Andhra HC (Pre-Telangana)
Progressive Aluminium Ltd. And Ors. vs Registrar Of Companies And Anr. on 6 December, 1995
Equivalent citations: 1996(1)ALD(CRI)684, 1996(2)ALD(CRI)81, [1997]89COMPCAS147(AP)
JUDGMENT D.H. Nasir, J.
1. Company Petition No. 25 of 1993 is filed under section 633(2) of the Companies Act, 1956 (for short "the Act"), for securing release of petitioners Nos. 2 of 10 who are directors of petitioner No. 1-company from criminal liability under section 63(1) of the Act.
2. The petitioners have also filed Crl. Petition No. 1304 of 1993 to quash C.C. No. 16 of 1993 on the file of the Special Judge for Economic Offences, City Criminal Courts, Hyderabad, in which the petitioners are prosecuted for offences punishable under section 63 read with section 55 of the Act, which is punishable with imprisonment for a terms which may extend to two years or with fine which may extend to Rs. 5,000, or with both.
3. Since the subject-matter of both the above proceedings is the same, the same are being disposed of by this common order.
4. The facts in brief are as follows :
Petitioner No. 1, Progressive Aluminium Limited, was incorporated under the Act, and petitioners Nos. 2 to 10 are its directors. Petitioner No. 1-company applied to the Central Government and obtained its consent for issuing equity shares to the public. The company also obtained industrial licence for establishment of a new industrial undertaking a Kallakal village, Medak district, Andhra Pradesh, for manufacture of aluminium extrusions with annual capacity of 5,000 metric tons. The company proposed to issue shares to the public to an extent of Rs. 1,43,00,000 divided into 14,30,000 equity shares of Rs. 10 each for cash at par. After obtaining the necessary sanction and approval, the company issued a prospectus to the public, which according to the company was strictly in accordance with the requirements of the Act.
5. Petitioner No. 1-company was promoted by M. Rajendra Prasad, A. Seshagiri Rao and Progressive Constructions Limited (for short "PCL"). In regard to one of the promoters, it had been stated in the prospectus that :
"Progressive Constructions Limited is a large construction company engaged in construction activity for two and a half decades."
6. In the issue highlights it had been stated as under :
"Promoted by Progressive Constructions Limited, existing profit-making and dividend-paying company with a proven track record in the construction industry for two and a half decades."
7. It had also been stated in the prospectus in regard to the status of the project that :
"The company is expected to go in for trial runs during October, 1990, and commence commercial production immediately thereafter."
8. In the issue highlights it is stated as under :
"No gestation period : commercial production to begin in November, 1990."
9. It is further the case of the petitioner that PCL, one of the promoters, had been originally incorporated as a private limited company, vide Certificate of Incorporation No. 3337 of 1981-82, granted by the Registrar of Companies on December 23, 1981. The main object of PCL was "to acquire the business carried on by Progressive Engineering Company, having its office at Hyderabad, with all its assets and liabilities as a going concern, and to carry on the business of undertaking of all types of civil, electrical and mechanical works, civil constructions, construction of projects, dams, undertaking of supply works, railways works, military and other engineering works with State and Central Governments, Corporations, Municipalities, Parishads and with such other local self-Government bodies or authorities or individuals or bodies and in manufacturing of engineering and other implements and in such other commodities that may be used in construction works.
10. It is further the case of the petitioners that Progressive Engineering Company was established as a partnership firm in 1966 and had subsequently undergone changes in its constitution, and, therefore, according to the company, the statement made in the prospectus was referring to the business of construction itself spanned over a period of two and a half decades. It was not the company which physically had the experience of carrying on the business, but the persons who constituted the company had the experience of carrying on business. The promoters of PCL were the partners of the firm, PEC, and it was through their experience that the company had acquired the experience. Further, according to the company, the date of commencement of commercial production was indicated only as a probable date.
11. The respondent-Registrar of Companies issued a notice dated February 17, 1993, to the company stating that in terms of sections 63(1) of the Act, there were untrue statements, and that, therefore, every person who authorised the issue of prospectus had incurred the liability of being punishable with imprisonment for a term which may extend to two years or with fine which may extend to Rs. 5,000 or with both. The company was called upon to show cause why penal action should not be initiated against every person show authorised the issue. Similar notices were issued to all other petitioners. In reply to the show-cause notice, it was pointed out that due to circumstances beyond the control of the company, the production could not be commenced in the month of August, 1990. The letter of credit for import of 1,600 tons hydraulic extrusion press, which was the heart of the plant and machinery for the manufacture of aluminium extrusions, was established in October, 1989. After inspection taken by the company, the packing of the machine was completed by the manufacturer at Japan and was sent to Kobe Port in Japan in the month of August, 1990, for shipment to Madras Port. However, due to circumstances beyond the control of petitioner No. 1-company and the manufacturer of the machinery, no suitable ship was available till October 30, 1990. The machine finally arrived at Madras in December, 1990, and was received by the company in the month of January, 1991. The Japanese engineers were reluctant to come to India at that time in view of the Gulf war. Eventually, the engineers from Japan came, and the erection of the press was undertaken between February 17, 1991, and March 27, 1991.
12. Further, according to the petitioner, they had taken reasonable care while approving the statements in prospectus, which had been issued under the Act. There was no intention whatsoever to mislead the public in regard to the terms of the issue. The petitioners further stated that they were professionals, and held responsible positions in society.
13. With these facts in view, the petitioners have come forward seeking a relief to relieve them from the liability, if any, under section 63(1) of the Act.
14. Section 63 of the Act provides as under :
"Criminal liability for misstatement in prospectus. - (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.
(2) A person shall not be deemed for the purposes of this section, to have authorised the issue of a prospectus by reason only of his having given -
(a) the consent required by section 58 to the inclusion therein of a statement purporting to be made by him as an expert, or
(b) the consent required by sub-section (3) of section 60."
15. Section 633 of the Act lays down as under :
"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 proceedings 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."
16. Sub-section (2) of section 633 of the Act makes it clear that the concerned officer may apply to the High Court for relief, if such officer has reason to apprehend that any proceedings will or might be brought against him. In the instance case, we have seen that action had already been taken against the petitioners by prosecuting them for the offence punishable under section 63(1) of the Act, and that is why the petitioners also filed the criminal petition seeking to quash the proceedings against them in C.C. No. 16 of 1993 on the file of the Special Judge for Economic Offences, City Criminal Courts, Hyderabad.
17. Learned counsel for the respondent-Registrar of Companies, drew my attention to the fact that under sub-section (1) of section 63 of the Act, the prosecution could be launched in cases where the prospectus included any untrue statement, whereas under Section 633 of the Act, the court was authorised to relieve an officer of a company, if he (officer) was or was likely to be held liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust, and, therefore, according to learned counsel, the provisions of section 633 of the Act were not attracted in this case. The "untrue statement" was mainly the ground for which the petitioners were prosecuted, which did not entitle the petitioners to seek any relief from the court under section 633 of the Act.
18. Before we proceed to examine the liability of the petitioners under section 63 of the Act and their eligibility for being relieved under section 633 of the Act, a note is required to be taken of the fact that during the pendency of this company petition, the proceedings in C.C. No. 16 of 1993 were stayed by an order dated June 15, 1993, passed in C.M.P. No. 1457 of 1993.
19. As seen earlier, the allegation is that in the prospectus it had been stated that "Progressive Constructions Limited is a large construction company engaged in construction activity for two and a half decades", and it had also been highlighted in the prospectus that "the company was promoted by Progressive Constructions Limited, existing profit-making and dividend-paying company with a proven track record in the construction industry for two and a half decades". It was further highlighted in the prospectus that "the company is expected to go in for trial runs during October, 1990, and commence commercial production immediately thereafter". The issue highlights also included the statement that "no gestation period : Commercial production to begin in November, 1990".
20. On behalf of the petitioners, learned counsel submitted that the firm, Progressive Engineering Company, was established as a partnership firm in the year 1966, and had subsequently undergone changes in its constitution, and, therefore, the statement made in the prospectus was indicative of the fact that the business of construction itself spanned over a period of two and a half decades. Further, according to learned counsel, in case of corporate bodies, whether a limited company or a statutory body or a partnership firm, the business fell or flourished, according to the experience and wisdom of the persons manning such corporate bodies, viz., the directors or secretaries or partners or managers, as the case may be. The corporate body itself could not claim actual physical experience in any field. Whatever it claims by way of experience had to be attributed to the persons manning the organisation and not to the corporate body itself. Further, according to learned counsel, the promoters of PCL were the partners of the firm Progressive Engineering Corporation, and it was through their experience that the company claimed that it had acquired experience in a particular field. Learned counsel further pointed out that after receipt of show-cause notice dated February 17, 1993, from the Registrar of Companies, calling upon petitioner No. 1-company, to show cause why penal action should not be initiated against every person who authorised the issue, for contravening the provisions of section 63(1) of the Act, cause was shown by the company why prosecution was not required to be initiated by letter dated February 26, 1993, addressed to the Registrar of Companies. In paragraph 2 of the said explanation it was pointed out that one of the main objects to be pursued by PCL on its incorporation was to acquire the business carried on by the then existing partnership firm, viz., Progressive Engineering Company, having its office at Hyderabad, with all its assets and liabilities as a going concern and carry on the business of Progressive Engineering Company, undertaking all types of civil, electrical and mechanical works, civil constructions, construction of projects, dams, undertaking of supply works with the State and Central Governments, Municipalities and other semi-Government bodies or authorities. It was further explained that the partnership firm was formed in the year 1966 and executing works in the construction field. After acquiring the partnership firm in 1982, PCL enlarged the construction activities and grew in size and operations. The promoter directors/first directors of PCL were A Seshagiri Rao and M Rajendra Prasad, who were the partners of the firm and it was these two persons who had been actually running the business of Progressive Engineering Company. Later on after incorporation of PCL they continued the operations for two and a half decades. If was under these circumstances that the experience of two and a half decades could be attributed to PCL along with two other promoters. Therefore, according to learned counsel for the petitioners, it could not alleged that untrue statements were made in the prospectus dated August 3, 1990, offering shares to the public.
21. It was further explained in reply to show-cause notice that the project for manufacture of aluminium extrusions was originally scheduled for production from October, 1990, onwards. The letter of credit for import of 1,600 tons of hydraulic extrusion press from Japan, which was the heart of the project for manufacture of aluminium extrusions was opened in October, 1989, and after inspection, the supplier from Japan, packed the press and sent the same to Kobe port, Japan, in the month of August, 1990, for shipment to Madras port. However, due to circumstances beyond the control of the company and the supplier, due to non-availability of a suitable ship from Kobe port to Madras port, the press could not be shipped till October 30, 1990. The press finally arrived during December, 1990, at the Madras port, and it was installed at the factory site during January, 1991. It was further explained that on account of reluctance on the part of Japanese engineers to travel to India due to the Gulf crisis during January and February, 1991, the erection and commissioning of the press could be done only from February 17, 1991, and March 27, 1991. The erection and commissioning of two other imported equipment, viz., casting machine and extrusion puller, was also done simultaneously with the erection and commissioning of the extrusion press. Thus, it was for these reasons, the delay took place in commissioning of the extrusion press and stabilising operations of the casting machine were largely responsible for the delay in commercial production. It was further pointed out that these unavoidable developments could not have been envisaged at the time of issue of prospectus, and, therefore, no ulterior motive could be attributed to the petitioners on that account.
22. It was further argued on behalf of the petitioners that the highlights mentioned in the prospectus should not be read in isolation, but should be read as a whole. The statement included in the prospectus could be deemed to have been untrue, if it was misleading in the form and context in which it was included. A mere representation of something expected to happen or likely to happen in future was not a misrepresentation of facts if the expected future event stands disturbed owing to unavoidable circumstances, and taking into consideration the facts and circumstances in totality, according to learned counsel for the petitioners, it would become evident that the statements were made in the prospectus honestly believing them to be true.
23. In respect of his submissions, learned counsel for the petitioners pressed into service the decision of the Calcutta High Court rendered in the case of East India Hotels Ltd., In re [1980] 50 Comp Cas 381, wherein it was held that after considering the entire circumstances of a particular case if the court came to the conclusion that the petitioner had acted reasonably and honestly then they might be relieved either wholly or in part, on such terms as the court may think fit and proper for the acts of negligence, default, etc., and that this was the clear position of section 633 of the Companies Act, 1956. It is further observed that the whole question was whether the petitioners should be given relief having regard to the facts and circumstances of the case and whether they ought fairly to be excused on the ground that they had acted honestly and reasonably. In other words, could the petitioners be said to have acted honestly and reasonably in the facts and circumstances of the case. As the default was admitted and the acceptance of deposit was in violation, i.e., in excess of the permissible limit within the meaning of section 58A of the Companies (Acceptance of Deposits) Rules, 1975, which came into operation on February 3, 1975, could the petitioners be relieved of such default, breach and negligence. It is further observed that the company had acquired an international reputation and was running a chain of five-star hotels in India, which naturally involved large sums of money, and for raising adequate finance the company had to accept such deposits. The company had foreign collaborations and acquired technical know-how and expertise for running big hotels, both in India and abroad, and thereby earning large amount of foreign exchange through tourism and otherwise. It also transpired that the petitioner had taken all reasonable and possible steps, including making an application before the Reserve Bank of India being dated May 5, 1977, inter alia, for granting exemption under section 58A(7)(a)(ii), and the same was only rejected by letter dated May 21, 1977, by the Reserve Bank of India. It is further observed that the company by letter dated May 25, 1977, asked for personal hearing and also there were other prayers in the same application for exemption before the Reserve Bank of India, dated May 5, 1977, which had not been dealt with by the Reserve Bank of India. It is further observed that after rejection of the application for exemption by the Reserve Bank of India, the company took the opinion of eminent jurists and lawyers and also made the application and obtained an order for maintaining status quo as on July 27, 1977, and in the meantime in September, 1977, the company had secured the said deposits and thereby the excess deposits were wiped out and it became no longer the deposit under section 58A of the Act read with the Companies (Acceptance of Deposits) Rules, 1975. Therefore, it was quite clear that if the loan was secured in terms of Explanation 1 to rule 3(3) of the Companies (Acceptance of Deposits) Rules, 1975, then the same could not be said to be deposits within the meaning of the said rules. Admittedly, the company had acquired deposits, and it appeared prima facie that the same was indeed in compliance with the said Explanation as the amount of the loan did not exceed 25 per cent. of the market value of the asset, which constituted the security for the loan, and the two nationalised banks being Union Bank of India and the Bank of India having been appointed as trustees for the beneficiaries being the depositors specifically securing the said loans which were made by deposit with the company. It was, therefore, held under the given circumstances that the deposits in question could not be said to be in violation of the Companies (Acceptance of Deposits) Rules, 1975, as they were not deposits any longer, but loans secured by the mortgage, and, therefore, it could not be said that the petitioner had not taken all possible steps for the purpose of regularising or making good the default by accepting deposits in excess of the limit under section 58A of the Act read with the Companies (Acceptance of Deposits) Rules, 1975.
24. Reliance was next placed by learned counsel for the petitioners on the decision of the Delhi High Court rendered in the case of Ashok Bhatia v. Registrar of Companies [1993] 76 Comp Cas 405, wherein it was observed that petitioners Nos. 1 to 8 were directors of a company, petitioners No. 9, one of main objects of the company was financing of industrial enterprises and investment in shares of companies. The Regional Director of the Company Law Board, after inspection of the company's books of account, wrote a letter to the company and its directors informing them that they had contravened the provisions of sub-section (1) of section 370 of the Act, by not passing any special resolution of its members and by not obtaining the appropriate approval of the Central Government for giving such loans to bodies corporate in excess of the limits prescribed under section 370(1) of the Act. The company replied that it was under the bona fide belief, having taken a legal opinion, both before and after the amendment of the Act in 1988, that the exemption under section 370(2)(a)(v) and section 370(2)(b)(v) was available to it since one of its main objects was the financing of industrial enterprises. The Regional Director, however, did not accept the explanation of the company. The company and its directors moved the High Court for relief under section 633(2) of the Act. The respondents objected that the petition was premature.
25. With the above facts and circumstances in view, the Delhi High Court held that since the clear conclusion of the respondents was that the company had contravened the provisions of section 370(1) of the Act, the petitioners' apprehension of prosecution was not baseless, moreover an application to the High Court under section 633(2) would not lie after prosecution had been launched when section 633(1) alone was applicable. The petition, was, therefore, maintainable and not premature. The High Court further held that the directors had acted with ordinary prudence and had taken reasonable care to ensure that there was no conscious violation of the provisions of law. Having regard to all the circumstances of the case, they had to be excused and relieved from their liability if any action had been brought by the Company Law Board or any other authority under the Act. The High Court, however, held that the protection under section 633 of the Act was not available to the company and was confined only to the officers of the company.
26. In the case before us, it could equally be seen that the petitioners have not acted with a mala fide intention of luring the public for subscribing to the shares of the company under a false representation that the company had experience of two and a half decades. The only default, if at all it could be termed as a default, was the omission on the part of the promoters to clarify that the experience of two and a half decades in the field was of the persons who were manning the earlier partnership firm and not the partnership firm itself. However, such omission could not be treated as a deliberate omission with a mala fide intention of suppressing any truth from the public, and in fact as submitted by learned counsel for the petitioners and not controverted by learned counsel for the respondents-Registrar of Companies, that the company has successfully launched production on the strength of the experience of the directors, and that neither any complaint had been made that the company had not lived up to its expectations nor in actual practice it could be seen that any situation had arisen which would lend any credence to the implied allegation that any wrongful attempt was made by the promoters by making the aforesaid statement in the prospectus. Delay indeed has taken place in commencing production. However, the explanation tendered by the petitioners for delay does not call for any stricture to be passed against the promoters that they were actuated by any mala fide intention which resulted in delay or that any wrongful gain was derived by the promoters by intentionally allowing the delay to creep in. The cause for the delay appears to be quite reasonable. In fact the subsequent developments and the progress made by the company in the direction of fructifying the objects for which the company was incorporated, discharges or acquits the promoters of any allegation that the alleged misstatements in the prospectus were made with any dishonest intention of practising fraud upon the subscribers of the company. Of course, the liability of being prosecuted cannot be viewed lightly from subsequent developments. However, in the face of our finding that the intentions were not mala fide, which stands corroborated by the subsequent developments, the prosecution loses its force and substance, more particularly so because this could be categorised as an economic offence, where wrongful pecuniary gains is the main consideration, which is conspicuous by its absence in this case.
27. It was argued on behalf of the respondent-Registrar of Companies that this court was deprived of its jurisdiction to entertain the petition under section 633(2) of the Act on account of the fact that the apprehension of launching prosecution against the petitioners had in fact become a reality, because the prosecution had already been launched against petitioners Nos. 2 to 10 by the time when the High Court's orders restraining the respondents-Registrar of Companies from launching prosecution was received. This arguments, however, does not hold goods, having regard to the fact that on the date on which the company petition was made, the petitioners legitimately carried an apprehension that the prosecution would be launched against them. If the launching of prosecution is an earlier event, it would frustrate the petitioners' right to move the court for orders under section 633(2) of the Act. In the present company petition, this High Court had passed an order on April 30, 1993, not to take any final decision in the matter of launching prosecution. The said order was received by the Registrar of Companies only on June 7, 1993, and, therefore, the respondent-Registrar of Companies was not aware of the same till that day. This situation makes it clear that on the date on which this company petition was made, the cause for moving the court under section 633 of the Act did exist, and, therefore, the petition cannot be dismissed merely on the ground that subsequent to the filling of the petition, the prosecution had been launched.
28. Adverting now to the liability of the petitioners to be prosecuted under section 63 of the Act, the main ingredient of the provision is that every person who authorised the issue of the prospectus is liable to be punished with imprisonment and fine if it is shown and established that the prospectus included any untrue statement. The above discussion throws ample light on the proposition whether the statement with regard to two and a half decades' experience included in the prospectus could be termed as an untrue statement, and we have already recorded a finding that it could not be termed as an untrue statement mainly because it was not besmeared with any mala fide intention of practising fraud upon the subscribers apart from the fact that the statement cannot be altogether branded as a false statement, having regard to the fact that the partners of PEC, who were the promoters of the first petitioner-company did have the necessary experience in the field spread over a period of two and a half decades. The statement, therefore, cannot be branded as wholly untrue. It suffered only from want of a clarification that the experience was that of the persons manning the partnership firm and not the firm itself. In fact, even the omission of such clarification cannot be treated as rendering any credibility to the substratum of the statement because it is a matter of ordinary prudence that the experience of a body corporate is always that of the persons manning the body corporate and not of the body corporate itself. I am, therefore, not in agreement with the submissions made by learned counsel for the Registrar of Companies that any cause existed to believe that the statements in question made in the prospectus were untrue statements so as to believe that the offence punishable under section 63 of the Act had been committed, and for that matter, the petitioners had become liable to be prosecuted for the alleged offence. In that view of the matter, therefore, not only are the petitioners entitled to protection under section 633(2) of the Act, but they can also not be treated as having incurred any liability for the offence punishable under section 63 of the Act. Therefore, the prosecution deserves to be quashed at the threshold.
29. An argument was also advanced on behalf of the respondent-Registrar of Companies that this court had no jurisdiction to entertain the criminal petition for quashing the proceedings under section 63(1) of the Act under original jurisdiction having regard to the fact that under the Act, the same ought to have been moved by the court having criminal jurisdiction. A note in this regard is required to be taken of the fact that by an order passed on September 12, 1995, by the Hon'ble Chief Justice, we directed to post the present criminal petition along with C.P. No. 25 of 1993, before this court, as this court had already been seized of the company petition and the subject-matter of the criminal petition was the same. Hence, the question of jurisdiction to consider and decide this petition for quashing the prosecution does not suffer from any vice which could unsettle the authority of the court to deal with the same.
30. In the result, therefore, the company petition as well as the criminal petition are allowed. The proceeding in C.C. No. 16 of 1993 on the file of the Special Judge for Economic Offences, City Criminal Courts, Hyderabad, is hereby quashed. No costs.