Madras High Court
Farouk Irani vs Board For Industrial & Financial ... on 5 December, 2001
Equivalent citations: [2002]110COMPCAS64(MAD)
JUDGMENT E. Padmanabhan, J.
1. This company petition has been filed by two of the directors of First Leasing Co. of India Ltd., under Section 633(1) of the Companies Act, 1956 ('the Act'), read with Rule 11(a)(23) of the Companies (Court) Rules, 1959 praying this Court to relieve the petitioners herein from any proceedings that may be instituted by the respondents by way of criminal complaints, to prosecute the petitioners herein in respect of the alleged violations under Section 628 of the Act, in pursuance of the show-cause notice of the first respondent herein in No. 6423/CI/209A/ 628/2001, dated 27-7-2001, on such terms and conditions as this Court may deem fit.
2. The petitioners' case is that the first petitioner is the managing director of the first leasing Co. of India Ltd. and the second petitioner was formerly the company secretary of the said company between 4-10-1994 and 15-11-2001. The books of account and registers of first leasing Co. of India, hereinafter called 'the company', were made under Section 209A of the Act and the inspection report was submitted on 1-5-2000. According to the report, certain violations of mandatory provisions of the Companies Act and the rules have been pointed out and the returns were not in accordance with the requirements and, therefore, there is a violation of Section 161(2)(9) of the Act. The nature of the violations has been pointed out in the said report.
3. On receipt of the show-cause notice, an explanation was offered by the petitioners, contending that there was no violation of Section 628, invocation of Section 628 is misconceived and the entire action is not maintainable in the absence of essential requirements of the said section. That apart, the above company had filed a revised return incorporating the details and particulars, besides remitting normal and additional fees for the same.
4. According to the petitioners, though Section 628 provides for penalty for false statements, there could be penal action only if there is deliberate violation and not for inadvertent mistake. If not, there is no scope for prosecution. In the absence of minimum imputation of deliberate or wilful omission or any wilful negligence or dishonest act on their part or any mala fide or want of good faith, no prosecution could be maintained or continued. Having regard to the facts of the case, it is pointed out by the applicants that they ought to be excused from any prosecution that may be launched against them, since there arc inadvertent mistakes which will not attract prosecution. It is contended that for such inadvertent mistakes or technical or venial breach of provision, and the mere acts of inadvertence not being deliberate or dishonest or misconceived, no prosecution could be launched or continued and, therefore, the petitioners should be relieved by orders of this Court.
5. Heard Mr. Arvind Dattar, the learned counsel, for Mr. R. Senthil Kumar. The learned counsel addressed arguments elaborately, besides relying upon the decision of the Apex Court in Hindustan Steel Ltd. v. State of Orissa [l972] 83 ITR 26. The Apex Court held that in the absence of mala fides or deliberate defiance of law or the fact that the petitioner was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation, no criminal action could be initiated.
6. The material portion of the inspection report would show a number of contraventions/non-compliance and irregularities such as :
(1) failure to mention transaction in respect of loans and advances to the directors to the tune of Rs. 2,93,392 in violation of Part I, Schedule VI, read with Section 211 of the Act.
(2) Failure to maintain loan register. Without exercising the powers, by passing the board resolution, as provided under Section 292(1)(c), intercorporate borrowings have been made and intercorporate deposits have been received.
(3) Violation of Section 292(1)(e), namely, advancing innumerable number of loans without passing a resolution of the board on 30-11-1996, 30-11-1997, 30-11-1998, 30-11-1999.
(4) Violation of Section 370 in that loans exceeded 30 per cent of the aggregate of the paid up capital and free reserves and they arc not authorized by special resolution, besides no prior approval of the Central Government has been secured and it is violation of Section 370(1).
(5) Violation of Part II, Schedule VI read with Section 211.
(6) Non-disclosure of authorized capital properly in the balance-sheet as on 30-11-1997 to 30-11-1999.
(7) Sale of unquoted investments to the chairman of the company at Rs. 20 per share and shares have been sold or transferred, overlooking the lock-in period, besides the balance-sheet as on 30-11-1999, does not show true and fair view as required, within the meaning of Section 211.
(8) Investments in the capital of First India Asset Management Co. Ltd. in violation of Section 211.
(9) Violation of the provisions of Section 217, read with the Companies (Particulars of Employees) Rules, 1975.
(10) Appointment of Mrs. Farah Bakshy, daughter of Mr. Farouk Irani, managing director, as assistant manager marketing on a gross salary of Rs. 6,000 (increased to Rs. 9,000) and sanction of consumer loan of Rs. 70,000 at 17.50 per cent per annum on 30-3-1996), in violation of Section 292 of the Act.
(11) Loans and advances include assets due from managing director to the tune of Rs. 8,15,850.
(12) Annual return made as on 4-5-1998 and 7-5-1999, by furnishing incorrect information regarding indebtedness of the company.
(13) Violation of Part I, Schedule VI to the Act.
(14) Violation of Section 125(4)(c) read with Section 128 of the Act.
(15) Violation of Section 113 for non-issue of debenture certificate to Dhanalakshmi Bank Ltd.
(16) Satisfaction of charges in Form No. 17, in violation of Section 138 of the Act.
(17) Donation to MAC Charities under the provisions of Section 293(1)(e)/ 293A of the Act.
(18) Loans and advances to staff shares in violation of Section 77 of the Act and financial irregularity.
(19) Remuneration of managing director and other amenities provided, in violation of Sections 198 and 309, read with Schedule XIII to the Act.
(20) Non-compliance with the provisions of Section 138 in regard to satisfaction of the charges.
7. While setting out those violations, the petitioners herein and six others were served with the show-cause notice to the same, the company has sent an explanation, running to several pages.
8. Thereafter, a show-cause notice was issued to the two applicants herein, to show cause as to why penal action should not be taken against both of them under Section 628 of the Act and a portion of the show-cause notice reads thus :
"Whereas as per the provisions of Section 628 of the Companies Act, 1956 (hereinafter referred to as 'the Act'). 'If in any return, report, certificate, balance-sheet, prospectus, statement or other document required by or for the purposes of any of the provisions of this Act, any person makes a statement,
(a) which is false in any material particular, knowing it to be false; or
(b) which omits any material fact, knowing it to be material; he shall, save as otherwise expressly provided in this Act, be punishable with imprisonment for a term which may extend to two years, and shall also be liable to fine.' Whereas it was observed from the records of the company under Section 209A of the Act that the annual returns for the years 1997, 1998 and 1999 signed by the managing director and the company secretary, contain a statement under Part VII with regard to the company's indebtedness, which is false in material particulars, attracting the provisions of Section 628 of the Act."
9. To the said show-cause notice, explanation has been submitted by the first applicant on 7-9-2001. At this stage, the present company petition has been filed under Section 633(2).
10. Though attractive contentions were advanced by the learned senior counsels, besides pointing out that at any time the petitioners could come before this Court, this Court is not persuaded to exercise its jurisdiction on the facts of the case in favour of the applicants at this juncture.
11. Section 633 confers powers on the company court to grant relief in certain cases. Even in terms of Section 633, the court when it declines to grant the relief against violation of any statutory duties, as in such cases, it could not be said that the officer has acted honestly and reasonably.
12. The power under Section 633 is discretionary and such power the court can be called upon to exercise only when it is satisfied that the defaulting officer has acted honestly and reasonably and having regard to all the circumstances of the case, he ought to be excused, only then the court could relieve him. This Court has to satisfy itself after a serious and careful consideration of the whole question that the officer has acted honestly and reasonably and having regard to the circumstances of the case, he ought fairly to be excused.
13. This Court has to examine such applications at the appropriate stage. When it has to examine as to whether an offence has been made out or not, based on the evidence adduced through examination of witnesses, except when affidavit evidence is permissible, the very show-cause notice already issued read with inspection report, with respect to which the company and its directors were called upon to state its objectives, would show that this is not a fit case where this court would be justified in entertaining the application under Section 633.
14. Though an application could be maintained even at the stage of apprehension of any criminal proceedings, yet this Court has to come to the conclusion that there is prima facie material that offence has been made out and a direction should be given.
15. Under Section 633(2), this Court has the power to grant relief as a trial court, provided the conditions laid down under Section 633(1) are satisfied and the offence/s being,
(a) the lapse or offence alleged must be one of the kinds mentioned in Section 633(1).
(b) The applicant must be shown to have acted honestly and reasonably.
(c) The court is in a position to conclude or render the finding with regard to all the circumstances of the case, that the officer ought to be excused fairly.
16. Exercise of power under Section 633(2) is discretionary. On the facts of the case and in the light of the imputations set out in the inspection report, read with the show-cause notice, this Court is not inclined to exercise its discretion in favour of the applicants. As in my view, the violations, as pointed out in the inspection report, arc violations of the statutory provisions and some of them are mandatory in nature and in respect of such mandatory provisions, the question of bona fides or not being wilful or dishonest may not have a bearing at all. That apart, for the purpose of disposal of this petition and when the same being taken as a finding, this Court will be justified in proceeding on the basis that the applicants have not acted honestly or reasonably, having regard to the facts and circumstances of the case.
17. In Rabindra Chamaria v. Registrar of Companies , their Lordships of the Apex Court had an occasion to consider the scope of Section 633 and held that Sub-section (2) of Section 633 is intended to restrict its operation only to the proceedings arising out of the default, breach of trust, misfeasance or breach of duty in respect of the duties prescribed under the provisions of the Act. Unless this Court comes to the conclusion that the applicants have acted honestly or reasonably, this Court will not be justified in going to the rescue of the applicants. The only other alternative open to the applicants is to contest the proceedings before the judicial magistrate before whom the complaint is instituted.
18. The material question for consideration is whether the applicants have acted honestly or in good faith or whether the applicants have any justifiable reason to escape from liability, in such cases, criminal intention is irrelevant as has been held by this Court in Amara Pictures (P.) Ltd., In re [1970] 40 Comp. Cas. 130.
19. On a consideration of the show-cause notice read with the inspection report, this is not a fit case where this Court would be justified to relieve the petitioners by exercising its discretionary jurisdiction under Section 633. It is made clear that any observation or finding recorded in this order is only for the limited purpose of this company petition and the criminal court before whom the complaints may be made, against the petitioners herein, shall decide the complaints on the merits and on the evidence that may be let in without reference to any observations or findings, if any, recorded by this Court for the purpose of this petition.
20. With the above observations, the company petition is dismissed.