Bombay High Court
Jagjivan Hiralal Doshi And Others vs Registrar Of Companies on 28 July, 1988
Equivalent citations: [1989]65COMPCAS553(BOM)
JUDGMENT G.H. Guttal, J.
1. The directors of Amar Dye-Chem. Ltd. (in liquidation) have filed these petitions for an order that they be relieved from any criminal proceedings that might be brought against them for default, negligence, misfeasance, etc., in compliance with the provisions of section 58A of the Companies Act and the Companies (Acceptance of Deposits) Rules, 1975. The applications are made under section 633 of the Companies Act. The Companies Act, 1956, and the Companies (Acceptance of Deposits) Rules, 1975, are hereinafter referred to as "the Act" and "the Rules", respectively.
2. J H Doshi and H J Doshi, who are, respectively, the petitioners in Company Petitions Nos. 502 of 1984 and 506 of 1984 were, at the relevant time, full time directors of the company. The former was the chairman of the company. The petitioners in Company Petitions Nos. 528 of 1984, 529 of 1984 and 530 of 1984, were appointed as directors of the company on January 11, 1984. They were not directors of the company on the date on which the winding up order was made. The petitioners in Company Petitions Nos. 526 of 1984 and 527 of 1984 were directors in their capacity as professional men and were not full-time directors of the company. Company Applications Nos. 322 of 1984 (in Company Petition No 502 of 1984), 323 of 1984 (in Company Petition No 506 of 1984), Company Application No 33 of 1984 (in Company Petition No 528 of 1984), Company Application No 334 of 1984 (in Company Petition No 529 of 1984), Company Application No 335 of 1984 (in Company Petition No 530 of 1984), Company Application No 332 of 1984 (in Company Petition No 527 of 1984), and Company Application No 331 of 1984 (in Company Petition No 526 of 1984), are for interim orders to the effect that the applicants be relieved from any criminal proceedings arising out of their default in compliance with section 58A of the Rules of 1975.
3. The admitted facts are as under :
(i) The company is engaged in the manufacture and distribution of dyes, intermediates and chemicals. The company supplies the products mainly to the textile industry.
(ii) The total of the acceptances of new deposits during July 1983, and October, 1983, was for Rs. 2,94,000 in excess of the permissible limit. The total of renewals of old deposits between July 1983, and June, 1984, was for Rs. 46,72,500 in excess of the legal limit.
(iii) In respect of the acceptance of fresh deposits of Rs. 2,94,000 and renewals of old deposits of Rs. 46,72,500 between July, 1983, and October, 1983, the company has contravened section 58A of the Companies Act.
(iv) The aggregate amount of deposits which was not repaid as on June 30, 1984, was Rs. 45,68,000.
(v) In their return of deposits as on March 31, 1984, filed with the Registrar of Companies, the company has admitted that a total of Rs. 21,74,664 excess deposits remained unpaid to the depositors.
(vi) In the return of deposits as on March 31, 1984, the company has stated that the deposits of Rs. 10,72,000 claimed by the depositors had been deferred with the consent of the shareholders.
(vii) The amount of deposits accepted or renewed under rule 3(2)(ii) during the year ending March 31, 1985, was Rs. 78,16,000. During April, May, June, 1984, the company accepted or renewed deposits of the value of Rs. 15,75,000 from the public and accepted Rs. 3,28,000 from shareholders.
(viii) No deposits were repaid after September 30, 1983.
4. Thus, there is an admitted default in acceptance of deposits.
5. The arguments advanced by counsel for the petitioners may be summarised as under :
(1) The directors who are petitioners in Company Petitions Nos. 528 of 1984, 529 of 1984 and 530 of 1984, were appointed on January 11, 1984. They were not directors on the date on which the winding up order was made. Therefore, they should be relived from liability for the acts of the company.
(2) The petitioners in Company Petitions Nos. 526 of 1984 and 527 of 1984, and those referred to at (1) above were appointed as directors in their professional capacity and were not full-time directors. Since they were not concerned with the day to day management of the affairs of the company, they cannot be held responsible for any act leading to criminal proceedings.
(3) There were special circumstances beyond the control of the company which caused loss of production and strained the economy of the company. There was a strike and "go slow" by the workers between 1981 and December 27, 1982, when the company commenced production. However, the period during which the textile workers strike affected the sales has not been stated. These factors caused losses and drove the company to invite deposits.
(4) For the reasons stated in (3) above, the petitioners should be held to have acted honestly and reasonably within the meaning of section 633 of the Act.
6. Mr. Rale, appearing for the Regional Director of the Company Law Board, drew my attention to the provisions of the Act and the Rules, and urged that in law there is no distinction between the liability of full-time directors and directors appointed by virtue of their professional skill. Having regard to the facts of the case, the directors cannot be said to have acted honestly and reasonably.
7. In view of the admitted violation of section 58A of the Act and Rules 3 of the Rules, it is not necessary to deal with the facts any further. I will immediately proceed to consider whether the elements of section 633(1) have been fulfilled.
8. In order to understand the nature of the liability of the members of the board of directors, certain provisions of the Companies Act which highlight the responsibility of directors need to be borne in mind. Section 58A enacts very stringent provisions in regard to acceptance of deposits. For example, advertisements inviting deposits, disclosure of the financial position of the company, application of the Rules even to renewal of deposits highlight the intention to protect the interests of the investing public. It follows, therefore, that the officers of the company are enjoined to follow the provisions strictly.
9. Similarly, rule 3 employs language which is prohibitory in its tenor and, therefore, demands strict compliance.
10. Does the law make any distinction between full-time directors and directors who lend their special skills by accepting membership of the board of directors? The answer is provided by certain provisions of the Act. Let me consider them.
11. "Officer", the word used in section 633, includes "any director, managing agent, secretaries and treasures, 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 .........". Thus, "any director" is an officer of the company. The Legislature which defined the word "Officer" has made no distinction based on full-time and part-time performance of duty.
12. The powers of the company are exercised by the board of directors. It shall not exercise any power or do any act which is required to be exercised or done by the company in general meetings. Here again no distinction founded on part-time participation as member of the board is discernible. A meeting of the board of directors shall be held at least once in three months. In such meeting, every member participates in voting and takes decisions without distinction as to whether he is part-time or full-time director.
13. At every annual general meeting of the company held in pursuance of section 166, the board of directors is enjoined to lay before the company a balance-sheet. Every balance-sheet and every profit and loss account of a company shall be signed on behalf of the board of directors by not less than two directors of the company one of whom shall be the managing director where there is one. The balance-sheet and profit and loss account are required to be signed by not less than two directors. One of them may be a part-time director. "Director" has been defined to include "any person occupying the position of director by whatever name called."
14. The enactment, viz., section 58A, which demands strict compliance, the definition of "Officer" which makes no distinction based on part-time performance of duties, the equality of the responsibilities of th members of the board of directors and the definition of "director" which admits of no differentiation between part-time and full-time directors, has to be construed according to its plain meaning. For this purpose, one must ask the question : Does any interpretative criterion point away from what these sections mean? The words mean what they say. If there is nothing to modify, nothing to alter, nothing to qualify the language which a statute contains, the words and sentences must be construed in their ordinary and natural meaning. The words should be given the meaning which a normal speaker of the English language would understand them to bear in their context.
15. The plain meaning of director is the person occupying the position of director-call him a part-time director or a full-time director. The rules of construction do not call for any modification or qualification of this meaning. Therefore, every petitioner herein is a director of the company. Any distinction based on part-time performance of duties is unrealistic, opposed to the usage of English prose and would lead to absurd results.
16. Mr. Nain sought support to his argument from Trisure India Ltd., In re [1983] 54 Comp Cas 197 (Bom). The directors were accused of a conspiracy to manipulate the accounts and intentional misstatements in the prospectus. It was found subsequently that the books of the company were fabricated and falsified to show a false picture. The figures of profits and sales shown in the prospectus were based on the fabricated records. The decision of the trial court not to relieve the directors from the liability to prosecution was based on events discovered subsequently. This was the main reason why the Division Bench decided to relieve the directors from liability for criminal action. The conclusions of the Division Bench on the facts may be summarised as under :
(a) The directors who were in America did not approve of the method by which the Indian director carried on business and raised money. The managing director in India was asked to discontinue the practice.
(b) The petitioning directors did not take immediate drastic action as, in their opinion, the irregularities were not serious.
(c) The directors were not required to go through the account books, nor were they under any obligation to examine the sale statistics.
(d) The failure to send returns of production to the directors in America was never considered to be important. This failure assumed importance only after the fraud was discovered. Such failure was not sufficient to arouse suspicion of the American directors against the manner of maintaining accounts in India. The failure of the directors to supervise had nothing to do with the detection of sales figures or misstatements in the prospectus. These could not have been detected by the directors without examining the account books which they were under no obligation to do.
(e) The frauds were not known to the directors at the time when the prospectus was signed by them. The subsequent discovery did not make them responsible.
17. It is against the background of these facts that the judgment has to be understood. All the facts in that case pointed at Hegde-the managing director. The directors who were in America could not have been fixed with the knowledge of the events which were discovered after the prospectus was signed by them. The absence of any obligation on them to scrutinise the accounts personally, their judgment not to consider the irregularities as serious and their reliance on the other director who signed the prospectus, were factors which went into the making of the decision. In the present case, the facts are different. Nowhere in the petition is it averred that the petitioners were ignorant about the fact that the deposits and renewals exceeded the permissible limit, thereby violating section 58A and rules 3. The annual general meetings were held. The meetings of the board were held and all the documents, such as balance-sheets were placed before them at such meetings. Besides, the amount of deposits and paid up capital were not such facts which needed to be discovered by a close scrutiny of the books of accounts. The probabilities leave no doubt that the petitioners knew that the deposits exceeded the permissible limit and that they should not have accepted or renewed the deposits. The judgment in Trisure India Ltd. [1983] 54 Comp Cas 197 (Bom), does not assist the petitioners at all.
18. This is not to suggest that none of the petitioners herein should be relieved from criminal proceedings. The point is whether, as matter of law, the part-time directors carry no responsibilities which may lead to criminal proceedings. If they are liable, the question of relief from criminal action becomes part of the court's discretion. In the matter of proceedings for negligence, default, breach of duty, misfeance and breach of trust, the Act and the rules admit of no distinction between members of the board of directors based on their part-time or full-time performance of duties. Their liability for any proceedings for such acts is equal.
19. The next question is whether, in accepting the deposits in breach of the Act and the Rules, the petitioners acted honestly and reasonably.
20. Even if the production suffered due to go-slow tactics of the workers and the strike, this situation ended on December 27, 8982, or early in 1983. There is no explanation as to why new deposits to the tune of Rs. 2,94,000 were accepted after July, 1983. It is not the case of the petitioners that in July, 1983, also, this situation continued. Even if it is assumed that the company was in need of money and, therefore, new deposits were accepted, there is no explanation as to why, the sanction of the company in general meeting was not taken. Then, between, July 1983, and October, 1983, the deposits of Rs. 46,72,500 were renewed. If the company was unable to repay the old deposits, it is not reasonable to borrow money, and that too, without the sanction of the company. The return of deposits dated March 31, 1984, shows that a total of Rs. 21,74,664 is the amount of excess deposits which remained unpaid. Again, in April, May and June, 1984, the company accepted or renewed deposits of the value of Rs. 15,75,000 from the public and Rs. 3,28,000 from shareholders. All this has been done notwithstanding the financial position of the company which showed that the company was not in a position to repay the deposits and that it was not entitled to borrow money in excess of the limit permitted by law. The meetings of the board of directors were held every year and the picture was clear to the directors as to whether they were full-time directors or part-time directors. It is not the case of the part-time directors that they were unable to know the financial picture in respect of the deposits without scrutiny of the account books. The statements of profit and loss and the balance-sheet must have shown that there were deposits in excess of the limit. Yet the board of directors proceeded to sanction the acceptance of new deposits and renewal of the old ones. No circumstances which suggest that this was reasonable conduct are discernible from the petition.
21. It was urged that the sum of Rs. 46,72,500 represents renewal of deposits. According to Mr Nain, the renewals made between July, 1983, and June, 1984, do not constitute "acceptance" of deposits. This submission is untenable. When a company is unable to repay the deposits and, therefore, renews them, what it does is to accept the old deposits for a longer period. The word "renew" means "to acquire again". Hence, renewal of fixed deposits amounts to receiving fresh deposits within the meaning of section 58A of the Act.
22. Having regard to the provisions of the law, I do not find any distinction, in principle, between the cases of a full-time director and the case of a part-time director of a company. Cases like Trisure India Ltd. [1983] 54 Comp Cas 197 (Bom), are in a different category. The distinction made in that case was based on the fact that the petitioning-directors were sought to be held liable because of events discovered subsequently, and the court found that, on the date on which the prospectus was signed, there was nothing which could attribute, to the directors, knowledge of the fraud. So far as the petitioners in Company Petitions Nos. 502 of 1984 and 506 of 1984 are concerned, they were associated personally with the management of the company and were, therefore, not only cognizant of, but are liable for, the acceptance of the deposits contrary to the provisions of law. Notwithstanding the pressure on the company's finances, they cannot be permitted to shut their eyes to what was obvious to everyone who examines the affairs of the company even superficially.
23. Even if all the directors are, in law, liable for their acts, the question of relieving them is still one of discretion. Now, the question is whether, in exercise of my discretion, I should relieve the officers of the company from liability for legal proceedings. The petitioners, except the petitioners in Company Petition No. 502 of 1984 and Company Petition No. 506 of 1984, were part time directors. This fact is the basis of Mr. Nain's argument. The petitioners in Company Petition No. 502 of 1984 and Company Petition No. 506 of 1984 were directly concerned with the day to day affairs of the company. The petitioners in Company Petitions Nos. 526 of 1984, 527 of 1984, 528 of 1984, 529 of 1984 and 530 of 1984 were not expected to look after the day to day affairs of the company. If the responsibility of all the directors, whether they perform part time duties or full time duties is equal, should any of the directors be relieved from the liability in respect of negligence, breach of trust, misfeasance, etc.? This is always a question of judicial discretion. What are the cases in which part-time directors should be relieved? The answer would depend upon the circumstances of each case and no rigid formula can be laid down. In this case, the directors who perform part time functions may be relieved from liability because no evidence of the fact that they had exercised any control in the matter has been brough forth. But, in a given case, evidence about their knowledge of the facts which constitute negligence, breach of trust, misfeasance, etc., may be brought forth. In such cases, they should not be relieved from liability for acts of negligence, misfeasance, etc. I should not be understood to have held that part time directors, by reason of their part time status, should invariably be relieved from the liability for negligence, breach of duty, misfeasance, breach of trust etc.
24. In my opinion, it will be reasonable to fasten these directors with the liability for their defaults, negligence, misfeasance or breach of trust which might have been caused because of the conduct of the petitioners in Company Petitions Nos. 502 of 1984 and 506 of 1984, who were admittedly in charge of the day-today affairs of the company.
25. The petitioners in Company Petitions Nos. 528 of 1984, 529 of 1984 and 530 of 1984 were not directors of the company on January 11, 1984, on which date the winding-up order was made. These petitioners also cannot be held liable for the acts of the company. They, too, will have to be relieved.
26. For all these reasons, I make the following order:
(i) Company Petitions Nos. 502 of 1984 and 506 of 1984 are dismissed. Similarly, Company Application No. 322 of 1984 (in Company Petition No. 502 of 1984) and Company Application No. 323 of 1984 (in Company Petition No. 506 of 1984) are dismissed.
The petitioners shall pay costs of each of these petitions and applications of the Official Liquidator and the Regional Director of the Company Law Board, quantified at Rs. 300 each.
(ii) Company Petition No. 526 of 1984, No. 527 of 1984, No. 528 of 1984, 529 of 1984 and No. 530 of 1984 are made absolute in terms of prayer (a).
(iii) There shall be no order on Company Application o. 331 of 1984 (in Company Petition No. 526 of 1984), Company Application No. 332 of 1984 (in Company Petition No. 527 of 1984), Company Application No. 333 of 1984 (in Company Petition No. 528 of 1984), Company Application No. 334 of 1984 (in Company Petition No. 529 of 1984) and Company Application No. 335 of 1984 (in Company Petition No. 530 of 1984).
(iv) This order shall not come into operation for three weeks.