Madras High Court
Madhavan Nambiar vs Registrar Of Companies on 9 November, 2001
Equivalent citations: [2002]108COMPCAS1(MAD)
JUDGMENT E. Padmanabhan, J.
1. 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 by the respondent herein.
2. This court ordered notice to the respondent on August 24, 1999. The respondent has been served and the respondent also filed a counter-affidavit.
3. Heard Mr. Arvind P. Datar, learned senior counsel appearing for the petitioner and Mr. K. Sridhar, Senior Central Government Standing Counsel, appearing for the 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. Chettiar 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.
4. 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 irregu-larities 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.
5. 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 is a 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 cannot 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.
6. ' 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.
7. 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 283(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 has no information since the said company had not filed any returns after March 31, 1992. The petitioner was the director of the company with effect from June 27, 1996. The respondent is not aware of the board's resolution passed by the company conferring substantial powers of management on the said 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 is liable to be prosecuted for the violations pointed out as he was director of the 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.
8. 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 ?
9. 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).
10. 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 company') 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 Mittal.
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."
11. 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, 297, 301 and 299 of the Companies Act ?
B. Whether the petitioner's claim that he is an ex officio director/chairman and, therefore, he is not liable to be proceeded against for one or more of the alleged violations is sustainable ?
12. In respect of the very same show-cause notices and in respect of the same violations 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. 183 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.
13. It may be that the petitioner may not be a whole-time director, but that does not mean he is exonerated of the statutory obligations which are imposed under the Act and the rules and he cannot 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 thereunder. 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 care in the affairs of the company.
14. In the matter of proceedings for negligence, default, breach of duty, misfeasance 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.
15. Section 5 of the Companies Act defines the expression "officer who is in default". The expression means either (a) the managing director or managing directors ; (b) the whole-time director or whole-time directors ; (c) the manager ; (d) the secretary ; (e) any person in accordance with whose directions or instructions the board of directors of the company is accustomed to act; (f) any person charged by the board with the responsibility of complying with that provision ; (g) any director or directors who may be specified by the board in this behalf or where no director is so specified, all the directors.
16. Section 29 of the Companies Act provides the general power of the board and such power has been exercised by the petitioner as a member of the board or the chairman of the board with respect to the affairs of the company. Therefore it follows there cannot be a blanket direction or a blanket indemnity in favour of the petitioner or other directors who have been nominated by the Government either ex officio or otherwise. Hence the second point deserves to be answered against the petitioner.
17. As regards the first contention, it is contended by Mr. Arvind P. Datar, learned senior counsel appearing for the petitioner that the company or its board had resolved that Thiagaraj S. Chettiar shall be the director in charge of the company of all its day-to-day affairs and, therefore, the petitioner, an ex officio chairman and director, cannot be expected to attend to the affairs on a day-to-day basis. This contention though attractive cannot be sustained as a whole. There may be a delegation, but ultimately it comes before the board and it is the board and the general body of the company which are responsible.
18. As regards the alleged violation of Section 58A(2) read with Rule 2(b)(ix), Rule 3(2)(i), Rule 10, with respect to which the petitioner is being threatened with a prosecution under Section 58A(6) read with Rule 11, Rule 3(2)(i) applies Only if the deposit exceeds the limit and the alleged loan advanced by the director in charge to the company is within the prescribed limit. Being a loan and not being a deposit it falls within Section 58A(2), and consequently the petitioner cannot be proceeded against and such an action by the respondent is a misconception of the statutory provision.
19. As regards the alleged second violation it is rightly pointed out that in the balance-sheet Rs. 249 lakhs though not shown under the head contingent liabilities, it has been shown under the notes on accounts in respect of the very same Rs. 249 lakhs and, therefore, there being no material defect or concealment, nor is there any deliberate or wilful act, the petitioner cannot be proceeded against at all.
20. Taking up the next violation namely, violation of Section 292(1)(c), it is rightly pointed out that the said violation relates to the period ending with December 31, 1994. Admittedly the petitioner was not a director during the material period. Incidentally in respect of the violation of Section 301(4) it is 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).
21. 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.
22. 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.
23. 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 is a full time director who is in charge as per the company's resolution and the petitioner is only a member of the board who has to attend the company board meetings. That apart there is 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.
24. 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.
25. In Rabindra Chamaria v. Registrar of Companies [1992] 73 Comp Cas 257; [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.
26. 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.
27. 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."
28. 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.
29. 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 the 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.
30. 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.
31. The company petition is allowed. The parties shall bear their respective costs.