.
It was on 10th January that a petition was filed in the Bombay High Court and notices were served on the company on the 21st of that month. Mr. Reed informed Mr. Subedar that they had extended the option to purchase Calmoni Works to 20th June at the same price, but £10,000 remaining on six per cent. debentures. The Chairman of Low & Co. wrote to Kerr, Stuart & Co., the Managing Agents of the Peninsular Locomotive Company, on 20th January 1930. This letter stated the terms of the option granted to the Peninsular Locomotive Company. He acknowledged the receipt of £1500 giving the company the option to be exercised within five months to purchase all the works, buildings, plant, machinery, tools etc., for £14,625. On the exercise of the option a further payment was to be made of £4625 and it is this £4625 which is the major portion of £6000 claimed in this application. I revert for a moment to the payments of £500 and £2125 in June and July of 1927. It is a little difficult to understand exactly what those payments were. The respondent in his affidavit refers to them as "paid in view of an intended purchase of the said factory". Whether the £1500 was a further sum paid for the extension of the option does not appear. The terms set out in the letter of the 20th January would appear to indicate that the £1500 was the first payment in connexion with the option. However, no particular point arises with regard to this, and indeed the summons before me deals only with the later payment of £4625 and the balance of the £6000 the details of which will be mentioned in a moment. On 22nd January 1930 Mr. Subedar cabled to Mr. Langham Reed to the effect that Mr. Dinshaw had presented a petition in Court and that he wanted authority to defend the proceedings.
A further letter dated 25th January 1930 clearly discloses that of which there can be no possible doubt, if it is at all material, that Mr. Subedar and the directors were well aware of the action of Mr. Dinshaw in presenting a petition to wind up the company. Mr. Dinshaw in this letter of 25th January showed some anxiety as regards the purchase of the Calmoni Works and he was fearful lest the winding up proceedings in Court should disclose the intention of the directors as regards this purchase. And it is clear that Mr. Subedar was of the opinion that one of the grounds upon which they should resist the petition of Mr. Dinshaw was that the company was under contract for the purchase of the Calmoni Works. He points out during the course of that letter that the Calmoni Works was not a saleable asset although a valuable asset to the Peninsular Locomotive Company. He further points out that they were in a dilemma, if they put forward in their affidavit by way of defence to the petition for winding up, that they were under contract to purchase the Calmoni Works, it would prevent their taking advantage of any legal flaws to 'get out of this contract'. A power of attorney was sent by the directors on 7th February to Mr. Subedar. On 18th June 1930 Mr. Subedar cabled to Mr. Langham Reed to the effect that he understood that Mr. Dinshaw had filed a petition for compulsory liquidation. The words were, "understand that Mr. Dinshaw filed a petition compulsory liquidation". There was a suggestion by Sir Sultan Ahmed who appears on behalf of Mr. Subedar that it had not been proved that Mr. Subedar had knowledge of the winding up petition. That he had is in my opinion too clear to be discussed. We now come to an important point. On 18th June 1930 there was a cable from Mr. Langham Reed which I propose to set out in full:
Board Penloco Thursday next to complete purchase Calmoni and lay down future programme. Please instruct P & O Bank to credit by cable Penloco London £6000. All outstanding matters will be immediately dealt with.
The position was this. There was a banking account in London and there was also a banking account in Bombay, and I do not think it is disputed that whereas the London banking account was not in funds the Bombay banking account was, and it was for this reason that a cable was sent by Mr. Langham Reed asking Mr. Subedar to transfer money from the Bombay account to the London account. We have in Ex. G. to the liquidator's affidavit, a minute dated 19th June 1930 of a Board meeting held at 5 Board Street Place, London. Of the directors there were present Mr. Langham Reed, Sir George Buchanan and Mr. C.T. Gordon. The Secretary was there, the balance sheet of the year 1925 was submitted for the approval of the Board; it was approved and signed by the directors and he was instructed to post it to Mr. Subedar. It was resolved to complete the purchase of the Calmoni Works and to pay the balance of the cash consideration of £4625 to Messrs. James Low & Co. at once. It was resolved that the members of the Board should accept £250, the Chairman £500 for their services to date. It was agreed that the following cheques were to be drawn and signed: £4625 for the purchase of Calmoni Works, £500 for Mr. Langham Reed's fees, £250 each for Sir George Buchanan and C.T. Gordon (Directors' fee), £100 for the Secretary, £20 for Mr. Bignal for services rendered and £20 for petty cash.
These sums make up £6000 which is claimed by this Summons. Mr. Langham Reed cabled to Mr. Subedar on 20th June to the effect that it was decided to complete the purchase of Calmoni Works and that the balance had been paid. I would have stated that on 20th June Mr. Subedar cabled: "As per your telegram have telegraphed to-day £6000". The payment was made by the London Board sending a cheque under cover of a letter dated 21st June 1930, Ex. M, to the liquidator's affidavit. It is not disputed that the payment was made possible by Mr. Manu Subedar's transferring money from the Bombay account to the London account. On 21st June the Secretary of the Company in India wrote to Messrs. Lovelock and Lewes, Liquidators of the Calmoni works, informing them that as the Board in England had informed the writer by a telegram that the balance of the purchase-money has been paid, they had arranged for the Locomotive Company to take possession on 30th June 1930. On 23rd June Mr. Subedar received a letter from the Secretary in London informing him of a Board meeting held on 19th June in London. The draft balance sheet was enclosed with that letter. Apparently Mr. Subedar was to prepare the report and it was suggested that the report should contain the following statement:
"During the year no active operations have been carried on by the Company. Negotiations have been carried on by the Company with the Government of India with a view to obtaining some satisfactory compensation in respect of the loss of possible locomotive orders, but no arrangement which would be satisfactory to the Company has yet been arrived at. During the year an option on the General Engineering Works of the Calmoni Company had been obtained on favourable terms with a view to the Company being able to carry on a manufacturing business should a favourable opportunity occur."
I refer to this suggestion made by the English Board in order to show exactly what the position was at this date. There was further correspondence with which we are not cencerned. A letter written by the Solicitors representing the Company to the Official Liquidator on 20th March 1921 sets out briefly the details of negotiations regarding the purchase of the Calmoni Engineering Works. It was on those facts that the liquidator made application to this Court for a summons under S. 235 of the Act. When this matter came before me on the application for the issue of a misfeasance summons, the question of the jurisdiction of this Court arose, and it was held that although this Court had jurisdiction over the directors in India it had no jurisdiction to issue process in England and therefore on the London directors. In answer to the case made by the liquidators Mr. Manu Subedar contended in his affidavit that this Court had no jurisdiction over him as he was not a resident within the Province, but this point has not been pressed before me at the hearing; indeed Sir Sultan Ahmed appearing on behalf of Mr. Manu Subedar does not deny that this Court had jurisdiction over Mr. Subedar in this matter. It is the contention of Mr. Manu Subedar that in transferring £6000 to the London account on 20th June 1930 he was acting under the instructions of the English Board, and was therefore in no way responsible for the payment of the sum of £4625. It is also contended that even if he be taken to have been responsible for the payment, in fact there was no liability under S. 235 of the Act. In development of that argument it is contended that it was neither a misfeasance nor a breach of trust; that the sum was paid in the ordinary course of business; that the payment was not one for which the directors would be liable; that S. 235 created no liability unless it could be shown otherwise that the payment was a breach of trust, and that a payment such as that contemplated by S. 227 was not within S. 235 of the Act.
As regards the question of fact I have no doubt. It is true that Mr. Subedar did not actually sign the cheque for £4625 or the other items which made up the balance of £6000; but it is clear that he was acting in agreement with the other directors and was (apart from matters of detail) at one with the policy of the English Board. And although from the facts and physical circumstances of the case it was impossible for Mr. Subedar to sign the London cheque, it is not by any means possible to hold that Mr. Subedar had no connection with the payment. But for the transfer of the money from Bombay to London it would appear that the payment would have been impossible. This in my opinion can be gathered from the fact that the English Board requested Mr. Subedar to transfer the money. Nor do I think that the liability of Mr. Subedar rests alone on the fact of his having transmitted the money from Bombay to London. The fact referred to is the clearest evidence of his agreement with the policy of the London directors, and evidence of that whether got from the proof of his having transferred money from the Bombay account to the London account, or from other facts in the case is sufficient to establish his liability. But it is said by Sir Sultan Ahmed that Mr. Subedar could do nothing but to obey the instructions of the Board. It is, however, impossible to look upon Mr. Subedar as anything other than what he was, namely, a director, and therefore entitled to express his views as regards the policy of the Company. What would have been the position had Mr. Subedar protested and declined to agree to the payment, but at the same time transferred the sum of money to the London account, it is difficult to say.
In my judgment it is impossible to look upon Mr. Subedar other than as being responsible equally with the other directors for the payment of this sum. On the rather limited question of Mr. Subedar's attitude in this matter, reference might be made to the decision in Joint Stock Discount Co. v. Brown. There a payment had been made by the Company with regard to a transaction which was ultra vires, and Brown, one of the directors, was said to have protested; nevertheless he was held responsible. There is nothing in this case to suggest that Mr. Subedar had in any way disagreed with his fellow directors and, even if the transmission of the money from Bombay to London is looked upon as a mere ministerial act, I find it impossible to excuse Mr. Subedar on that account. As regards the legal position it is impossible to contend that this transaction was in any way valid. My brother Fazl Ali has already held in an application by the liquidator for a direction under S. 183, Companies Act, that the payment cannot be validated under S. 227 of the Act. Chitty, J. in Re Neath Harbour Smelting and Rolling Works, held that by the operation of Ss. 153 and 165, Companies Act, then in force in England (these sections are equivalent to Ss. 227 and 283 of the Indian Companies Act) the directors were liable for the sums paid not in the ordinary course of business but after the commencement of the winding up. The authority of this case has never been questioned and is relied upon in such authoritative text-books as the late Lord Wrenbury's (Lord Justice, Buckley's) Book on Company Law. But it is contended by Sir Sultan Ahmed that in that case the payment was a breach of trust apart from the section which made the disposition of the property of the Company after the winding up void.
I can hardly concede this argument, however, as it quite clearly appears from the very commencement of the judgment of the learned Judge who decided that case, that the liquidator was endeavouring to take advantage of S. 153, equivalent to our S. 227, and it was on that point that he rested his case. Chitty, J. decided that he was entitled so to do. I can only assume therefore that it was necessary in the circumstances to take advantage of that section. There may be no direct authority expressly holding, however, that the disposition of the company's property by the directors during the winding up is of itself a breach of trust. It must, however, be decided on first principles and, as was pointed out in Neath Harbour case, if the directors make such a payment, they do so at their peril, and excepting those cases in which it would be held that the payment was necessary for the winding up or for the carrying on of the business of the Company pending the hearing of the winding up petition, the directors must be aware that there is always a risk of such payments being void under the section. It is impossible to excuse the directors on account of lack of knowledge. They, above all, must have known what were necessary payments, and they also must be assumed to have known having entered in a contract which had not been completed before the winding up, the persons with whom they were contracting were entitled only to prove in the winding up for damages: In re Wiltshire Iron Co., Ex parte Pearson. In the sense therefore that the directors were aware that they were making, an unauthorized payment, they were disposing of the property of the Company wrongfully and therefore guilty of a breach of trust. There is another aspect of the case. From the letter to which I have referred (if from no other fact) it is seen that from 1927 at least the Company was doing no business, the substratum of the Company had gone, as was held by this Court in deciding the application to wind up the Company; there was no hope of their ever doing the business for which they were incorporated. That the Company was incorporated for the purpose of building railway locomotives we have seen. Cl. 3 of the Memorandum is wide it its terms and I suppose, had the intention of the promoters been to carry on any one of the many businesses therein described, other than locomotive building, and had any of these trades been carried on from the incorporation of the Company, it would have been difficult if not impossible to say that the Company was acting beyond its powers. But here locomotive building was the purpose of the Company as I have said, and that can be gathered from the name of the Company and the Memorandum must be construed.
"General words (in the Memorandum) which construed literally, include anything must be limited by their context and the name of the company may also be important in construing the clauses which define the objects if these are not clear and unambiguous in themselves (Buckley's Company Law, Edn. 11. p. 5, and the authorities therein referred to)."
Although Art. 3 of the Memorandum of Association might authorise them to carry on the business of heavy engineering, in which the Calmoni Engineering Co., Ltd., was engaged before that Company was wound up, there is nothing in the Memorandum of Association which would entitle the Locomotive Company to purchase the Calmoni Engineering Works. Such omnibus clause as sub-cl. (21) of Cl. 3 in the Memorandum of Association would not entitle them to make this purchase and indeed it is not suggested by Sir Sultan Ahmed that any such power is to be got from the Memorandum of Association. There are innumerable authorities to that effect. In Masonic General Life Assurance Co. v. Sharpe, which was a case of payment of dividends or interest out of capital Lindley L.J., in holding such payment to be ultra vires said:
"As soon as the conclusion is arrived at that the Company's money has been applied by the directors for purposes which the Company cannot sanction, it follows that the directors are liable to replace the money however honestly they may have acted."
As it will be seen, the learned Lord Justice used these words 'which the Company cannot sanction'. It has not been contended in this case before me that the Company could sanction the £4625. The assets of the company are entrusted to the directors to be applied to certain defined objects and they are responsible as for a breach of trust if they apply them to other objects. I am quoting for the moment from Buckley's (Lord Wrenbury's) Company Act, Edn. 11, p. 732 on this point. But with regard to objects which are intra vires: see British Seamless Paper Box Co. The position of directors has been discussed in a large number of cases and although their position differs from that of trustees in some respects, yet to the extent of their being entrusted with the monies of the Company, they are trustees; see Ramskil v. Edwards. I am not unmindful of the case In re Forest of Dean Coal Mining Co., and SIR GEORGE JESSEL's observations with regard to directors. But that case differs to a very considerable degree from the present and relates to the liabilities of the directors on their failure to get in sums 4ue to the company. It is not disputed incidentally that directors are jointly and severally liable for breach of trust: In re Carnage Co-operative Supply Association.
It was strongly urged by Sir Sultan Ahmed that as the respondent was not acting dishonestly he was not liable. I am pleased to be able to observe that the liquidator has withdrawn the allegations of dishonesty and fraud, indeed the only course open to him, as there was no evidence whatever of anything of the kind. But the absence of dishonesty and fraud does not assist the respondent as will be seen from the decision in Masonic General Life Assurance Co. v. Sharpe. There was at one time thought to be something in the nature of a conflict between the decision to which I have just referred and the decisions of VAUGHAN WILLIAMS, J., (as he then was) in two cases, In re New Mashonaland Exploration Co., and In re Kingston Cotton Mill Co. But in the former case it was held that the payment of money (the granting of a loan) was intra vires of the Company and that the directors had exercised their discretion and judgment and were therefore not liable. Again in In re Kingston Cotton Mill Co., the director accepted (and reasonably so) the certificate of the Manager as to stock in trade. During the course of the judgment the learned Judge in that case observed at p. 345:
"I should have thought that he might safely be treated as the paid manager and agent of the Company and might well be held not to be responsible for misapplication of the funds of the Company unless he, through want of care or fraud, misapplied those funds. If it is said that if his responsibility were thus defined he would not be responsible if by the direction of the shareholders, he applied the funds to a purpose which the Company could not authorize because it was a purpose ultra vires, my answer would be that, if he did so without carelessness or fraud he ought not to be held liable, and that if he did so knowing that the purpose was ultra vires or carelessly he ought to be held responsible not because he is a trustee but because the ownership of the Company is limited, i. e., is limited to the application of the funds to the statutory purposes and his duty to the Company as manager is not knowingly or carelessly to apply the funds to a purpose ultra, vires of the Company, even though he may have the authority of the shareholders, for a Company does not seem to me, in regard to questions of ultra vires, to be an aggregate of the shareholders, but a substantive legal entity."
The Lord Justice later observed:
"There is, however, a considerable bulk of authority to show that the directors are trustees for the Company of such funds as are committed to their control in such sense that they will, be liable for a misapplication of the funds which is ultra vires of the Company, independently of any proof of fraud actionable negligence by the directors, and then referring to a number of authorities which established the liability of the directors the learned Judge observes:
But in no one of those cases can I find that the directors were held liable unless the payments were made either with actual knowledge that the funds of the company were being misappropriated or with knowledge of the facts that established the misappropriation.
"Misappropriation" is a hard word, but what was being referred to by the learned Judge was the application of the funds to purposes beyond the powers of the company, as the case before him (as Lord Justice Buckley observes in his book) was a case of an application right in law if the state of facts which he honestly believed to exist did in fact exist, but which turned out to be wrong. There is no question in this case of any misapprehension or lack of a correct appreciation of the true position on the part of the director or directors. Indeed the directors were in full possession of all the facts and it must be assumed that they knew the law. The position therefore in my Judgment is that the director is liable to repay the sum of £4625 or a part thereof as compensation for loss sustained by the company. Had the other directors been before me I should have been in a position to determine the question of the liability as regards the balance of £6000, expended for the purposes to which I have already referred in the earlier part of judgment. To what extent they were entitled to pay the directors fees and sums for the remuneration of the Secretary, etc., is a matter with which I am hardly able to deal on the evidence before me. It is true that in requesting to transfer £6300 it was clearly indicated by the London Board that this sum was being paid. Apart from the bare fact of transferring the £6000 there is no evidence that Mr. Subedar took any part in this payment. I am well aware that the same argument has been advanced with regard to the £4625, but in that case there is clear evidence that Mr. Manu Subedar was acting in concert with the other directors. In any event I should find myself in some difficulty in holding Mr. Manu Subedar liable for the balance. Sir Sultan Ahmed also relied upon the indemnity clause of the Articles of Association, Art. 137, which is as follows:
Each and every Director, Auditor, Managing agent. Secretary, Treasurer and every member, Manager, Assistant or employee of any company being agents of the company and every ex-officio and alternate director of the company, and every other officer or servant of the company and the respective heirs, executors and administrators of each and every such director and other person as aforesaid, shall be indemnified out of the funds of the company against all claims, liabilities, losses, costs, charges and expenses that may at any time be made against or incurred by him respectively in the discharge of his duties or in the conduct of the company's business, except such as are incurred by his own wilful neglect or default, and no director or other such person as aforesaid shall be liable for any act or omission committed by any other director of person as aforesaid or by reason of any loss accruing to the company in relation to any transaction into which the company may enter or upon any ground whatever other than his own wilful neglect or default."
In my judgment this clause has no application. It is a clause indemnifying the director
"against claims, liabilities, losses, costs, charges and expenses that may at any time be made against or incurred by him respectively in the discharge of his duties or in the conduct of the company's business, except such as are incurred by his own wilful neglect or default."
The words of this clause are explicit and point to liabilities incurred in discharge of the director's duties. That together with the exception that there is no indemnity where the liability has been incurred by wilful neglect or default clearly indicates that this clause has no application to payment of funds for purposes which are ultra vires of the company. In the course of the argument Sir Sultan Ahmed agreed that this clause does not apply to the facts of this case. There are two other matters, one of limitation and the other the question whether relief should be granted to Mr. Subedar under S. 281 of the Act. As regards the question of limitation Sultan Ahmed contended that Art. 36 and not Art. 120, Limitation Act, applied. This argument was not developed although in the course of the argument by the learned advocate on behalf of the liquidator it was contended that neither Arts. 36, 115 nor 116 applied. The authorities were not analysed by the advocates, and there is a difference of opinion in India with regard to the matter. This question appears to be one of very considerable importance and it was for that reason primarily that I took time to consider my decision in the case as a whole In Govind Narayan v. Rangnath Gopal, the Court held that Art. 120 applied.
In 47 All. 669 (In the matter of Union Bank, Allahabad, Ltd.) it was also held that Art. 120 applied. I prefer to follow the resoning in these cases than that adopted by the Lahore High Court in AIR 1923 Lah 58 (Bank of Multan Ltd. v. Hukum Chand) which was mentioned by Sir Sultan Ahmed in support of his argument. The first point was whether the liability of the directors under S. 235, Companies Act, was a liability independent of contract. The directors as I have already shown are in a limited manner trustees. Their liabilities are liabilities which depend upon their position as directors. Their position as directors is governed by the Articles of Association and generally by the written constitution of the company. The articles are a part only of the contract however as was pointed out in the Bombay case to which I have just referred. There is ample support for this view in [1902] 2 K.B. 589 (Molineaux v. London, Birmingham and Manchester Insurance Co.) where COZENS HARDY, L.J. states that where a director accepts an appointment as such, he "must be held to have contracted with the company that he will, etc." The recent case in [1925] Ch. 407 (In re City Equitable Fire Insurance Co., Ltd.) in the Court of Appeal at p. 520 also supports this view, There WARRINGTON, L.J., in dealing with the position of the auditors and referring to one of the Articles of Association (Art. 150), made this statement:
"In the first place, I think that that article, as the learned Judge has held expressly in the case of the directors and impliedly if not expressly in the case of auditors, does in such a case as the present form part of the contract between the company and the auditors."
The liability which I have held has been established here is a liability which arises from a breach of duty to deal with the property of the Company in accordance with its constitution and in accordance with the law, and, therefore, I find it impossible to hold that it is a liability which arises independent of contract. Art. 116 is an article applicable to registered contracts and so long as it is held that a contract is partly in writing and partly not in writing, it cannot be said that that article applies. Again so long as the Articles are held to be part of the contract Art. 115 does not apply as that article deals with contracts not in writing. Again Art. 115 deals with a contract not in Writing registered, and so long as either registration is present or writing is present that article can not apply. There has been some discussion and difference of opinion in the Indian High Courts as to whether registration mentioned in these articles is a registration referable to the Registration Act or otherwise. In 54 Bom. 226 Sir AMBERSON MARTEN, C.J., took the view that "registered" within the meaning of Arts. 115 and 116 was not confined to documents registered under the Registration Act, preferring the view expresed by SIR JOHN WALLIS in 42 Mad. 33 (Ripon Press and Sugar Mill Co., Bellary, Ltd. v. Venkatarama Chetty) to the view of the Full Bench of the same Court in 49 Mad. 468 (Venkata Gurumadha Ram Seshayya v. Tripura Sundari Cotton Press, Bezwada.) However, it is unnecessary for me in this case to decide whether the word "registered" is confined to registration under the Indian Registration Act, as I have already held in conformity with English decisions that the contract by which the directors are governed is a contract partly in writing and partly not in writing. Arts. 115 and 116 deal with contracts exclusively in writing or not in writing. These articles therefore in my judgment did not apply. We are thrown back to the provisions of Art. 120, Limitation Act, which gives a period of six years and in this case brings the application of the Liquidator well within time and obviates the necessity of a discussion of the question of the date from which limitation runs—a question which has been discussed with different results in a number of cases in the Indian High Courts. I hold therefore that the application is not barred by limitation.
The only other question raised by the defence is whether the director should be relieved either wholly or partly from his liability and ought fairly to be excused for negligence and breach of trust under S. 281, Companies Act. I know of no authority which would entitle me to hold that in circumstances such as the present although Mr. Subedar acted honestly, he ought fairly to be excused. A decision of ASTBURY, J., in the Chancery Division in England in [1921] Ch. 543 (In re Claridge's Patent Asphalt Co., Ltd.,) is often relied upon as showing that S. 281, which is similar to S. 279, Company's Consolidation Act in England of 1908, applies to acts ultra vires. But in that case the directors had acted reasonably as they had taken the best advice in the circumstances as in [1914] 1 Ch. 1 (In re Allsop) and had acted on that advice although erroneous. The directors in this case cannot be said to have been misled and it can hardly be said that the directors in making this payment did not act deliberately, but as I have already held they must have known or must be assumed to have known that their act was ultra vires. Mr. Subedar's letter of 25th January 1930 throws some light upon his view of the payment. It indicates that he was desirous of using the fact that they had entered into this contract as a defence to the petition of Mr. Dinshaw to wind up the company and at the same time to have the way open to retire from the contract is possible. It is impossible in my judgment to find any circumstances which would entitle me to grant relief under S. 281.
As it is a question of damages the only remaining point is the amount. The total amount claimed by the Liquidator is £6000. I have already decided that in the circumstances Mr. Subedar cannot be held liable for £1375, the balance of the £6000. There remains therefore the sum of £4625. Had all the directors been before me I should have found it difficult to reduce in any way the claim made by the liquidator. But so far as Mr. Manu. Subedar is concerned, he is one of a body of four directors and, although liable with the rest jointly and severally it is a mere accident that the Court cannot impose liability on the whole body of directors. I hold in the circumstances that it would be right and proper to hold Mr. Subedar liable for one quarter of the sum of £4625 reducing thus the total liability under my power under S. 281. The sum will be payable at the rate of 1/6 to the rupee. The Official Liquidator is entitled to costs which I assess at Rs. 500.
[1962] 32 COMP. CAS. 341 (PUNJ.)
v.
Registrar, Joint
Stock Companies, Delhi.
G.
D. KHOSLA CJ. AND SHAMSHER BAHADUR J.
DECEMBER
6, 1961
This judgment
will dispose of Letter Patent Appeals Nos. 9-D of 1961 and 119-D of 1960, both
arising out of the orders of Tek Chand J. dated 30th December, 1960, ad 28th
October, 1960, respectively.
An application
was present by Ram Krishan Dalmia and other directors of the Asia Udyog Private
Ltd. under section 633 of the companies Act, 1956, for relieving them form
liability under section 210 and 220 of the Act. The books of the company were
seized by the special Police Establishment in November, 1953, under search
warrants issued under the authority of the District Magistrate, Delhi. The
petitioner failed in their ;efforts to obtain possession of those books and
their application to challenge the validity of the search warrants was
dismissed by the District Magistrate on 28th March, 1956. the books relating to
the tears 1954 and 1955 were also seized by the Special Police Establishment.
These books still remain with the commission of Inquiry which has ;been
constituted under the chairmanship of Mr. Vivian Bose.
Under section
210 of the Companies Act, 1956, the board of directors of a company are under a
statutory duty to lay in the annual general meeting of the company the
balance-sheet and a statement of profit and loss account. Three copies of these
balance-sheets and profit and loss accounts submitted in the annual general
meetings are to be filed before the Registrar of Companies under section 220.
Default in compliance with these provisions involves penalties form which the petitioners,
in their desire to save themsleves have invoked the protection section 633 of
the Act where with this court can relevant them.
The matter
came up before Tek Chand J., in the first instance, who made an order on 28th
October, 1960, in which two moths period was allowed to the company for
compliance of the statuary conditions. When the case came up again on 30th
December, 1960, the petitioner pleaded their inability to comply with the
statutory requirements and an order was thereupon passed by the learned single
judge ;to this effect :
"The
statutory conditions have not been compelled with. The Registrar is now at
liberty to proceed again the company's officers in accordance with law as he
may be advise."
Separate
appeals have been filed form the two orders passed by the learned judge as
already; mentioned.
The contention
of the learned counsel for the appellants if that the seizure of the company's
books made it impossible ;for the petitioners to comply with the statutory
requirements. It is not dispirited ;that the companies still carrying on its
business and day-to-day accounts are maintained. The company soon after the
orders of Tek Chand J. on 28th October, 1960, wrote to their auditors to
prepare the balance-sheet and profit and loss account of the company. the
Special Police Establishment was approached and also the Commission of Inquiry
that the books may be made accessible to the auditors. The auditors wrote bank
to say that they are unable to prepare the balance-sheet ad the profit and loss
account ;within the period of two months. It was also stated by them that the
entries in the books had to be ticked for purposes for audit and the
secretariat of the Commission of inquiry would not agree to any markings to be
made on the books. Faced with this position, the appellants contend that they
are prevented by reasons beyond their control to prepare the balance- sheet and
the profit and loss account as required by law. Reliance is also placed on an
order of Falshow J. dated 18th March, 1960, in which on similar considerations
relief was granted to the petitioners under section 633 of the Companies Act,
1956.
It seems to us
;that the petitioners had ample time for preparation of balance-sheet and
profit and loss account which primarily is the ;concern of the company; and not
the auditors. the auditors, after the balance sheet is prepared, have to
certify that the figures are in conformity with the entries in the books which
are regularly maintained and have been examined by the auditors. As stated in
section 215 of the Companies Act, every balance-sheet and profit and loss
account has ;to be authenticated by the directors. It follows that it is the
primary responsibility of the directors to have these documents prepared. It is
later that they are submitted to the scrutiny of the auditors and it is only;
after their shareholders.
The company
has been carrying on it as busices despite the seizure of books. there is no
conceivable reason why the balance- sheet and profit and loss accounts could
not be prepared without assistance ;of the books which are with the Commission
of Inquiry. It may; ;be that the auditors require the old books for checking
the entries and figures in the balance-sheet but it dies not provide any;;
excuse for the company to carry on their business without drawn up proper
balance-sheet and profit & loss accounts. It may; ;be observed in passing
that even Falshow j. in his order of 18th March, 1960, afforded relief to the
directors on the condition that "within two moths statement of income and
expenditure and receipt as and payments of the year ending 31st July
1958.....are finished, and also a statement of the particulars required under
section 159 of the Act as nearly as possible in conformity with the
form.......". The concession was allowed by Falshow J. for the statement
of accounts ending with 31st July, 19589, and there is no convincing reason why
the petitioners should not have maintained regular accounts for subsequent
years.
Reported as
Asia udyog Private Ltd., In re [1961] 31 comp. CAs. 262.
The counsel
for the Registrar has submitted that this court has no jurisdiction to grant
the relief under section 633 of the companies Act of 1956 which governs the
present application. under the amendment in the Companies Act made in 1960 to
sub- section (2) of section 633 such a relief is possible. there is some
difference of opinion as to whether the unamended section enables the court to
grant relief against possible criminal prosecutions. A single judge of the
Allahabad High court, A.P. Srivastava j., Thakur Dan Singh Bist v. Registrar of
Companies, held the view that the court has no such power while a silage judge
of the Kerala ;High Court, Raman Nayar j., in In re Bank of Deccan Ltd., held
the opposite view. It is not necessary to decide this question as, in our view,
the petitioners had no justification for non-compliance with the statutory
requirements.
Moreover, it is the
discretion of the judge to grant relief under section 633 We have not been
persuaded that the learned judge in declining the relief has exercised his
powers injudiciously. In this view so the matter, we see no force in these
appeals which fail and are dismissed with costs.
[1983] 54 COMP. CAS. 5
(MAD.)
High Court of Madras
v.
Coimbatore Murugan Mills Ltd.
Ramanujam J.
April 13, 1982
T. Dulip Singh for the Appellant. T.R. Rajagopalan
and T.R. Rajaraman for the Respondent.
Ramanujam J.—The defendant in O.S. No. 100 of
1973, on the file of the Sub-court, Coimbatore, who was unsuccessful in both
the courts below, is the appellant herein.
The appellant was the managing director of M/s.
Coimbatore Murugan Mills Ltd., till its management was taken over by the Tamil
Nadu Textiles Corporation as authorised controllers by the order of the Govt.
of India dated December 19, 1970. When possession was taken over by the said
Corporation, there was a deficit in the yarn stocks to the tune of 995.5 kgs.,
valued at Rs. 9,796.29. Subsequently, the management of the mills was taken
over by the National Textile Corporation (Tamil Nadu and Pondicherry) Ltd.
Thereafter, the National Textile Corporation filed the said suit for the
recovery of Rs. 9,796.29 from the defendant.
The defendant resisted the suit contending that he
was not liable to pay the suit claim, that during the relevant period, he and
the staff working under him were physically prevented from entering the mills
by the workers, that the stock was not verified in the presence of the
defendant, that there was no shortage, and that even if there was any, he was
not liable to make good the loss. He also contended that the weight of cotton
yarn was subject to variation on account of the climatic factors, and,
therefore, the shortage in this case can be attributed to the climatic changes.
The trial court held that the defendant was liable to
pay the amount, and decreed the suit with costs. On appeal by the defendant,
the lower appellate court also held the defendant liable to make good the loss
arising out of the shortage of yarn. At the appellate stage, the defendant
filed an application, LA. No. 1588 of 1974, under s. 633 of the Companies Act,
alleging that he was physically prevented from entering the mills, that the
watchman was having the keys and that no one was allowed to enter the mills,
that he could not be expected to check the departments at every stage which was
humanly impossible, that he had to accept the statement made by his
subordinates, and as such he was not liable for the alleged loss, and that,
therefore, the court should pass an order relieving him from the liability even
if there was any liability in law. The lower appellate court held that the said
section will come into play only if the defendant is shown to have acted
honestly and reasonably, that in this case, it has not been shown that the
defendant had acted reasonably and honestly, and that, therefore, there is no
room for applying s. 633 of the Companies Act. In that view, the lower
appellate court confirmed the decree and judgment of the trial court.
Aggrieved against the judgment of the lower appellate
court, the defendant has come in appeal. According to the defendant, the stock
of yarn was not checked in his presence and, therefore, the shortage of yarn
cannot be taken to have been duly established in this case. It is seen from the
evidence that a notice was given to the defendant to be present at the time of
stock taking, but the defendant had absented himself. Therefore, he cannot
complain now that the verification of stock was not done in his presence, and,
therefore, he is not bound to accept the shortage alleged.
In this case, both the courts below have concurrently
held that the shortage had been duly proved, having regard to the entries in
the accounts and evidence adduced on the side of the plaintiff. I cannot go
behind the factual findings of both the courts below at the stage of the second
appeal merely because the defendant disputes the shortage. 1 have to,
therefore, agree with the courts below that there was shortage of 995.5 kgs. of
yarn worth about Rs. 9,796.29. Thus, the main question is as to whether the
appellant is liable for the shortage found;
According to the appellant, there was practically a
seige of the mills by the workers
during the relevant period and, therefore, for the shortage in question, he
cannot be held liable. It is seen from the evidence of P.W. 1, that from
November, 1970, to February, 1971, there was labour trouble in the mills and
the workers had assembled outside and prevented others from entering and,
therefore, the defendant could not have gone into the mills. Under Exs. A-30 to
A-38 gate passes had been issued and goods had been taken out of the mills. In
view of the said gate passes, it is not possible to conclusively say that the
yarn inside the mills could not have been removed from the mills during the
period from November, 1970, to February, 1971. According to the appellant,
there was a possibility of pilferage of yarn from the mills during the period
when the workers were on strike, and the shortage might also be due to the
climatic changes. The trial court had held that even if there was any pilferage
of yarn from the mills, as managing director he should have given a complaint
to the police. Since he has not given any complaint as regards pilferage, the defendant
as managing director should be held liable for the shortage. The lower
appellate court also held that the loss of weight due to any climatic
conditions cannot exceed 8 per cent. as stated by P.W. 2, and even that 8 per
cent. variation should be noted in the accounts. Since the court below held
that there was no pilferage but there was a possibility of the yarn being
removed from the mills, with the knowledge of the appellant, he should be held
liable for the shortage. In the light of these facts, we have to decide the
question as to whether the defendant can be held liable for the shortage of
yarn.
The learned counsel for the appellant refers to the
following passage in Palmer's Company Law in support of his submission that a
managing director will be liable only in case of gross, wilful or culpable
negligence or has acted dishonestly or fraudulently.
"The duty of a director is not, however, as
strict as that of a trustee because, whereas, a trustee is normally liable if
he allows trust funds, or the control of such funds, to remain for an
unreasonable period in the hands of his co-trustee or co-trustees and loss
results therefrom, a director may, upon the first principle stated, supra, rely
upon co-directors or officers of the company, provided that such reliance is
reasonable in all the circumstances."
It is no doubt true, in some of the earlier cases,
the courts suggest "gross negligence" as being the measure by which a
director would be found to have failed in his duty. But the said view that a
director could be held liable only if he was grossly negligent, was doubted by
Romer J. in In re City Equitable Fire
Insurance Co. Ltd. [1925] 1 Ch 407, 427 (CA), where the court, after a
full examination of the relevant authorities, observed :
"................one cannot say whether a man
has been guilty of negligence, gross or otherwise, unless one can determine
what is the extent of the duty which he is alleged to have neglected. For
myself, I confess to feeling some difficulty in understanding the difference
between negligence and gross negligence, except in so far as the expressions
are used for the purpose of drawing a distinction between the duty that is owed
in one case and the duty that is owed in another. If two men owe the same duty
to a third person, and neglect to perform that duty, they are both guilty of
negligence, and it is not altogether easy to understand how one can be guilty
of gross negligence, and the other of negligence only. But if it be said that
of two men one is only liable to a third person for gross negligence, and the
other is liable for mere negligence, this, I think, means no more than that the
duties of the two men are different. The one owes a duty to take a greater
degree of care than does the other : .................If, therefore, a director
is only liable for gross or culpable negligence, this means that he does not
owe a duty to his company, to take all possible care."
The learned counsel also contends that the appellant
being the managing director cannot be expected to check the stock of yarn every
day and he has to naturally depend on the subordinate officers of the company
to look after that work and if by their negligence there has been no proper
check of the stock of yarn, he, as a managing director, cannot be held liable.
It is no doubt true that in determining the director's duties, consideration
must be given to the nature of the company's business and the director's right
to distribute the work in a reasonable way between the officials of the
company. In determining the question whether a director has been guilty of
negligence, the court will have to take into account the character of the
business, the number of directors, the provisions of the articles, the ordinary
course of management, the practice of directors, the extent of their knowledge
and experience, and, in short, all the special circumstances of the particular
case. Romer J., in the case referred to above, has pointed out that there is
little resemblance between the duties of a director, and the duties of a trustee,
and that the position of a director of a company carrying on a small retail
business is very different from the director of a big company. He had observed
(p. 426):
"The position of a director of a company
carrying on a small retail business is very different from that of a director
of a railway company. The duties of a bank director may differ widely from
those of an insurance director, and the duties of a director of one insurance
company may differ from those of a director of another. In one company, for
instance, matters may normally be attended to by the manager or other members
of the staff, that in another company are attended to by the directors
themselves. The larger the business carried on by the company the more
numerous, and the more important, the matters that must of necessity be left to
the managers, the accountants and the rest of the staff. The manner in which
the work of the company is to be distributed between the board of directors and
the staff is in truth a business matter to be decided on business lines."
The question whether the director has been guilty of
negligence has to be considered in the light of the articles of association of
the company and the duties assigned to him thereunder. In that case, Romer J.,
has laid down the following three tests for determining the extent of the
director's liability for loss : (1) The director need not exhibit in the
performance of his duties a greater degree of skill than may reasonably be
expected from a person' of his knowledge and experience and is not liable for
mere errors of judgment. (2) A director is not bound to give continuous
attention to the affairs of his company as his duties are of an intermittent
nature to be performed at periodical board meetings, and at meetings of any committee
of the board upon which he happens to be placed. He is not, however, bound to
attend all such meetings, though he ought to attend whenever, in the
circumstances, he is reasonably able to do so. In respect of all duties which,
having regard to the exigencies of business and the articles of association,
may properly be left to some other official, a director is, in the absence of
grounds for suspicion, justified in trusting that official to perform such
duties honestly.
Sir James Hannen in In re Young and Harston's
Contract [1886] 31 Ch D 168, 173 (CA) dealing with the obligations as between
the parties to a contract to sell real estate, has observed :
"Our judgment, therefore, is that where a man
knowing that some act has to be done by him on the particular day, goes away in
disregard of that obligation, he is guilty of default; and doing it
intentionally it is wilful within the terms of a contract of this kind."
Of course that was a case where the vendor's default
consisted not merely of an omission to do an act which was his duty to do, but
of omission to do an act which he knew was his duty to do. The same view was
taken in a later decision by a Court of Chancery Division in In re Mayor of
London and Tubbs' Contract [1894] 2 Ch 524 (CA), wherein the default of a
vendor consisted of a mis-statement contained in the contract and Lindley L.J.
observed that it was difficult to lay down any general definition of
"wilful" that the word was relative, and that each case must depend
on its own particular circumstance.
The learned counsel for the appellant also places
reliance on the decision in Thinnappa Chettiar v. Rajagopalan [1944] 14 Comp
Cas 207 ; [1944] 2 MLJ 85, where a Division Bench has expressed the view that a
managing director, like an ordinary director, is entitled to place reliance on
the company's auditors and other subordinate officials unless there exists some
ground for suspicion. But that decision has no application to the facts of this
case, as the facts therein are entirely different.
In In re Denham & Co. [1884] 25 Ch D 752 (Ch D),
Chitty J. held that an innocent director cannot be held liable for the fraud
practised by his co-directors in issuing to the shareholders false reports and
balance-sheets, provided that the books and accounts of the company have been
kept and audited by duly appointed and responsible officers and he has no
ground for suspecting fraud. Relying on the said decision, the learned counsel
for the appellant says that in this case the manager and other subordinate
officials of the company have been put in charge of the stock of yarn, and the
managing director was justified in relying on them and there was no ground for
suspecting fraud on their part, at the time of entrustment of the stocks of
yarn.
However, a perusal of the pleadings in this case does
not indicate that the appellant/defendant had pleaded that any particular
subordinate official of the company was made accountable for the stocks of
yarn, and that, therefore, he cannot be held personally liable for any loss in
the stock of yarn. On the other hand, it is seen that during the relevant
period, gate passes have been issued only by the appellant as managing director
and not by any other official of the company. The fact that he had issued gate
passes for removing the stock indicates that the stock of yarn was under his
personal custody, and nobody could have dealt with it without his knowledge.
The appellant has not. explained as to how the gate passes have been issued by
him, if any other subordinate official has been entrusted with the stock of
yarn. Thus, the appellant cannot now put forward a plea that the shortage of
yarn was due to the negligence of the subordinate staff of the company. As
already pointed out, the only explanation given by the appellant for the
shortage of yarn is that there was a strike by the workers in the mill during
the relevant period and that he or other officers were not allowed inside the
mills, and that the shortage might be due to the climatic conditions. Once it
is found that the loss has occurred, notwithstanding the above reasons, as a
managing director who is in the position of a trustee, he is liable to account
for the losses especially in this case where the evidence indicates that the
stock of yarn could not have been removed from the mill without the knowledge
of, or the gate passes issued by, the managing director.
As regards the second point as to the applicability
of s. 633 of the Companies Act, it is seen that a relief may be prayed for
under that section only if the applicant has acted quite honestly. In this
case, the appellant has completely disowned any liability for the shortage and
it is not a case where the shortage has occurred by an honest act of the
managing director. In this view of the matter, it has been rightly held by the
lower appellate court that s. 633 of the Companies Act is not applicable to the
facts of this case.
We have to, therefore, agree with the findings of the
courts below that the appellant is liable to make good the loss which arose out
of the shortage of yarn. The second appeal is, therefore, dismissed. There
will, however, be no order as to costs.
[1991] 71 COMP. CAS. 69
(BOM.)
HIGH COURT OF BOMBAY
v.
COMPANY PETITION NO. 222 OF 1989
AUGUST 23, 1989
Virendra V.
Tulzapurkar for the Petitioner.
B.J. Rele,
Neeta Masurkar, K.R. Jaykar and A.R. Kini for the Respondent.
JUDGMENT
Pendse J.—Petitioners Nos. 1 to 3 are directors of
Raghuvan-shi Mills Ltd., being a company incorporated and registered under the Companies
Act, 1956, while petitioner No. 4 is manager of the company. The company had
engaged several workmen in the running of the mills. Under the provisions of
section 40 of the Employees' State Insurance Act, 1948, the company is required
to pay, in respect of every employee, both the employer's contribution and the
employees' contribution. The employees contribution is paid after deducting the
amount from the wages payable to the employees. The company is also required to
pay a Deposit-linked Insurance Fund in accordance with section 6C of the
Employees' Provident Funds and Miscellaneous Provisions Act, 1952. The company
failed to pay its dues both under the Provident Funds Act and the Employees'
State Insurance Act. Respondent No. 2, the Regional Provident Fund
Commissioner, thereupon issued several show-cause notices to the petitioners to
show cause as to why action should not be taken for having committed an offence
under sections 14(1A) and 14(2) by contravening the provisions of the Provident
Funds Act. Respondent No. 4, the Regional Director, Employees' State Insurance
Corporation, also issued notices to show cause why proceedings under section 85
of the Insurance Act should not be adopted for failing to pay the contribution.
In pursuance of the notices, respondent No. 3, the Provident Fund Inspector,
filed prosecutions against the petitioners for having committed default and the
said prosecutions are pending in the court of the Metropolitan Magistrate.
Prosecutions were also launched by respondent No. 5 in respect of violation of
the provisions of the Employees' State Insurance Act. Respondents Nos. 2 and 4
also passed orders determining the amount due from the company in respect of
the contributions to be made under the Provident Funds and the Insurance Acts.
The present
petition was filed on April 3, 1989, under section 633(2) of the Companies Act,
1956, claiming that the petitioners should be relieved in respect of criminal
and civil liabilities. The petitioners claimed that there is a reasonable apprehension
that further prosecutions would be launched against the petitioners and the
civil liability to pay the amount would be enforced by the concerned officers.
The petitioners claimed that default in making contribution or payment is not
mala fide but the petitioners have acted honestly and reasonably and the
default had occurred for reasons beyond their control and, therefore, they
should be excused. The petitioners claimed that the company is facing serious
financial difficulties since the year 1982-83 and a reference is made under the
Sick Industrial Companies (Special Provisions) Act, 1985, for being declared
"a sick company". The petitioners further claimed that the Board for
Industrial and Financial Reconstruction has appointed the Industrial Development
Bank of India as the operating agency for rehabilitation of the company. The
default, claim the petitioners, is because of the financial difficulties which
are beyond their control.
The respondents raised a
preliminary objection to the maintainability of the petition claiming that the
petitioners cannot be relieved from criminal prosecutions and civil liabilities
in exercise of the powers under sub-section (2) of section 633 of the Companies
Act in respect of breaches or violations arising under statutes other than the
Companies Act. It is claimed that the powers or jurisdiction of the High Court
under sub-section (2) of section 633 is restricted only in respect of criminal
and civil proceedings which are likely to be instituted in respect of any default
prescribed under the Companies Act. The preliminary objection raised on behalf
of the respondents is correct and deserves acceptance.
Section 633
of the Companies Act reads as under :
"633.
(1) If in any proceeding for negligence, default, breach of duty, misfeasance
or breach of trust against an officer of a company, it appears to the court
hearing the case that he is or may be liable in respect of the negligence,
default, breach of duty, misfeasance or breach of trust, but that he has acted
honestly and reasonably, and that having regard to all the circumstances of the
case, including those connected with his appointment, he ought fairly to be
excused, the court may relieve him, either wholly or partly, from his liability
on such terms as it may think fit :
Provided
that, in a criminal proceeding under this sub-section, the court shall have no
power to grant relief from any civil liability which may attach to an officer
in respect of such negligence, default, breach of duty, misfeasance or breach
of trust.
(2) Where any
such officer has reason to apprehend that any proceeding will or might be
brought against him in respect of any negligence, default, breach of duty,
misfeasance or breach of trust, he may apply to the High Court for relief and
the High Court on such application shall have the same power to relieve him as
it would have had if it had been a court before which a proceeding against that
officer for negligence, default, breach of duty, misfeasance or breach of trust
had been brought under sub-section (1).
(3) No court
shall grant any relief to any officer under sub section (1) or sub-section (2)
unless it has, by notice served in the manner specified by it, required the
Registrar and such other per son, if any, as it thinks necessary, to show cause
why such relief should not be granted."
The relief
sought in the present petition is not in respect of criminal proceedings
already instituted but only in respect of proceedings which the petitioners
apprehend would be instituted here after. Shri Tulzapurkar, learned counsel
appearing on behalf of the petitioners, submitted that the ambit of sub-section
(2) of section 633 of the Companies Act is very wide and the expression
"any proceeding" would include proceedings arising not only out of
the default committed under the provisions of the Companies Act, but defaults
under any statute. It is not possible to accede to the submission of learned
counsel.
Section 621
of the Companies Act provides that no court shall take cognizance of any
offence against this Act except on a complaint in writing of the Registrar or
of a shareholder of the company or of a person authorised by the Central
Government in that behalf. Section 622 of the Companies Act provides that no
court inferior to that of a Presidency Magistrate or a Magistrate of the First
Class shall try any offence under this Act. Section 524 provides that every
offence under the Act shall be deemed to be non-cognizable within the meaning
of the Code of Criminal Procedure, 1898. The subsequent sections deal with the
procedure to be followed in respect of complaints and the penalty to be
imposed. The subject of "offence" is dealt with in Part XIII of the
Companies Act and section 621 to section 635SA deals with the offences
committed under the Act and the procedure to be followed for taking action
against the offender. While examining the ambit of sub-section (2) of section
633, it must be borne in mind that though the expression "any
proceeding" is used in the sub-section, the Legislature intended to restrict
it only to those proceedings arising out of negligence, default, breach of
trust, misfeasance or breach of duty in respect of duties prescribed under the
provisions of the Companies Act. Although sub-section (2) was expressed in wide
language, looking to the context and placement of the sub-section and on its
true construction, the only proceedings for which relief under sub-section (2)
of section 633 could be claimed are proceedings against the officer of the
company for breach of duty to the company or criminal proceedings for breach of
the provisions of the Companies Act. Subsection (2) cannot apply to proceedings
instituted against the officers of the company to enforce liability arising out
of violation of provisions of other statutes. There is an intrinsic indication
in subsection (3) of section 633 to hold that exercise of powers under
subsection (2) must be restricted in respect of proceedings arising out of
violations of the Companies Act. Sub-section (3) provides that relief under
sub-section (2) shall not be granted without notice being served in the manner
specified to the Registrar and such other person to show cause why the relief
should not be granted. The expression "such other person" would cover
shareholders of the company or the person authorised by the Central Government
to launch a prosecution. Sub-section (3) does not contemplate service of notice
on any other authorities who are likely to institute prosecution or enforce a
civil liability in accordance with statutory provisions other than the
provisions under the Companies Act.
Section 14AC
of the Provident Funds Act provides that no court shall take cognizance of any
offence punishable under the Provident Funds Act except on a report in writing
of the facts constituting such offence made with the previous sanction of the
Central Provident Fund Commissioner. Section 86 of the Employees' State
Insurance Act prescribes that no prosecution shall be instituted except by, or
with the precious sanction of the Insurance Commissioner and except on a
complaint made in writing within six months of the date on which the offence is
alleged to have been committed. The prosecution proposed to be launched under
the Provident Funds and Miscellaneous Provisions Act and the Employees' State
Insurance Act are not at the behest of the Registrar of Companies or the
shareholders of the company or by a person authorised by the Central Government
in that behalf. It is, therefore, obvious that such prosecution to be
instituted by the officers appointed under the provisions of statutes other
than the Companies Act cannot be prevented by resort to the provisions of
sub-section (2) of section 633 of the Companies Act.
A provision
identical to section 633 of the Companies Act came up for consideration before
the Court of Appeal in the decision in Customs and Excise Commissioners v.
Hedon Alpha Ltd. [1981] 2 All ER 697 (CA). The company in that case carried on
the business of an off-course book-maker. The company failed to pay general
betting duty due under section 2(1) of the Betting and Gaming Duties Act, 1972,
and, thereupon, the Commissioner of Customs and Excise brought proceedings
under section 2 (2) of the 1972 Act to recover the duty due from the company
from another director who was the holder of the bookmaker's permit and betting
office licence and from another director of the company suing them jointly and
severally. The director claimed that he had acted honestly and reasonably and
should be excused and relieved from liability pursuant to section 448 (1) of the
Companies Act, 1948. Section 448 (1) of the Companies Act, 1948, inter alia,
provided that the court may relieve the officer of the company in respect of
negligence, default, breach of duty or breach of trust, if he has acted
honestly and reasonably. The director sought relief under section 448 and the
Court of Appeal refused to accede to the request. Lord Justice Stephenson,
presiding over the Court of Appeal, observed ( at p. 701) :
"Furthermore,
the language of section 448 was apt to describe the area in which a company
director might be in breach of his duties to the company, and the ambit and
concern, the context or matrix, of the section was company law and the relation
of the officer (or auditor) of a company to the company and not to third
persons. The proceedings which qualified for the statutory relief were claims
made by companies, or on their behalf or for their benefit by, e.g.,
liquidators, the Board of Trade, private prosecutors, including penal
proceedings for the enforcement of the Companies Act, but not proceedings for
the recovery of debts or the enforcement of civil liability to strangers."
Lord Justice
Griffiths observed in his judgment (at page 704) :
"In my
judgment, section 448 has no application to the present claim. Although the
section is expressed in wide language, it is, in my view, clearly intended to
enable the court to give relief to a director who, although he has behaved
reasonably and honestly, has nevertheless failed in some way in the discharge
of his obligations to his company or their shareholders or who has infringed
one of the numerous provisions in the Companies Acts that regulate the conduct
of directors."
I am in
respectful agreement with the decision of the Court of Appeal.
Shri
Tulzapurkar heavily relied upon the decision of the Delhi High Court in Beejay
Engineers Put. Ltd., In re and Satinder Sandhu, In re [1983] 53 Comp Cas 918.
The Division Bench of the Delhi High Court heard a reference made by a single
judge expressing doubt as to whether sub-section (2) of section 633 of the
Companies Act enables the court to grant relief against prosecutions under
other Acts. The Division Bench held that the protection is sought to be given
to an officer of a company which necessarily implies that the liability arises
on account of negligence or default in relation to the affairs of the company
which he is required to conduct honestly and reasonably, and the protection
will not extend to and cover acts of misfeasance or breach of trust, etc.,
which have no connection whatsoever with his status or duties as an officer of
the company. The Division Bench then observed (at p. 922 of 53 Comp Cas) :
"The
expression 'any proceeding' occurring in the section is of wide amplitude and
comprehensive enough to include all kinds of proceedings, i.e., civil as well
as criminal. There is nothing in the language or the context in which this
section is laid to limit, restrict or confine its operation to a liability
arising out of negligence, default, breach of duty, misfeasance or breach of
trust under the Act alone. In our opinion, protection under this section will
be equally available to an officer of a company against liability to be
proceeded against for negligence, default, breach of duty, etc., even under
other Acts so long as it is with regard to the affairs and functioning of the
company."
I am afraid,
that it is not possible to agree with the view taken by the Division Bench. The
Division Bench, with respect, has not examined the context and the placement of
sub-section (2) as well as sub-section (3) of section 633 of the Companies Act
and which, in my judgment, clearly indicates that the Legislature desired to
restrict the powers to proceedings to be instituted for violation of provisions
of only the Companies Act. Mr. Justice D. P. Wadhwa of the Delhi High Court in
the later case, Jagannath Prasad Jhalani v. Regional Provident Fund
Commissioner [1987] 62 Comp Cas 571 (Delhi), felt doubt about the correctness
of the decision of the Division Bench.
Shri
Tulzapurkar also made reference to the decision in Muktsar Electric Supply Co.
Ltd., In re [1966] 36 Comp Cas 144 (P&H), where a single judge of the
Punjab High Court held that the High Court can grant relief under sub-section
(2) as the subsection is wide enough to cover criminal prosecutions. There
cannot be any quarrel with the proposition, but the sub-section is not wide
enough to cover criminal prosecutions commenced under Acts other than the
Companies Act. In my judgment, the preliminary objection raised on behalf of
the respondents that the petitioners cannot be relieved of civil and criminal
liabilities arising out of violation of the Provident Funds Act and Employees'
State Insurance Act by resorting to sub-section (2) of section 633 of the
Companies Act is required to be upheld and the petition must fail.
Accordingly,
the petition is dismissed with costs.
[1956]
26 COMP. CAS. 218 (ORI.)
Orissa Jute & Cotton Mills Ltd, In Re.
RAO, J.
APRIL
9, 1956
RAO, J.-This is an application under section 281 of the Indian Companies Act
of 1913 corresponding to section 633 of the new Companies Act, that is, Act 1
of 1956, which has come into force on 1st April, 1956.
2. The petitioners are:
The Orissa Jute and Cotton Mills, Ltd., a company incorporated in the State of
Orissa with its registered office at Cantonment Road, Cuttack, and Messrs.
Madanlal Jajodia, Sohanlal Jajodia, Bhagabati Prasad Khaitan and Radhakrishna
Bala as its directors.
3. The Orissa Jute and
Cotton Mills Limited was incorporated under the Indian Companies Act on 27th
November, 1946, and a certificate for commencement of business was issued in
its favour on 19th August, 1949. The registered office of the company which was
originally situated at Bakharbad was shifted to 14, Cantonment Road, Cuttack,
and it was duly initimated to the Registrar, Joint Stock Companies, on 4th
October, 1949. Sri Madanlal was in charge of the management of the assets of
the company, but the accountant of the company who was in charge of all the
accounts died in November, 1952, after a protracted illness and consequently
the company could not hold its annual general meetings in the years 1951, 1952
and 1953, inasmuch as the accounts of the company could not be duly audited.
The accounts of the company have since been audited, and the annual general meetings
of the company have been duly held on 21st September, 1954. The annual summary
of share capital, list of shareholders and directors and the balance sheet for
1950 and 1951 were duly filed before the Registrar of Joint Stock Companies on
24th September, 1954. The annual general meeting for the year ending 31st
December, 1951, was held on 9th November, 1954, and the annual summary of share
capital, list of shareholders and the balance sheet were filed before the
Registrar on 17th November, 1954. On these allegations, the petitioners state
that they may be relieved from their liabilities in respect of the defaults
committed by them.
4. But it is also alleged
in the petition that the Assistant Registrar of Joint Stock Companies filed a
complaint under section 76(2), 32(5), 133(3), 134(4) and 72(4) of the Indian
Companies Act, against the petitioners in the Court of the Sub-Divisional
Magistrate, Cuttack, and the petitioners are now being tried in the Court of
Sri N.N. Mitra, Magistrate, 1st Class, Cuttack, in Criminal Case No.2130-2 of
1954. The petitioners obtained an interim stay of the proceedings of this
criminal case after filing this application. Notice of this application was
duly published in two newspapers, viz., Eastern Times of 5th August, 1955, and
in the Samaj of the same date. Nobody appears to object the application. The
petitioners could not comply with the provisions of the Act as stated in the
affidavit filed by them on account of the death of accountant who was in charge
of these accounts and another accountant could not be appointed in time in his
place. All these things which were not done in time were subsequently complied
with, and I am, therefore, satisfied that the petitioners are entitled to be
relief from their liabilities under the Act which were due to their negligence,
the negligence being only on account of certain unavoidable circumstances. But
the question still remains whether this relief can be availed of by the
petitioners in the prosecution against them before the criminal court. Mr. R.K.
Ghosh, the learned counsel for the petitioners, contended that they ought to be
relieved against that also. The law on this subject is the same in India as in
England. It is also the same under section 281 of the Indian Companies Act,
1913, and section 633 of Act 1 of 1956. In England also the law appears to be
the same under section 372 of the Act of 1929 and section 488 of the Act of
1948. The wording of these sections is practically the same as of section 633
of the Indian Companies Act (1 of 1956). Section 633 of the Indian Companies
Act, 1956, is as follows: "(1) If in any proceeding for negligence,
default, breach of duty, misfeasance or breach of trust against an officer of a
company, it appears to the court hearing the case that he is or may be liable
in respect of negligence, default, breach of duty, misfeasance or breach of
trust, but that he has acted honestly and reasonably and that having regard to
all the circumstances of the case, including those connected with his
appointment, he ought fairly to be execused, the court may relieve him, either
wholly or partly, from his liability on such terms as it may think fit.
"(2)
Where any such officer has reason to apprehend that any claim will or might be
made against him in respect of any negligence, default, breach of duty,
misfeasance or breach of trust, he may apply to the court for relief, and the
court on any such application shall have the same power to relieve him as it
would have had under this section if it had been a court before which
proceedings against that person for negligence, default, breach of duty,
misfeasance or breach of trust had been brought."
Section 281 of
the Act of 1913 is identical with the above and this applies to the case.
Clause (2) of this section clearly empowers the court to relieve the
petitioners against any apprehended claim for not complying with the provisions
complained of; but clause (1) empowers only the court before whom the
proceeding for negligence, default, breach of duty is complained of and is
pending, and the power is strictly confined to that court. In this case,
unfortunately the petitioners came to this court not even after the negligence
was found out by them to have been committed, but after the institution of the
proceedings against them by the Registrar of Joint Stock Companies. had they
filed their application before the institution of the prosecution, this court
could have, if it was satisfied with the reasons given by the petitioners,
passed an order giving relief to the petitioners against the defaults
committed, which would have prevented the prosecution being instituted. But the
petitioners having filed this application after institution of the prosecution,
though I am satisfied that the default was due to unavoidable circumstances and
grant them the relief, this relief will be confined only as far as the future
liabilities for the default are concerned. Under the express provisions of
clause (1) of section 281, it is only the court which is in seisin of the
matter complained of that can grant relief regarding the subject matter of the
prosecution. In this case, the Magistrate, before whom the proceedings are
pending, can if he is so satisfied grant the relief. This is the correct
position of the law in England also as will be clearly seen from the decision
in In re Gilt Edge Safety Glass Limited, wherein it was held that "section
372, sub-section (1), made the court which heard the case the only court which
had already been commenced, and that with regard to the claim under section 372,
sub-section (2), the court would make an order granting the petitioners relief
from future or apprehended claims in respect of what was a purely technical
defect; the summary proceedings already commenced being expressly excepted from
that order." Following this decision and the wording of section 281, I
relieve the petitioners from any apprehended liability as I am satisfied that
they could not comply with the provisions of law on account of the unavoidable
circumstances due to the death of the accountant but I cannot relieve them from
liability of pending prosecution. And this order shall not in any way prejudice
the proceedings which are pending before the Magistrate and the Magistrate is
at perfect liberty to come to his own conclusion irrespective of this order
from the facts and the evidence in the case before him.
Petition
allowed.
[1991] 71 Comp. Cas. 669 (DelHI)
High Court of Delhi
v.
Registrar of Companies
N.S. Gupta for the Respondent.
Sapra J.—By the present application filed under
section 446 of the Companies Act, 1956 (hereinafter called "the
Act"), the petitioner prays that this court be pleased to call for the
files of Cases Nos. 9459/5 of 1981, 9460/5 of 1981, 9461/5 of 1981, 9462/5 of
1981, and 8521/5 of 1981, titled Registrar of Companies v. Anand Finance (P.)
Ltd., now pending in the court of the Additional Chief Metropolitan Magistrate,
Delhi, and quash all the proceedings.
Briefly, the facts are that a
creditor filed a petition, being Company Petition No. 34 of 1966, against Anand
Finance Private Ltd., hereinafter referred to as "the company", for
its winding up, on the ground that it was unable to pay its debts.
During the
pendency of the petition for winding up, a scheme of arrangement, between the
creditors and the company, was approved by this court, vide order dated July
29, 1968, whereby 65 per cent. of the amount due to the creditors was to be
paid within a period of two years and for the balance 35 per cent. shares of
the company were to be allotted. The scheme also divested the shareholders of
their right to vote etc. A new board of directors was appointed by the court to
supervise the affairs of the company and make payment to the creditors.
In C.A. No.
516 of 1973, vide order dated February 7, 1974, the court superseded the
previous board of directors, as was appointed under the scheme, and in its
place, appointed the petitioner, as the chairman of the board of directors.
According to
the petitioner, he continued to discharge the functions of the chairman till
such time when the company was ordered to be wound up, vide order dated
February 3, 1982, pursuant to the report of the chairman, as, the court was
satisfied that the scheme, as sanctioned under section 391 of the Act could not
be worked out, with or without modification. The official liquidator attached
to this court was appointed as the liquidator of the company.
It is further
alleged that the Registrar of Companies was in full knowledge of all the proceedings.
The scheme had also been filed with the respondent, and he was aware that the
rights of the shareholders of the company had been suspended. There was thus no
question of holding an annual general meeting of the company, as the
shareholders had been divested of their rights to vote. Notwithstanding this
fact, the respondent launched five prosecutions against the petitioner for not
holding the annual general meeting and laying the balance-sheet, etc., in the annual general
meeting which are now pending in the Court of the Additional Chief Metropolitan
Magistrate, Delhi.
Thus, the
prosecutions launched against the petitioner are unwarranted and illegal.
Moreover, the petitioner was appointed the chairman by the court. As such, no
such prosecutions could be launched against him as he was functioning under the
direct supervision of the company court as per the scheme of arrangement.
In its reply,
the respondent has stated that the prosecutions have been launched for the year
1979-80, while the company went into liquidation by the order passed by the
court on February 3, 1982. The prosecutions are for the period when the company
was very much in existence and, moreover, the prosecutions were launched on
September 17, 1981, for the offences committed under sections 220 and 159 of
the Act while, for the offence. committed under section 210 of the Act, the
complaint was filed in the Court of the Additional Metropolitan Magistrate,
Delhi, on July 29, 1981. As the prosecutions have since been launched against the
company and its directors, prior to the going into liquidation of the company,
the accused cannot claim any advantage whatsoever.
Thus, the
Registrar of Companies has launched prosecutions against petitioner for the
offences of not holding the annual general meeting and non-filing of the
returns with the Registrar of Companies, in accordance with section 159 of the
Act, for not laying before the company; at its annual general meeting, the
balance-sheet and profit and loss account, as per section 210 of the Act, and
for non-filing of the balance-sheet and profit and loss account with the
Registrar of Companies.
Though the
petition has been filed under section 446 of the Act, yet, I will treat the
same as one filed under section 633(2) of the Act.
The following
three questions arise, for decision in the present case :
(1) Whether, under section 633(2) of the
Act, this court has jurisdiction to relieve the petitioner from the liabilities
relating to the aforesaid defaults, in view of the fact that the respondent had
already filed complaints against the petitioner, prior to the filing of the pre
sent application ;
(2) Whether the offences for which the
criminal complaints have been filed against the petitioner are continuing
offences, and
(3) Whether, under the facts and
circumstances of the present case, cognizance of the offences for which the
complaints have been filed against the petitioner has been taken by the learned
Additional Chief Metropolitan Magistrate, Delhi.
Identical
questions arose in Company Petition No. 133 of 1989, S.P. Punj v. Registrar of
Companies, [1991] 71 Comp Cas 509 (Delhi). In that case, the petitioners filed
a petition under section 633(2) of the Act for being relieved from prosecution
for their alleged liability for non-filing of returns, under rule 10 of the
Companies (Acceptance of Deposits) Rules, 1975. The petition was filed after
launching of the prosecutions by the Registrar of Companies. Vide my judgment
dated September 11, 1990, I allowed that petition, and relieved the petitioners
therein from their liabilities for not filing of the returns under section 10
of the aforesaid Rules.
Admittedly,
the petitioner has filed the present petition during the pendency of the
prosecution in the Court of the Additional Chief Metropolitan Magistrate,
Delhi, for the aforesaid offences.
In Sri
Krishna Parshad v. Registrar of Companies [1978] 48 Comp Cas 397 (Delhi), Mr.
Justice D.K. Kapur (as he then was) was considering the question with regard to
the jurisdiction of the court under section 633(2) of the Act. In that case,
the facts were that the petitioners who were directors of M/s. Western U.P.
Electric Power and Supply Co. Ltd. committed defaults in respect of holding the
annual general meeting, for the period ending March 31, 1976. It was held (at
page 400) :
"I may
also indicate that the other court covered by section 633(1) need not
necessarily be a criminal court because there may very well be a civil
proceeding, criminal proceeding or even a revenue proceeding in respect of
which section 633(1) may apply. In all such cases if a proceeding is
anticipated, the officer concerned can move the High Court at an early stage
and get relief in a suitable case. This has the great advantage of avoiding
that other proceeding if the High Court grants relief. If that other proceeding
has commenced then the officer concerned has no other course open but to apply
to the relevant court under section 633(1) to say that whatever negligence,
default, breach of trust, misfeasance, breach of duty or any other default
complained of there may be, he in fact, acted reasonably and honestly keeping
in view the circumstances of the case. The court can then grant relief. Thus,
the section, as it were, operates in two stages. The High Court can grant
anticipatory relief and if a case
is actually initiated, only the court before which the complaint or trial is
going on can grant relief. The preliminary objection has, therefore, to be
accepted."
I am in
respectful agreement with the view expressed above.
It may,
however, be noted that in Sri Krishna Parshad [1978] 48 Comp Cas 397 (Delhi),
it appears that the prosecution had already been launched and the cognizance of
the offence had already been taken by the learned Magistrate, and the question
of limitation was not involved.
Now, it is to
be seen whether, the offences/defaults, allegedly committed by the present
petitioner, are continuing ones or not.
In CWT v.
Suresh Seth [1981] 129 ITR 328, their Lordships of the Supreme Court were
considering the question whether the default committed under section 18(1)(a)
of the Wealth-tax Act, 1957, was a single default or a continuing one. The
facts, in that case, were that the assessee filed his wealth-tax returns for
the assessment years 1964-65 and 1965-66, on March 18, 1971, while he was
required, by section 14(1) of the Wealth-tax Act, to file the same, for the
year 1964-65, on or before June 30, 1964, and the return, for the assessment
year 1965-66, on or before June 30, 1965. The Supreme Court held (at pages 338,
339) :
"Section
18 of the Act, with which we are concerned in this case, does not require the
assessee to file a return during every month after the last day to file it is
over. Non-performance of any of the acts mentioned in section 18(1)(a) of the
Act gives rise to a single default and to a single penalty, the measure of
which, however, is geared up to the time lag between the last date on which the
return has to be filed and the date on which it is filed. The default, if any
committed, is committed on the last date allowed to file the return. The
default cannot be one committed every month thereafter. The words "for
every" month during which the default continued" indicate only the
multiplier to be adopted in determining the quantum of penalty and do not have
the effect of making the default in question a continuing one. Nor do they make
the amended provisions modifying the penalty applicable to earlier defaults in
the absence of necessary provisions in the amending Acts. The principle
underlying section 6 of the General Clauses Act is clearly applicable to these
cases. It may be stated here that the majority of the High Courts in India have
also taken the same view."
In Assistant Registrar of Companies v. R.
Narayanaswamy [1985] 57 Comp Cas 787,
the Madras High Court held (at pages 788 and 789) :
"It is
not disputed before me by learned counsel for the petitioner that the
respondents became directors of the first accused-company only from July, 1975,
and they were not directors on April 1, 1975, when the excess deposits had to
be returned as per section 58A(3)(c) of the Act. It is, however, contended by
him that the failure to repay the deposit on or before April 1, 1975, is a
continuing offence and persons who became directors even subsequent to April 1,
1975, are liable, for the default, so long as the excess deposits are not
repaid. But, there is nothing in section 58A(3Xc) or any other provision of the
Act to hold that the non-repayment of the excess deposits on or before April 1,
1975, is a continuing offence. In CWT v. Suresh Seth [1981] 129 ITR 328 (SC),
the question that came up before the Supreme Court was whether the failure to
file a wealth-tax return by the assessee after the last date was over, was a
continuing offence. It was held by the Supreme Court that such a failure gave
rise to a single default and to a single penalty the measure of which, however,
is geared up to the time lag between the last date on which the return has to
be filed and the date on which it is actually filed. The default, if any, committed,
is committed on the last date allowed to file the return ; the default cannot
be one committed every month thereafter. The words in section 18(1)(a) of the
Act 'for every month during which the default continued' indicate only the
multiplier to be adopted in determining the quantum of penalty and do not have
the effect of making the default in question a continuing one. The principle
enunciated therein applies on all fours to the case on hand. The failure to
repay the excess deposits on or before April 1, 1975, is a single default,
which gets completed on the expiry of the aforesaid period and cannot be said
to be a continuing one."
Following the
dictum of the Supreme Court in CWT v. Suresh Seth [1981] 129 ITR 328, and
relying upon the judgment in Asst. Registrar of Companies, Madras v. R.
Narayanaswamy [1985] 57 Comp Cas 787 (Mad), I, in my judgment in S.P. Punj
[1991] 71 Comp Cas 509 (Delhi), held that the principles of law, enumerated
above, apply on all fours to the default under rule 11 of the Rules. The words
in rule 11 that the fine may extend to Rs. 50 for every day after the first
indicate only the multiplier to be adopted in determining the quantity of
penalty, and did not have the effect of making the default in question a
continuing one.
The principles
of law enumerated above apply on all fours to the defaults/offences, allegedly
committed by the petitioner in the present case. The provisions thereby
extending the fine for every day after the first indicate only the multiplier
to be adopted in deter-mining the quantity of penalty, and do not have the
effect of making the defaults in question continuing ones.
In the
present case, the period of limitation for filing the complaints for the
offences/defaults under sections 159, 210 and 220 of the Act is six months
because, under section 467 of the Criminal Procedure Code, these offences are
punishable with fine only.
Sections 467,
468, 469 and 473 of the Criminal Procedure Code read as under :
" 467.For the purposes of this Chapter,
unless the context otherwise requires, 'period of limitation' means the period
specified in section 468 for taking cognizance of an offence.
468.
(1) Except as otherwise provided elsewhere in this Code, no court shall take
cognizance of an offence of the category specified in sub-section (2), after
the expiry of the period of limitation.
(2) The period of limitation
shall be—
(a) six
months, if the offence is punishable with fine only ;
(b) one
year, if the offence is punishable with imprisonment for a term not exceeding one
year ;
(c) three years, if the offence is punishable
with imprisonment for a term exceeding one year but not exceeding three years.
(3) For
the purposes of this section, the period of limitation, in relation to offences
which may be tried together, shall be deter mined with reference to the offence
which is punishable with the more severe punishment or, as the case may be, the
most severe punishment.
469.
(1) The period of limitation, in relation to an offender, shall commence—
(a) on
the date of the offence ; or
(b) where the commission of the offence was not
known to the person aggrieved by the offence or to any police officer, the
first day on which such offence comes to the knowledge of such person or to any
police officer, whichever is earlier ; or
(c) where it is not known by whom the offence
was committed, the first day on which the identity of the offender is known to
the person aggrieved by the offence or to the police officer making
investigation into the offence, whichever is earlier.
(2) In computing the said period, the day
from which such period is to be computed shall be excluded.
473. Notwithstanding anything
contained in the foregoing provisions of this Chapter, any court may take
cognizance of an offence after the expiry of the period of limitation, if it is
satisfied on the facts and in the circumstances of the case that the delay has
been properly explained or that it is necessary so to do in the interests of
justice."
In Hindustan
Wire and Metal Products [1983] 54 Comp Cas 104 (Cal), the facts were that a
petition under section 633 of the Act for relieving the petitioner as a
consequence of default and violation of section 295 of the Act in granting a
loan to another company was filed on June 28, 1980. The Registrar of Companies
filed a complaint before the Chief Metropolitan Magistrate, Calcutta, on June
12, 1980. An interim stay was granted by the court, on July 2, 1980, whereby
the Registrar of Companies was personally restrained from commencing any
prosecution against the petitioners for the default and the delay was condoned
by the Chief Metropolitan Magistrate, on November 4, 1980, ex parte. The fact
remains that the complaint was filed on June 12, 1980, i.e., 16 days prior to
the filing of the petition under section 633 of the Act. The following points
arose (1) whether the application under section 633 of the Act was maintainable
after the complaint had been filed and cognizance of the same having been taken
by the Magistrate, and (2) whether filing the complaint and making an application
for condoning the delay could be said to be the initiation of a criminal
proceeding or initiation of proceedings, before the delay was condoned and the
offence was taken cognizance of by the criminal court where the proceedings had
been filed. The Calcutta High Court held (at pages 112, 113) :
"I am of the view that
there is no substance or merit in the contention raised on behalf of the
respondent as the said criminal proceeding is clearly in violation of the order
of injunction passed by this court and it is strange enough that before the
criminal court the respondent has not brought to the notice of the court the
order of this court dated 2nd July, 1980, by which the respondent was
restrained from proceeding or taking any step against the petitioners pursuant
to the letter dated 12th May, 1980, by way of initiating any criminal
proceeding. It must be held, according to the provisions of the Criminal
Procedure Code, which I have set out before, that there was no pending criminal
proceeding or initiation of any criminal proceeding against the petitioners
before the present application was made. It is only after the present
application was made and an ad interim order was issued, as hereinbefore
stated, that the said order condoning the delay was passed ex parte without any
notice to the accused and cognizance of the offence was taken at the instance
of the respondent, who was restrained by an injunction of this court from
taking any steps in the matter."
I am in respectful agreement
with the view expressed by the Calcutta High Court in the said judgment.
Relying upon
the said judgment, I, in S.P. Punj [1991] 71 Comp Cas 509 (Delhi), held that as
the complaints were filed after the period of limitation and no application for
condonation of delay was filed, it could not be said that the cognizance of the
offence had been taken merely on the filing of the complaint.
In the
present case, the complaints against the petitioner have been filed after the
period of six months and it appears that no steps have been taken for
condonation of delay in filing the complaints.
Section 468
of the Criminal Procedure Code lays down that, except as otherwise provided
elsewhere in the Code, no court shall take cognizance of an offence of the
category specified in sub-section (2) after the expiry of the period of
limitation.
It means
that, in the facts and circumstances of the present case, unless the bar of
limitation was lifted by condonation of delay by an order of the Magistrate
made under section 473 of the Criminal Procedure Code, it cannot be said that
cognizance of an offence has been taken on the mere filing of the complaint
against the accused.
Coming to the
merits of the present case, it is not disputed that the petitioner was
appointed chairman by this court, under a scheme of arrangement.
Vide order
dated July 29, 1968, in C.A. No. 128 of 1968, it was directed that the
shareholders of the company would not exercise any voting and any other right
until and unless unsecured creditors had been paid 65% of their dues in
accordance with the terms of the aforesaid scheme of arrangement, and then
until the shares have been allotted to the creditors under the scheme. It is
also not disputed that before 60 per cent. could be paid to the creditors as
per the scheme of arrangement, the company went into liquidation.
The company
was wound up on the basis of the report submitted by the chairman. Thus, by the
order of the court, the rights of the shareholders of the company with regard
to the voting were suspended. Thus, there is force in the arguments of the
petitioner that the question of holding an annual general meeting of the
company did not arise, as the shareholders had been divested of their rights.
Similarly, for this reason, the balance-sheets and profit and loss accounts could
not be laid before the annual general meeting.
Taking into
consideration the totality of the circumstances, I am of the view that the
petitioner has been able to establish that he is entitled to be relieved of the
alleged liabilities and defaults for which the prosecutions have been launched
against him under sections 159, 210 and 220 of the Act.
Under the
facts and circumstances of the case, the petitioner is hereby relieved from the
aforesaid liabilities/defaults for which the complaints have been filed under
the aforesaid provisions and also from the consequences of the said defaults.
C.A. No. 827
of 1987 stands disposed of. No order as to costs.
[1991] 71 COMP. CAS. 509
(DELHI)
HIGH COURT OF DELHI
v.
Registrar of
Companies
S.N. SAPRA J.
SEPTEMBER 11, 1990
B.N. Nayyar,
B.R. Sethi and Ms. Sudha Srivastava for the Appellant.
N.S. Gupta,
for the Respondent.
Sapra J.—The petitioners have filed this petition,
under section 633(2) of the Companies Act, 1956 (hereinafter called "the
Act"), for being relieved from prosecution for their alleged liability for
non-filing of returns under rule 10 of the Companies (Acceptance of Deposits)
Rules, 1975, hereinafter called "the Rules".
Briefly, the
facts, as stated in the petition, are that M/s Punj Sons Private Limited,
hereinafter referred to as "the company", is a family concern, which
was incorporated in the year 1954. Petitioners Nos. 1, 2 and 3 became directors
in the year 1954. Petitioners Nos. 4 and 5 became directors of the company in
the years 1980 and 1982, respectively. Petitioners Nos. 1 to 4, along with the
company, and Shri Satya Narain Prakash Punj, are being prosecuted in the court
of the Chief Metropolitan Magistrate, Delhi, on a complaint filed by the
Registrar of Companies, Delhi, under rule 11 of the Rules, read with section
58A of the Act, for non-filing of returns under rule 10 of the Rules for the
years 31st March, 1976, to 31st March, 1982. There are complaints now pending
against them.
Shri Satya
Narain Prakash Punj has been acting as director in charge-managing director of
the company, right since its incorporation. The petitioners, being ordinary
directors, have never been in control of the affairs and day to day management
of the company and were never apprised of the excess borrowings nor was any
resolution passed to which they are parties that permitted the alleged
borrowings, beyond limits, by the company.
Shri Satya
Narain Prakash Punj who is in possession of the books of account, minutes
books, correspondence files and the statutory books has been managing the
affairs of the company and did not take the petitioners into his confidence
about the alleged excess borrowings by the company.
It is further
alleged that petitioner No. 1 is aged about 70 years. Smt. Maya Rani Punj,
petitioner No. 2 herein, is a housewife, and so is petitioner No. 3. Petitioner
No. 4 is a resident of Bombay, and is suffering from severe diabetes mellitus
and ischaemic heart disease.
From
enquiries made and from a perusal of the records in the office of the Registrar
of Companies, it has come to the knowledge of the petitioners that all the
deposits were loans advanced by the directors, shareholders and relatives of
directors whose advances had been guaranteed by the directors. According to the
petitioners, the person who is in default has been specifically defined and the
entire board of directors cannot be foisted with liability till they fall in
the definition now given under section 5 of the amended Act. For these reasons
and also for the other facts and averments made in the petition, the
petitioners submit that they are not liable, in any manner, to be held
responsible and liable for the prosecution launched against them by the
respondent on the complaint filed under section 11 of the Rules, read with
section 58A of the Act.
In reply, the
Registrar of Companies, the respondent herein, has stated that this court has
jurisdiction to grant relief only in respect of apprehended prosecution under
section 633(2) of the Act, and, therefore, in respect of the pending
prosecutions, the petition is not maintainable. Further, according to the
respondent, the petitioners have failed to implead the necessary party, i.e.,
Shri Satya Prakash Punj, as, according to the petitioners, he has been in
control of the affairs and the day to day management of the company.
The first
question which arises for decision is, whether, under section 633(2) of the
Act, this court has jurisdiction to relieve the petitioners from the liability
of not filing returns under rule 11 of the Rules, in view of the fact that the
criminal complaints are already pending before the Chief Metropolitan
Magistrate, Delhi.
In the first
place, Mr. B.N. Nayyar, learned counsel for the petitioners, contended that
non-filing of returns under rule 10 of the Rules qua the defaulting year
constitutes a single default and is not a continuing one. As such, the
petitioners cannot be prosecuted for default, allegedly committed, pertaining
to a particular year, repeatedly in the subsequent years. In any case,
petitioner No. 5, namely, Shri B.R. Punj, who became a director during 1982,
cannot be held liable for apprehended prosecution for the alleged defaults
which were committed by the company prior to his induction as director.
Reliance is placed upon the judgment in Assistant Registrar of Companies v. R.
Narayanaswamy [1985] 57 Comp Cas 787 (Mad).
Mr. Nayyar
has further urged that the complaints filed by the respondent under rule 11 of
the Rules in the Court of the Chief Metropolitan Magistrate, Delhi, are time
barred as the same were filed after a period of 3 years, from the alleged
defaults, which were committed
in the year 1982. The period of limitation is 6 months and the respondent has
not filed any application under section 473 of the Criminal Procedure Code, for
condonation of delay. In other words, no cognizance of the offence could be
taken by the court as the prosecutions were hopelessly time-barred. Cognizance
of the offence in such cases is deemed to have been taken when the delay is
condoned under section 473 of the Criminal Procedure Code.
Mr. Nayyar
submits that, in view of the judgment of the Calcutta High Court in In re
Hindustan Wire and Metal Products [1983] 54 Comp Cas 104, the petitioners are
entitled to be relieved of the liability, not only regarding the apprehended
prosecution, but also for prosecutions which are pending before the Chief
Metropolitan Magistrate, Delhi.
On the other
hand, Mr. N.S. Gupta, Assistant Registrar of Companies, has submitted that the
offence under rules 10 and 11 of the Rules is of a continuing nature and as
such, all the directors of the company are liable. He has further contended
that this court has no jurisdiction to grant relief under section 633(2) of the
Act, because the complaints already filed by the respondent are pending in the
Court of Additional Chief Metropolitan Magistrate, Delhi.
Sub-sections
(1) and (2) of section 633 of the Act are reproduced as under:
"(1) If in any proceeding for negligence, default,
breach of duty, misfeasance or breach of trust against an officer of a company,
it appears to the court hearing the case that he is or may be liable in respect
of the negligence, default, breach of duty, misfeasance or breach of trust, but
that he has acted honestly and reasonably, and that having regard to all the
circumstances of the case, including those connected with his appointment, he
ought fairly to be excused, the court may relieve him, either wholly or partly,
from his liability on such terms, as it may think fit:
Provided that in a criminal
proceeding under this sub-section the court shall have no power to grant relief
from any civil liability which may attach to an officer in respect of such
negligence, default, breach of duty, misfeasance or breach of trust.
(2) Where any such officer has reason to
apprehend that any proceeding will or might be brought against him in respect
of any negligence, default, breach of duty, misfeasance or breach of trust, he
may apply to the High Court for relief and the High Court on such application
shall have the same power to relieve him as it would have had if it had been a court before which a
proceeding against that officer for negligence, default, breach of duty,
misfeasance or breach of trust had been brought under sub-section (1)."
A bare
reading of the opening words of sub-section (2) clearly indicates that the
officer concerned must have an apprehension that the proceeding will or might
be brought against him in respect of any negligence, default, breach of duty,
misfeasance or breach of trust. Thus, the anticipation or apprehension is about
the possibility of a proceeding being brought. When the proceedings are
actually brought, then, ordinarily, there is no apprehension any more, as
contemplated in sub-section (2).
In Sri
Krishna Parshad v. Registrar of Companies [1978] 48 Comp Cas 397 (Delhi), Mr.
Justice D.K. Kapur (as he then was) was considering the question with regard to
the jurisdiction of the court under section 633(2) of the Act. In that case,
the facts were that petitioners, who were directors of M/s Western U.P.
Electric Power and Supply Co. Ltd., committed defaults in respect of holding
the annual general meeting for the period ending March 31, 1976. It was held
(at p. 400):
"I may
also indicate that the other court covered by section 633(1) need not
necessarily be a criminal court because there may very well be a civil
proceeding, criminal proceeding or even a revenue proceeding in respect of
which section 633(1) may apply. In all such cases, if a proceeding is anticipated,
the officer concerned can move the High Court at an early stage and get relief
in a suitable case. This has the great advantage of avoiding that other
proceeding if the High Court grants relief. If that other proceeding has
commenced, then the officer concerned has no other course open but to apply to
the relevant court under section 633 (1) to say that whatever negligence,
default, breach of trust, misfeasance, breach of duty or any other default
complained of there may be, he in fact, acted reasonably and honestly keeping
in view the circumstances of the case. The court can then grant relief. Thus,
the section as it were, operates in two stages. The High Court can grant
anticipatory relief and if a case is actually initiated, only the court before
which the complaint or trial is going on can grant relief. The preliminary
objection has, therefore, to be accepted."
I am in
respectful agreement with the view expressed above.
It may,
however, be pointed out that this view is only with regard to the jurisdiction
of the court under section 633(2) of the Act. But, in cases where cognizance of the offence has already been taken by
the court and the prosecutions are pending, under other provision of law, an
aggrieved party can move the High Court for quashing such pending complaints or
prosecutions. In Sri Krishna Parshad [1978] 48 Comp Cas 397 (Delhi) the
admitted fact was that the complaint had already been filed before a Magistrate
in respect of default and, from the judgment, it appears that cognizance had
been taken by the court and the question of limitation was not involved.
Now, it is to
be seen whether, in the present case, cognizance of the offence was taken by
the learned Chief Metropolitan Magistrate on the complaints filed by the
respondent under rule 11 of the Rules.
Before I
proceed to decide this point, it is necessary to deal with the other
contentions, viz., whether the contravention/offence under rule 11 of the Rules
is a continuing offence or not.
For my
benefit, rules 10 and 11 of the Companies (Acceptance of Deposits) Rules, 1975,
are reproduced as under: —
"10. Return of deposits to
be filed with the Registrar.—Every company to which these Rules apply shall, on
or before the 30th day of June of every year, file with the Registrar, a return
in the form annexed to these rules and furnishing the information contained
therein as on the 31st day of March of that year duly certified by the auditor
of the company.
(2) A copy of
the return shall also be simultaneously furnished to the Reserve Bank of India.
11. Penalty.
—If a company or any other person contravenes any provision of these rules for
which no punishment is provided in the Act, the company and every officer of
the company who is in default or such other person shall be punishable with
fine which may extend to five hundred rupees and where the contravention is a
continuing one, with a further fine which may extend to fifty rupees for every
day after the first, during which the contravention continues."
In support of
its contention that the offence under rule 11 of the Rules is a continuing one,
the respondent has placed reliance on the nature of fine which is to the extent
of Rs. 500 and where, the contravention is a continuing one with a further fine
which may extend to Rs. 50 for every day after the first.
In CWT v.
Suresh Seth [1981] 129 ITR 328, their Lordships of the Supreme Court were
considering the question whether the default committed under section 18(1)(a)
of the Wealth-tax Act, 1957, was a single
default or a continuing one. The facts in that case were that the assessee
filed his wealth-tax returns, for the assessment years 1964-65 and 1965-66, on
March 18, 1971, while he was required, by section 14(1) of the Wealth-tax Act,
to file the same, for the year 1964-65, on or before June 30, 1964, and the
return for the assessment year 1965-66 on or before June 30, 1965. The
following two questions were referred, under section 27(1) of the Wealth-tax
Act, to the Punjab and Haryana High Court which answered the same in favour of
the assessee :
"1. Whether, on the facts and in the
circumstances of the case, the Tribunal was right in law in holding that the
offence relating to the omission to file the wealth-tax returns was a
continuing offence ?
2. Whether, on the facts and in the circumstances
of the case, the Tribunal was right in law in upholding the penalties of Rs.
5,382 and Rs. 7,759 levied by the department on the assessee under section
18(1)(a) of the Wealth-tax Act, 1957, for the assessment years 1964-65 and
1965-66, respectively?"
The Supreme
Court held (at pages 338, 339) :
"Section
18 of the Act, with which we are concerned in this case, however, does not
require the assessee to file a return during every month after the last day to
file it is over. Non-performance of any of the acts mentioned in section
18(1)(a) of the Act gives rise to a single default and to a single penalty, the
measure of which, however, is geared up to the time lag between the last date
on which the return has to be filed and the date on which it is filed. The
default, if any committed, is committed on the last date allowed to file the
return. The default cannot be one committed every month thereafter. The words
'for every month during which the default continued' indicate only the
multiplier to be adopted in determining the quantum of penalty and do not have
the effect of making the default in question a continuing one. Nor do they make
the amended provisions modifying the penalty applicable to earlier defaults in
the absence of necessary provisions in the amending Acts. The principle
underlying section 6 of the General Clauses Act is clearly applicable to these
cases. It may be stated here that the majority of the High Courts in India have
also taken the same view."
In Assistant Registrar of Companies v. R.
Narayanaswamy [1985] 57 Comp Cas 787
(Mad), the facts were that the Assistant Registrar of Companies of Tamil Nadu
filed a criminal complaint against Southern Textiles Ltd., and its 13 directors
under section 58A(3)(c) of the Companies Act, 1956, for the offence that the
company had accepted deposits in excess
of the limits prescribed by the Reserve Bank of India Act, 1934, and the rules,
framed thereunder, and it failed to repay the excess, on or before April 1,
1975, as required by law. Following the judgment in CWT v. Suresh Seth [1981]
129 ITR 328 (SC), the Madras High Court held (at pages 788 and 789 of 57 Comp
Cas) :
"It is
not disputed before me by learned counsel for the petitioner that the
respondents became directors of the first accused-company only from July, 1975,
and they were not directors on April 1, 1975, when the excess deposits had to
be returned as per section 58A(3)(c) of the Act. It is, however, contended by
him that the failure to repay the deposits on or before April 1, 1975, is a continuing
offence and persons who became directors even subsequent to April 1, 1975, are
liable for the default, so long as the excess deposits are not repaid. But,
there is nothing in section 58A(3)(c) or any other provision of the Act to hold
that the non-repayment of the excess deposits on or before April 1, 1975, is a
continuing offence. In CWT v. Suresh Seth [1981] 129 ITR 328 (SC), the question
came up before the Supreme Court whether the failure to file a wealth-tax
return by the assessee after the last date was over, was a continuing offence.
It was held by the Supreme Court that such a failure gave rise to a single
default and to a single penalty the measure of which, however, is geared up to
the time lag between the last date on which the return has to be filed and the
date on which it is actually filed. The default, if any committed, is committed
on the last date allowed to file the return, the default cannot be one
committed every month thereafter. The words in section 18(1)(a) of the Act,
'for every month during which the default continued indicate only the
multiplier to be adopted in determining the quantum of penalty and do not have
the effect of making the default in question a continuing one. The principle
enunciated therein applies on all fours to the case on hand. The failure to
repay the excess deposits on or before April 1, 1975, is a single default,
which gets completed on the expiry of the aforesaid period and cannot be said
to be a continuing one."
The
principles of law enumerated above apply on all fours to the default under rule
11 of the rules. The words in rule 11 that the fine may extend to Rs. 50 for
every day after the first, indicate only the multiplier to be adopted in
determining the quantity of penalty, and did not have the effect of making the
default in question a continuing one.
There is
nothing in rule 11 or section 58A of the Act to show that the offence was
intended to be a continuing one.
Now, I will
deal with the other contention of Mr. Nayyar that, in view of the admitted fact
that the compliants were filed after the period of limitation, and no
application for condonation of delay has been filed, so, no cognizance of the
offence, is deemed to have been taken.
Chapter XXXVI
and sections 467 to 473 of the Code of Criminal Procedure, deal with the
limitation for taking cognizance of certain offences and condonation of delay,
etc.
Sections 467,
468, 469 and 473 of the Code of Criminal Procedure read as under :
"467.
For the purposes of this Chapter, unless the context otherwise requires,
'period of limitation' means the period specified in section 468 for taking
cognizance of an offence.
468. (1)
Except as otherwise provided elsewhere in this Code, no court shall take
cognizance of an offence of the category specified in sub-section (2), after
the expiry of the period of limitation.
(2) The
period of limitation shall be —
(a) six
months, if the offence is punishable with fine only;
(b) one
year, if the offence is punishable with imprisonment for a term not exceeding
one year;
(c) three years, if the offence is punishable
with imprisonment for a term exceeding one year but not exceeding three years.
(3) For the
purposes of this section, the period of limitation, in relation to offences
which may be tried together, shall be deter mined with reference to the offence
which is punishable with the more severe punishment or, as the case may be, the
most severe punishment.
469. (1) The
period of limitation, in relation to an offender, shall commence—
(a) on
the date of the offence; or
(b) where the commission of the offence was not
known to the person aggrieved by the offence or to any police officer, the
first day on which such offence comes to the knowledge of such person or to any
police officer, whichever is earlier; or
(c) where it is not known by whom the offence
was committed, the first day on which the identity of the offender is known to
the person aggrieved by the offence or to the police officer making
investigation into the offence, whichever is earlier.
(2) In
computing the said period, the day from which such period is to be computed
shall be excluded.
473.
Notwithstanding anything contained in the foregoing provisions of this Chapter,
any court may take cognizance of an offence after the expiry of the period of
limitation, if it is satisfied on the facts and in the circumstances of the
case that the delay has been properly explained or that it is necessary so to
do in the interests of justice."
In Hindustan
Wire and Metal Products, In re [1983] 54 Comp Cas 104 (Cal), the facts were
that a petition under section 633 of the Act for relieving the petitioner as a
consequence of default and violation of section 295 of the Act in granting a
loan to another company was filed on June 28, 1980. The Registrar of Companies
filed a complaint before the Chief Metropolitan Magistrate, Calcutta, on June
12, 1980. Ad interim stay was granted by the court, on July 2, 1980 whereby,
the Registrar of the Companies was personally restrained from commencing any
prosecution against petitioners for the default and the delay was condoned by
the Chief Metropolitan Magistrate, on November 4, 1980, ex parte. The fact
remains that the complaint was filed on June 12, 1980, i.e., 16 days prior to
the filing of the petition under section 633 of the Act. Two points arose: (1)
whether the application under section 633 of the Act was maintainable, after
the complaint had been filed and cognizance of the same was taken by the
Magistrate, and (2) whether filing the complaint and making an application for
condoning the delay could be said to be the initiation of a criminal proceeding
or initiation of proceedings before the delay was condoned and the offence was
taken cognizance of by the criminal court where the proceedings had been filed.
The Calcutta High Court held (at pages 112, 113):
"I am of
the view that there is no substance or merit in the contention raised on behalf
of the respondent as the said criminal proceeding is clearly in violation of
the order of injunction passed by this court and it is strange enough that
before the criminal court the respondent has not brought to the notice of the
court the order of this court dated 2nd July, 1980, by which the respondent was
restrained from proceeding or taking any step against the petitioners pursuant
to the letter dated 12th May, 1980, by way of initiating any criminal
proceeding. It must be held, according to the provisions of the Criminal
Procedure Code, which I have set out before, that there was no pending criminal
proceeding or initiation of any criminal proceeding against the petitioner
before the present application was made. It is only after the present application was made and an ad interim order was
issued, as hereinbefore stated, that the said order condoning the delay was
passed ex parte without any notice to the accused and cognizance of the offence
was taken at the instance of the respondent, who was restrained by an
injunction of this court from taking any step in the matter."
I am in
respectful agreement with the view expressed by the Calcutta High Court in the
said judgment.
The offence
under rule 11 of the Rules is punishable with fine as such; the period of
limitation is six months subject to other exceptions as provided in Chapter
XXXVI. It is not disputed that the respondent has not filed any application
under section 473 of the Criminal Procedure Code for condonation of delay in
filing the complaint for which the period of limitation is six months.
Section 468
of the Criminal Procedure Code lays down that, except as otherwise provided
elsewhere in the Code, no court shall take cognizance of an offence of the
category specified in sub-section 2 after the expiry of the period of
limitation.
It means
that, in the facts and circumstances of the present case, unless the bar of
limitation was lifted by condonation of delay, by an order of the Magistrate
made under section 473 of the Criminal Procedure Code, it cannot be said that
the cognizance of an offence has been taken on the mere filing of the complaint
against the accused.
The
contention of Mr. Nayyar is that none of the petitioners is an "officer in
default" within the meaning of section 5 of the Act, inter alia, on the
grounds that the petitioners never participated or were parties to any
resolution of the company, thereby allowing the company to make borrowings or
to accept deposits within the scope of rule 2 of the Rules; that the
petitioners were never in control or the management of the affairs of the
company, nor at any time, were they in possession and control of the books of
account and other statutory books. Mr. Nayyar contends that Shri S.P. Punj,
petitioner No. 1, is about 70 years of age, Smt. Maya Rani Punj, petitioner No.
2, and Smt. Shakuntla Rani Punj, petitioner No. 3, are housewives. Petitioner
No. 4 is a resident of Bombay and has been suffering from severe diabetes
mellitus and ischaemic heart disease. As such, he is unable to concentrate due
to abnormal vision and cannot also walk properly. Petitioner No. 5, namely,
Shri B.R. Punj, became director of the company during the year 1982. In fact,
Shri Satya Narain Prakash Punj has been the managing director of the company
and has been in possession of
the books of account, minutes books, correspondence files and the other
statutory books of the company. He has been managing the affairs of the company
without, in any manner, taking the petitioners into confidence, about the
alleged borrowings or deposits by the company.
Mr. Nayyar,
has also urged that, in fact, neither the petitioner nor the company is liable
to file any return under rule 10 of the Rules as the "company" being
a private limited company and being neither a banking company, nor a financial
company, was exempted from filing a nil return, vide Department of Company
Affairs Circular letter No. 4/1/76-CL-XIV, dated February 5, 1976, as the
amounts involved belonged either to the directors or relatives of directors or
shareholders of the company, or were guaranteed by the directors and did not
come under the definitipn of deposits, as given under rule 2(ix)(b) of the
Rules. He has filed a photo copy of the relevant circular.
According to
Mr. Nayyar, a bare reading of the provisions of section 5 of the Act, prior to
its substitution by the Companies (Amendment) Act, 1988, shows that if any
prosecution is launched by the Registrar of Companies, he has to investigate as
to who is the officer in default and not to launch prosecution against all the
directors, when they are part time, whole time or outstation directors, or are
not concerned with the day to day working of the company.
The next
contention of Mr. Nayyar is that various circulars have been issued by the
Department of Company Affairs, Government of India, from time to time, for the
guidance of the Registrars of Companies, and for following up of the policy
regarding institution of prosecution for defaults of non filing of returns
under rule 10 of the Rules. He has placed reliance upon the judgment in H.
Nanjundiah v. V. Govindan, Registrar of Companies, Maharashtra [1986] 59 Comp
Cas 356 (Bom).
In H.
Nanjundiah's case [1986] 59 Comp Cas 356 (Bom), by a resolution of the board of
directors, the company was allowed to make borrowings in excess of the limits.
The Registrar of Companies issued notice, to show cause as to why action be not
taken against the directors for accepting deposits exceeding the limits
prescribed by rule 3(2)(i) and (ii) of the Companies (Acceptance of Deposits)
Rules, 1975. While interpreting the meaning of "officer" who is in
default, under section 5 of the Act, the High Court of Bombay held (at page 358):
"In view
of this, I had asked Mr. Bulchandani, learned counsel for the respondent, to
point out any resolution of the company to which the petitioner was a party which allowed the company to make
borrowings in excess of the limits or to point out any act of the petitioner
wherein the petitioner had knowingly subscribed to the borrowings beyond the
limits, or of the petitioner having wilfully authorised or permitted someone to
borrow monies in excess of the limits. Mr. Bulchandani was unable to point out a
single act to satisfy this position or even indicate remotely as to how the
petitioner could be said to be 'an officer in default'."
The
petitioners have filed a copy of the application, annexure 8 to the petition,
which was submitted by Shri Satya Narain Prakash Punj, under section 205 of the
Code of Criminal Procedure, before the learned Chief Metropolitan Magistrate,
Delhi. Shri Satya Narain Prakash Punj has admitted that he was the managing
director of the company.
Mr. Nayyar
has invited the attention of this court to the copy of the award, annexed with
the rejoinder, to show that the company, namely, M/s Punj Sons Pvt. Ltd., has
gone to the group headed by Shri Satya Narain Prakash Punj, as a result of
family partition. The award has since been made a rule of the court, vide order
dated March 17, 1988, passed by the High Court of Delhi. Thus, the petitioners
are no longer in the company.
From the
various circulars issued by the Department of Company Affairs, it becomes
doubtful whether the alleged deposits were beyond the permissible limits, as
provided under rule 3(2) of the Rules. It is not disputed that petitioner No. 1
is 70 years of age, while petitioners Nos. 2 and 3 are housewives; petitioner
No. 4 is a resident of Bombay and is suffering from the aforesaid diseases and
is unable to walk. Petitioner No. 5 was made director in the year 1982.
The
respondent has not been able to show that any of the petitioners was a party to
any of the resolutions passed by the company for borrowings or taking deposits.
In my view,
it is established that the petitioners are not "officers in default",
within the meaning of section 5 of the Act.
Under the
facts and circumstances, the petitioners are relieved from the alleged
liabilities for non-filing of returns by M/s Punj Sons Pvt. Ltd., under rule 10
of the Companies (Acceptance of Deposits) Rules, 1975, read with section 58A of
the Companies Act, 1956, and also from the consequence of the alleged defaults
for which the complaints have been filed under rule 11 of the Rules. Company
Petition No. 133 of 1989 stands disposed off. No order as to costs.
[1980] 50 COMP. CAS. 699 (DELHI)
HIGH COURT OF
DELHI
v.
PRAKASH NARAIN AND LEILA SETH, JJ.
MAY 9, 1979
Daljit
Singh for the Petitioner.
Madan Bhatia, P.C. Khanna, P.K. Seth and Satish
Chandra for the Respondent.
Prakash
Narain J.—This appeal is
directed against an order of the learned company judge giving certain
directions under s. 454(2) and (5) of the Companies Act, 1956. In order
to appreciate the points involved in the case it would be desirable to briefly
set out the salient facts leading to the passing of the order under appeal.
M/s. Sipso Agencies Private Ltd., was incorporated on
October 24. 1964. The first directors or the founding directors of the company
were Devinder Kishore Mehra, the appellant, Gaj Raj Singh, respondent No. 2,
Dr. (Mrs) Pushpa Gupta, Mrs. Prem Dulari Kohli, wife of Roshan Lal Kohli,
respondent No. 4, Smt. Nirmal Kumari, respondent No. 5, and Smt. Ved Kumari
Ahuja, respondent No. 6. Om Parkash Gupta, respondent No. 3, was appointed
secretary of the company. On December 16, 1965, Roshan Lal Kohli was appointed
director in place of his wife, Mrs. Kohli. Om Parkash Gupta, respondent No. 3,
was appointed director-cum-secretary in January, 1966. In December, 1966,
certain disputes started among the directors in respect of the provisional
balance-sheet to be submitted by the company to the Punjab National Bank. The appeallant,
Devinder Kishore Mehra, is claimed to have refused to sign it and as a
consequence of that, it is claimed, he was ousted from the management of the
company and was not even given access to the company's records. In 1968, the
appellant moved an application in this court, under s. 633 of the Companies Act
for being relieved of the consequences of diverse defaults which the company
and its officers were making and for which they could be prosecuted. Some of
the parties before us were parties to that application. This application was
allowed by S.K. Kapur J. on January 13, 1969, and the applicant was relieved of
all consequences of any alleged defaults. On January 14, 1969, the appellant
submitted his resignation as director of the company and informed all the
parties concerned including the Registrar of Companies of that fact. The
Registrar launched prosecution for various defaults against diverse parties. No
prosecution was launched against the appellant. Another application by the
appellant under s. 633 of the Companies Act was allowed by this court on
November 24, 1969. It is claimed by the appellant that he moved the Central
Govt. on June 16, 1969, to take appropriate steps against the company and the
management alleging that no annual general meetings were being held by the
company. The application was, however, not pursued. A winding-up petition, C.P.
No. 53 of 1973, was filed in this court on May 25, 1973. The winding-up order
was made on November 6, 1974. The official liquidator moved C.A. No. 664 of
1975 in November, 1975, praying for directions under s. 454(2) and (5) of the
Companies Act, as no statement of affairs was filed by anybody. Notice of this
application was given to the appellant and respondents Nos. 2 to 6 before us.
The appellant filed his reply and affidavit on July 31, 1976, giving all the
facts enumerated above and prayed that no directions, at least qua him, should
be given. Other parties also filed
replies. The order under appeal was passed on August 4, 1976. By this order our
brother, D.K. Kapur J., has directed as under:
"....I
would, therefore, prefer to pass an order directing the respondents to file the
statement of affairs. I make it clear that it is not necessary that all of them
must file a statement of affairs but any one of them may file it, which will be
sufficient compliance with the section. However, if none of them file a
statement of affairs then all will risk a prosecution, subject of course, to
any defence that may be open to them."
Aggrieved by
the above order the appellant has filed the present appeal.
The relevant
provisions of the Companies Act, read as under :
"454.
Statement of affairs to be made to official liquidator.—(1) Where the court has
made a winding-up order or appointed the official liquidator as provisional
liquidator, unless the court in its discretion otherwise orders, there shall be
made out and submitted to the official liquidator a statement as to the affairs
of the company in the prescribed form, verified by an affidavit, and containing
the following particulars, namely :—
(a) the assets of the company, stating
separately the cash balance in hand and at the bank, if any, and the negotiable
securities, if any, held by the company;
(b) its
debts and liabilities;
(c) the names, residences and occupations of its
creditors, stating separately the amount of secured and unsecured debts; and in
the case of secured debts, particulars of the securities given, whether by the
company or an officer thereof, their value and the dates on which they were given;
(d) the debts due to the company and the names,
residences and occupations of the persons from whom they are due and the amount
likely to be realised on account thereof;
(e) such
further or other information as may be prescribed, or as the official liquidator
may require.
(2) The statement shall be
submitted and verified by one or more of the persons who are at the relevant
date the directors and by the person who is at that date the manager, secretary
or other chief officer of the company, or by such of the persons hereinafter in
this sub-section mentioned, as the official liquidator, subject to the
direction of the court, may require to submit and verify the statement, that is
to say, persons—
(a) who
are or have been officers of the company ;
(b) who have taken part in the formation of the
company at any time within one year before the relevant date;
(c) who are in the employment of the company or
have been in the employment of the company within the said year, and are, in
the opinion of the official liquidator, capable of giving the information
required;
(d) who are
or have been within the said year officers of, or in the employment of, a
company which is, or within the said year was an officer of the company to
which the statement relates......
(5) If any person, without reasonable excuse, makes default in
complying with any of the requirements of this section, he shall be punishable
with imprisonment for a term which may extend to two years, or with fine which
may extend to one hundred rupees for every day during which the default
continues, or with both.
(5A)The court by which the
winding-up order is made or the provisional liquidator is appointed may take
cognizance of an offence under sub section (5) upon receiving a complaint of
facts constituting such an offence and trying the offence itself in accordance
with the procedure laid down in the Code of Criminal Procedure, 1898, for the
trial of summons cases by magistrates......
(8) In this section, the expression 'the relevant date' means, in a
case where a provisional liquidator is appointed, the date of his appointment,
and in a case where no such appointment is made, the date of the winding-up
order."
"2.(30) 'Officer' includes any director,
managing agent, secretaries and treasurers, manager or secretary, or any person
in accordance with whose directions or instructions the Board of directors or
any one or more of the directors is or are accustomed to act, and also
includes—
(a) where the managing agent, or the secretaries and treasurers is or are a firm, any partner in the firm ;
(b) where the managing agent or the secretaries and treasurers is or are a body corporate, any director or manager of the body corporate;
(c) ......
but, save in sections 477, 478, 539, 543, 545, 621,
625 and 633 does not include an auditor."
"633.
Power of court to grant relief in certain cases.—(1) If in any proceeding
for negligence, default, breach of duty, misfeasance or breach of trust against
an officer of a company, it appears to the court hearing the case that he is or
may be liable in respect of the negligence, default, breach of duty,
misfeasance or breach of trust, but that he has acted honestly and reasonably,
and that having regard to all the circumstances of the case, including those
connected with his appointment, he ought fairly to be excused, the court may
relieve him, either wholly or partly, from his liability on such terms as it
may think fit:
Provided that in a criminal proceeding under this
sub-section, the court shall have no power to grant relief from any civil
liability which may attach to an officer in respect of such negligence,
default, breach of duty, misfeasance or breach of trust.
(2) Where any such officer has reason to apprehend that any proceed ing will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a court before which a proceeding against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1).
(3) No court shall grant any relief to any officer under sub-section (1) or sub-section (2) unless it has, by notice served in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted."
The first point which arises for determination is
whether an ex-director like the appellant falls within the ambit of sub-s. (2)
of s. 454 of the Companies Act. Our brother, D.K. Kapur J., revising an earlier
opinion given by him, has held that an order under s. 454 of the Companies Act
can be passed in respect of persons who were directors of the company even more
than one year prior to the passing of the winding-up order. What led our
learned brother to revise his opinion was a peculiar circumstance disclosed in
this case. It seems that all the respondents in C.A. No. 664 of 1975 claimed
that they had resigned as directors between the years 1965 and 1969, long
before the winding-up order was passed. Thus, in the case of M/s. Sipso
Agencies Private Ltd., it appeared that there was nobody who could be called
upon to file a statement of affairs as none was a director on the relevant
date. Analysing s. 454 of the Companies Act, the learned judge, therefore, came
to the conclusion that it could not be envisaged that nobody could be called
upon in such a situation to file a statement of affairs of the company and so,
the ex-directors of a company who resigned even more than one year before the
winding-up order could be directed to submit a statement of affairs. We are in
agreement with the approach of the learned judge that sub-s. (2) of s. 454
speaks of two categories of persons—first, persons who are, on the relevant
date, the directors or other officers of the company and, second, such persons
other than the first category whom the official liquidator, subject to the
directions of the court, may call upon to submit and verify the statement of
affairs. The second category is comprised of persons, inter alia, mentioned in
cl. (a). There is no conflict between persons falling in the category under cl.
(a) of sub-s. (2) and cl. (d) thereof. The learned judge, we say with respect,
was right in observing that at first sight cl. (d) seems to refer to officers
of the company which is being wound up but "in fact it refers to persons
employed by a person which itself is a company being wound up". Therefore,
ex-directors of the company who resigned even more than one year before the
winding-up order could, in appropriate cases, be directed to submit a statement
of affairs.
The next contention on behalf of the appellant is
that the official liquidator can only require such other persons to submit a
statement of affairs, subject to the directions of the court, as are in a
position to give relevant information. This postulates that the court would
apply its mind and decide in each case whether such direction should be given.
It is not contemplated that the court would give direction to the official
liquidator to require any and every person to file a statement of affairs
merely as an academic exercise. The purpose of getting the statement of affairs
is to enable effective and proper winding up of the company. The court is not
required to give a direction which in effect would be infructuous. We are in
entire agreement with this submission. Indeed, our learned brother has noticed
that the appellant was not in a position to know anything about the affairs of
the company ever since he was ousted from the management, way back in December,
1966. He had ceased to have approach or access to the books and papers of the
company. He did not take part in its management. He even refused to sign the
provisional balance-sheet for being submitted to the Punjab National Bank in
December, 1966. In this view of the matter, asking such a person to file a
statement of affairs is an exercise in futility and we see no reason why a mere
academic order should be passed.
The third contention is with regard to the effect of
the orders relieving the appellant made on two occasions and the Registrar
himself not filing any prosecutions against him. Our learned brother has
noticed this but it seems to have escaped his attention in making the final
order. If an officer of the company or a person is relieved under s. 633(2) of
the Companies Act it is inherent in the situation that he cannot be called upon
to discharge those duties once again. In our view, the absolution or relief
granted would bar calling upon the appellant to discharge the same duties
again. The first order in favour of the appellant that was passed under the
provision of s. 633(2) of the Companies Act was on January 13, 1969. The
respondents in that matter (C.P. No. 26 of 1968) were, the Registrar of
Companies, Gaj Raj Singh, Roshan Lal Kohli, Om Parkash Gupta, Smt. Ved Kumari
Ahuja and Smt. Nirmal Kumari Puri. Our learned brother, late S.K. Kapur J., had
dealt with the affairs of the company at some length in his judgment. The
situation then obtaining was the same as has been commented upon by D.K. Kapur
J. in the judgment under appeal. Each party was throwing the blame on the other
in not calling a general meeting of the company, preparing accounts and
balance-sheet or presenting the same at a general meeting of the shareholders.
Holding that the appellant, who was the petitioner before S.K. Kapur J., was
not in a position to either prepare the accounts or balance-sheet or call a
general meeting, exoneration was granted for the year ending December 31, 1966.
The second exoneration was granted to the appellant herein by S.N. Andley J.
(as he then was), by his judgment dated November 24, 1969. Agreeing with the
observations of S.K. Kapur J., it had been held that relief under s. 633(2) was
called for. The appellant was excused for not holding the annual general
meeting by June 30, 1967, for not filing annual return for the period ending
June 30, 1967, and for not having filed copy of the balance-sheet as at
December 31, 1966, with the Registrar of Companies and all other defaults in
respect of the year 1967-68. As already noticed, the appellant had resigned
from the directorship on January 14, 1969. The winding-up order was made by
Rangarajan J. in C.P. No. 53 of 1973. The fact that the appellant had been
exonerated twice and had ceased to be a director was noticed by Rangarajan J.
In these circumstances, it is inconceivable that the appellant should be
saddled with the responsibility of filing the statement of affairs. Indeed, we
are of the view that, despite knowing the incapacity or incapability of the
appellant which has even been noticed in the order under appeal, directing him
to file the statement of affairs virtually amounts to negativing the earlier
orders of exoneration. The court should see who is capable of filing a
statement of affairs if the exercise is to have any meaning. That some one may
be in a likely position to file the statement of affairs would not be the proper
approach.
It is not in dispute and indeed it is noticed in the
order under appeal that there is a great deal of controversy as to who was in
possession of the relevant records of the company. One thing is certain and
that is that the appellant was not, having been ousted from the management as
far back as in December, 1966, which fact has been acknowledged in the two
applications under s. 633(2) which he moved.
In these circumstances, no directions could be given
to the appellant to file the statement of affairs. We are in agreement with the
rule enunciated by the Calcutta High Court in Sarkar Estates (P.) Ltd. v.
Gostho Behari Sarkar, ILR [1967] 1 Cal 360.
The question that now arises is what directions, if
any, could be issued under s. 454 on a motion by the official liquidator. A
direction under s. 454 has to be a judicial direction. With respect we must say
that the sort of directions that have been given by the learned company judge
that he would rather give directions to all than determine at this stage to
whom and what directions should be given is not the correct approach. There is
no other stage at which any further directions can be given and criminal trial
would not be the stage to give any proper direction. Reading rr. 125 and 126 of
the Companies (Court) Rules, 1959, it is obvious that the court has to decide
the matter at this stage. The official liquidator's opinion may be subjective
in making a motion to the court but it has to be based on some material. The
court may require him to provide the material and give directions to first hold
a proper enquiry. The court cannot allow the matter to drift. It is not an
exploration trip which has to be taken. The responsibility has to be fixed as
to who is to file the statement of affairs if the exercise is to be worthwhile.
Of course, mere pleading by a party that he is not in a position to file a
statement of affairs is neither here nor there. The pleas have to be heard and
decided and if a person is capable of filing a statement of affairs he must be
called upon to do so on pain of being prosecuted. Statement of affairs is the
very basis of the winding-up proceedings. It is not a proceeding which can be
called a fact-finding enquiry or a fishing enquiry. Fact finding is to be done
by invoking the provisions of ss. 477 and 478 of the Companies Act.
Furthermore, the statement of affairs postulated by s. 454 of the Companies Act
is to obtain as full an information as possible, not piecemeal information.
This statement of affairs is to be filed by persons in a position to do so and
not by persons who are or were directors or officers in name or have never had
opportunity to know the affairs of the company. It is for this reason that the
official liquidator is to obtain the directions of the court before calling
upon anyone to file the statement of affairs. No doubt, in the present case,
the parties are throwing the responsibility on each other. All the same on a
full enquiry it can be found out at this stage as to who is really the person
concerned who should be called upon to file a statement of affairs. Once a
person is directed to file a statement of affairs under s. 454 of the Companies
Act, an onerous responsibility falls upon him with penal consequences in case
of default. So, even on principles of natural justice, each person sought to be
made responsible should be heard, his individual case considered and a decision
given whether he should be called upon to file the statement of affairs. Making
a general order applicable to each and every one who at any point of time may
have been connected with the management of the company will serve no useful
purpose.
It has been urged that even past officers may be able
to give valuable information and s. 454(2)(a) in terms talks of past officers.
So, the date of resignation of the appellant is immaterial. There is some force
in this contention but in the circumstances of this case we do not see how any
useful information or rather any information at all can be furnished by the
appellant. As has been held by D.K. Kapur J. in Official Liquidator of R.S.
Motors P. Ltd. v. Jagjit Singh Sawhney [1974] 44 Comp Cas 381 ; ILR [1974] 1
Delhi 243, if the books of the company are not available to a director who is
required to file a statement under s. 454, then it will be a reasonable excuse
for him in not submitting the statement of affairs of the company ordered to be
wound up in a prosecution launched against him for failure to file the
statement of affairs. The appellant, as we have already noticed, has been held
not to be in a position to have access to the books of the company ever since
he was ousted from the management. In these circumstances, calling upon him to
file the statement of affairs cannot be justified. Indeed, it cannot be
justified for any of the persons unless a clear-cut finding is given that any
one of the persons concerned is in a position to or capable of filing the
statement of affairs. Such an enquiry is an imperative pre-requisite for giving
directions under s. 454 on a motion by the official liquidator. We cannot agree
with the contention that pleading reasonable excuse is available at the stage
of prosecution only. Putting a person in jeopardy of that type without an
earlier investigation when it is so required to be made is not called for.
The books of account and other papers in this case,
as it appears, would be either with Kohli or Gaj Raj Singh. Kohli is alleged to
have handed over charge to Gaj Raj Singh in September, 1969. Kohli was in
charge of the Indore branch. So, the company was not defunct at the end of
1966. The appellant, however, seems to have been ousted at the end of 1966. We
notice these facts on the basis of the pleadings of the parties. We should not
be understood to have made any observation that either Kohli or Gaj Raj Singh
or both are persons who should have been called upon to file the statement of
affairs. Why we have noticed this aspect is to show that the appellant, in any
case, could not have been called upon to do so.
The result is that we accept the appeal, set aside the order of the learned company judge and direct re-hearing of the application of the official liquidator for directions under s. 454 of the Companies Act. Parties will bear their own costs.
[1970] 40 COMP. CAS. 137 (BOM.)
High Court of Bombay
C.S.D. Financiers Private Ltd., In re
v.
MADON J.
COMPANY PETITION NO. 164 OF 1968
JULY 11, 1969
Hegde for the petitioner.
D.R. Zaiwalla
for the respondent.
Madon J.—This is a petition under the Companies Act,
1956, to relieve the petitioner from the liability to refile returns of the
C.S.D. Financiers Private Ltd., a company of which the only two directors and
two shareholders are the petitioner and the respondent, for the year ended
August 31,1965, and from filing returns for the years ended August 31,1966, and
August 31, 1967, as required by the Registrar of Companies. Section 633(2) of
the Companies Act was the only section to which Mr. Hegde, learned counsel for
the petitioner, invited my attention as being the section under which such a
relief can be granted. That sub-section confers power upon the court when an
officer of a company has reason to apprehend that any proceedings will or might
be brought against him in respect of any negligence, default, breach of duty,
misfeasance or breach of trust, to relieve that officer from liability in
respect thereof in the same manner as it would have had if it had been the
court in which such proceedings were brought. Obviously the present petition
does not and cannot fall within the purview of section 633(2). Mr. Hegde has
been unable to point out any other provision of the Companies Act which could
enable the court to relieve the petitioner of his liability to file returns
under the Companies Act. This petition is, therefore, misconceived and not
maintainable.
Mr. Hegde
then applied that he should be allowed to amend the prayer in the petition. No
draft of the application for amendment was submitted to me. Since, in my
opinion, the petition is not maintainable and must be dismissed, to permit any
amendment would be really to substitute a new petition on the file of the court. I, accordingly, refuse Mr. Hegde's
application for amendment.
In the
result, the petition fails and is dismissed. In view of the fact that this
petition was originally filed by the petitioner in person, there will be no
order as to costs of the petition.
Gujarat
High Court
Companies Act
[2005] 59 SCL 265
(Guj.)
HIGH COURT OF GUJARAT
v.
Registrar of Companies
K.A. PUJ, J.
COMPANY APPLICATION
NOS. 51 AND 52 OF 2003
DECEMBER 30, 2004
Section 63, read with sections 68 and 628, of
the Companies Act, 1956 - Prospectus - Criminal liability for mis-statement in
- ‘B’ Ltd. issued prospectus for public issue of equity shares - Applicants
became directors of company and signatory to prospectus - Subsequently,
opponent-Registrar issued notices to applicants intending to take penal action
against them under sections 63, 68 and 628 alleging that various statements
made in prospectus were not implemented and said statements were false,
deceptive and misleading - Applicants denied allegations stating that they had
ceased to be directors of company and for period during which they were
directors of company, it had fully implemented projects mentioned in prospectus
- However, Registrar rejected applicants’ explanation and refused to drop
proposed prosecution proceedings - However, facts revealed that Registrar had
not dealt with any of submissions raised by applicants in their true
perspectives; that even though company (‘B’ Ltd.) was not a vanishing company
yet action was sought to be taken against applicants on assumption that it was
a vanishing company; that though prospectus had been issued way back on
8-5-1992, impugned notice was issued by Registrar on 1-6-2002, i.e., after more
than ten years; and that while issuing notice, Registrar had not pointed out
any specific instances stating that which false or deliberate statements were
made in prospectus or that such statements were made to induce public for
subscribing shares of company - Whether in aforesaid circumstances, it could be
concluded that applicants had acted bona fide and there was no deliberate
intention on their part to defraud public and that there was no false statement
in prospectus - Held, yes - Whether, therefore, prosecution proceedings
launched against them were liable to be set aside - Held, yes
FACTS
‘B’ Ltd. issued a prospectus dated 6-5-1992
for the public issue of equity shares. The applicants became directors of the
company and signatory to the prospectus. The opponent-Registrar issued notices
to the applicants intending to take penal action under sections 63, 68 and 628
alleging that various statements/forecasts made in the prospectus were not
implemented and that the said statements were false, deceptive and misleading.
The applicants denied the allegations contending that they had ceased to be
directors of ‘B’ Ltd. It was further stated that when they were directors of
the company, it had fully implemented the projects as mentioned in the
prospectus. Despite the aforesaid submissions made by the applicants, the
Registrar issued a communication stating that explanation furnished by them did
not justify dropping of proposed prosecution proceedings.
On application under section 633(2) :
HELD
The opponent had not dealt
with any of the submission raised by the applicants, in their true perspectives
and in the most laconic manner, the said submissions were either discarded or
ignored completely. The glaring example of non-application of mind could be
found from the fact that despite specific plea raised by the applicants that
they ceased to be the directors of the company and they did not have any say in
the affairs of the company, the said plea was not dealt with. It was to be,
therefore, opined that the matters were not dealt with by the opponent in the
manner in which they ought to have been dealt with. [Para 27]
The action of the opponent was
not sustainable even on the ground that the company in question was not a
vanishing company and still the notices were issued on the applicants on
assumption that the company was a vanishing company. The company did not fall
in any of the criterias which are laid down for treating the company as a
vanishing company. The applicants had demonstrated before the Court in their
pleadings that the company’s name was not included in the list of vanishing
companies and there was no allegation against the company that it did not
comply with the listing requirement for two years or that it did not submit the
required report to Regional Stock Exchange or that it did not correspond with
Regional Stock Exchanges for two years or that it was not available at its
Regd. office at the time of stock exchange inspection. Since the company was
not a vanishing company and yet the action was sought to be taken against the
directors and/or promoters of the company on that basis, the said action was
not justifiable on that count. [Para 28]
The action was unsustainable
also on the ground of delay and latches as admittedly, the prospectus was
issued by the company way back on 8-5-1992 and the notice under reference was
issued by the opponent on 1-6-2002, i.e., after more than ten years. Even if
one takes the view that law of limitation was not applicable to the proposed
action, the same was clearly barred by delay and latches and the Court was
certainly reluctant to take cognizance of alleged defaults after the expiry of
period of more than ten years. [Para 29]
If the opponent was of the
view that the directors and/or promoters of the company had committed breach of
the provisions contained in sections 63, 68 and 628, he should not have waited
for long ten years. Such commission or omission on their part would have come
to the forefront immediately. The action taken after ten years itself suggested
that it was based on the instruction issued by the Director of Inspection and
Investigation to initiate actions against the vanishing companies. While
issuing notices, the respondent authority had not pointed out any specific
instances stating that which false or deliberate statements were made in the
prospectus or that such statements were made to induce the public for
subscribing the shares of the company. If any action is sought to be taken
without any basis, the Court has every power to entertain an application under
section 633(2). [Para 31]
Looking to the submissions and
explanations tendered, it could hardly be said that the applicants were liable
for making any false or deliberate mis-statements in the prospectus.
Sanctioning of loan by the financial institutions, granting licenses by the
respective authorities, furnishing returns and statements before the statutory
authorities under the excise and other laws were sufficient to reveal that the
company had made all attempts to adhere to the assurances and promises given in
the prospectus. If something was lacking somewhere, no motive could be
attributed to that, only with a view to bring the case within the purview of
sections 63, 68 or 628. Even the case of the opponent was also to the effect
that there was no satisfactory explanation for non-fulfilment of commitments
and promises made in the prospectus dated 8-5-1992 timely and completely. That
timely and completely non-fulfilment of assurances and promises would not
entitle the opponent to initiate the action under sections 63, 68 and 628.
Besides subsequent developments and the progress made by the company in the
direction of fructifying the objects for which the company was incorporated,
discharged or acquitted the promoters of any allegation that the mis-statements
in the prospectus were made with any dishonest intention of practising fraud
upon the subscribers of the company. [Para 32]
Having regard to the facts and
circumstances of the case and taking overall view of the matter, the Court was
satisfied that the applicants had acted bona fide and there was no deliberate
intention on their part to defraud the public and that there was no false or
deliberate statement in the prospectus. The applicants, therefore, deserved the
relief as prayed for in instant applications. The applications were, therefore,
allowed. The impugned notices were quashed and set aside. [Para 33]
CASES REFERRED TO
G.D. Bhargava v. Registrar of Companies [1970]
40 Comp. Cas. 664 (All.) (para 16), S. Pandit, In re [1990] 2 Comp. LJ. 170
(Bom.) (para 17), Coal Marketing Co. India (P.) Ltd., In re AIR 1968 Cal. 119
(para 17), M. Meyyappan v. Registrar of Companies [2002] 112 Comp. Cas. 450/
[2003] 42 SCL 758 (Mad.) (para 25), R.K. Mahapatra v. Secretary to Government
[1998] 92 Comp. Cas. 809 (AP) (para 25) and Progressive Aluminium Ltd. v.
Registrar of Companies [1997] 89 Comp. Cas. 147/14 SCL 117 (AP) (para 32).
S.N. Soparkar and Manish R. Bhatt for the Applicant.
Kamal B. Trivedi, Ms. P.J. Davawala and Jitendra Malkan for the
Opponent.
JUDGMENT
1. The
applicants in these two applications are the Ex-Directors/Directors of Bahuma
Polytex Ltd., a company incorporated under the Companies Act, 1956 and have
taken out these two judges summons separately seeking declaration from this
Court that the applicants have acted honestly and reasonably and having regard
to all the circumstances of the case, the applicants ought to be excused and be
relieved from the liability arising out of the notices dated 21-6-2002 issued
by the Registrar of Companies, the opponent herein.
2. The
applicants have filed affidavits in support of the respective Judges Summons
taken out by them in these two applications. Heard Mr. S.N. Soparkar, learned
Senior counsel appearing with learned advocate Mr. Manish R. Bhatt for the
applicants, Mr. Kamal B. Trivedi, learned Additional Advocate General and
Senior Counsel appearing initially with Ms. P.J. Davawala and thereafter Mr.
J.M. Malkan, learned Standing Counsel appearing for the Opponent.
3. It
is the case of the applicants that Bahuma Polytex Ltd. was incorporated and
registered on 12-11-1986 as a private limited company. Consequent to the change
in the status as a public limited company, a fresh certificate of incorporation
was granted by the Registrar of Companies, Gujarat on 23-11-1990. The company
had issued a prospectus dated 6-5-1992 for the public issue of 22 Lakhs Equity
shares of Rs. 10 each at par aggregating to Rs. 220 Lakhs. The applicants were
invited to become Directors of the company and signatory to the prospectus.
4. It
is also the case of the applicants that the applicants have received notices
dated 21-6-2002 issued by the opponent alleging that the company had come out
with the public issue of 22 lakhs equity shares of Rs. 10 vide prospectus dated
8-5-1992 and that various statements/forecasts were made in the prospectus
which have not been implemented. It is also alleged in the said notices that
the said statements made in the prospectus were false, deceptive and misleading
and, therefore, the said show-cause notices were issued calling upon the
applicants and other Directors to explain within seven days as to why penal
action under sections 63, 68 and 628 of the Act should not be taken against
them.
5. The
applicants vide their letter dated 2-7-2002 gave a detailed reply to the said
notices denying the allegations and explaining that the Company has fully
implemented the project as mentioned in the prospectus. It was also stated that
IFCI has issued a Project Completion Certificate and that the final
disbursement of the loan was made only after the project was completed.
Emphasising on the sales aspect, it was submitted by the Company that the
Company has achieved what was projected in the prospectus and sometimes it even
exceeded the projections so far as sales are concerned. It has also been
recorded by the Company that after the project was completed, it was decided to
convert one of the plants into a 100% Export Oriented Unit since the company
was gearing itself to enter export market in a big way. It was also stated that
all the export obligations of the EOU were completed as planned. It was,
therefore, requested that the Registrar of Companies should not take any penal
action under sections 63, 68 and 628 of the Act.
6. Despite
the aforesaid reply, the applicants were apprehending penal action to be taken
against them and hence, they preferred Company Application Nos. 170 of 2002 and
213 of 2002 before this Court under the provisions of section 633(2) of the
Act. The said two applications came to be disposed of by this Court vide order
dated 26-12-2002 whereby the applicants were permitted to file additional
submissions and the Registrar of Companies was directed to consider and pass an
order on the same so as to take a view as to whether it was a fit case for
justifying dropping of proposed prosecution proceedings. It was also stated in
the said order that if the Registrar of Companies takes an adverse view, the
prosecution shall not be launched for a period of fifteen days.
7. Pursuant
to the aforesaid order of this Court, the applicants have filed their detailed
submissions on 3-1-2003. The applicant of Company Application No. 51 of 2003
has reiterated his submissions made in his earlier letter dated 2-7-2002
stating that he had ceased to be a Director of the Company on and from
15-3-1997 as notified to the Registrar of Companies, by the Company’s Form No.
32 dated 28-3-1997. It has been duly acknowledged in the opponent’s office. It
was also stated that during the period from 8-5-1992 to 15-3-1997, when the
applicant was Director of the Company, the company had duly implemented the
expansion-cum -diversification project under the direct control and supervision
of the lead financial institutions, i.e. IFCI, which had released the finances
from time to time after duly verifying the relevant implementation of the
project and had also issued the project certificate in favour of the company.
The issuance of a project certificate by a Government Corporation i.e. IFCI
would conclusively establish that the project has been duly implemented. By the
time, the applicant had left the company in March, 1997, the company had been
exceeding the estimated sales figures as were originally projected in its
prospectus and that the company was also earning profits, that its networth was
positive and that it had healthy reserves. It was also stated that the said
applicant was an ordinary Director of the Company and had never been assigned
any executive or managerial or other responsibility or that he had not
participated in the management of the affairs of the Company and that the
Company had Managing/whole-time Directors during the period of his Directorship
and, therefore, he had never been the officer in default within the meaning of
section 5 of Companies Act in the case of the Company. After his resignation
from the Company, he did not have any knowledge or information about the
Company’s subsequent working and financial position. In the notice dated
21-6-2002, addressed by the Registrar of Companies, reference was made to the
position stated in the Company’s balance-sheet as on 30-6-2000. Since the said
applicant has resigned as a Director from 15-3-1997, he was not in a position
to offer any comments thereat.
8. Similarly,
the applicant in Company Application No. 52 of 2003 have also filed his
detailed reply on 3-1-2003. It was stated in the said reply that the applicant
No. 2 ceased to be a Director of the Company on and from 14-12-2000 as notified
to the Registrar of Companies by the Company’s Form No. 32 dated 14-12-2000.
The company has also made detailed submissions under its letter dated 4-1-2003
to the Registrar of Companies.
9. Despite
the aforesaid submissions made by the applicants, the Registrar of Companies
has issued a communication dated 4-2-2003 stating that the explanation
furnished by the applicants did not justify dropping of proposed prosecution
proceedings. The present applications are, therefore, filed by the applicants
by invoking the provisions of section 633(2) of the Act. The Court has issued
notice on 14-2-2003 and granted ad interim relief in terms of para B of the
Judges Summons. The said ad interim relief was continued from time to time till
the applications are finally heard and disposed of.
10. Mr.
S.N. Soparkar, learned senior counsel appearing with Mr. Manish R. Bhatt for
the applicants has submitted that the Registrar of Companies has not at all
taken into consideration the various submissions made so as to satisfy him that
this is not a fit case for initiating prosecution. The communication issued on
4-2-2003 was not even referring to the various factual and legal submissions
made by the applicants. Despite the clear directions of this Court, the
Registrar of Companies has not applied his mind and has issued a mechanical
order deciding to proceed further for initiation of prosecution proceedings.
The relevant statements as appearing in the company’s prospectus were made bona
fide and were based upon the facts and circumstances then prevailing. The cost
of project and means and finance as mentioned in the company’s prospectus and
as actually incurred has been given by him in the tabular form in the affidavit
filed in support of the Judges Summons. The same is as under :—
|
|
(Amount in Rs. in lakhs) |
|
|
|
As per Prospectus |
As
actually Incurred |
|
Land and site development |
10.50 |
8.89 |
|
Building |
42.32 |
73.97 |
|
Plant and machinery and other fixed asset |
402.20 |
388.66 |
|
Preliminary and pre-operative expenses |
37.48 |
60.28 |
|
Contingencies |
39.05 |
(adjusted
in other head) |
|
Working capital margin |
67.45 |
110.13 |
|
|
600.00 |
641.93 |
|
Means of Financial and Share Capital :— |
|
|
|
Promoters and Associates |
150.00 |
150.00 |
|
Public |
220.00 |
220.00 |
|
Internal accruals |
— |
8.93 |
|
Total (A) |
370.00 |
411.93 |
|
Loans :— |
|
|
|
IFCI |
130.00 |
130.00 |
|
ICICI |
100.00 |
100.00 |
|
Total (B) |
230.00 |
230.00 |
|
Total (A)(B) |
600.00 |
641.93 |
11. Mr.
Soparkar has further submitted that the company had indeed achieved what has been
projected in the company’s prospectus. In support of this submission, he has
relied on the several letters and correspondence which are produced along with
the affidavit filed in support of the Judges Summons. He has further submitted
that the impugned notices dated 21-6-2002 as well as 4-2-2003 alleging breach
of the statements made in the prospectus issued in the year 1992 are barred by
delay and latches as it is not open to the Registrar of Companies to rake up
the issue after a period of about more than ten years.
12. Mr.
Soparkar has further submitted that the issuance of notices itself is bad and
illegal as it is based on misapprehension and wrongly treating the company as
vanishing company. He has further submitted that the criteria for identifying
vanishing companies are that such company does not comply with the legal
requirements for two years [Listing requirements include filing of annual
returns and balance-sheets] with Stock Exchange/Registrar of Companies, and
that it does not submit the required reports to Regional Stock Exchange, and
that it does not corres-pond with Regional Stock Exchange for two years and
that it is not available at its Regd. office at the time of Stock Exchange
Inspection. Insofar as the company in question is concerned, it does not fall
in any of these four criterias. The company has applied for listing
requirement, and has been submitting required report to Regional Stock
Exchange. No complaint has been made by the Regional Stock Exchange that it has
not corresponded for two years or that the company is not available at its
Regd. office. Since none of the four criterias is applicable, the company
cannot be considered to be a vanishing company. In the list of vanishing
companies issued by SEBI, the name of the company in question does not figure.
In the lists downloaded from the internet on 20-12-2003 and 7-8-2004 of
vanishing companies, the name of the company does not appear. The impugned
action taken against the company and its Directors or Promoters is obviously due
to the mistaken identity. Mr. Soparkar, therefore, submitted that the impugned
notices deserve to be discharged.
13. Mr.
Kamal B. Trivedi, learned senior advocate appearing with Ms. P.J. Davawala and
Mr. Jitendra Malkan, the learned Standing Counsels appearing for the opponent
has submitted that it is incorrect to proceed on assumption that the actions
were initiated against the company and its Directors solely on the basis of
treating the company as vanishing company. It is a matter of fact that none of the
notices issued on the applicants referred to the words ‘Vanishing Companies’.
If one refers to the heading ‘Plant & Machinery’ on internal page 11 of the
Prospectus, it was suggested that the company under the proposed expansion-cum-
diversification scheme will have (i) Texturising Machine of 216 Spindles, (ii)
14 Nos. Con Winding Machine of 24 Spindles, (iii) one two-for-one (IFO)
Twisting Machine of 320 Spindles, (iv) Dyeing Plant of 200 Kg. par batch
capacity with other accessories. It was also stated under the said heading that
the Company had already placed order for Dyeing Plant which was expected to be
delivered by the end of May, 1992 and that it has also negotiated orders for
Con Winding Machine, delivery of which was already started by end of March,
1992 and would continue to June 1992 and that the order for Texturising and
Twisting Machines would be placed in August and the same would be commissioned
by September/October, 1992.
14. He
has further submitted that as against the above statements made in the
Prospectus, it is seen from the balance-sheets for the year 1991-92 and 1992-93
that though Texturising Machine of 216 Spindles was mentioned, a Twisting
Machine of 320 Spindles was not referred to at all, meaning thereby the said
two balance-sheets as well as other subsequent balance-sheets did not indicate
the factum of the Company having installed a Twisting Machine of 320 Spindles
as promised. Mr. Trivedi has further submitted that it was assured in the
prospectus under the head ‘Project’ at page 11 that on completion of the
proposed Scheme, the installed capacity for manufacturing of texturising and
twisted yarn would be increased from 576 M.Ts. to 1860 M.Ts. The balance-sheet
for the year 1991-92 did not show that the installed capacity was over 576
M.Ts. Similarly, subsequent balance-sheets also showed that the company never
reached the installed capacity to 1860 M.Ts. as promised. As against the
assurance given in the prospectus, it has been seen from the subsequent
balance-sheets that the Twisting Machine was never purchased as promised. It
was assured in the Prospectus under the head Land and Building that the order
for Texturising and Twisting Machine will be placed in August 1992 and will be
commissioned by September/October, 1992. The Building at site was not completed
by the date as promised in the Prospectus. It was assured in the Prospectus
under the head ‘location’ at page 11 that the proposed expansion scheme would
be implemented at GIDC Industrial Estate, Kadi, C category backward area which
is 1.5 km. away from the existing plant of Krishnanagar, Kadi. The
balance-sheet subsequent to the prospectus clearly indicated that the proposed
expansion scheme was never fully implemented as promised.
15. From
the perusal of the assurances given in the Prospectus as well as the
balance-sheets, Mr. Trivedi has submitted that the signatories to the
Prospectus have made false, deceptive and misleading statement. The applicants
instead of explaining their conduct and acting honestly and reasonably for
being excused, have contested the facts and merits of the offences committed by
them and other co-promoters and directors. This is not an appropriate forum and
they should undergo the trial before the appropriate Court and the present
applications under section 633(2) of the Act filed by the applicants are not
sustainable at all in the eye of law. It would not be possible for the
applicants to prove as to whether the charges sought to be levelled against
them vide the impugned show-cause notices are incorrect, nor is it possible to
arrive at a satisfactory conclusion with regard to the knowledge or complicity
or honesty or reasonableness of the action of the applicants or with regard to
the fairness of their claim to be excused for any lapse or offence. It is
always open for them to establish their defence in case the prosecution is
launched by the Registrar of Companies. He has, therefore, submitted that the
communication dated 4-2-2003 issued by the Registrar of Companies is not one
which is called mechanical or without any application of mind.
16. In
support of his submission, Mr. Trivedi has relied on the decision of the
Allahabad High Court in the case of G.D. Bhargava v. Registrar of Companies
[1970] 40 Comp. Cas. 664 wherein it is held that the Trial Court, where charges
of offences falling both within and outside the purview of section 633 of the
Act may have been joined, can take and examine detailed oral and documentary
evidence so as to be able even to view them separately and to take appropriate
action under section 633(1) with regard to some allegations or some particular
officer or officers but this Court cannot satisfactorily do so as it is not a
Court of trial for an alleged offence or offences when acting under section
633(2) of the Act.
17. Mr.
Trivedi has further relied on the decision of the Bombay High Court in the case
of S. Pandit, In re [1990] 2 Comp. LJ. 170 wherein it is held that the issues
raised by the petitioner under section 633(2) of the Act would be determined by
the Court in which the proceedings may be instituted by the Registrar of
Companies and before which Court, it is open for the Directors to establish
that they had acted honestly and reasonably. He has, therefore, submitted that
the present applications may be rejected in limine with liberty to the
applicants to raise various contentions before the Trial Court and no relief
can be granted in these applications. Mr. Trivedi has further relied on the
decision of the Calcutta High Court in the case of Coal Marketing Co. India
(P.) Ltd. In re AIR 1968 Cal. 119 wherein, on facts it is held that the excuses
put forward were frivolous and did not explain non-compliance with the
statutory requirements. The power under section 633 was a discretionary one and
could be exercised only when the Court was satisfied that the defaulting
directors had acted honestly and reasonably. The satisfaction of the Court was
not a mere ritual and was not met by mechanical averments in the affidavit. The
satisfaction ought to be reached after serious and careful considerations.
18. Mr.
Soparkar, learned senior counsel, in rejoinder on the basis of the further
affidavits filed by the applicants, has submitted that additional twisting
machines were not purchased by the company only because the Company already had
twisting machines in its possession, installed at the factory and at that point
of time, twisted polyester filament yarn was becoming unpopular and out of
vogue in the domestic market and it was not prevalent in the overseas market.
Instead, there was demand for air intermingled yarn for use in warp of fabrics.
This air intermingled yarn totally replaced twisted yarn in this application
and export market almost exclusively used Air intermingled yarn. He has,
therefore, submitted that it was thought prudent to invest in Air intermingling
yarn equipment instead of additional Twisting machine. This provided the
company with greater flexibility to produce both twisted yarn and Air
intermingled yarn as per demand. The investment was made in Air intermingled
yarn equipments and the same was installed. This decision in fact proved
fruitful as large quantity of intermingled yarn was subsequently exported by
the company.
19. Mr.
Soparkar has further drawn the attention of the Court to the company’s position
of Profit After Tax (PAT) which is given in the further affidavit filed on
11-8-2004. The same is as under:—
PAT (Rupees in Lakhs)
|
|
1993 |
1994 |
1995 |
|||
|
|
Projected
|
Actual |
Projected |
Actual |
Projected |
Actual |
|
Sales |
1671 |
925 |
2910 |
1515 |
2910 |
1957 |
|
PAT |
33 |
12.41 |
50 |
40.20 |
41 |
97.03 |
He has submitted that in the year 1993, the
project was not fully implemented as the disbursement of loan from IFCI was delayed.
In 1994, (i.e. first full working year) profit achieved was 90% of the
projected profit and in the year 1995, the PAT achieved was 2.37 time the
projected profit. This was inspite of the fact that the turnover figures were
lower due to reduction in excise duties on polyester. The export turnover was
net of excise duty and customs duty. Inspite of turnover falling, percentage of
PAT actually increased beyond projections. He has further submitted that the
turnovers assumed in projections were inclusive of duties and actuals have much
lesser duties for domestic and zero duties for exports.
20. Mr. Soparkar has also clarified certain issues raised during the course
of hearing on 7-10-2004, by filing further affidavit-in-rejoinder on
14-10-2004. He has submitted that the summary of machinery acquired during the
years 1991-92, 1992-93 and 1993-94 as assured in the Prospectus, is as under:—
|
Sr. |
Particulars |
1991-92 |
1992-93 |
1993-94 |
1996-97
(sic) |
||||
|
No. |
|
|
|
|
|
||||
|
1. |
Texturising Machinery |
— |
153.57* |
— |
— |
||||
|
2. |
Cone Winding
Machinery |
5.75 |
27.26 |
36.84 |
— |
||||
|
3. |
TFO Twisting
Machinery |
— |
— |
— |
— |
||||
|
4. |
Dyeing Machinery |
40.23 |
— |
— |
— |
||||
|
5. |
Other fixed assets including
land, building, machineries, other than mentioned in 1 to 4 above like
Boiler, Air-conditioning, Electrification, DG Sets, Air Compressor etc. |
74.23 |
55.78 |
77.42 |
— |
||||
|
6. |
Public issue |
|
|
|
|
||||
|
|
Exps. |
— |
60.28 |
— |
— |
||||
|
|
Total |
|
120.21 |
|
297.39 |
|
114.26 |
|
7.10
(sic) |
|
|
Sources of Funds |
|
|
|
|
||||
|
|
Promoters contribution |
135.00 |
— |
— |
|
||||
|
|
Public Issue |
— |
268.00 |
— |
|
||||
|
|
Term Loans |
— |
190.00 |
40.00 |
|
||||
|
|
Total |
|
135.00 |
|
458.00 |
|
40.00 |
|
|
As submitted in the above statement, though
the Dyeing Machine was acquired in 1991-92, the payment thereof was made in 1992-93.
The Texturising Machine includes intermingled air jets used to manufacture
intermingled yarn. The investment in Working Capital was not included in the
above statement.
21. While
dealing with the specific allegations of non-installation of dyeing plant, Mr.
Soparkar has submitted that Dyeing Plant having capacity bigger than 200
kg./batch was installed and subsequently in 1996-97 another dyeing plant of 100
kg. capacity/batch was installed. The Plants are present and available at the
site. Subsequent records related to excise and exports clearly demonstrate that
dyed yarn in large quantities was not only exported to various countries but
also sold extensively in the domestic market. With regard to the allegation of
non-installation of Texturising Machine and TFO Twisting Machine, Mr. Soparkar
has submitted that Texturising Machine with 216 Spindles was installed at 20
KEJF GIDC, Kadi. Air Jet Intermingling attachment were part of texturising
machine which were installed on this machine as a substitute to twisting as the
company already had twisting capacity. The Twisting Machinery worth Rs. 16.08
Lakhs was already available since 1988-1989. This enabled the Company to add to
its product mix and offer both twisted and intermingled yarn, which are substitutes
of each other, as warp yarns. This is borne out by the fact that large
quantities of intermingled yarn both dyed and undyed were exported and dyed
twisted yarns were sold in the domestic market and also exported to Turkey and
Italy. All necessary machinery and plants were installed and run successfully.
22. While
dealing with this further affidavit as well as the submissions made by Mr.
Soparkar, further reply affidavit was filed on behalf of the Registrar of
Companies on 30-11-2004 wherein it is inter alia stated that the applicants
have miserably failed to give satisfactory and cogent evidence to prove their
actions as per the Prospectus in respect of the machineries mentioned therein.
It has been summarised that:—
(i) Twisting Machine and Dyeing Plant in
question were never purchased and installed during the period in question,
(ii) Core Winding Machines and Dyeing Plant
were not commissioned in June 1992 and May 1992, respectively,
(iii) There is no mention of Air Jet
Intermingling Attachment as a substitute for Twisting Machine in any of the
balance sheet of the company.
(iv) Installed capacity did not increase from
576 MTs to 1860 MTs during the period in question, for the manufacture of
Texturised and Twisted Yarn, based on an average denier of 132.
(v) There was never a full-fledged
implementation of the prospectus as promised.
(vi) Only an amount of Rs. 180.83 lakhs
appeared to have been spent by the company towards plant and machinery. As
against this, the company had shown the project cost of Rs. 303.81 lakhs in the
prospectus for raising money. This was so despite the fact that the company had
got Rs. 230.00 lakhs by way of financial assistance from the institutions,
which perhaps could have taken care of the requirement of the company at the
material time without raising money from the public.
23. Based
on the above summary, it has been submitted by Mr. Trivedi that the present
applications filed by the applicants are thoroughly misconceived, untenable and
unsustainable in the eye of law and more particularly, when the applicants have
failed to discharge the onus of proving their bona fide to discharge their
liability qua the mis-statements made in the said Prospectus despite numerous
opportunities provided to them, as also looking to the conduct of the
applicants, they are not entitled to any relief as prayed for or otherwise.
24. The
above summary made by the Registrar of Companies in the aforesaid affidavit was
further replied to by filing further affidavit on 14-12-2004. The point-wise reply
was given to the above six items stated in the said affidavit. With regard to
item No. 1, it was stated that Dyeing Machine was purchased and installed and
dyed yarn was produced. This is a matter of public record as exports of dyed
yarn were made under excise control. The relevant excise records, advance
license, export documentation bear out testimony to this fact. With regard to
item No. 2, it was stated that the Cone Winding Machines have been installed
and dyed yarn, which has to be necessarily wound on the same has been produced
and exported. With regard to item No. 3, it was stated that the Air jet
intermingling attachment has been installed and production/excise and records
of Development Commissioner (EOU) Kandla and export documentation of Air intermingled
yarn are sufficient evidence on this aspect. With regard to item No. 4, it was
stated that Texturising machine of 216 Spindles has been installed and in
addition, excise records pertaining to production is available at site. The
same site was also an export oriented unit registered with Development
Commissioner, Kandla. EOU status was granted to the unit only after due
diligence and verification by the Government authorities. With regard to item
No. 5, it was stated that financial institutions disbursed loans and issued
Project Completion Certificate only after detailed and periodic inspection of
the projects financed by them. Project Completion Certificate was granted by
IFCI after due diligence. With regard to item No. 6, it was stated that the
opponent has not even cared to look at the relevant clauses of the prospectus.
There is no substance in saying that in view of the financial assistance from
the institutions, there is no need by the Company to raise money from the
public.
25. Based
on the aforesaid clarifications made in the affidavit filed on 14-12-2004, Mr.
Soparkar has submitted that there is no substance in any of the allegations
made by the Registrar of Companies and hence the proposed action of initiating
and/or launching criminal prosecution against the applicants is unsustainable
and impugned notices deserve to be quashed. In support of his submissions, Mr.
Soparkar has relied on the decision of the Madras High Court in the case of M.
Meyyappan v. Registrar of Companies [2002] 112 Comp. Cas. 4501 wherein it is held that under section 633(2)
if any notice is received for negligence, breach of duty, miscompliance or
breach of trust and any application is made before the High Court, the Court
has the same power to decide as if it had been a court before which a
proceeding against the officer for negligence, default, breach of duty and
breach of compliance has been brought under sub-section (1). The petition is,
therefore, maintainable. It is further held that since the petitioner had acted
honestly and diligently and properly explained the delay of 24 days in
submitting the cost report to the Company Law Board, the Registrar of Companies
was to forbear from prosecuting the petitioner for the offence mentioned in the
show-cause notice. Mr. Soparkar has further relied on the decision of the
Andhra Pradesh High Court in the case of R.K. Mahapatra v. Secretary to
Government [1998] 92 Comp. Cas. 809 wherein, while allowing the petition on the
ground that the complaints were barred by limitation in respect of sections
49(1)(a), 292, 292(1)(d) and 292(3) of the Companies Act, 1956 the Court has
further held that the question whether the deployment of funds was in the
nature of short-term deposit or investment in the nature of portfolio
management scheme was debatable. There was no reason why the averments in the
petition that the petitioners had acted honestly and reasonably and in good
faith in treating the deployment of funds as short-term deposits should not be
accepted, especially, when the Company was not put to any loss nor had the
petitioners gained any personal advantage as a result of these transactions. In
view of the circumstances, the petitioners had acted honestly, reasonably and
in good faith and were entitled to be relieved of the liability for the offence
under section 211 of the Act.
26. After
having heard learned advocates appearing for the respective parties and after
considering their pleadings as contained in several affidavits filed during the
course of hearing of these two applications and after examining the relevant
provisions of the Companies Act, 1956 as well as the authorities cited before
the Court, the Court is of the view that both these applications deserve to be
allowed and they are accordingly allowed for the reasons stated hereinunder.
27. It
is pertinent to note here that while disposing of the earlier Company
Application Nos. 170 of 2002 and 213 of 2002 vide order dated 26-12-2002, this
Court has specifically directed the opponent to consider the reply filed by the
applicants and/or additional reply or submissions which were to be made by the
applicants, within one week from the date of the order and thereafter take
appropriate decision in the matter. The Court has further directed that the
explanation which was already given and the explanation which was to be given
thereafter within the aforesaid period would be considered on merits and
appropriate decision would be taken within a period of one month thereafter. It
appears from the communication dated 4-2-2003 sent by the opponent to the
company and copy thereof endorsed to the applicants of both these applications
that he has not considered at all the letters written by the applicants on 3-1-2003.
The opponent has only dealt with the submissions made by the company vide its
letter dated 4-1-2003. The submissions made by the applicants have not been
dealt with and even Company’s submissions were not dealt with in detail. It was
merely observed therein that explanation furnished by them and the submissions
made by their letters under reference and their previous letters dated 1-7-2002
did not explain satisfactorily the reasons for non-fulfilment of commitments
and promises made in the Prospectus dated 8-5-1992 timely and completely, on
the basis of which the public in general was induced to invest money in the
Company. It was further stated that the claims made by the Company in its
letter under reference that issue proceeds have been deployed for the project
as stated in the Prospectus were incorrect and false in material particulars
since they were not supported by the Balance sheets subsequent to the public
issue. On the basis of these averments, the opponent has come to the conclusion
that there was default and/or breach of duty and/or breach of trust on the part
of signatories to the Prospectus and he has, therefore, believed that untrue
statements were made in the Prospectus knowingly it, to be false, deceptive or
misleading with an intent to induce or attempt to induce person to invest money
in the Company. The opponent has not dealt with any of the submissions raised
by the applicants, in their true perspectives and in the most laconic manner,
the said submissions were either discarded or ignored completely. The glaring
example of this non-application of mind can be found from the fact that despite
specific plea raised by the applicant in Company Application No. 51 of 2003 and
the applicant No. 2 in Company Application No. 52 of 2003 that they ceased to
be the directors of the Company and that they did not have any say in the
affairs of the Company, the said plea was not dealt with. Mr. Trivedi was fair
enough in stating that the authority will not have any case against the
applicant in Company Application No. 51 of 2003. When the said action was
challenged by the applicants in the present proceedings, the opponent has gone
on filing affidavits after affidavits to justify his decision. The Court is,
therefore, of the view that despite a specific direction being given by this
Court, the matters were not dealt with by the opponent in the manner in which
they ought to have been dealt with.
28. The
action of the opponent is not sustainable even on the ground that the Company
in question is not a vanishing company and still the notices were issued on the
applicants on assumption that the Company is a vanishing company. The Company
does not fall in any of the criterias which are laid down for treating the
Company as a vanishing company. The applicants have demonstrated before this
Court in their pleadings that the applicants’ name was not included in the list
of Vanishing Companies and there was no allegation against the Company that it
did not comply with the listing requirement for two years or that it did not
submit the required report to Regional Stock Exchange or that it did not
correspond with Regional Stock Exchanges for two years or that it was not
available at its Regd. office at the time of Stock Exchange Inspection. Since
the Company is not a Vanishing Company and yet the action was sought to be
taken against the Directors and/or Promoters of the Company on that basis, the
said action is not justifiable on that count.
29. The
action is unsustainable also on the ground of delay and latches as admittedly,
the Prospectus was issued by the Company way back on 8-5-1992 and the notice
under reference was issued by the opponent on 1-6-2002, i.e., after more than
ten years. Even if one takes the view that law of limitation is not applicable
to the proposed action, the same is clearly barred by delay and latches and the
Court is certainly reluctant to take cognizance of alleged defaults after the
expiry of period of more than ten years.
30. Even
on merits, the action sought to be initiated by the opponent is not
sustainable. The alleged notice refers to three sections, namely, 63, 68 and
628 of the Companies Act for initiating penal action against the applicants.
Section 63 deals with criminal liability for mis-statement in prospectus. It
states that where a prospectus issued after the commencement of this Act
includes any untrue statement, every person who authorized the issue of the
prospectus shall be punishable with imprisonment for a term which may extend to
two years, or with fine which may extend to Rs. 50,000 or with both, unless he
proves either that the statement was immaterial or that he had reasonable
ground to believe, and did, up to the time of the issue of the prospectus
believe, that the statement was true. Section 68 deals with Penalty for fraudulently
inducing persons to invest money. It states that any person who, either by
knowingly or recklessly making any statement, promise or forecast which is
false, deceptive or misleading, or by any dishonest concealment of material
facts, induces or attempts to induce another person to enter into, or to offer
to enter into - (a) any agreement for, or with a view to, acquiring, disposing
of, subscribing for, or underwriting shares or debentures; or (b) any
agreement, the purpose or pretended purpose of which is to secure a profit to
any of the parties from the yield of shares or debentures, or by reference to
fluctuations in the value of shares or debentures; shall be punishable with
imprisonment for a term which may extend to five years, or with fine which may
extend to Rs. 1 lakh, or with both. Section 628 deals with penalty for false
statements. It states that if any return, report, certificate, balance-sheet,
prospectus, statement or other document required by or for the purpose of any
of the provisions of this Act, any person makes a statement (a) which is false
in any material particular, knowing it to be false; or (b) which omits any
material fact, knowing it to be material, he shall save as otherwise expressly
provided in this Act, be punishable with imprisonment for a term which may
extend to two years, and shall also be liable to fine.
31. If
the opponent is of the view that the Directors and/or Promoters of the Company
have committed breach of the provisions contained in sections 63, 68 and 628 of
the Act, he should not have waited for long ten years. Such commission or
omission on their part would have come to the forefront immediately. The action
taken after ten years itself suggested that it was based on the instruction
issued by the Director of Inspection and Investigation to initiate actions
against the Vanishing Companies. While issuing notices, the respondent
authority has not pointed out any specific instances stating that which false
or deliberate statements were made in the Prospectus or that such statements
were made to induce the public for subscribing the shares of the Company. If
any action is sought to be taken without any basis, the Court has every power
to entertain an application under section 633(2) of the Act. It says that where
any such officer has reason to apprehend that any proceeding will or might be
brought against him in respect of any negligence, default, breach of duty,
misfeasance or breach of trust, he may apply to the High Court for relief and
the High Court on such application shall have the same power to relieve him as
it would have had if it had been a Court before which a proceeding against that
officer for negligence, default, breach of duty, misfeasance or breach of trust
had been brought under sub-section (1).
32. Looking
to the submissions and explanations tendered, it can hardly be said that the
applicants are liable for making any false or deliberate mis-statements in the
Prospectus. Sanctioning of loan by the Financial institutions, granting
licenses by the respective authorities, furnishing returns and statements
before the statutory authorities under the excise and other laws are sufficient
to reveal that the Company has made all attempts to adhere to the assurances
and promises given in the Prospectus. If something is lacking somewhere, no
motive can be attributed to that, only with a view to bring the case within the
purview of section 63, 68 or 628 of the Act. Even the case of the opponent is
also to the effect that there was no satisfactory explanation for
non-fulfilment of commitments and promises made in the Prospectus dated
8-5-1992 timely and completely. This timely and completely non-fulfilment of
assurances and promises would not entitle the opponent to initiate the action
under section 63, 68 and 628 of the Act. A reference is made to the decision of
Andhra Pradesh High Court in the case of Progressive Aluminium Ltd. v.
Registrar of Companies [1997] 89 Comp. Cas. 1471 wherein the Court has taken the view that the
omission in question could not be treated as a deliberate omission with a mala
fide intention of suppressing any truth from the public and that the
explanation tendered by the petitioners for the delay in commercial production
was reasonable. Subsequent developments and the progress made by the Company in
the direction of fructifying the objects for which the Company was
incorporated, discharged or acquitted the promoters of any allegation that the
mis-statements in the prospectus were made with any dishonest intention of
practising fraud upon the subscribers of the company.
33. Having
regard to the facts and circumstances of the case and taking overall view of
the matter, the Court is satisfied that the applicants have acted bona fide and
there was no deliberate intention on their part to defraud the public and that
there was no false or deliberate statement in the prospectus. The applicants,
therefore, deserve the relief as prayed for in these applications. The
applications are, therefore, allowed. The impugned notices are quashed and set
aside. There shall be no order as to costs.
rajasthan
high court
companies
act
[2005]
62 scl 110 (raj.)
HIGH COURT OF
RAJASTHAN, JAIPUR BENCH
v.
S.K.
Keshote, J.
SB
Company Petition No. 27 of 1999
October
8, 2004
Section 633 of
the Companies Act, 1956 - Court - Power of, to grant relief - Petitioners were
directors of company in question which defaulted in making compliance with
certain provisions of Act and, therefore, Registrar of Companies issued notices
upon petitioners - Petitioners filed application under section 633(2) praying
to relieve them from having to comply with provisions and procedures of Act -
Whether when petitioners had voluntarily accepted directorship of company and
had not produced any documents to show and establish that they were not
concerned with day-to-day management of company and business thereof, they
could not be permitted to go scot free as regards their liabilities,
responsibilities and duties as directors under provisions of Act - Held, yes -
Whether petitioners having also failed to produce evidence in support of their
plea that Rajasthan Industrial Investment Corporation (RIICO) had taken over
management of company and had handed over same to third party, same could not
be accepted - Held, yes - Whether even if RIICO had taken over management of
company, in view of fact that petitioners had not resigned from directorship,
reasonably it could be presumed and assumed that they voluntarily continued as
directors of company and, therefore, they could not run away from their
liability, obligation and duty to make compliance of provisions of Act - Held,
yes - Whether moreover, petitioners should have placed their cases for
consideration before Registrar and in their prosecution, they could take all
their defences and, therefore, it was not a fit case to grant any relief to
petitioners - Held, yes - Whether accordingly, petition failed and was to be
dismissed - Held, yes
Facts
The petitioners were directors of the company
in question. The said company made defaults in complying with the provisions of
sections 159, 160, 210 and 220 and, thus, the Registrar of the Companies sent
notices to the petitioners to show cause as to why action should not be taken
for their prosecution for contravention of said sections. The petitioners, on
receipt of said notices, filed application under section 633(2) praying to
relieve them from having to comply with the provisions and procedures of the
Act contending that they were not active directors of the company and they,
being not connected with the management of the company as well as other
day-to-day business, deserved to be granted the benefit of section 633(2). It
was further contended that RIICO had taken over all the records and
processed/unprocessed stock in hand of the company in 1988 and at the later
stage, handed over the same to another party and, therefore, they were not in a
position to submit and make compliance of the provisions of the Act.
Held
The petitioners had voluntarily accepted the
directorship of the company. They had not produced any document to show and
establish that they were not concerned with the day-to-day management of the
company and the business thereof. In view of the same, they could not be
permitted to go scot-free as regards to their liabilities, responsibilities and
duties as directors under the provisions of the Act. [Para 9]
As regards RIICO having taken over the
management of the company or not, the petitioners had failed to produce any
evidence in support of their plea and same could not be accepted. For the same
reason, plea taken that the RIICO had handed over the management of the company
to a third party also could not be accepted. They continued to be directors of
the company as on day. [Para 10]
Further, if RIICO had taken over the
management of the company in the year 1988, the first and foremost step on the
part of the petitioners would have been to resign from the office of the
director of the company. Undisputedly, the petitioners had not resigned from
the directorship of the company. The default in compliance of the provisions of
the Act pertained to the period from 1988 to 1998 and from the fact that they
had not resigned from the directorship, reasonably, it could be presumed and
assumed that they voluntarily continued as directors of the company. Being the
directors of the company, they could not run away from their liability,
obligation and duty to make the compliance of the provisions of the Act. The
board of directors had never resolved to exempt them from their responsibility,
obligation and duty as the directors to comply with the provisions of the Act.
[Para 11]
It was also hardly of any substance and
material that the petitioners were senior citizens. They had accepted the
directorship of the company voluntarily and presumed to have known their
responsibility, obligation, liability and duty under the provisions of the Act.
[Para 12]
The Registrar had given to them a show-cause
notice. Rather than to approach the High Court at that stage, they should have
pleaded their cases for consideration before the Registrar but that had not
been done. That apart, the notices had been given only for launching the
prosecution against the petitioners and in their prosecution, they could take
all the defences and if they were able to prove the same, the Court might not
punish them for violation of the provisions of the Act. Thus, considering the
matter from any angle and aspect, it was not found to be a fit case to grant
any of the reliefs as prayed for by the petitioners in the petition. [Para 13]
In the result, the petition failed and the
same was to be dismissed. [Para 14]
The petition was decided against the
petitioners.
Rakesh Kumar for the Petitioner.
Order
1. Petitioners filed this petition under
section 633(2) of the Companies Act, 1956 (for short, ‘the Act, 1956’) in the
matter of notices dated 12th of July, 1999 of the respondent Registrar of
Companies, Rajasthan, Jaipur. In the petition the petitioners prayed for grant
of following relief,—
“1. To relieve the petitioners under section 633(2) of the Companies
Act from having to comply with the provisions and procedures of the said Act,
and other relevant Acts.
2. The petitioners submit that not being directors with any
functional responsibility, they cannot be ‘officers who are in default’ under
section 5 of the Companies Act, in any case.
3. To direct Registrar of Companies, Rajasthan, to desist from
instituting or continuing proceedings under the Companies Act against the
petitioners, with particular reference to the impugned notices Annexures 1 and
2.
4. To issue such order or directions as the Hon’ble Court may
deem proper in their wisdom and experience in the special circumstances of this
case, which the petitioners may have failed to mention but merit still.
5. Ad interim orders in terms of prayers 1 to 4. Above may also
kindly be passed.
6. Such further order or orders be made and/or directions be
given that the Hon’ble Court may deem fit and proper to restrain the
non-petitioners from instituting any legal proceedings against the petitioners
till the disposal of this petition.”
2. The
facts of the case are that M/s. Fancy Stones (India) Limited came to be incorporated
under the provisions of the Act, 1956 on October 29, 1979 with its registered
office at C-72, Sarojini Marg, ‘C’ Scheme, Jaipur. The registered address of
the Company changed a couple of times within the city of Jaipur, but ultimately
it was the same as the place where manufacturing/processing of the company’s
products was being done at Village Pasoond, near Rajasmand, District Udaipur in
Rajasthan. Undisputedly the petitioners accepted the Directorship of the
Company. The petitioners averred that though they were the Directors of the
Company but main affairs thereof were being dealt with by other Directors. Shri
Ajay Sharma was the Executive Director of the Company. Besides two other
Directors, Shri Ramesh Advani, Resident of Ranchi Club Compound, Ranchi, Bihar,
was made the Executive Director after sometime, and Shri Ratan Banka, Resident
of J.V. Colony, Andheri (East), Mumbai, was also a Director in the same
Company. There was one Director from the Rajasthan Industrial Investment
Corporation (for short, ‘the RIICO’). It is stated that the management of the
Company continued till 26th of March, 1988 and thereafter it was taken over by
the RIICO. The petitioners have not produced any material on the record that
the management of the company had been taken over by the RIICO after 26th of
March, 1988. Otherwise also I have my own reservation whether the RIICO could
have taken the management of the Company. The RIICO for non-payment of the dues
or for some other default, may take possession of the Unit or other property of
the Company but not the management of the Company.
3. The Company has made defaults in making the compliance of the
provisions of sections 159, 160, 210 and 220 of the Act, 1956 for the years
1988 to 1998 the respondent, the Registrar of Companies, Rajasthan, Jaipur,
sent notices to the petitioners which were received by them on 15-7-1999. The
petitioners were called upon to show cause as to why action should not be taken
for their prosecution for contravention of section 159/160/162/220 and as to
why they should not be prosecuted under section 210(5) of the Act, 1956 for the
default in complying with the section 210(3) of the Act, 1956. The petitioners
on receipt of the notices aforestated, instead of showing cause to the
respondent, had chosen to file this application under section 633(2) of the
Act, 1956.
4. The learned counsel for the petitioner contended that the
petitioners were not the active Directors of the Company and as being not
connected with the management of the Company and are completely unaware of the
operational aspects of the company’s business as well as other day-to-day
business and as such they deserves to be granted the benefit of section 633(2)
of the Act, 1956.
5. Learned counsel for the petitioners next submitted that the
Provident Fund Authorities had also issued notices to the petitioners for
provident fund dues pending against the Company and had gone to the extent of
issuing non-bailable warrants against them and this Court in S.B. Civil Writ
Petition No. 4219/96 was pleased to stay the arrest of the petitioners. It has
further been contended that the RIICO has taken all the records, pro-cessed and
unprocessed stock in hand of the Company sometime in the first quarter of 1988.
At a later stage, the same was handed over to some other party and the
petitioners were not in a position to submit and make compliance of the
provisions of the Act, 1956. The petitioners are just two out of five Directors
and being old persons they may not be put to suffer this agony at the ends of
the respondent.
6. It is unfortunate that none is present on behalf of the
respondent. However, the respondent has filed reply to the petition. The facts
disclosed in the reply are that the petitioners were appointed Directors of the
Company on 1st of October, 1982 and 19th of May, 1985 respectively. As per the
last annual return dated 31st of October, 1986 available with the respondent
the petitioners stand at Nos. 1 and 2 in the list of Directors of the Company.
7. I have given my thoughtful and anxious consideration to the
contentions made by the learned counsel for the petitioner.
8. The Provident Fund Authorities had issued notices to the
petitioners. The writ petition has been filed by the petitioners. They admitted
that the stay of their arrest has been stayed by the Court as they deposited
the amount demanded by the provident fund department. The writ petition is not
finally decided, thus, filing of the writ petition and stay of the arrest
warrant of the petitioners in the matter of provident fund dues it hardly has
any relevance to the matter in issue.
9. The petitioners have voluntarily accepted the Directorship of
the Company. The petitioners have not produced any document to show and
establish that they were not concerned with the day-to-day management of the
company and the business thereof. The fact that they voluntarily accepted the
Directorship of the Company, at the same time they cannot be permitted to go
scot-free as regards to their liabilities, responsibilities and duties as
Directors under the provisions of the Act, 1956.
10. The plea taken that the RIICO has taken over the management of
the Company in the year 1988, it is suffice to say that leaving apart whether
the RIICO could have taken over the management of the Company or not, the
petitioners have failed to produce any evidence in support of their this plea
and same cannot be accepted. That apart similarly for these reasons and grounds
the plea taken that the RIICO has handed over the management of the Company to
third party also cannot be accepted. They continued Directors of the Company as
on day.
11. This plea taken also deserves outright rejection yet on another
ground. The RIICO has taken over the management of the Company in the year
1988. In case what it is stated would have been correct the first and foremost
step on the part of the petitioners would have been to resign from the office
of the Directors of the Company. Undisputedly the petitioners have not resigned
from the Directorship of the Company. The default in compliance of the
provisions of the Act, 1956 pertains to the period from 1988 to 1998 and the
fact that they have not resigned from the Directorship, reasonably it can be
presumed and assumed that they voluntarily continued as Directors of the
Company. Being the Directors of the Company, they cannot run away from their
liability, obligation and duty to make the compliance of the provisions of the
Act, 1956. The Board of Directors has never resolved to exempt them from their
responsibility, obligation and duty as the Directors to comply with the
provisions of the Act, 1956.
12. It is also hardly of any substance and material that the
petitioners are the senior citizens. They had accepted the Directorship of the
Company voluntarily and presumed to have known of their responsibility,
obligation, liability and duty under the provisions of the Act, 1956.
13. The respondent has given to them a show-cause notice. Rather
than to approach to this Court at this stage they should have placed their
cases for consideration before the respondent but that has not been done. That
apart the notices have been given only for launching the prosecution against
the petitioners and in their prosecution they can take all these defences and
where they are able to prove the same the Court may not punish them for
violation of the provisions of the Act, 1956. Thus, consi-dering the matter
from any angle and aspect I do not find it to be a fit case to grant any of the
relief as prayed by the petitioners in the petition.
14. In
the result, the petition fails and the same is dismissed.
[1980] 50 COMP. CAS. 426
(KER.)
HIGH COURT OF
KERALA
Harrisons & Crosfield (India)
Ltd.
v.
Registrar of Companies, Kerala
M.P. MENON, J.
COMPANY PETITION NOS. 45, 46 & 99 OF 1979
DECEMBER 3, 1979
K.V.R. Shenoy, P.K. Kurian, K.A. Nair, E.R.
Venkiteswaran, J.B. Koshy and K. Anandavally for the Petitioner.
M.P. Menon J.—These petitions filed under s.
633(2) of the Companies Act, 1956, raise a common question. Harrisons & Crosfield
(India) Ltd., an Indian Company incorporated on November 1, 1977, is the first
petitioner in C.P. No. 45. The 2nd petitioner is one of its directors. The
petitioners in C.Ps. Nos. 46 and 99 are two other directors of the company.
They are threatened with prosecution for alleged contravention of s. 210.
The Indian company was formed with the object of
taking over the Indian business of Harrisons & Crosfield Ltd., a foreign
company. A scheme was drawn up for this purpose providing for the vesting of the
assets and liabilities of the Indian business of the latter, in the Indian
company, with effect from November 1, 1977. The scheme is pending approval
before this court. In the meanwhile, the annual general meeting of the company
(petitioner) had to be held within the time fixed under s. 166 and such a
meeting was, therefore, called on April 20, 1979. But the balance-sheet and
profit and loss account for the period ended December 31, 1978, were not laid
before it, as envisaged in s. 210. The directors apparently thought that
"a true and fair view of the assets and liabilities position" could
be obtained only after the approval of the scheme. Therefore, the meeting was
adjourned after transacting other business. But on September 15, 1979, the Registrar
of Companies issued a notice threatening prosecution under s. 210(5) for
non-compliance with the requirements of sub-sec. (1). According to him, the
balance-sheet and profit and loss account should have been laid at the meeting
held on April 20, 1979, and three copies of the same should have been filed
within 30 days, in accordance with s. 220.
The petitioners' case is that there has been no
contravention of s. 210(1), and that even assuming there be any, they had acted
honestly and reasonably so that their neglect, default or breach of duty could
be condoned under s. 633(2). They were under the bona fide belief that the
balance-sheet and profit and loss account could reflect the true financial
position of the company only when the scheme was approved, as such approval
would have the effect of substantially altering the assets and liabilities
position, retrospectively from November 1, 1977.
The Registrar, in his counter affidavit, states:—
"The provisions of s. 210 of Companies Act, 1956, are distinct time
bound provisions of law which cannot be duly discharged by the short cut
process of holding an annual general meeting under s. 166 of Companies Act and
adjourning it to a future date for the purpose of laying accounts. It was the
duty of directors to have laid the balance-sheet and profit and loss account
for the 1st financial year which ended on December 31, 1978 in the meeting held
on April 20, 1979. The scheme of amalgamation will take effect only when it is
approved by this hon'ble court. Since it was in the stage of consideration by
the court, the question of incorporating the figures in the above balance-sheet
on the basis of the scheme did not arise when the annual general meeting was
held on April 20, 1979. The balance-sheet is to disclose the actual state of
affairs of the company as on the last date of the financial year and not what
it will be if the scheme is allowed at a future date."
It is averred that the process of holding an annual
general meeting and adjourning the same for the purpose of presenting the
balance-sheet, etc., at a later stage is not compliance with the statutory
requirement, but a circumvention thereof. The directors have not discharged the
burden of proving that the meeting was adjourned "for reasons which by
standards of prudence were real"; the reasons are only a creation of their
imagination.
Counsel for the petitioners contends that an
adjourned meeting is a continuation of the meeting and that it is enough, for
the purpose of s. 210(1), if the balance-sheet and profit and loss account are
placed before the adjourned annual general meeting. Reference is made to the
"practice notes" at pages 417 and 614 of Palmer's Company Law (21st
Edn.) for the position that when the annual accounts are not available in time
for the annual general meeting, the usual practice is to hold that meeting in
time and then adjourn it to some future date for consideration of the accounts.
But the provisions of s. 148 of the English Companies Act (1948) are not
identical with those of s. 210 of our Act. The requirement of s. 148 is that
the profit and loss account shall be laid "before the company in general
meeting" once at least in a calendar year. There is no prescription that
it should be laid at the annual general meeting, as in s. 210 of our Act. A
company's articles may provide that the consideration of the annual accounts is
part of the ordinary business to be transacted at the annual general meeting;
and in a case where it is so provided, the accounts should normally be laid
before the annual general meeting itself, to be convened within the time limit
specified by s. 131 (of the English Act). Where, however, the accounts are not
ready within this time, the practice of adjourning the annual meeting after
transacting all, other business seems to have been recognised. But meeting the
requirements of a company's article is not the same thing as complying with a
statutory requirement, particularly when the non-compliance is made penal.
In Sudhir
Kumar Seal v. Asst. Registrar of Companies [1979] 49 Comp Cas 462 the
Calcutta High Court observed (p. 463) :
"In case the annual accounts of a company are not ready for laying
at the annual general meeting it is open to the company concerned to adjourn
the said annual general meeting to a subsequent date by an appropriate
resolution and the accounts may be laid at the adjourned annual general
meeting."
This view seems to have been taken solely on a
concession made by counsel for the Registrar, on the basis of Circular No.
35/9/72-CL. III, dated February 2, 1974, issued by the Company Law Board, the
relevant part of which reads as follows:
"I am directed to say that it has come to the notice of this
department that a company sent to a Registrar of Companies for filing under
section 220 of the Companies Act, 1956, its balance-sheet and profit and loss
account which had been laid before a general meeting and not an annual general
meeting. In this context the question arose for consideration as to whether the
Registrar of Companies could take the document on record in view of the clear
provisions of sub-section (1) of section 210 read with sub-section (1) of
section 220 of the Act requiring the balance-sheet and profit and loss account
to be laid before a company at an annual general meeting before sending it to
the Registrar for filing. The department has been advised that the
balance-sheet and profit and loss account are required to be placed only at an annual general meeting and not any other
general meeting. In case the annual accounts are not ready for laying at
the appropriate annual general meeting, it is open for the company concerned to
adjourn the said annual general meeting to a subsequent date when the annual
accounts are expected to be ready for laying. This may be done by adopting a
suitable resolution adjourning the said annual general meeting to a specified
date, or to a date to be specified later on. I am to request you to advise the
companies accordingly whenever they approach you for guidance in the matter. I
am to enclose for your information a copy of the circular letter of even number
and date addressed to all the chambers of commerce in this regard."
In the present case, however, the Registrar argues
that neither a concession by counsel nor an interpretation by the Company Law
Board could be treated as having finally settled the scope of s. 210 which it
is for the court to delimit. There appears to be some force in this contention.
What is more important is not whether s. 210(1) has
been violated, but whether the petitioners should be relieved of the criminal
liability under s. 210(5), even if there has been a violation. Relief can be
granted under section 633(2) if it is found that the petitioners have acted
honestly and reasonably and that having regard to all the circumstances of the
case, they ought fairly to be excused. Now, in the circular aforenoticed, the
Company Law Board has clearly indicated that where the annual accounts are not
ready, "it is open for the company concerned" to adjourn the annual
general meeting to a date when the accounts are expected to be ready. It may
be, as the Registrar's representative submitted, that the circular was intended
to bring out the distinction between an ordinary meeting and the annual
meeting, in the context of s. 210. But the circular certainly goes further and
directs the Registrars to advise all companies that it would be permissible to
adopt the method of adjournment in cases where accounts are not ready. In my
view, the directors herein were entitled to rely on the above advice, as honest
and reasonable men, even if the same was not legally correct. They had only
chosen to follow the path indicated by the Board, a high authority in the
hierarchy of company law-administration, and for that they should not be
penalised, if it is possible for this court to avert such a situation.
Section 633(2) empowers the High Court to grant
relief against apprehended actions for negligence, default, breach of duty,
misfeasance or breach of trust. That the above terms are wide enough to cover
an apprehended criminal prosecution for contravention of s. 210, has been laid
down by Raman Nayar J. (as he then was) in In re Bank of Deccan Ltd. [1960] 30
Comp Cas 284 (Ker). The section applies only to officers and not to the company
itself, and the first petitioner in C.P. No. 45 is, therefore, not entitled to
any relief. As regards the other three petitioners who are directors, I
consider it proper, for the reasons stated above, that they be relieved of the
criminal liability under s. 210 on condition that the adjourned annual general meeting
is called within two months from today and the profit and loss account and the
balance-sheet for the period ended December 31, 1978, are laid before it.
Ordered accordingly.
[1979] 49 COMP. CAS. 317 (ORI.)
v.
Registrar of Companies
B.K. RAY, J.
Company Act Case No. 8 of 1977
MAY 12, 1978
S.C. Sinha for the Petitioner.
JUDGMENT
B.K. Ray, J.—The petitioner was appointed as a
voluntary liquidator of Messrs. Sambalpur Krishak Trading Co. Ltd., Bargarah,
which went on voluntary liquidation since April 15, 1965. 'In the course of
liquidation proceedings it is alleged by the petitioner that the assets of the
company were, realised. The creditors were fully paid off, the shareholders
where paid to the extent of 68 per cent. of their share capital and a sum of
Rs. 21,129.26 was deposited in the company's account as undistributed amount.
After the affairs of the company were fully wound up, it is said that an
account showing how the winding-up was conducted was prepared by the
liquidation whereafter the final general meeting of the company (in
liquidation) was called for the purpose of laying the account before it and
explaining the same to it as provided under s. 497 of the Companies Act, 1-956
(hereinafter called "the Act"). The notice convening the meeting was
published in the local newspaper Matrubhumi on October 12, 1972, and the
meeting was held on October 14, 1972. In the meeting thus held, the statement
of accounts prepared by the liquidator was discussed and adopted by a
resolution passed in the meeting on October 14, 1972. Thereafter, the
petitioner alleges that the final statement of voluntary liquidation in Form
No. 156 as provided in r. 329 of the Companies (Court) Rules, 1959 (hereinafter
called "the Rules"), and a return of the holding of the general
meeting were sent to the Registrar of Companies and copies thereof were also
sent to the official liquidator of the Orissa High Court as provided under s.
497 of the Act. After receipt of the final statement of accounts and of the
return, the Registrar of Companies intimated to the petitioner that as the
final general meeting had not been held one month after publication in the
newspaper and as no notice of the proposed general meeting was published in the
Official Gazette as provided under s. 497 of the Act, the final general meeting
held on October 14, 1972, was not regular and accordingly the return and the
statement of accounts filed by the petitioner could not be accepted unless an
order for condonation of the irregularities was obtained from this court.
Thereafter, the petitioner moved the official liquidator of this court to
condone the irregularities pointed out by the Registrar. In reply, the
petitioner was told by the official liquidator that he had no power to condone
the irregularities as pointed out by the Registrar. On these allegations, the
petitioner had come to this court with the present application under s. 633 of
the Act for condonation of the irregularities mentioned above.
After filing the petition and after notice to the
Registrar as well as the official liquidator, both of them have entered
appearance and filed their respective counter. The contentions raised by the
opposite parties are that the petitioner not having complied with the statutory
requirements of s. 497 of the Act while convening the final general meeting,
that the notice of the meeting not having been drawn up in Form No. 155 as
prescribed by r. 329 of the Rules that a copy of the resolution passed in the
final general meeting held on October 14, 1972 not having been filed before the
Registrar along with the final statement of accounts, that the final statement
in Forms Nos. 156 and 157 not having been filed before the Registrar within 60
days from the date of closing of the accounts and that copies of the accounts
not having been supplied to the Registrar within the prescribed period, the
liquidator must be held to have violated the statutory provisions, and so, the
irregularities complained of cannot be condoned.
At the time of hearing of the petition a point was
raised by the opposite parties that s. 633 of the Act is applicable in the case
of an officer of a company. Officer of the company has been defined under s.
2(30) of the Act which reads thus:
"'Officer' includes any director, managing
agent, secretaries and treasurers, manager or secretary, or any person in.
accordance with whose directions or instructions the board of directors or any
one or more of the directors is or are accustomed to act, and Also includes—
(a) where the
managing agent or the secretaries and; treasurers is or are a firm, any partner
in the firm;
(b) where the
managing agent or the secretaries and treasusers is or are a body corporate/any
director or manager of the body corporate; but, save in sections 477, 478, 539,
543, 545, 621, 625 and 633 does not include an auditor."
Therefore, the petitioner who is a voluntary
liquidator of the company (in liquidation) does not come within the definition
of an officer of a company and hence he cannot invoke the jurisdiction of the
court for condonation of the irregularities complained against him under s. 633
of the Act. The definition as quoted above of an officer of the company is an
inclusive, one, and, therefore, merely because a liquidator of the company has
not been included within s. 2(30) of the Act, it cannot be said that he is not
an officer of a company even though he fulfils all the requirements of an
officer. The question as to whether a liquidator of a company is an officer of
the company came up for consideration in the decision reported in [1978] 48 Comp Cas 120 (Guj) (Official
Liquidators, Baroda Batteries Ltd. v. Registrar of Companies). It had
been clearly laid down in that decision that a liquidator, while dealing with
the liquidation proceedings, represents the company, which does not lose its
identity as a company till it is dissolved. The liquidator alone can act for
and on behalf of the company. The liquidator can, therefore, be said to be an
officer of the company though not specifically mentioned in s. 2(30) of the
Act. No decision has been cited before me by the opposite parties to show that
a liquidator of a company is not an officer of the company and by an officer of
a company is only meant the persons who have been specifically named in s. 2(30)
of the Act Therefore, on the authority of the aforesad decision, I hold that
the petitioner is an officer of the company and, hence, can invoke the power of
this court under s. 633 f the Act.
It is the consistent view that where the acts of negligence,
default, breach of duty, misfeasance of breach of trust of an officer of a
company appear to the court not to have occasioned any loss to the company and
the court is satisfied that the omissions on the part of the officer are not
due to any dishonest or any deliberate remissness or any deliberate attempt to
delay the winding-up proceeding, the court can exercise its power under s. 633
of the Act and can condone the irregularities. In the present case, in the
course of hearing of the petition, nothing has been shown to me that the
irregularities complained of against the petitioner are due to dishonesty on
his part. On the other hand, Mr. S. C. Sinha, learned counsel for the
petitioner, argues that the petitioner has been working honestly and diligently
and with much effort has finalised the winding-up proceedings. The omissions
pointed out by the opposite parties, according to Mr. Sinha, are due to
ignorance of the relevant provisions of the Act and the Rules and are not
deliberate and have not been actuated by any mala fide intention. A sum of Rs.
21,129.26 has been deposited by the petitioner as undistributed amount to the
credit of the company. The entire dues of all the creditors have been paid off
and the shareholders have been paid up to 68% of their share capital. It is not
disputed that notice of the final general meeting has not been published as
provided in s. 497 of the Act and the returns and the final account together
with a copy of the resolution passed in the final general meeting have not been
sent to the Registrar within the prescribed period. In view of the fact that no
loss has been occasioned to the company by the irregularities alleged to have
been committed by the petitioner and that the winding-up proceedings of the
company have been brought to an end with satisfactory result, I accept the case
of the petitioner that he did not commit the irregularities with a dishonest
motive and that he acted honestly throughout. In these circumstances, there
being no mala fide on the part of the petitioner I will have no hesitation in
granting relief under sub-s. (2) of s. 633 of the Act to the petitioner in
spite of his failure to comply with the requirement of s. 497 of the Act.
In the result, therefore, I
allow the petition, make the rule absolute and condone the irregularities
complained of against the petitioner. I, however, direct the petitioner to
supply the omissions which are capable of being so supplied now forthwith.
There will be no order for the costs.
[1959]
29 COMP. CAS. 34 (BOM.)
SHELAT,
J.
O.C.J.C.I
PETITION NO. 40 OF 1958
APRIL
30, 1958
SHELAT, J. - This is petition under sub-section (2) of
section 633 of the Companies Act, 1956, for relief against liabilities for
fines or penalties in regard to the failure of Filmistan Private Ltd. to file
with the Registrar of Companies copies of the balance-sheet and the auditor's
report for the year ending August 31, 1956.
The reason
given by the petitioners for this omission is that accounts up to the year
1950-51 used to be audited by M/s. Sharp and Tannon but that some time in
August, 1955, the auditing of the accounts was the entrusted to M/s.
Kalayaniwala and Mistry, who were then appointed the company's auditors and
that the new auditors could not audit the accounts owing to a radical conflict
of opinion between the company on the one hand and the income-tax authorities
on the other hand as to the manner in which the unexploited value of five
cinematographic pictures produced by the company should be determined for the
purpose of computing annual profits or losses of the company. The case of the
petitioner is that until the value of these unexploited pictures was finally
determined, it would not be possible for the auditors to prepare a true and
fair balance-sheet and profit and loss account except on a hypothetical basis.
It appears, therefore, that there is considerable force in the contention of
the petitioners that it was due to this difference of views between the company
and the Income-tax authorities that the balance-sheet and the profit and loss
account for the year 1955-56 could not be prepared in time to enable the
petitioners to file the same with the Registrar of Companies as required by the
Act. It may be stated that it is not the case of the Registrar, who opposes
this petition, that this omission to file the balance-sheet and the profit and
loss account was due to any deliberate attempt on the part of the petitioners
to delay in preparing the profit and loss account and the balance-sheet. On
behalf of the Registrar it was conceded that no dishonesty could be imputed to
the petitioners in respect of this omission. That being so, I would proceed
upon the footing that the omission of the petitioners so far to file the balance-sheet
and the profit and loss account for the year 1955-56 as required by section 220
of the Act was not mala fide but there was a real difficulty in the way of the
company in having the balance-sheet and the profit and loss account prepared in
time.
The question
that has been seriously canvassed before me is whether I have jurisdiction
under sub-section (2) of section 633 of the Act to grant relief against the
liability of the petitioners, who are directors and secretary of the company
respectively, which they apprehend they might have incurred and for which steps
might be taken against them under sections 159, 162 and 220 of the Act. Section
159 provides that every company having a share capital shall within 42 days
from the day on which each of the annual general meetings referred to in
section 166 is held, prepare and file with the Registrar a return containing
particulars set out therein. Section 162 is a penalty section and provides that
if a company fails to comply with any of the provisions contained in sections
159, 160 or 161, the company and every officer of the company who is in default
shall be punishable with a certain fine. There is no dispute that the
petitioners are the persons to whom sections 159 and 162 of the Act apply.
Section 633
under which the relief is sought is identical with section 372 of the English
Companies Act of 1929. Sub-section (1) of section 633 contemplates proceedings
for negligence, default, breach of duty, misfeasance or breach of trust against
an officer of a company and gives power to the court hearing the case in
certain circumstances to grant relief. Sub-section (2) gives power, on the
other hand, to the High Court to grant relief against a prospective liability
in respect of a claim that an officer of a company apprehends might be made
against him in regard to negligence, default, breach of duty, misfeasance or
breach of trust. Now it is clear that whereas sub-section (1) refers to
proceedings already commenced, sub-section (2) contemplates a claim which is
anticipated as one which might be made in future. Under sub-section (1) the
important words are "the court hearing the case" which obviously mean
the court before which a proceeding is pending. These words, therefore, mean
that it would not be this court which can grant relief under sub-section (1)
but the court before whom the proceeding has commenced and is pending.
Sub-section (2), on the other hand, creates a fiction and provides that in
respect of an apprehended claim this court shall have the same power to grant
relief as it would have had under this section if it had been the court before
which proceedings for negligence, default, breach of duty, misfeasance or
breach of trust had been brought.
The question
then is what meaning should be attached to the word "claim" occurring
in sub-section (2) and whether the word "claim" would also include
proceedings such as penal proceedings under section 162 read with section 220
of the Act.
It is urged
that the word "claim" would prima facie mean a civil claim, such as a
claim for damages which may be made by a company against a defaulting director
or an officer of the company or where the company is in liquidation by the
liquidator or a creditor or a contributory, and not a penal proceeding
contemplated by sections such as section 162. The dictionary meaning of the
word "claim" is undoubtedly an assertion of a right to something and
a relief provided by statute. I have also been pointed out several sections of
the Act where the Legislature has used the word "claim", such as
sections 101, 104, 429, 474, 528 and 529, and it is clear from these sections
that the meaning that can be attached to the word "claim" used in
these sections must mean a demand or an assertion to a civil right. It was also
urged that the Legislature could not have intended to include in the word
"claim" in sub-section (2) of section 633 proceeding of a penal
nature for otherwise the Legislature would have used the word
"proceeding" rather than the word "claim". It was further
urged that inasmuch as the Legislature has given relief from criminal
proceedings by separate sections in the Act such, sections 63, 69(5), 70(5),
75(4), 207, 209, 210, 211, 217 and 393(4), the Legislature could not have
contemplated including proceedings of a penal nature in the word
"claim" in sub-section (2). It was, therefore, contended that the
word "claim" cannot be interpreted as inclusive of proceeding
described in sub-section (1) of section 633, and therefore, no relief is
provided against an anticipated proceeding under section 633, the only relief
provided being in respect of appending proceeding and that too by the court
before which such a proceeding has commenced and is pending. But then so far as
sections 63, 69(5) and other sections, which were pointed out to me to show
that the Legislature has given relief in respect of criminal proceedings, are
concerned, it is clear that what those sections and provisos thereto provide
are by way of substantive defences to a director or an officer of a company
charged under one of the penal sections of the Act. Those are not sections like
section 633 which empower the court to grant relief in respect of liability
incurred by such a director or an officer of a company. A comparison between
those sections and section 633 cannot, therefore, help in the construction of
the word "claim" in section 633(2).
It is true
that the Legislature uses the word "proceeding" in sub-section (1)
and the word "claim" in sub-section (2), no doubt a different
phraseology. None the less it does provide in sub-section (2) that the court on
any application for relief shall have the same power to grant relief as it
would have had under this section if it had been a court before which
proceedings for negligence, default etc. had been brought. It seems to me that
if the word "claim" was intended to mean only a civil demand such as
damages, sub-section (2) would not have contained the words "under this
section" which must also mean relief against proceedings described in
sub-section (1). Besides, misfeasance is a civil remedy and yet sub-section (1)
speaks of a proceeding connected with misfeasance and even breach of trust. It
seems, therefore, that there is no clear demarcation made in this section
between proceedings of a penal nature and a civil remedy by way of a claim
provided in sub-section (2) of this section. Inasmuch as a proceeding in
connection with misfeasance is included in sub-section (1), the word
"proceeding" therein used cannot be said to mean proceed-in, of a
penal nature only but would include proceedings also of a civil nature.
As I have
pointed out section 633 is the exact replica of section 372 of the English Act
of 1929. That section came up for consideration in at least two decisions
pointed out to me. In Barry & Staines Linoleum Ltd., In re [1934] 4 comp.
Cas.196,247 a director failed to obtain his qualification shares within the
time fixed thinking that he had them at the date of his appointment, and having
either overlooked or forgotten the definition of "qualification
shares" in the company's articles of association. At the end of the time
fixed, he ceased, in accordance with sub-section (3) of section 141 of the
Companies Act, 1929, to be a director, but continued to act and to receive
remuneration as a director, thus incurring penalties under sub-section (5) of
section 141 of the Act. Later he was re-appointed by the board pursuant to the
company's articles of association, retired and was re-elected by the
shareholders. He applied to the court under sub-section (2) of section 372 for
relief against any liability which he had incurred by acting and receiving
remuneration as a director after he had ceased to be a director. It is clear
from the facts set out in the report that the petition was for relief not in
respect of a pending proceeding but against an apprehended liability for
penalty. It was in fact contended on behalf of the petitioner that where a
director apprehending a claim made against him under section 372(1) applies to
the court for relief, the court can grant such relief having power to do so
under sub-section (2) of that section. In answer to this plea, MAUGHAM J.
observed that sub-section (1) of section 372 applies inter alia to proceeding
under section 275, which was the misfeasance section, as it applied to
proceedings taken in a court of summary jurisdiction to recover one of the
penalties imposed on directors and others under the Act and accordingly, it
included power to relieve against the penalty imposed under section 141 of the
Act. Construing section 372 the learned Judge also remarked that sub-section
(2) gave power to the court to grant relief in cases where application is made
for it by a director who, although no proceedings such as are described in
sub-section (1) are being taken against him, apprehends that a claim may be
made against him under that sub-section. A director apprehending such a claim
may apply to the court for relief, and the court has under sub-section (2),
"the same power to relieve him as under this section it would have had if
it had been a court before which proceedings against that person for
negligence, default, breach of duty or breach of trust had been brought."
It is clear that MAUGHAM J. did not make any distinction between a
"proceeding" and a "claim" appearing in section 372 as is
sought to be urged. In fact he held that a proceeding would include a civil
proceeding under the misfeasance section as it would include proceedings for
penalties in both of which he held that the court would have the jurisdiction
to grant relief under sub-section (2) although no proceeding has commenced or
is pending. The only distinction that MAUGHAM J. seems to make is between a
proceeding for a fine and a penalty and a proceeding where the company might
make a claim with regard to something which the director may be liable to pay
to the company in which case he thought the company court would not readily
grant the relief without knowing the wishes of the shareholders.
This section
again came up for consideration by CROSSMAN J. in Gilt Edge Safety Glass Ltd.,
In re [1940] 10 comp. Cas 244 where although the case fell under sub-section
(1) of section 372, the learned Judge, on the decision of MAUGHAM, J. being
cited before him, observed as follows :
"I think that
it follows from the decision of MAUGHAM, J. in Barry and Staines Linoleum,
Ltd., In re [1934] 4 comp .cas. 196 that the phrase 'any claim .... in respect
of any negligence, default, breach of duty or breach of trust' in section
372(2) of the Act of 1929, includes proceedings against the petitioners under
section 141(5), and so includes the proceedings against the petitioners which
were commenced last October at Bow Street Police Court, as in that case the
learned Judge gave relief under section 372(2), from prospective liability to
fines and penalties under section 141(5)."
As already
pointed out, the important words in sub-section (2) of section 633 are
"the court ...... shall have the same power to relieve him as it would
have had under this section if it had been a court before which proceedings
against that person for negligence ..... had been brought." These words,
in my view, mean proceedings described in sub-section (1) including proceedings
involving fines and penalties in respect of which, if already commenced, only
the court before which they are pending has the authority to grant relief but
which if not pending or already commenced it would be this court which would
have the jurisdiction to grant relief as if it had been a court before which proceedings
had been brought. In this view I have no difficulty in holding that I have the
jurisdiction to grant relief under sub-section (2) of section 633 in respect of
a proceeding which the petitioners apprehend might be adopted against them for
their omission to file the balance sheet and the profit and loss account for
the year 1955-56.
On the
question whether this is a fit case where I should grant the relief, no serious
difficulty would seem to arise. As I have already pointed out, it is not urged
on behalf of the Registrar that the omission of the petitioners has been due to
any dishonesty or any deliberate remissness on their part or any deliberate
attempt to delay the preparation of and the filing of the profit and loss
account and the balance-sheet. What was, however, urged was that the omission
on the part of the petitioners was unreasonable inasmuch as accounts even or
the years 1952-53 and onwards have until recently not only not been prepared
and finalised but have not also been laid before the share holders. That
omission, if true, is one with which I am not at present concerned in this
petition. The petition is restricted to the omission on the part of the
petitioners to file the balance-sheet and the profit and loss account for the
year 1955-56 and is also restricted, as the learned counsel for the petitioners
stated before me, for relief against fine or penalty arising under section 220
in respect of the balance sheet and the profit and loss account for year
1955-56 only. As already observed, there being a conflict and a radical
conflict, of view between the company on the one hand and the Income-tax
authorities on the other hand with regard to the manner in which the
unexploited pictures produced by the company should be valued, it would not
have been possible for the directors to prepare a fair and true balance-sheet
giving exact information with regard to the profit made in respect of these
pictures to the shareholders. At best, such a balance-sheet would be
hypothetical. It would not have been possible also for the accountants of the
company to give an exact and a precise closing and opening stock. Likewise it
would not be possible for the company to lay before the shareholders a true and
correct picture of the state of affairs of the company in respect of these five
pictures. I understand, however, from the learned counsel for the petitioners
that the assessment orders are now finalised and the auditors of the company
say that they will now be able to finalise the balance-sheet on the basis of
the findings as to profits in these assessment orders. In these circumstances
there being no element of mala fides or dishonesty or unreasonableness on the
part of the petitioners, I should have no hesitation in granting relief under
sub-section (2) of section 633 to the petitioners in respect of their failure
to file with the Registrar of Companies the balance-sheet and the profit and
loss account for the year 1955-56.
The petition,
therefore, is made absolute in that the petitioners are granted the relief from
any liability for any fine or penalty under section 162 read with section 220
for their failure to file the said balance-sheet and the profit and loss
account for the year 1955-56 and for which proceedings might in future be taken
against them.
So far as
prayer (b) is concerned, Mr. Bhagwati relies on section 614 of the Companies
Act and says that it is upon that section that that prayer is based. In my
view, section 614 does not apply to prayer (b) such as it is framed, for that
section contemplates an application by a member or a creditor of the company or
by the Registrar of the Companies for an order directing the company or any
officer thereof to make good the default in filing or registering or delivering
or sending to the Registrar any return, account or other document etc.
Obviously section 614 can have no application to extend the time for filing the
balance-sheet and the profit and loss account in queaccount stion with the
Registrar of Companies. It is not, therefore, possible to grant prayer (b).
The point of
construction being of a somewhat important nature, the Registrar was justified
in appearing and putting his point of view before the court. The fair order,
therefore, of costs would be that each party will bear his own costs.
Petition
allowed.
[1984] 56 COMP. CAS. 265 (KAR.)
HIGH COURT of kARNATAKA
v.
Registrar of Companies
M.P. CHANDRAKANTARAJ URS J.
OCTOBER 5, 1982
A.G. Holla for the petitioners.
JUDGMENT
Chandrakantaraj Urs J.—This petition under s.
633(2) of the Companies Act, 1956, is made by the three directors of M/s. Agro
(Pvt) Ltd., Bangalore, a company incorporated under the Companies Act, 1956.
The company also is joined as a petitioner. The petitioners have been issued
show-cause notices by the Registrar of Companies in Karnataka, dated June 26,
1982, calling upon the directors of the company as to why the company and its
directors should not be prosecuted for violating the provisions of s. 58A(3)(c)
read with rr. 3(2)(i) and 4 of the Companies (Acceptance of Deposits) Rules,
1975. The substance of the allegations in the show-cause notice is that even
after the Companies Act, 1956, was amended in 1974 by the insertion of s. 58A
in the Companies Act, 1956, prohibiting the acceptance of deposits or
continuing deposits already accepted beyond April 1, 1975, except in accordance
with the rules, viz., the Companies (Acceptance of Deposits) Rules, 1975,
framed under s. 58A, of the Act, inasmuch as the companies had accepted the
deposits, prior to the coming into force of the Amendment in 1974, sums in
excess of what was prescribed by the RBI for the companies and failed to repay
the deposits in accordance with the rules before the expiry of April 1, 1975.
Numerous reasons are given by the petitioners for
non-compliance. It is sufficient to state the substance of the various reasons
given. Due to mismanagement by one of the directors resulting in lack of funds
in the company, the deposits could not be returned in accordance with the
provisions referred to above. But, however, one of the directors, who is also a
petitioner herein, has since sold his personal coffee estate for a sum of Rs.
25 lakhs and has used that amount to repay all the deposits before the show-cause
notice came to be issued. In that circumstance, it is submitted for the
petitioner that the violation of law and rules was not intentional, but
something unavoidable in the peculiar circumstances in which the company was
placed due to financial difficulty on account of the earlier mismanagement by
one of its directors.
It is also contended by Sri A.G. Holla, learned
counsel appearing for the petitioners, that, as on the date of the show-cause
notice issued by the respondent-Registrar, there was no violation subsisting.
Reliance was placed on a decision of the Calcutta High Court in East India
Hotels Ltd., In re [1980] 50 Comp Cas 381, wherein, in identical circumstances,
the court took the view, having regard to the conduct of the petitioner company
therein, that any offence which had been committed by violating sub-s. (3)(c)
of s. 58A of the Act read with r. 4 of the Companies (Acceptance of Deposits)
Rules, 1975, the offence had ceased to be an offence, when the hotel had
converted, immediately on a refusal of exemption, the deposits into a charge or
secured credit in favour of the depositors. In my view, the conduct in the case
of the present petitioners is somewhat better inasmuch as the deposits have
been repaid as on the date of the show-cause notice and the date of this
petition and there cannot possibly be any complaint against the company by the
depositors. This should not be construed as condoning the lapses on the part of
the company. Violation of s. 58A is a penal offence made as such in public
interest and the companies cannot commit the offence with impunity.
Therefore, in the circumstances made out in this
case, this court, under s. 633(2) of the Act, directs the Registrar of
Companies to forbear from prosecuting the petitioners for the offence mentioned
in the show-cause notice which is at annex.-B.
Accordingly, this petition, is allowed.
[1983] 54 COMP. CAS. 104
(CAL.)
HIGH COURT OF
CALCUTTA
SALIL K. ROY CHOWDHURY J.
COMPANY APPLICATION NO. 133
OF 1980
FEBRUARY 25, 1981
S.B. Mukherjee and U.B. Mukherjee for the Petitioner.
Sunil Mukherjee for the Registrar.
This is an application under s. 633 of the Companies
Act, 1956, for relieving the petitioners as a consequence of default and
violation of s. 295 of the Companies Act, 1956, in granting a loan to another
company being M/s. Associated Industrial Development Co. Pvt. Ltd. The
application was presented on 28th June, 1980, and, thereafter, a notice was
served on the respondent and directions for filing the affidavits were also
given and it also appears that on 2nd July, 1980, there was an ad interim order
of injunction in terms of prayer (c) restraining the respondent, the Registrar
of Companies, West Bengal, from commencing any prosecution against the
petitioners for the default and purchase as mentioned in the repondent's letter
dated 12th May, 1980, or in similar notices in respect of the several
violations under s. 295 of the Companies Act.
It appears from the affidavit-in-opposition that the
respondent, on 12th June, 1980, filed a petition of complaint before the Chief
Metropolitan Magistrate, Calcutta, and it was adjourned till 4th November,
1980, due to congestion in the diary of the said Chief Metropolitan Magistrate.
It also appears that prior to the said application by the respondent before the
Chief Metropolitan Magistrate a notice dated 12th May, 1980, was served on
petitioners Nos. 1 to 4 by the Registrar of Companies, West Bengal, pointing
out about the contravention of s. 295 of the Companies Act, 1956, giving
particulars of the loans and the amounts and asking for a reply to that notice
or show cause within 15 days from the date of the said notice. The company, by
its letter dated 27th May, 1980, replied to the said notice of the Registrar,
inter alia, stating that as soon as the said contravention was brought to the
notice of the company's director concerned, she submitted her resignation from
the company which was accepted by the Board on 29th September, 1979, and a
return to that effect was filed with the Registrar of Companies, West Bengal,
and the said loan together with interest was repaid by M/s. Associated
Industrial Development Co. Pvt. Ltd. on 21st January, 1980. Therefore,
contravention, if any, has been made good and no offence was continuing on that
date. The copies of the notice dated 12th May, 1980, and the reply to the
notice dated 27th May, 1980, are annexed to the petition and the present
petition was filed on 28th June, 1980, and on 2nd July, 1980, an ad interim order
was obtained restraining the respondents from proceeding in any way by way of
complaint or otherwise for that alleged contravention under s. 295 by the
petitioners.
As I have noticed earlier, it will appear from the
photostat copy of the order sheet that on 12th June, 1980, before the Chief
Metropolitan Magistrate a petition under s. 473 of the Criminal Procedure Code,
1973, for condonation of delay in filing a complaint could not be taken up as
the diary of the said Magistrate was congested and the same was directed to be
put up on 4th November, 1980. After the present application was made and the
said interim order was obtained and the same was served on the respondent on
5th July, 1980, on 10th July, 1980, an affidavit of service was filed and directions
were given for filing affidavits and the interim order was directed to
continue. It appears that on 4th November, 1980, the Chief Metropolitan
Magistrate condoned the delay under s. 473 and, after perusing the complaint,
took cognizance of the offence under s. 295(4) of the Companies Act, 1956, and
personal attendance of the accused was dispensed with. Such order was made by
the Chief Metropolitan Magistrate and on the very same day the matter was
transferred to the Metropolitan Magistrate's 17th Court for issue of summons
and adjourned till 23rd December, 1980,
for service return. On 20th December, 1980, summons of the proceedings
before the Chief Metropolitan Magistrate was received by the petitioners, the
accused therein. On 23rd December, 1980, appearance of the accused was fixed
before the Metropolitan Magistrate as will appear from the photostat copy of
the said order.
Mr. S.B. Mukherjee, appearing with Mrs. U.B.
Mukherjee for the petitioners, submitted that in this case the alleged offence
of granting a loan in contravention of s. 295, sub-s. (4), of the Companies Act
has been made good as the loan has been repaid by the company and, therefore,
in the facts and circumstances of the case, the petitioners should be relieved
from the consequence of default and there should be injunction against the
respondent from taking any criminal proceedings against the petitioners.
Now, the point arose as to whether the application
under s. 633 is maintainable after the said complaint has been filed and
cognizance of the same being taken by the Metropolitan Magistrate and if so as
it is admitted that under sub-s. (2) of s. 633 it is only at the stage of
apprehension of any criminal proceedings, this court has jurisdiction to issue
an order under sub-s. (1) of s. 633 relieving the defaulting officers and
directors of the company from the consequence of the default in the facts and
circumstances of the case if the court is satisfied in this particular case.
There cannot be any doubt that, in the facts and circumstances of this case, it
must be held that the offence, if any, has been made good by repayment of the
loan and the director concerned has also resigned from the Board which has been
accepted. Therefore, the offence, no longer is continuing and it has been made
good and, in the facts and circumstances of the case, the court will not
hesitate to relieve the petitioners from the consequence of such default and
issue the necessary injunction.
The point involved is whether filing the complaint
and making an application for condoning the delay under s. 473 of the Cr P.C.
can be Said to be the institution of a criminal proceeding or initiation of a
proceeding before the delay is condoned and the offence is taken cognizance of
by the criminal court where the proceeding has been filed. In order to
appreciate the question involved, Mr. Mukherjee drew my attention to various
sections of the Criminal Procedure Code, firstly, to s. 2(d), where a complaint
is defined as follows :
"Clause (d) : 'Complaint' means any allegation made orally or in
writing to a Magistrate, with a view to his taking action under this Code, that
some person, whether known or unknown, has committed an offence, but does not
include a police report,"
Thereafter, Mr. Mukherjee drew my attention to s. 190
in Chap. XIV with the heading "Conditions requisite for initiation of
proceedings" :
"Section 190(1).— Subject to
the provisions of this Chapter any Magistrate of the first class, and any
Magistrate of the second class specifically empowered in this behalf under
sub-section (2) may take cognizance of any offence—
(a) upon
receiving a complaint of facts which constitute such offence ;
(b) upon
a police report of such facts ;
(c) upon information received from any person
other than a police officer, or upon his own knowledge, that such offence has
been committed..."
Then s. 192
of the Cr. PC provides as follows :
"Section 192(1).—Any Chief
Judicial Magistrate may, after taking cognizance of an offence, make over the
case for enquiry or trial to any competent Magistrate subordinate to him."
Then s. 200
under Chap. XV with the heading "Complaints to Magistrates" :
"Section 200.—A Magistrate
taking cognizance of an offence on complaint shall examine upon oath the
complainant and the witnesses present, if any, and the substance of such
examination shall be reduced to writing and shall be signed by the complainant
and the witnesses, and also by the Magistrate :
Provided that, when the complaint
is made in writing, the Magistrate need not examine the complainant and the
witnesses."
Then s. 204
in Chap XVI—"Commencement of proceedings before Magistrates."
"Section 204(1).—If in the
opinion of a Magistrate taking cognizance of an offence there is sufficient
ground for proceeding, and the case appears to tie—
(a) a summons-case, he shall issue his summons
for the attendance of the accused, or
(b) a warrant-case, he may issue a warrant, or,
if he thinks fit, a summons, for causing the accused to be brought or to appear
at a certain time before such Magistrate or (if he has no jurisdiction himself)
some other Magistrate having jurisdiction.
(2) No summons or warrant shall
be issued against the accused under sub section (1) until a list of the
prosecution witnesses has been filed.
(3) In a proceeding instituted
upon complaint made in writing, every summons or warrant issued under
sub-section (1) shall be accompanied by a copy of such complaint."
Then s. 468 :
"468(1).—Except as otherwise
provided elsewhere in this Code, no Court shall take cognizance of an offence
of the category specified in subsection (2), after the expiry of the period of
limitation.
2 The period of limitation shall
be—
(a) six
months, if the offence is punishable with fine only;
(b) one year, if the offence is punishable with
imprisonment for a term not exceeding one year ;
(c) three years, if the offence is punishable
with imprisonment for a term exceeding one year but not exceeding three
years."
Then s. 469
(1) : "The period of limitation, in
relation to an offender, shall commence,—
(a) on the date of the offence ; or
(b) where the commission of the offence was
not known to the per son aggrieved by the offence or to any police officer, the
first day on which such offence comes to the knowledge of such person or to any
police officer, whichever is earlier ; or
(c) where it is not known by whom the
offence was committed, the first day on which the identity of the offender is
known to the person aggrieved, by the offence or to the police officer making
investigation into the offence, whichever is earlier.
(2) In computing the said period, the day
from which such period is to be computed shall be excluded. "
Then s. 473 :
"Notwithstanding anything contained in the foregoing provisions of this
Chapter, any court may take cognizance of an offence after the expiry of the
period of limitation, if it is satisfied on the facts and in the circumstances
of the case that the delay has been properly explained or that it is necessary
so to do in the interests of justice."
AH these
sections, being ss. 468, 469 and 473, occur in Chap. XXXVI of the Cr. PC which
has a heading "Limitation for taking cognizance of certain offences."
In this
particular case it is admitted that on 12th June, 1980, a petition under s. 473
of the Criminal Procedure Code was filed. The complaint against the petitioners
was barred, otherwise there was no question of condoning the delay in filing
the complaint. It also appears from the order sheet that on 12th June, 1980,
the said matter was not taken up and it was put up for hearing on 4th November,
1980. In between, the present petition was filed on 28th June, 1980, and an ad
interim order of injunction was obtained against the respondent from commencing
or instituting any criminal proceeding for the alleged offence under s. 495 of
the Companies Act on 2nd July, 1980. Thereafter, direction for affidavits was
given and the respondent filed an affidavit in this application affirmed by one
Sourindra Narayan Guha dated 15th January, 1981. In para. 19 of the said
affidavit-in-opposition it is mentioned about the application under s. 473 of
the Cr. PC for condoning the delay, which was filed on 12th June, 1980, and the
delay was condoned by the order dated 4th November, 1980, and the offence was
taken cognizance of by the Chief Metropolitan Magistrate and the case was
transferred to the Metropolitan Magistrate, 17th Court. It is strange that in
the said affidavit it is not mentioned that the order condoning the delay and
taking cognizance of the alleged offence was passed on 4th November, 1980, and
not on 12th June, 1980, as would appear from the photostat copy of the order
sheet. Again in para. 22 of the said affidavit it is repeated that the present
petition was moved by the petitioners on or about 2nd July, 1980, whereas the
criminal case was initiated on 12th June, 1980, before the learned Chief
Metropolitan Magistrate and as such this court has no jurisdiction to stay the
criminal proceeding and has no power to grant any relief to the petitioners and
the present petition is misconceived and not maintainable in law. It appears,
the said affidavit is not only misleading but incorrect facts are stated, which
is clear from the photostat copy of the order sheet and the records of the
present application as the delay was not condoned under s. 473 of the Cr. PC on
12th June, 1980, but the same was ordered on 4th November, 1980, when also the
petition of complaint was filed after the condonation of the delay by the Chief
Metropolitan Magistrate and cognizance was taken by the Chief Metropolitan
Magistrate. In the meantime, on 28th June, 1980, the present application was
filed and on 2nd July, 1980, an ad interim order of injunction was issued
against the respondent from commencing any proceeding against the petitioners
in terms of the notice dated 12th May, 1980, or any similar notice for the
alleged violation of the provisions of s. 495 of the Companies Act, 1956. But
the whole question turns round the fact whether the offence was taken
cognizance of before the present application was made and an ad interim order
of injunction was issued.
Mr. Mukherjee, after drawing my attention to the said
sections of the Cr. PC, submitted that on the admitted facts the violation of
s. 295 was known to the respondent from the balance-sheet of the company. As
the filing of the complaint was barred, the respondent made an application for
condonation of the delay under s. 473 of the Cr. PC and filed the same on 12th
June, 1980, but no order was made condoning the delay as there was a congestion
in the diary and the same was put up on 4th November, 1980. Therefore, on 12th
June, 1980, it cannot be said that cognizance of the said offence was taken of
or any proceeding was initiated against the accused in respect of the alleged
offence under s. 295 of the Companies Act, as, unless the bar of limitation was
lifted by condonation of delay by an order of the Magistrate made under s. 473
of the Cr. PC, there cannot be any question of taking cognizance of the offence
or filing of the complaint against the accused. Before that could be done, on
4th November, 1980, the present petition was filed in this court on 28th June,
1980, and an ad interim order of injunction was obtained against the respondent
from filing any complaint in respect of the offence pursuant to the letter
dated 12th May, 1980, against the petitioners. Therefore, admittedly, the said
petition of complaint was filed during the period when the injunction order
against the respondent, Registrar of Companies, West Bengal, was in force and
operative as issued by this court in this petition which was filed on 28th
June, 1980, and an ad interim injunction was passed on 2nd July, 1980.
Therefore, the said petition of complaint was filed in violation of the
injunction order and cognizance of the offence was taken by the Magistrate
during the period when the injunction was in force and operative against the
respondent. Therefore, the said proceeding is bad and a nullity according to
the well-known principle that anything done in violation of the injunction
order is of no effect and non est.
Mr. Mukherjee drew my attention also to a decision in
Krishna Sanghi v. State of Madhya Pradesh [1977] Cri LJ 90, where a Single
Bench of the Madhya Pradesh High Court, dealing with an application for
condonation of delay in filing a criminal complaint, observed that after the
delay is condoned by the court on its being satisfied in the manner as
mentioned in the said decision, then alone it would register the case and
proceed with the same in accordance with law. Before condoning the delay, according
to the principles of natural justice, the accused persons must be heard before
passing an order in the record, inasmuch as the order is bound to affect the
valuable right which accrues to the accused which cannot be allowed to be taken
away lightly. As such, the accused are to be heard when an application under s.
473 of the Cr. PC is moved by the prosecution before cognizance is taken.
Relying on the said principle Mr. Mukherjee rightly submitted that in this case
admittedly no notice was served on the accused persons before the application
under s. 473 of the Cr. PC was disposed of by the Metropolitan Magistrate,
Calcutta, on 4th November, 1980. Therefore, the said order is also vitiated and
against the principle of natural justice as laid down in the said decision. Mr.
Mukherjee also cited a decision in E. Pedda Subba Reddy v. State, AIR 1969 AP
281, where the meaning of the word "cognizance" occurring in s. 190
of the Cr. PC has been interpreted as indicating the point of time when a criminal
court first takes notice of an offence. Taking cognizance is not the same thing
as the initiation of the proceedings, as cognizance is taken of the offence and
not of the persons. Therefore, taking "cognizance" of an offence by a
Magistrate does not necessarily lead to the conclusion that the judicial
proceedings against the offender has been started. Relying on the said
principle Mr. Mukherjee, in my view, rightly submitted that in this case before
the order of 4th November, 1980, made ex parte by the Metropolitan Magistrate,
it cannot be said that any criminal proceeding has been initiated against the
accused who are the petitioners in this application. Therefore, Mr. Mukherjee
rightly submitted that in the circumstances of this case where there was an ad
interim injunction against the respondent to take any proceedings against the
petitioners pursuant to the letter dated 12th May, 1980, or any other letter,
he was debarred or incapacitated to move the said criminal court on the 4th
November, 1980, and to obtain the said order of condonation of delay under s.
473 of the Cr. PC and cognizance of the offence under s. 295(4) as recorded in
the said order. The order must be said to be in violation of this court's order
of injunction and also against the principles of natural justice and in that
view it must be said to be non est and a nullity so far as the proceeding
before the criminal court is concerned. Mr. Mukherjee also referred to the
decision in Sri Krishna Parshad v. Registrar of Companies [1978] 48 Comp Cas 397
(Delhi), where, from the judgment it appears, the initiation and cognizance of
the offence before the proceeding under s. 633(2) of the Companies Act was
admittedly pending and, therefore, it was held that the court had no
jurisdiction to grant any relief under s. 633(2) as the criminal proceeding was
pending and there was no question of apprehension of criminal proceeding.
Therefore, the said case and also from the judgment it is not quite clear
whether the questions which have arisen in this case were before the Delhi High
Court, which was a Single Bench, or not.
Mr. Sunil Mukherjee, appearing for the Registrar,
submitted relying on the said decision in [1978] 48 Comp Cas 397 (Delhi), that
this court has no jurisdiction and, in the facts and, circumstances of this
case, the application should be dismissed. I am of the view that there is no
substance or merit in the contention raised on behalf of the respondent as the
said criminal proceeding is clearly in violation of the order of injunction
passed by this court and it is strange enough that before the criminal court
the respondent has not brought to the notice of the court the order of this
court dated 2nd July, 1980, by which the respondent was restrained from
proceeding or taking any step against the petitioners pursuant to the letter
dated 12th May, 1980, by way of initiating any criminal proceeding. It must be
held, according to the provisions of the Criminal Procedure Code, which I have
set out before, that there was no pending criminal proceeding or initiation of
any criminal proceeding against the petitioners before the present application
was made. It is only after the present application was made and an ad interim
order was issued, as hereinbefore stated, that the said order condoning the
delay was passed ex parte without any notice to the accused and cognizance of
the offence was taken at the instance of the respondent, who was restrained by
an injunction of this court from taking any step in the matter. Therefore, the
said act on the part of the respondent is clearly violative of the injunction
order and prima facie was guilty of contempt but Mr. Sunil Mukherjee has
rightly tendered his apology on behalf of the respondent and submitted that
through ignorance and good faith they have initiated the said proceeding and as
the diary of the Magistrate was congested on 12th June, 1980, the same was
adjourned till 4th November, 1980, and on the adjourned date the order was made
by the Magistrate. Photostat copies of the said orders are produced before me.
There is no dispute that the petitioners have already repaid the loan and the
person concerned, being a common director, also resigned which was accepted.
Therefore, in these circumstances, I am satisfied that the petitioners should
be relieved from the consequence of default as there is no longer any default
which had been made good as soon as the same was brought to the notice of the
petitioners. Further, it appears that the offence which is alleged to be in
contravention of s. 295(4) of the Companies Act was known to the respondent
from the balance-sheet of the company and the same was barred and, therefore,
an application under s. 473 of the Criminal Procedure Code for the condonation
of delay was made by the respondent in which the order was made ex parte in
violation of the principles of natural justice and also in violation of this
court's order of injunction on 4th November, 1980. In these circumstances, the
said order is of no effect and a nullity and without jurisdiction and,
therefore, it cannot be taken any notice of. In that view of the matter, it
cannot be said that any criminal proceeding was pending as no cognizance of the
offence was taken of before the present application was made and an ad interim
order was passed as hereinbefore stated.
Therefore, I have no hesitation in passing an order
confirming the ad interim order and relieving the petitioners from the
consequences of the alleged default under s. 295 of the Companies Act, which
has already been made good by refund of the loan and resignation of the common
director.
In the peculiar circumstances
of this case, I am making no order as to costs.