Company Law Board
A. Sivasailam vs Registrar Of Companies on 31 May, 1994
Equivalent citations: [1995]83COMPCAS141(CLB)
ORDER
S. Balasubramanian, Chairman
1. This is an application filed under Section 621A of the Companies Act, 1956 (hereinafter referred to as "the Act"), by Shri A. Sivasailam, chairman-cum-managing director of Tractors and Farm Equipment Limited (hereinafter referred to as "the company") for compounding the offence alleged to have been committed by him under Section 283(2A) read with Section 283(1)(i) and Section 299 of the Act.
2. The facts of the case are that during the course of inspection of the company under Section 209A of the Act, the Inspecting Officer, authorised under Section 209A of the Act, noticed that, vide board resolution passed on December 19, 1990, Ms. Mallika Srinivasan, daughter of the applicant herein, was approved for appointment as vice-president with effect from April 1, 1990; on certain terms and conditions as mentioned in the resolution. The Registrar of Companies, Tamil Nadu at Madras, issued a show-cause notice which was received by the applicant on December 15, 1993, inviting the attention of the applicant to the provisions of Section 299(1) of the Act pointing out that the applicant herein had not disclosed his interest in the appointment of the said vice-president being his relative and also asked the applicant to show cause as to how he participated in passing the resolution for the said appointment in contravention of Section 300(1) of the Act. He was also asked how he, having automatically vacated the office for violation of the provisions of Section 299 of the Act, continued to act as a director in violation of Section 283(1)(i) read with Section 283(2A). In the meanwhile, the Registrar of Companies had also filed prosecution against the applicant on the above charges on December 9, 1993. On receipt of the prosecution notice, the applicant herein desired to avail of the compounding provision under Section 621A of the Act and accordingly has filed this application.
3. The issues that arise for consideration are :
(a) Whether the applicant has violated the provisions of section 299 of the Act ;
(b) if so, whether he has vacated the office under Section 283(1)(i) of the Act ; and
(c) if so, whether his continuing in office would attract the provisions of Section 283(2A) of the Act and, therefore, be compoundable.
4. The vacation of office as per Section 283(1)(i) of the Act arises on account of violation of the provisions of Section 299 which requires disclosure of interest. Therefore, the issue for consideration is whether the applicant had actually violated the provisions of Section 299 of the Act. It was stated during the hearing that separate prosecutions were filed for violation of the provisions of Section 299, Section 300 and Section 283(2A). The Regional Director, Department of Company Affairs, Madras, has already compounded the offences under Section 299 and Section 300. In other words, the applicant had already admitted to have violated the provisions of Section 299 and the cause of action in the present application is the outcome of the violation of Section 299.
5. It was urged during the hearing that the applicant made an application for compounding the alleged offence under Section 299 only because prosecution has been launched and to mitigate the difficulties arising therefrom the compounding application was preferred. The fact of having compounded this offence, it was further urged, should not stand in the way of my having a re-look at the alleged violation of Section 290 especially when full facts relating to the same are placed before me.
6. I have perused the board resolution dated December 19, 1990. Vide paragraph 10.4 of the board resolution, Ms. Mallika Srinivasan was appointed as vice-president. It is seen that there is no mention regarding disclosure of interest by the applicant nor there is any indication that he abstained from voting on this resolution. In regard to violation of Section 300, the offence has already been compounded. As far as non-disclosure is concerned, it is seen from the resolution that this appointment as vice-president and consequential terms of appointment we're in modification of the earlier resolution passed by the board on October 30, 1989. A perusal of the resolution dated October 30, 1989, shows that in paragraph 15 of the said resolution under the heading "Accounts and Administration", Ms. Mallika Srinivasan was appointed as executive director (planning arid co-ordination) with certain terms arid conditions. In this resolution, it has been very specifically stated that Shri A. Sivasailam, managing director of the company, being a relative of Ms. Mallika Srinivasan, abstained from discussion. In other words, the resolution dated December 19, 1990, is nothing but a modification of the earlier resolution dated October 30, 1989, in which Shri A. Sivasailam had disclosed his interest and specific attention of the board has been drawn to this resolution. It is also seen that in the board meeting held on December 19, 1990, vide item 12, a decision was taken to hold an extraordinary general meeting on January 18, 1991, to get the approval of the shareholders on various resolutions, inter alia, including the revision of terms of remuneration in respect of Ms. Mallika Srinivasan. The said item reads as follows :
"Revision of terms of remuneration in respect of Ms. Mallika Srinivasan, a relative of chairman and managing director of the company".
7. The disclosure of interest by a director has been provided for in Section 299 only with a view to ensure that a director who occupies a fiduciary position in the company should disclose his interest in any arrangement or contract either directly or indirectly so that the company is in a position to know whether he is acting in any way prejudicial to the interest of the company or for his own benefit. This section further lays down that such a disclosure should be in the meeting of a board. The object of the provision in the section is not that a director should not have any personal interest in a contract or arrangement but only stipulates that the same should be disclosed. The term "disclosure" means to make others aware of something which they are not aware of. Here the relationship between the applicant and the appointee is that of father and daughter. She was appointed originally in the company in the year 1983 and continues to be in employment till now. The proposition that when the board is aware of the interest of a director in a particular transaction it would not be necessary for such A director to formally disclose his interest in the board has been propounded by the High Court of Mysore in Ramakrishna Rao v. Bangalore Race Club [1970] 40 Comp Cas 674 (Mys). In the instant case before me, only three directors were present in the board meeting held on December 19, 1990, and they were all present during the board meeting held on October 30, 1989, in which there was a specific disclosure by the applicant that Ms. Mallika Srinivasan was his relative. Therefore, the board was aware of the relationship between the applicant and the appointee when the resolution was passed on December 19, 1990. Not only the attention of the board was drawn to the earlier resolution where the applicant had disclosed his interest in the appointment of Ms. Mallika Srinivasan as an executive director (planning and co-ordination), in the same meeting, i. e., on December 19, 1990, vide item 12, there is a specific mention that Ms. Mallika Srinivasan was a relative of the applicant. As a matter of fact the proposal to put this item for consideration by the general body arose only because of the subsisting relationship between the applicant and the appointee. No doubt the applicant has not followed the letter of law by not disclosing his interest while passing the resolution, which according to him also is not correct in the sense there were some defects in minuting of the discussions, but in spirit he had done so especially when we look at item 12 of the same board meeting. Even Section 299 stipulates disclosure of interest in the board meeting in which an item relating to a director having interest is discussed. In this case, even assuming that there was omission on the part of the applicant to disclose his interest at the board meeting held on December 19, 1990, when the terms of appointment of Ms. Mallika Srinivasan was discussed in modification of the resolutions of this board passed on October 30, 1989, yet in the same board meeting he has disclosed his interest in the same matter in item 12.
8. It is also seen from the notice issued for convening the extraordinary general meeting on January 18, 1991, in the Explanatory Note, there is a specific mention that Ms. Mallika Srinivasan is a relative of the applicant. It was further informed that no remuneration as specified in the impugned resolution was drawn by Ms. Mallika Srinivasan till the same was approved by the extraordinary general meeting.
9. From the narration of the facts it is abundantly clear that the applicant has not violated the provisions of Section 299 and, therefore, does not come under the mischief of Section 283(1)(i) and, therefore, he is not liable for imposition of any penalty under Section 283(2A) of the Act and the question of compounding, therefore, does not arise. Under these circumstances, it is a fit case for the Registrar of Companies, Tamil Nadu at Madras to withdraw the prosecution already launched. This is more so, when the prosecution was filed even before the applicant was in receipt of the show-cause notice and before his reply to the show-cause notice was received by the Registrar of Companies.
10. Accordingly the application is disposed of without any order relating to compounding the offence.
11. The Bench Officer will send a copy of this order to the Registrar of Companies, Tamil Nadu at Madras specifically drawing his attention to paragraph 9 of this order for necessary action.