Andhra HC (Pre-Telangana)
T.G. Venkatesh vs Registrar Of Companies on 5 June, 2006
Equivalent citations: [2007]78SCL1(AP)
ORDER S. Ananda Reddy, J.
1. By these Company Petitions, filed under Section 633(2) of the Companies Act, 1956 (for short 'the Act'), the petitioner, who is common in all these petitions, seeks to relieve him from being proceeded with the prosecution for the alleged violations under Sections 63, 68 and 628 of the Act, in pursuance of the show-cause notice dated 23-6-2005.
2. It is stated that the petitioner along with other Directors was signatory to the prospectus, issued by M/s. Richimen Silks Limited, stating that the trial production will be commenced in the first week of January, 1987 and the commercial production will be commenced in the second week of January, 1987 and dividends would be declared in the first year of operation, i.e., for the year ending 31-12-1987, which were not complied with. It is stated that M/s. Richimen Silks Limited was incorporated as private limited on 16-10-1984 with the main objects of manufacturing of various types of silk fabrics. The Company was converted into a public limited company and a fresh certification of Incorporation was issued on 19-9-1985. Then the Company issued a prospectus to the public, inviting subscriptions to its shares after obtaining necessary permission from the Controller of Capital Issues. Government of India, New Delhi. The prospectus was issued on 23-8-1986, inviting subscriptions from the public for its share capital and accordingly, received the public subscriptions. But, however the Company failed to adhere to the schedules as issued, which was given under the heading of Project implementation Schedule and profitability and Dividend. This fact of non-compliance of the projections and the declaration of dividend has come to light during the inspection conducted by the Inspector of the Company's Department, therefore, show-cause notice was issued to all the Directors, including the petitioner, who was shown as Director and the Chairman of the Company. It is stated by the petitioner that while conducting investigation under Section 237 of the Act, the Inspecting Officer has noticed the failure of the Company to comply with the schedule fixed in the prospectus issued, as there was delay of 11 months for going to the trial production and one year and three months for going to the commercial production.
3. The petitioner stated that the said Company was promoted by one Mr. G. Vittal, who persuaded the petitioner to give his consent to become one of the Directors of the company and the petitioner was appointed as a Non-Executive Independent Director, which the petitioner had relinquished on 26-4-1988. It is stated that the petitioner is no way connected as to the day-to-day running of the said Company, as he was not incharge of or in control of the affairs of the Company. The petitioner admitted the fact of the schedule specified in the prospectus issued on behalf of the Company, but, however, stated that due to unforeseen circumstances, inevitable delay was caused in project implementation over which the petitioner as a Non-Executive Independent director had no control whatsoever. However, despite pressing pre-occupation as a leading Industrialist of Andhra Pradesh, the petitioner continued as Non-Executive Independent Director of the said Company until shortly after the Company commissioned the project and thus has achieved commercial production. This by itself proves beyond doubt the bona fides of the petitioner in the matter. It is further stated that the Directors had expressed the intention to declare dividends based on the good market prospects and assessment of profitability barring unforeseen circumstances for the first year of the operation of the company, ending 31-12-1987. It is stated that the petitioner had resigned as a Non-Executive Independent Director of the said Company on 26-4-1988, by which time, the Company has achieved commercial production. Thereafter the petitioner was given to understand that the said Company was not able to declare dividends due to unforeseen slump in the business of the said Company's products. Further, since the petitioner is no longer a Non-Executive Independent Director of the said Company had no connections whatsoever. Therefore, the petitioner cannot be made liable for such non-declaration of the dividend by the said Company. It is also stated that the proposed statement made in the prospectus as to the declaration of dividends was a forward looking statement tampered with cautionary statement "barring unforeseen circumstances." There was delay in commissioning the plant. Meanwhile the market conditions underwent a drastic change in the Industry, and as a result the profitability went haywire, which were totally unforeseen at the time of issue of the prospectus and due to factors beyond the control of the management. In the absence of any profits, the Company could not have declared any dividend under the provisions of the Act. The statements made with good intentions could not be treated as a fraudulent or mischievous statements, therefore, sought for appropriate relief from being prosecuted under the above referred provisions.
4. The learned Counsel relied upon the observations made by the Supreme Court, in Rabindra Chanarua v. ROC [1992] 72 Comp. Cas. 257 and the decision of this Court Progressive Aluminium Ltd. v. ROC [1997] 89 Comp. Cas. 147 : 14 SCL 177 and the decision of the Bombay High Court in Jagijivan Hirala Dosh v. ROC [1989] 65 Comp. Cas. 553 and also the decision of the Supreme Court in Municipality of Bhiwandi & Nizampur v. Kailas Sizing Works . It was also stated that since the present show-cause notice is issued after 19 years of the issue of prospectus, the same is barred by limitation and the Court shall not take cognizance of the said alleged offence.
5. A counter is filed on behalf of the Central Government by the Registrar of the Companies, disputing and denying the allegations made by the petitioner. According to the respondent, the company petition itself is not maintainable since the petitioner has come to the Court on some pretext or other with a sole motive to stall the impending prosecution against him before the Special Judge for Economic Offences Court. It is stated that the petitioner along with other Directors are signatories to the prospectus where they have declared specific dates as to the trial production, commercial production as well as for the declaration of dividend, which the company failed to comply with. It is stated that even though one G. Vittalwas the promoter of the company and the Managing Director, since the petitioner joined as one of the Director and was designated as chairman, has got equal responsibility and obligation to comply with the terms of the prospectus issued to which he is one of the signatories. It is stated that the petitioner having subscribed his signature for issuance of the prospectus, the resignation on subsequent date would not relieve him of his obligation. In the counter, it is stated that the petitioner has failed to substantiate the reasons with adequate proof of non-commissioning of the project with the stipulated period, as stated in the prospectus, equally with reference to the commercial production and declaration of dividend. It is stated by the respondent that the petitioner has not approached this Court with clean hands since the promises made in the prospectus which are binding on the petitioner along with other directors both jointly and severally, failed to comply with the said promises and also failed to explain with any detailed reasons, therefore, the petitioner is not entitled to any relief. It is stated that the responsibility hinges upon the petitioner until the promises made in the prospectus fulfilled, he cannot take shelter stating that the notice was issued after a lapse of 19 years after issue of prospectus, since the prospectus addresses to several thousands of public who had responded to the same and contributed believing the terms of the prospectus. Since the investigation was made under Section 237 of the Act when these facts have come to know of the company department, therefore, immediate action was initiated by issuing a show-cause notice, therefore, the petitioner cannot take shelter under the guise of the delay in initiating the action. It is stated that the petitioner has got ample opportunity before the Economic Offences Court, where he can produce his evidence to prove his innocence if he is innocent and is not liable for being visited with any punishment for the violation of the provisions under Sections 63, 68 and 628 of the Act.
6. An additional counter is also filed on behalf of the respondents, bringing to the notice of this Court that along with the petitioner, show-cause notices were issued to other Directors as well, and the reply submitted by the petitioner was not satisfactory and therefore, there is no case to relieve the petitioner from being prosecuted for the violation of the provisions referred to above as the petitioner had approached this Court only to stall the proceedings.
7. Sri L.V.V. Iyer, learned Counsel appearing for the petitioner in all three company petitions, reiterated the averments that are made and contended that the petitioner, being non-executive independent Director, has no control over the affairs of the company, and therefore, he cannot be prosecuted for the alleged violations. The learned Counsel also relied upon certain observations made in the decisions that are referred to earlier, and therefore, sought for an order for relieving the petitioner from being prosecuted.
8. The learned Counsel, appearing for the respondent/Central Government contended that since there was no proper explanation, basing on which this Court can come to the conclusion that the petitioner has not committed any offence, in the absence of any explanation for not complying with the declarations made in the prospectus issued on behalf of the company, there are absolutely no grounds warranting interference with the proposed action against the petitioner.
9. Heard both sides and considered the material on record.
10. Admittedly, the petitioner was appointed as one of the Director and was designated as Chairman of the Company. As already been pointed out, the Company has issued a prospectus to the public, inviting public subscriptions for its shares and in the said prospectus, it was declared that the trial production will commence in the first week of January, 1987 and the commercial production in the second week of January, 1987, it has also made a declaration as to the profitability and dividend. The said declaration reads that based on the good market prospects and assessment profitability, the Directors of the Company are confident to declare, barring unforeseen circumstances, reasonable dividend for the first year of operation of the company, i.e., the year ending 31-12-1987. Though on behalf of the company the said declarations were made by the Directors, there was delay of 11 months while going for trial production and one year three months, while commencing commercial production. Further the Inspection Report shows that the company has not at all declared any dividend till 7-6-2004, the date of investigation undertaken by the Inspector of the Company Department. From this, it is clear that the Directors of the company have not stick to the schedule as declared by them, therefore show-cause notice was issued for prosecution of the Directors of the Company for contravention of Sections 63, 68 and 628 of the Act.
11. The explanation that was stated by the petitioner is only that due to unforeseen circumstances inevitable delays were caused in project implementation over which the petitioner as a non-executive independent Director had no control whatsoever. This clearly shows that there is no proper explanation at the first instance and at the second instance the petitioner seeks to excuse himself, claiming that he is only a non-executive independent Director, and therefore, he had no control. It is not known how he can seek such excuse, especially when he is one of the signatories to the prospectus. The prospectus was signed by all the Directors and not by the Managing Director alone, who is looking after the day-to-day affairs, therefore, the said excuse claimed by the petitioner is clearly devoid of merit.
12. With reference to the dividends, the petitioner has stated that the statement made in the prospectus was a forward looking statement, followed by a cautionary statement "barring unforeseen circumstances". It is stated that the market conditions underwent drastic change in the industry, as a result of which, the profitability went haywire, which were totally unforeseen at the time of issue of the prospectus. Therefore, due to the factors beyond the control of the management, the dividend would not be declared. But the statement made by the petitioner is clearly a vague statement which is not supported or substantiated by any of the relevant material. In the absence of any supporting and substantiative material, it would be difficult for this Court to accept such vague statement to grant the relief of relieving the petitioner from being prosecuted in terms of the provisions of the Act.
13. The learned Counsel relied upon the following decisions:
In Tri-Sure India Ltd. In re [1983] 54 Comp. Cas. 197, the Bombay High Court was considering a case filed under Section 633 of the Act, seeking the relief of relieving from being prosecuted under the provisions of the Act on the premise of the false statement issued by the Company. The misstatement as alleged relates to the inflation of the profits of the years ending 31-8-1974, 31-8-1975, which were made basing on fabrication and falsification of books of account. But in that case even before the prosecution was initiated by the authorities, i.e., by the Registrar of the Companies, the remedial exercise was initiated and in fact a special Investigating team was appointed by the company itself. Immediately after the Directors came to know of the false statement alleged to have been made in the prospectus and in fact in the general body meeting that was convened, the shareholders who have subscribed in pursuance of the said prospectus, were offered to pay back the amount paid by way of subscription with interests at 6 per cent per annum from the date of allotment, and in fact, some of the members took advantage of the said offer and in those circumstances, the Company Judge granted relief with reference to some of the Directors, though negatived the relief with reference to some of the Directors, but, however, on appeal the Appellate Court granted the relief with reference to all the Directors.
14. The learned Judge observed, while considering the expression 'appears to the Court', contained in Section 633, must mean that the Court is reasonably satisfied that the requirements of the section are met. The learned Judge while rejecting the contention that something less than proof of satisfaction is required by Section 633, referred to the decision in Duomatic Ltd., In re [1969] 1 All ER 161 (Ch.D), which was rendered while considering the provisions of the Section 448 of the English Companies Act, 1948 and Section 372 of the English Companies Act, 1929, which are the sections therein equivalent to Section 633 of the present Act. In that judgment, Buckley, J. said that Section 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.
15. Though the learned Company Judge in that case granted relief in respect of some of the Directors and by the Division Bench in respect of all the Directors, but the said decision was rendered after considering evidence brought on by the petitioners against whom proceedings were sought to be initiated.
16. The learned Counsel also relied upon the observations of the learned Single Judge of the Delhi High Court in Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp. Cas. 235, where the learned Single Judge of the Delhi High Court referred with approval the observations made in Pennington's Company Law as under:
By the general law, directors can act on behalf of company only at Board Meetings at which their collective decisions are expressed by resolutions. They have no powers by law to act individually as agents for the company. This applies equally to the chairman of the Board of directors who is distinguished from the other only by the fact that he presides at Board meetings.
17. In Tapan Kumar Chowdary v. ROC [2003] 114 Comp. Cas. 631, 50 SCL 283 (Cal.), where the learned Single Judge after considering various decisions, had summarized the requirements of Section 633 of the Act in order to grant the relief as under:
(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. (p. 636)
18. In Progressive Aluminium Ltd. 's case (supra), the learned Judge of this Court had an occasion to consider the scope of Section 633(2) of the Act. In that case, the Registrar of the Companies issued a show-cause notice, proposed to initiate action in terms of Section 633(1) of the Act, alleging that the Company did not commence its production as is stated in the prospectus issued by the Directors. The Directors have explained the circumstances under which it could not commence the production. The Company had proposed to establish a unit for manufacture of aluminium extrusions with annual capacity of 5,000 metric tons and in the prospectus it was mentioned that the production will be commenced in the month of August, 1990. The explanation given by the petitioners in that case was that a letter of credit for import of 1,600 tons of hydraulic extrusion press was issued in October, 1989. After inspection has taken by the Company, the packing of the machine was completed at Japan and was sent to Kobe Port in Japan in the month of August, 1990 for shipment to Madras Port. As there was no suitable ship available till 30-10-1990, the machine could not be shipped and finally the machinery arrived at Madras in December, 19 and was received by the Company in the month of January, 1991. The Japan Engineers were reluctant to come to India in view of the Gulf war and eventually the Engineers of Japan came and erection of press was undertaken between 17-2-1991 and 27-3-1991. Therefore, under those circumstances it was stated that the delay was beyond their control. In those circumstances, the Court while allowing the petition, made the following observations:
22. 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 absence of 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 the learned Counsel for the petitioners and not controverted by the learned Counsel for the respondent-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 practicing 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 categorized as an economic offence, where wrongful pecuniary gains is the main consideration, which is conspicuous by its absence in this case. (p. 188 of SCL)
19. In Hafez Rustom Dalal v. ROC [2005] 59 SCL 265, a learned Judge of the Gujarat High Court, while considering the scope of Section 633 of the Act vis-a-vis, the misstatements in the prospectus, held that the Company was not included in the list of vanishing companies, therefore, penal action against the Directors/Promoters initiated on the basis that the company is a vanishing company, not justifiable. The Court also made the following observations with reference to the delay and laches:
29. The action is unsustainable also on the ground of delay and laches 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 laches and the Court is certainly reluctant to take cognizance of alleged defaults after the expiry of period of more than ten years. (p. 280)
20. In Jagijiwan Hiralal Dosh 's case (supra), a learned Single Judge of the Bombay High Court was considering the initiation of prosecution proceedings for acceptance of deposits in excess of sanctioned limit, held that under the Act and the Rules, no distinction between the members of the Board of Directors based on their full time or part time performance of duties can be drawn and their liability for any proceedings for such acts is equal. But, however, further observed that although part time directors could not invariably be relieved from the liability for negligence, breach of duty, misfeasance etc. the Court could exercise its discretion in this case to grant relief under Section 633 of the Act in favour of the part time directors because no evidence of fact that they had exercised any control in the matter had been brought forth. In that case, the prosecution was proposed for accepting the deposits in excess of sanctioned limit.
21. In Municipality of Bhiwandi & Nizampur v. Kailas Sizing Works the Supreme Court while considering the protection of action taken in good faith under the provisions of the Bombay General Clauses Act, 1897, observed that the authority is not acting honestly where an authority has a suspicion that there is something wrong and does not make further enquiries. Being aware of possible harm to others, and action in spite thereof, is acting with reckless disregard of consequences. It was worse than negligence, for negligent action is that, the consequences of which the law presumes to be present in the mind of the negligent person, whether actually it was there or not. This legal presumption is drawn through the well known hypothetical reasonable man. Reckless disregard of consequences and mala fides stand equal, where the actual state of mind of the actor is relevant. This is so in the eye of law, even if there might be variations in the degree of moral reproach deserved by recklessness and mala fides.
22. If we examine the facts of the present case in the light of the decisions and the facts of those cases, it is clear that the Registrar of Companies proposed to initiate proceedings for the alleged violations of Sections 63, 68 and 628 of the Act, treating the disclosures in the prospectus, issued on behalf of the Company, are false and incorrect. Though the petitioner is seeking relief under Section 633 of the Act, but the explanation that was brought on record is so vague. According to the petitioner, the petitioner admitted that the trial production as well as commercial production did not commence as declared in the prospectus, similarly even the dividend also was not declared not only for the first year ending 31-12-1987, but till 7-6-2004, when the Inspector of the Department had inspected the records of the Company. Therefore, it is clear that the schedules were not adhered as was declared in the prospectus, to which the petitioner is one of the signatories.
23. The explanation that is put forward by the petitioner is due to unforeseen circumstances inevitable delays were caused in project implementation over which the petitioner had no control. The petitioner did not elaborate what are the said inevitable circumstances under which the Company could not adhere to the schedules. The other explanation for non-declaration of dividend is also equally so vague and is not substantiated by any facts and figures.
24. Though the petitioner claimed that he had resigned from the Directorship on 26-4-1988, immediately after the commencement of the trial and commercial production, but still, being a signatory to the prospectus, he cannot be relieved of his obligation as even by the date of his resignation, the provisions of the Act are already been contravened, therefore, the resignation from the Directorship itself would not absolve the petitioner of his obligations and liabilities.
25. Though the learned Counsel for the petitioner relied upon the decisions that are cited earlier, in all those cases ample material was brought on record not only by way of oral evidence, but also by way of documentary evidence, explaining the circumstances, under which there are deviations from the schedules declared in the prospectus. In all those cases, a finding was recorded. Even in Tri-Sure India Ltd.'s case (supra), there were clear findings recorded by the Court. Though in the prospectus, fabricated and false statement of profits were disclosed or declared, as soon as the said fact came to the notice of the Directors, remedial measures were taken, and in fact the subscribers to the shares were offered even the subscribed amount with interest which benefit was even availed by some of the subscribers. Therefore, in order to consider whether the petitioner is entitled to get the relief under Section 633, clear material must be brought on record to prove that there are sufficient circumstances under which they could not comply with the terms, which they have declared in the prospectus. In the absence of any such detailed explanation in the present case, it is difficult for this Court to come to the conclusion that it is a case where the petitioner is entitled for grant of the benefit of relieving from being prosecuted for contravening the provisions of the Act.
26. Since the petitioner has got an opportunity to lead evidence and place the material to prove his innocence before the Court, where the proceedings would be initiated, this Court declines to interfere with the proposed action on the part of the Registrar of the Companies.
27. Under the above circumstances, the petitioner is not entitled for the relief as sought for under Section 633 of the Act, in view of the fact that no material is placed, explaining the circumstances for non-compliance of the terms, declared in the prospectus to prove that the statements made in the prospectus are not false, deceptive or misleading.
28. The Company Petitions are, accordingly, dismissed. However, it is open to the petitioner to adduce necessary evidence before the Court, where prosecutions if launched against the petitioner, to prove his innocence.