Sections 370 & 372
LOANS
TO COMPANIES UNDER SAME MANAGEMENT
[1987]
61 COMP. CAS. 479 (BOM)
HIGH COURT of BOMBAY
v.
Registrar of Companies
N.K. PAREKH, J.
SEPTEMBER 10, 1985
I.M.
Chagla, V.V. Tulzapurkar and D.J. Khambatta for the petitioners.
B.J.
Rele for the Registrar.
Parekh, J.—The petitioners have filed this petition under the
provisions of section 633 of the Companies Act, 1956.
The facts that give rise to
this petition are that the Registrar of Companies (hereinafter referred to as
"the respondent") served a notice dated December 27, 1984, on the
petitioners asking them to show cause why legal action should not be taken for
contravention by the company of section 370 of the Companies Act, 1956. In the
said notice, it has been, inter alia, stated as follows :
"Whereas the company has deposited Rs.
25.80 lakhs with various companies.
Whereas section 370 provides that no company shall
make loans to all bodies corporate exceeding 20% or 30%, as the case may be,
and if it exceeds, then the company is required to obtain prior approval of the
Central Government.
Whereas the total of subscribed capital and
reserves, i.e., Rs. 12,00,000 and Rs. 11,93,028, respectively, amounting to Rs.
23,93,028 and 30% of this come to Rs. 7,17,908 whereas the company has
deposited in other companies amounting to Rs. 20.80 lakhs. Prima facie it has
exceeded the limit prescribed under this Act. Hence, it has contravened the
provisions of section 370 of the Companies Act, 1956.
And Whereas the company by not obtaining the
approval of the Central Government as required under section 370 of the
Companies Act, 1956, has contravened the provisions of the above section of
this Act."
The petitioners have hence
filed this petition seeking relief. The petition has been opposed by the
respondent.
At the hearing of this
matter, Mr. Rele, learned counsel for the respondent, urged that it is not in dispute
that the company, viz., Birla
Consultants Ltd., had advanced a sum of Rs. 12,00,000 to the Associated Cement
Companies Ltd. That, in a monetary transaction, whether it be a deposit or a
loan, the relationship of a creditor and debtor must come about. That the word
"loan" is a "generic" term and includes a deposit. That
moneys placed with the bank on a current account is in the position of moneys
lent by the customer to a bank although all incidents of an ordinary
transaction of a loan do not exist. (vide N. Joachimson v. Swiss
Bank Corporation [1921] 3 KB 110 (CA)). That section 58A of the
Companies Act deals with deposits and applies to "borrowing
companies" (term used by Mr. Rele). Section 370 of the Companies Act deals
with "loan" and applies to "lending companies" (term used
by Mr. Rele). That the company, viz., Birla Consultants Ltd., has in fact in
the guise of a "deposit" actually lent moneys to the Associated
Cement Companies Ltd. and the transaction is squarely a "loan" within
the meaning of section 370 of the Companies Act. Then again, rule 2 of the
Companies (Acceptance of Deposits) Rules, 1975, provides as follows :
"2. Definitions.—In
these rules, unless the context otherwise requires,—......
(b) 'deposit' means any
deposit of money with, and includes any amount borrowed by, a company, but does
not include —......
(iv) any amount received by a company from any
other company;"
If this be so, then, in the
present case, since there is no dispute that the moneys given by the company
are to another company, the same cannot be considered as a "deposit",
but would in fact be a "loan". In the circumstances, the petitioners
would be entitled to no relief whatsoever on this petition.
Now, as regards the
aforesaid contentions, it may be stated that there can be no controversy that
in a transaction of a deposit of money or a loan, a relationship of a debtor
and creditor must come into existence. The terms "deposit" and
"loan" may not be mutually exclusive, but none the less in each case
what must be considered is the intention of the parties and the circumstances.
This is also the ratio laid down in V.E
.A. Annamalai Chettiar v. S.
V. V .S. Veerappa Chettiar, AIR
1956 SC 12, as also in Ram Janki Devi v.
Juggilal Kamlapat, AIR 1971 SC
2551. What must also be borne in mind is that under the Limitation Act, the
period when limitation would begin in a case of deposit and in a case of
lending are differently provided. Hence, the distinction between a loan and a
deposit is fine but appreciable. In the present case, barring the assertion of
the respondent that the moneys advanced by the company to the Associated Cement
Companies Ltd. constitute a loan and offend section 370 of the Companies Act,
there is nothing else to show that these moneys have been advanced as a
"loan". From what is aforestated, it follows, that in the context of
the statutory provision, the word "loan" may be used in the sense of
a "loan" not amounting to a deposit, (vide Nawab Major Sir Mohammad Akbar Khan v. Attar Singh, AIR 1936 PC 171 ; 63 IA 279 and Ram Janki Devi v. Juggilal Kamlapat, AIR 1971 SC 2551).
In other words, the word "loan" in section 370 must now be construed
as dealing with loans not amounting to deposits, because, otherwise, if deposit
of moneys with corporate bodies were to be treated as loans, then deposits with
scheduled banks would also fall within the ambit of section 370 of the
Companies Act. Mr. Rele has, however, fairly conceded that deposits with
scheduled banks do not fall within the ambit of section 370 of the Companies
Act. Then to treat certain deposits of money and not others as being within the
ambit of section 370 of the Act would be to give an inconsistent construction
to the section.
In the circumstances, the
contention of Mr. Rele that in this case the moneys given by Birla Consultants
Ltd. to the Associated Cement Companies Ltd. is a loan within the meaning of
section 370 of the Companies Act must be negatived.
In the result, the
petitioners would well be entitled to the relief in terms of prayers (a) and (d) of the petition.
[1987] 62 COMP. CAS. 112 (BOM)
v.
Registrar of Companies
KANIA, ACTG., C.J.
AND MRS. SUJATA V. MANOHAR, J.
APPEAL NO. 1108 OF 1984 IN WRIT
PETITION NO. 2285 OF 1984
FEBRUARY 11, 1986
R.J.
Joshi, N.H. Seervai and H.S.R. Vakil for the Appellant.
G.K.
Nilkanth for the Respondent.
Mrs. Sujata V. Manohar,
J.—The appellants are the original
petitioners. The first petitioner company is a company registered under the Companies
Act, 1956, and carries on business, inter alia, as general engineers and
contractors. Petitioners Nos. 2 and 3 are directors of the first petitioner
company.
During the years ending on
October 31, 1980, October 31, 1981, and October 31, 1982, the company had
deposited with various independent and reputed public limited companies certain
amounts as fixed deposits for six months, except in the case of one deposit
which was for a period of one year. All these amounts were repaid on maturity
and the interest -on these amounts was also received by the company.
The amounts so deposited by
the company have been shown in the balance-sheets of the company for the
relevant periods on the assets side under the general heading "loans and
advances". Under this heading, on the assets side of the balance-sheet,
the amounts of the deposits are shown under the sub-heading "deposits with
joint stock companies".
For the period ending
October 31, 1980, the company had so deposited a sum of Rs. 50,00,000 with
various independent companies. For the period ending on October 31, 1981, the
company had so deposited a sum of Rs. 76,00,000 and for the period ending on
October 31, 1982, the company had so deposited a sum of Rs. 35,00,000 in
various joint stock companies. The particulars of these investments are set out
in exhibit "C" to the petition. The deposits are with companies such
as National Organic Chemical Industries Limited, Tata Oil Mills, Mahindra & Mahindra Limited, The Indian Hotels
Company Limited and other reputed and independent companies. The amount of
deposits in the aggregate exceeds 30 per cent. of the subscribed capital of the
appellant company and its free reserves.
The company received a
show-cause notice dated June 12, 1984, from the office of the Registrar of
Companies under sections 370 and 371(1) of the Companies Act, 1956, for
exceeding the 30% limit prescribed under section 370(1)(a) of the Companies Act, 1956, without obtaining prior approval
of the Central Government. Under this notice, the company and its directors
were called upon to show cause why the penal provisions under section 371(1) of
the Companies Act, 1956, should not be invoked against them.
By its reply dated July 6,
1984, the company replied to the show-cause notice by pointing out that section
370 of the Companies Act has no application because the company had not
advanced any loans as contemplated under section 370 of the Companies Act. It
submitted that section 370 does not apply to deposits made by the company.
Thereafter, at the instance
of respondent No. 3, a criminal complaint has been filed by respondent No. 1
dated July 24, 1984, in the Court of the Additional Chief Metropolitan
Magistrate, Esplanade Court, Bombay, praying that process be issued to the
petitioners for violating section 370(1)(a)
of the Companies Act, 1956. Pursuant thereto, summons has been issued on the
petitioners and other directors of the first petitioner company.
The petitioners have filed
the present writ petition praying that the impugned complaint and the impugned
summons be quashed and set aside and respondents Nos. 1 to 4 be restrained from
proceeding with the said complaint. The petition was dismissed by a learned
single judge of this court at the stage of admission. The present appeal has
been filed from the order of dismissal. By consent of the parties, we have gone
into the merits of the contentions raised in the petition itself and we propose
to dispose of the matter on merits so that there is now no need to send the
petition before the trial court for a decision.
The relevant provisions of
section 370 of the Companies Act, 1956, are as follows :
"370. (1) No company hereinafter in this
section referred to as "the lending company") shall—
(a) make any loan to,
or..........any body corporate, unless the making of such loan, the giving of
such guarantee or the provision of such security has been previously authorised
by a special resolution of the lending company..........
Provided further that the aggregate of the
loans made to all bodies corporate shall not exceed without the prior approval
of the Central Government—
(a) thirty per cent. of
the aggregate of the subscribed capital of the lending company and its free
reserves where all such other bodies corporate are not under the same management
as the lending company;............".
The relevant provisions of
section 371 of the Companies Act, 1956, are as follows :
"371. (1) Every person who is a party to
any contravention of section 369 or section 370 excluding sub-section (1C) or
(1D), or section 370A including in particular any person to whom the loan is
made, or in whose interest the guarantee is given or the security is provided,
shall be punishable with fine which may extend to five thousand rupees or with
simple imprisonment for a term which may extend to six months".
Under the second proviso to
section 370 of the Companies Act, the aggregate of the loans made by a company
to all bodies corporate shall not exceed, without the prior approval of the
Central Government, thirty per cent of the aggregate of the subscribed capital
of the lending company and its free reserves where all such other bodies
corporate are not under the same management as the lending company. The only
question which arises in the present case is whether the deposits made by the
petitioner (appellant) company are to be considered as loans given by it to the
other companies. The petitioner company has not obtained approval of the
Central Government. If the deposits in question are covered by section 370, the
company would be liable to penalties as prescribed under section 371 of the
Companies Act. If deposits are not to be construed as loans under section 370,
there would be no violation of the provisions of the section.
The dividing line between a
loan and a deposit is undoubtedly thin. The two, however, are not synonymous.
For example, under the old Indian Limitation Act, 1908, article 59 in the First
Schedule to the said Act dealt with "money lent under an agreement that it
shall be payable on demand". The period of limitation was three years from
the time when the loan was made. Article 60 dealt with "money deposited
under an agreement that it shall be payable on demand..". and the period
of limitation was three years from the date when the demand was made. The Limitation
Act, therefore, made a distinction between money lent and money deposited.
Under the Companies Act,
1956, itself, there are provisions which would suggest that loans are not
considered as exactly equivalent to deposits. For example, under section 58A,
which deals with deposits, the Explanation
provides as follows :
"For the purposes of this section
'deposit' means any deposit of money with, and includes any amount borrowed by,
a company but shall not include such categories of amount as may be prescribed
in consultation with the Reserve Bank of India".
This section, therefore,
contains an express provision which includes, in the term "deposit",
monies borrowed by a company also. If a deposit and a loan were synonymous,
there would be no need for such a provision. Similarly, under section 227(1A)(d) it is provided that an auditor
shall, inter alia, inquire "whether loans and advances made by the company
have been shown as deposits". These provisions indicate that it may not be
possible to interchange the terms "loans" and "deposit"
under the Companies Act unless there is an express provision to that effect or
the context makes it clear that the terms are interchangeable.
It is undoubtedly true that
both in the case of a loan and in the case of a deposit, there is a
relationship of a debtor and a creditor between the party giving money and the
party receiving money. But, in the case of a deposit, the delivery of money is
usually at the instance of the giver and it is for the benefit of the person
who deposits the money—the benefit normally being earning of interest from a
party who customarily accepts deposits. Deposits could also be for safe-keeping
or as a security for the performance of an obligation undertaken by the
depositor. In the case of a loan, however, it is the borrower at whose instance
and for whose needs the money is advanced. The borrowing is primarily for the
benefit of the borrower although the person who lends the money may also stand
to gain thereby by earning interest on the amount lent. Ordinarily, though not
always, in the case of a deposit, it is the depositor who is the prime mover
while in the case of a loan, it is the borrower who is the prime mover. The
other and more important distinction is in relation to the obligation to return
the amount so received. In the case of a deposit which is payable on demand,
the deposit would become payable when a demand is made. In the case of a loan,
however, the obligation to repay the amount arises immediately on receipt of
the loan. It is possible that in the case of deposits which are for a fixed
period or loans which are for a fixed period, the point of repayment may arise
in a different manner. But, by and large, the transaction of a loan and the
transaction of making a deposit are not always considered identical.
In the case of Ram Ratan Gupta v. Director of Enforcement, Foreign Exchange
Regulation [1966] 36 Comp Cas 49; AIR 1966 SC 495, the
Supreme Court was required to deal with the provisions of section 4(1) of the
Foreign Exchange Regulation Act, 1947, under which there was a prohibition,
inter alia, on borrowing or lending any foreign exchange except as specified
therein. The appellant, Ram Ratan, had deposited unspent foreign exchange
allotted to him in bank accounts. He received payments from the accounts even
after his return to India. He was charged with contravening section 4(1) and
section 4(3). The Supreme Court held that he had not contravened section 4(1).
(He was held to have contravened section 4(3)). The Supreme Court made a distinction
between a loan and a deposit. It said (headnote of AIR 1966 SC 495) :
"It is settled law that the relationship
between a banker and a customer qua moneys deposited in the bank is that of a
debtor and creditor. Though, ordinarily a deposit of an amount in the current
account of a bank creates a debt, it does not necessarily involve a contract of
loan. The question whether a deposit amounts to a loan depends upon the terms
of the contract under which the deposit is made".
In the case of Suleman Haji Ahmed Umer v. Haji Abdulla Haji Rahimtulla, AIR
1940 PC 132; 43 Bom LR 971, the Privy Council made a distinction between a
deposit and a loan for the purpose of the Indian Limitation Act, 1908. The
Privy Council relied upon its own earlier ruling in the case of Nawab Major Sir Mohammad Akbar Khan v.
Attar Singh, AIR 1936 PC 171;
38 Bom LR 739, where it had observed that there was a distinction between a
loan and a deposit. It said (at page 173);
"It should be remembered that the two
terms are not mutually exclusive. A deposit of money is not confined to a
bailment of specific currency to be returned in specie. As in the case of a
deposit with a banker it does not necessarily involve the creation of a trust,
but may involve only the creation of the relation of debtor and creditor, a
loan under condition. The distinction which is perhaps the most obvious is that
the deposit not for a fixed term does not seem to impose an immediate
obligation on the depositee to seek out the depositor and repay him. He is to keep
the money till asked for it. A demand by the depositor would, therefore, seem
to be a normal condition of the obligation of the depositee to repay".
Mr. Nilkanth, learned
advocate for the respondents, placed some emphasis on the sentence "the
two terms are not mutually exclusive". He submitted that a loan includes a
deposit. This submission cannot be accepted. The Privy Council was referring to
the fact that both these transactions involved bailment of money. It went on to
distinguish the two for the purpose of the Limitation Act on the basis of the
mode of repayment, The Privy Council's observations cannot be read to mean that
a loan would include a deposit. The Privy Council observed that certain
features are common to the two transactions while certain features are not. In
some cases, a deposit, for example, with a bank, may amount to a loan with
conditions. The Privy Council went on to say that the two transactions were
distinct. The Supreme Court in the case of Ram Ratan Gupta, [1966] 36 Comp Cas 49, considered even a bank
deposit as distinct from a loan. It is therefore clear that "loan"
and "deposit" are not identical in meaning and cannot always be
interchanged. Some loans may be deposits and some deposits may be loans. But all
loans are not deposits or vice versa.
A single Judge of the
Rajasthan High Court, however, in the case of Totalal v. State, AIR
1963 Raj 6, held that for the purposes of section 295 of the Companies Act, no distinction
could be made between a loan and a deposit because in both cases there is a
relationship of debtor and creditor, though such a distinction might be
material for the purposes of limitation. In our view, however, the fact that
both transactions create the relationship of a debtor and a creditor is not
enough to equate a loan with a deposit. Nor would it be correct to make a
distinction between the two only for the purpose of calculating the period of
limitation. The nature of the two are somewhat different and that is the reason
why a distinction is made between the two for the purpose of calculating the
period of limitation. If the two transactions were identical, there would be no
need to prescribe different periods of limitation.
In the present case, the
amounts were deposited with well-known independent companies. There is nothing
to show that these deposits were in fact loans or amounts lent by the
petitioner and borrowed by these companies. They must, therefore, be considered
as deposits. There is no provision under section 370 of the Companies Act which
prescribes that a loan includes a deposit for the purposes of that section.
Section 371 lays down penal consequences for not complying with the provisions
of section 370. It was, therefore, absolutely necessary that if deposits were
also to be included in loans for the purposes of section 370, it should have
been clearly so specified. Bearing in mind that non-compliance with section 370
involves criminal prosecution and penal consequences, section 370 cannot be
given an interpretation wider than that warranted by the actual words used in
that section. Without any provision to that effect, the word "loan",
as used in section 370, cannot be given a wider interpretation to include
deposits.
It was contended by Mr.
Nilkanth that the petitioner company had itself treated the deposits in
question as loans, because these amounts are shown in the balance-sheets under
the heading "Loans and advances". Since the form of a balance sheet
is prescribed under Schedule VI to the Companies Act, 1956, the amounts in
question are required to be shown under the heading "Loans and
Advances" on the assets side. The subheading, however, clearly describes
the amounts as "deposits with joint stock companies". The balance-sheets,
therefore, do not assist the respondents.
In the premises, the rule
is made absolute in terms of prayer (a)
of the petition. In the circumstances, there will be no order as to costs.
[1998]
92 COMP. CAS. 564 (KAR.)
v.
Registrar of Companies
M.P. CHINNAPPA J.
Criminal Petitions Nos. 551, 552,
595 to 598, 607, 608,
626, 646, 662, 1064, 1151 and 1464
of 1993
FEBRUARY 5, 1997
Naganand, Santosh Hegde and S.G. Bhagavan for the petitioner.
Ashok Haranahalli, Mukunda Menon and A Padmanabhan for the respondent.
M.P.
Chinnappa J.—The
brief facts of the cases which lead to these petitions and which are common in all these petitions are as
follows:
Fairgrowth
Financial Services Ltd. was incorporated on July 9, 1990, as a public company
limited by shares under the Companies Act, 1956, (hereinafter referred as
"the Act"), in the State of Karnataka. The certificate of
commencement of business was issued by the Registrar of Companies on August 10,
1990. The company has its registered office at No. 22/11, Vittal Mallya Road,
Bangalore—Sri K. Dharmapal is the managing director and Sri R. Lakshminarayanan
is the whole-time director (also designated as executive director and company
secretary) of the company. It is also alleged that Dr. V. Krishnamurthy, Sri
Ved Kapoor, Sri Kanhaiyalal Rajgarhia, Sri T.P.G. Nambiar, Sri Pratap C. Reddy,
Sri Vijay Dhar, Dr. D.N. Patodia and Sri Vinod L. Doshi are said to be at all
material times pertaining to the complaint, the members of the board of
directors of the company. The main object for which the company was established
has been incorporated in the memorandum of association. Inspection of the books
of account and other books and papers of the company was ordered by the Department
of Company Affairs under section 209A of the Act, during the month of July,
1992. Accordingly, Sri Richard, Inspecting Officer, attached to the office of
the Regional Director, Madras, commenced the inspection on July 27, 1992, and
submitted an interim report dated October 23, 1992. After receipt of this
report on November 6, 1992, forwarded by the Regional Director, Madras,
advising to launch prosecutions for the various violations/contraventions of
the Act, the Registrar of Companies filed various complaints before the Special
Court for Economic Offences, Bangalore. C.C. No. 1181 of 1992 was filed for the
alleged offences under sections 17 and 291 punishable under section 629 of the
Act, on the allegation that the company had been doing business of an
investment company, such as acquiring shares, debentures and securities and
dealing in the same. The directors of the company exceeded the power vested in
them under section 291 of the Act by embarking upon business which was not
authorised by the memorandum of association of the company. The company filed a
petition under section 17 of the Act, before the Company Law Board, Madras, to
alter the objects clause of its memorandum of association only on January 23,
1991, to provide for specific objects enabling the company to acquire and deal
in shares, debentures and other securities. As on March 31, 1991, the company
was having investments in shares and debentures amounting to Rs. 2,670.73 lakhs
which was far in excess of the limits laid down under section 372 of the Act,
and it was acquired prior to the alteration of the objects clause by its order
dated May 17, 1991, and thereby the accused persons 2 to 11 being the directors
of the company at the relevant time, contravened the provisions of section 17 of
the Act. They are liable for punishment under section 629A of the Act.
It
is further alleged that accused Nos. 1 to 13 were under a statutory obligation
under section 210(1) and (3) of the Act, to lay before the company in its
annual general meeting which ought to have been held in pursuance of section
166 of the said Act, by September 30, 1992, at the latest (being extension
given by the complainant/Registrar), its balance-sheet and profit and loss
account for its financial year ending March 31, 1992, on June 30, 1992, but the
accused persons have failed to take all reasonable steps to comply with the
said provisions of section 210 of the said Act, and have thereby committed an
offence punishable under section 210(5) of the Act. This case was registered in
C.C. No. 298 of 1993.
Similarly,
the Registrar of Companies filed a complaint in C.C. No. 1180 of 1992 alleging
that the company had given loans to other body corporates on the allegation
that the inspection report, inter alia,
shows that the provisions of section 370(1) of the Act have been contravened by
the company by lending loans to other bodies corporate in excess of the limits
laid down under section 370(1) read with rule 11B of the Companies (Central
Government's) General Rules and Forms, 1956. The details of the loans given to
bodies corporate in excess of the maximum permissible limit have been furnished
in the complaint. Therefore, it is alleged that the accused persons have
committed an offence punishable under section 370(1) of the Act.
It
is alleged in C.C. No. 179 of 1993, that the company circulated large amount of
application forms for raising capital of the company by private placement
without complying with the provisions of sections 56 and 60 of the Act, and
received favourable response from the public. The company's board of directors
after allotting to 2,738 shareholders went ahead and made partial allotment to
some and refunded to some other shareholders. This was done without complying
with the provisions of sections 56 and 60 of the Act. The company's board of
directors thereby have committed offence punishable under section 60(5) of the
Act.
The
complainant has alleged in C.C. No. 678 of 1993, that in terms of section 217(2A)
of the Act, read with the Companies (Particulars of Employees) Rules, 1975, the
particulars of employees of the company drawing remuneration above the
prescribed limit should be furnished in the report of the board of directors
attached to every balance-sheet laid before the company in its annual general
meeting. The Department of Company Affairs has also clarified that such
statements should not be furnished in detachable annexures, but incorporated in
the board's report itself. The Inspecting Officer has reported that the copy of
the balance-sheet as at March 31, 1991, furnished to him at the time of
inspection did not contain the particulars of employees as required to be
furnished under the aforesaid provision. On a verification of the printed copy
of the balance-sheet as at March 31, 1991, filed by the company with the
complainant, it is seen that the aforesaid particulars of employees have been
furnished in a detachable annexure to the balance-sheet. No page number has
also been given to the said annexure. Thus the accused have not strictly
complied with the requirements of section 217(2A) of the Act, thereby they
committed an offence punishable under section 217(5) of the Act.
On
the basis of these complaints, the Special Court has taken cognizance of the
offences and directed to issue process to the accused persons. As against that
order, these petitions have been filed by the directors of the company.
However, the company, its managing director and executive director and company
secretary of the company have not filed any criminal petitions, but the other
eight directors preferred Crl. P. Nos. 551, 597, 608 and 626 of 1993,
questioning the order passed by the Special Court in C.C. No. 1181 of 1993.
Similarly, they have also questioned the order passed in C.C. No. 298 of 1993
by preferring Crl. P. Nos. 595 and 663 of 1993. The order passed in C.C. No.
179 of 1993 has been questioned by the other directors by preferring Crl. P.
Nos. 552, 596, 607 and 646 of 1993. The director also questioned the order
passed in C.C. No. 1180 of 1992, taking cognizance of the offences by
preferring Crl. P. Nos. 662, 598 and 1064 of 1993. In the same manner only Sri
Vinod L. Doshi and Shri T.P.G. Nambiar who were accused Nos. 10 and 6,
respectively, questioned the order passed in C.C. No. 678 of 1993, by
preferring Crl. P. Nos. 1151 and 1464 of 1993, respectively. The other
directors have not questioned the order in C.C. No. 678 of 1993.
Since
all these petitions pertain to the same company and are in respect of various
sections and material particulars are similar in nature, they are disposed of
by this common order. Retain a copy of this order in each file.
Heard
Sri Santosh Hegde, senior counsel appearing for Sri Vinod L. Doshi, who is the
petitioner in Crl. P. Nos. 595 to 598 and 1151 of 1993, Sri Naganand, learned
advocate appearing for Sri T.P.G. Nambiar in Crl. P. Nos. 551, 552, 1064 and
1464 of 1993, and Sri S. G. Bhagvan, learned counsel appearing for the
petitioners in Crl. P. Nos. 607, 608, 626, 646, 662 and 663 of 1993, and Sri
Ashok Haranahalli and Sri Mukunda Menon, learned advocates appearing for the
respondent.
Sri
Santosh Hegde, learned advocate for Sri Vinod L. Doshi, at the very outset
submitted that this petitioner was inducted as a director of the company
because of his reputation, experience and standing in society on February 1,
1991. He had never attended any director's meeting at any time nor the general
meeting of the company. He had never participated in any transaction of the
company. Further, on June 24, 1992, he had tendered his resignation to the
directorship which had taken effect from that day onwards. Though this fact was
within the knowledge of the complainant, he suppressed the same and arrayed him
as the accused. Therefore, the entire proceedings as far as this petitioner is
concerned may be quashed.
However,
learned counsel for the respondent submitted that this is not the stage at
which all these aspects will have to be considered. Even if he had tendered his
resignation, the question of his participation in the affairs of the company
and his responsibility as the director is a matter to be decided by the trial
court. Further, no material is placed by the petitioner before the trial court
in support of these arguments and this court cannot look into the documents
sought to be produced by the petitioner as it requires evidence to support
their contention.
It
is an admitted fact that this petitioner was the director during the relevant
period. Nothing is on record of the complainant to show that he had tendered
his resignation and that resignation had come into effect from the said date.
The complainant does not know anything about the resignation being tendered by
him. At this stage, as rightly pointed out by learned counsel for the respondent,
this court cannot go into the pros and cons of the case of the company nor can
this court look into the documents sought to be produced by the petitioners.
These documents ought to have been produced before the learned magistrate to
substantiate their case. On the other hand, the petitioners rushed to this
court under section 482 of the Criminal Procedure Code. At this stage, it is
also necessary to refer to the various decisions rendered by the Hon'ble
Supreme Court in regard to the scope, object and purpose of section 482 of the
Criminal Procedure Code.
In
State of H.P. v. Pirthi Chand [1996] 2 SCC 37, their
Lordships have considered the judgment of the Supreme Court in the case of State, of Haryana v. Bhajan Lal [1992] Supp 1 SCC 335, wherein
a two-judge Bench of the Supreme Court laid down certain broad tests to
exercise the inherent power or extraordinary power of the High Court. And it is
also laid down that the High Court should sparingly and only in exceptional
cases, in other words, in the rarest of rare cases, and not merely because it
would be appealable to the learned judge, be inclined to exercise the power to
quash the FIR/charge-sheet/complaint. It is also held that the FIR should not
be quashed since it disclosed prima facie cognizable offences to proceed
further in the investigation. In Rupan
Deol Bajaj v. Knnwar Pal Singh
Gill [1995] 6 SCC 194, the court reiterated the above view and held that
when the complaint or charge-sheet filed disclosed prima facie evidence the
court would not weigh at that stage and find out whether an offence could be
made out. It is also further observed that it is well-settled law that the
exercise of inherent power of the High Court is an exceptional one. Great care
should be taken by the High Court before embarking to scrutinise the
FIR/charge-sheet/complaint. In deciding whether the case is the rarest of rare
cases to scuttle the prosecution in its inception, it first has to get into the
grip of the matter whether the allegations constitute the offence. It must be
remembered that the FIR is only an initiation to move the machinery and to
investigate into cognizable offence. After the investigation is concluded and
the charge-sheet is laid, the prosecution produces the statements of the
witnesses recorded under section 161 of the Code, in support of the
charge-sheet. At that stage, it is not the function of the court to weigh the
pros and cons of the prosecution case or to consider the necessity of strict
compliance with the provisions which are considered mandatory and the effect of
non-compliance. It would be done after the trial is concluded.
In
regard to exercise of inherent power by the High Court under section 482 of the
Criminal Procedure Code, it is held that the prime consideration should only be
whether the exercise of the power
would advance the cause of justice or it would be an abuse of the process of
the court. Further action should not be short-circuited by resorting to
exercise of inherent power to quash the charge-sheet. The social stability and
order requires to be regulated by proceeding against the offender as it is an
offence against society as a whole. This cardinal principle should always be
kept in mind before embarking upon exercising inherent power.
It
is also held in Mushtaq Ahmad v.
Mohd. Habibur Rehman Faizi [1996]
JT 1 SC 656, 657, wherein the Supreme Court has held:
"According
to the complaint, the respondents had thereby committed breach of trust of
Government money. In support of the above allegations made in the complaint,
copies of the salary statements of the relevant periods were produced. In spite
of the fact that the complaint and the documents annexed thereto clearly made
out a, prima facie, case for cheating, breach of trust and forgery, the High
Court proceeded to consider the version of the respondents given out in their
petition filed under section 482 of the Criminal Procedure Code, vis-a-vis that of the appellant and
entered into the debatable area of deciding which of the version was true,—a
course wholly impermissible..."
Their
Lordships have in a decision in State
of U.P. v. O.P. Sharma [1996]
7 SCC 705, held reiterating the earlier judgments referred to above, that
quashing of criminal proceedings at initial stage-the High Court should be
loath to interfere at the threshold to thwart the prosecution, exercising its
inherent power under section 482 or under articles 226 and 227 of the
Constitution—FIR containing all the ingredients of the offence—High Court
committed grave error of law in quashing the FIR. From these judgments, it is
abundantly clear that the High Court should exercise its inherent power under
section 482 of the Criminal Procedure Code, under exceptionally exceptional
circumstances. At the cost of repetition, it may be mentioned here that when
the court exercises its inherent power under section 482, the prime
consideration should only be whether the exercise of the power would advance
the cause of justice or it would be an abuse of the process of the court, and
not otherwise. With this principle in mind, it is now necessary to consider the
common arguments advanced in respect of the other matters by the advocates for
the petitioners.
Before
proceeding to consider the various offences alleged to have been committed, it
is necessary to mention as a prelude that these complaints came to be filed on
the interim report submitted by the enquiry officer. The allegations of
commission of offences are based on this report. The said report may disclose
the various omissions and commissions and violations of the provisions of law.
What can be gathered in these cases is that this report was submitted after
enquiry and not merely on surmises or conjectures. Hence, this cannot be lost
sight of at this stage and, therefore, it will have to be attached with some
importance on the allegations made in the complaint in that regard to this
enquiry report.
It
is also necessary to mention that the company, the managing director and the
whole-time directors were also arrayed as accused persons before the trial
court. But they have not questioned the order passed by the court taking
cognizance of the offences. On that ground, the learned advocates for the
petitioners strenuously argued that the prosecution can proceed only against
them and the directors are unnecessarily prosecuted. The arguments will have to
be considered along with the allegations contained in each complaint which will
be dealt with presently.
C.C. Nos. 11-81 of 1992: The allegations in this
complaint have been stated at page 6 of the order. It is in regard to the
exceeding power vested in the directors of the company and the directors under
section 281. Learned counsel submitted that the memorandum of association
contains the main object of setting up the company. The memorandum of
association empowers the company and the company did the business within its
limits. The accusation against these petitioners is that the petition filed by
the board under section 17 to alter the objects clause of the memorandum of
association on January 23, 1991, to provide specific objects enabling the
company to acquire and deal in shares, debentures and other securities which
was allowed on May 17, 1991. The argument of learned counsel is that this is
already there in the memorandum of association. Therefore, there is no violation
of section 17 of the Act. This argument at this stage cannot be accepted. If
the object as contended by the petitioners was already there, there was no need
for the company to file a petition under section 17 and also an order being
passed. But as on March 31, 1991, the company was having investments in shares
and debentures amounting to Rs. 2,670.73 lakhs which was far in excess of the
limit laid down under section 372 of the Act.
Learned
counsel submitted that the amendment was allowed and brought into effect from
May 17, 1991. The illegality alleged is prior to May 17, 1991. This action was
by a resolution of the directors. The material allegations prima facie appear
that the complaint is not totally false. The question ultimately would be as to
whether the violation is with the knowledge, direction and at the instance of
the petitioners or not. Hence, trial will be necessary. It is further argued,
even if there is any violation, the directors are not responsible in view of
sections 5 and 220 of the Act. According to the allegation, the punishment
prescribed is under section 629A which provides penalty where no specific
penalty is provided elsewhere in the Act. Learned counsel for the petitioner
submitted that according to this section every officer of the company who is in
default or such other person shall be punishable. In the said company there are
managing director and also whole-time director. Therefore, these directors are
not liable to be punished. In support of this argument, they placed reliance on
a decision in Ravindra Narayan v.
Registrar of Companies [1994]
81 Comp Cas 925 (Raj) wherein the Rajasthan High Court has held (headnote):
"Complaints
were filed against a company, its managing director and directors for an
offence under section 220(3) of the Companies Act, 1956. The directors filed a
petition for quashing the complaint against them:
Held, allowing the petition, that under sub-section (3) of 220 of the
Act, the company and every officer of the company who is in default is liable to
punishment. The definition of 'officer who is in default' in section 5 of the
Act, makes it clear that directors of the company fall within the definition if
the company does not have officers specified in clauses (a) to (c), namely, managing directors, whole-time directors, managers.
Admittedly, in the present case, the company had a managing director at the
relevant time. Therefore, the petitioners who were directors, at the relevant
time, did not fall within the expression 'officer in default' and they could
not be held liable criminally, for the default in complying with the
requirements of sub-sections (1) and (2) of section 220 of the Companies Act,
1956."
Similarly,
they have also placed reliance on a decision in J.R. Grover, Director
of K.D. Woollen Mills (P.) Ltd. v. Assistant Director, Enforcement Directorate [1987] 62 Comp Cas 807,
wherein the Punjab and Haryana High Court has held in that case as follows
(headnote):
"A
complaint was filed against a company, and the petitioner, as director of the
company, for contravention of certain provisions of the Foreign Exchange
Regulation Act, 1973. Paragraph 9 of the complaint stated that 'accused No. 1
is the company and accused Nos. 2 to 5 were its directors and who were managing
the affairs of the company.' The director filed a petition under section 482 of
the Criminal Procedure Code, 1973, to have the complaint quashed:
Held, quashing the complaint, that in the light of the contents of
paragraph 9 of the complaint, neither the petitioner nor the other directors
like him could be held liable even vicariously for the offences alleged against
them."
They
also placed reliance on a decision in Siddharth
Kejriwal v. Regional Director,
ESI Corporation [1994] ILR Kar 3484; [1997] 90 Comp Cas 496, 517,
wherein this court has held:
"All
the directors as such cannot automatically become 'principal employers' when
the factory belongs to and is run by a company. The complaint or other material
produced along with the complaint must disclose how the directors of the company
would be liable in such a case."
In
this case, from the averments, it is clear that as on March 31, 1991, the
company was having investment in shares and debentures amounting to Rs.
2,670.73 lakhs which was far in excess of the limits laid down under section
372 of the Act. This means to say that in the normal course only the managing
director and the whole-time director could have done it without the active
connivance and knowledge of these petitioners who are the directors. Therefore,
it requires that the matter has to be tried by the court to find out as to
whether these petitioners also are involved in the commission of the offence.
The decisions cited above obviously are referring to one particular incident
but it is pertaining to a period from January 23, 1991, to May 17, 1991. Under
the circumstances, I am of the considered view that the impugned order cannot
be quashed at the threshold.
C.C. No. 298 of 1993: The complaint averments are mentioned in para. 2 of the order
which disclose that the annual general meeting ought to have been held in
pursuance of section 166 of the Act. As they did not hold the annual general
meeting, the directors committed offence under section 210(1) and (3)
punishable under section 210(5) of the Act. Admittedly, the annual general
meeting was not held. The petitioners sought to make out a ground by saying
that the meeting could not be held and the balance-sheet and profit and loss
accounts were not laid for the year on or before March 31, 1992, or extended
period by June 30, 1992. Therefore, they complained that the complaint read as
a whole does not constitute any offence. According to them, when the meeting
was not held, the question of presenting the balance-sheet does not arise. Further,
sections 220 and 210 are to be read together. At the time of filing the
complaint, the Registrar did not receive a reply to the show-cause notice and
it was because a custodian was appointed and records were seized. Therefore,
the general meeting could not be held. They also contended that some of the
directors sent replies on January 19, 1993, to the show-cause notice dated
January 4, 1993. They also further contended that the prosecution was launched
under section 220 and the company was convicted and the managing director was
relieved by the court under section 166 invoking section 633 of the Act. Even
if there is any liability, the petitioners are not at default as section 168
refers to "officers at default".
As
against it, the respondent submitted that offences under sections 166, 210 and
220 are different and distinct offences. There is no co-relation also. Whether
the annual general meeting was held or not, has no bearing to proceed under
section 210. They further emphasised that under section 210 all the directors
are liable to be prosecuted. In support of his argument, he placed reliance on
a decision in Assistant Registrar of
Companies v. Mati Begum Safaran
Khatoon [1979] 49 Comp Cas 651, wherein the Calcutta High Court has held
(headnote):
"The
circumstance that no annual general meeting was held will not absolve the
directors of a company from liability under section 210(1) of the Companies
Act, 1956, for failure to place before the annual general meeting of the
company, the profit and loss account and balance-sheet of the company. The
directors cannot defeat the provisions of the section simply by not calling the
meeting wilfully."
So
the question is whether they have wilfully failed to call the meeting or they
were prevented by sufficient cause, etc., and is once again a matter to be
decided by the trial court. Therefore, the first argument of learned counsel
for the petitioners that since the annual general meeting was not held, the
question of not placing the balance-sheet and profit and loss account of the
company, etc., is not available to them at this juncture and on this ground
this court cannot quash the entire proceedings pending against these
petitioners.
C.C. No. 1180 of 1993: The allegations made in the complaint are set out in
para. 3 of the order. The offences alleged against these petitioners are under
section 370(1), rule 11B of the Rules. The complaint contains the details of
the loan advanced by the company. Whether it was permitted or not and whether
the company violated section 370(1) and rule 11B are matters to be established
by the complainant. The fact is that loans were granted by the directors and
some of the directors have direct access. The words used under section 317(5)
"if any person being director and all the persons who are knowingly
parties are matters to be established by the complainant."(sic). Learned counsel for the petitioners however submitted that
these specific pleadings are absent in the complaint. Therefore, the court
below should have looked into all these ingredients at the inception itself and
dismissed the complaint and in support of their argument, they also placed
reliance on decisions in J.R. Grover, Director of K.D. Woollen Mills
(P.) Ltd. v. Assistant
Director, Enforcement Directorate [1987] 62 Comp Cas 807 (P&H) and Siddharth Kejriwal v. Regional Director, ESI Corporation [1994]
ILR 4 Kar 3484; [1997] 90 Comp Cas 496, which are already referred to above.
But from a perusal of para. 5 of the complaint, it is specifically stated
"the accused herein were knowingly parties to the above contravention by
the company and are, therefore, liable for punishment under sub-section (1) of
section 371 of the Act." From the details furnished in para. 4 of the
complaint, it is prima facie clear that the company had advanced loans right
from August 27, 1990, to January 5, 1991, far exceeding the limits prescribed.
Therefore, it cannot be at this stage said that the managing director and the,
whole-time director only were responsible for advancing the loan in violation of
section 370 of the Act, without the knowledge and consent and concurrence of
the directors. This is not a single transaction. On the other hand, it is a
continuous process. Therefore, the contention of the. petitioners cannot be
accepted and the same is liable to be rejected. Under the circumstances, these
criminal petitions are also liable to be dismissed.
C.C. No. 179 of 1993: The sum and substance of the allegations are mentioned in
para. 4 of the order. According to the complainant, the company's board of
directors after allotting 2738 shares went ahead and made partial allotment to
some and refunded to some other shareholders. This was done without complying
with the provisions of sections 56 and 60 of the Act. Thus, they committed an
offence punishable under section 60(5) of the Act. Learned counsel for the
petitioners submitted that under sections 56, 60 read with section 67, the
company has to follow the requirement only if prospectus is printed and
published and only if the company wants to go public. According to them there
is nothing to indicate that the directors issued applications to the public to
purchase shares. The directors issued shares only to friends, relatives and
business associates which is a private placement and not prohibited. No publicity
is produced. Mens rea is an important ingredient to constitute the offence as
stated in the section as the word "knowingly" is used in this
section. Therefore, no offence is committed.
Repelling
this argument, learned counsel for the respondent submitted whatever the
decisions of the board of directors are required, all the directors are
involved in the commission of the offence or offences being committed by the
directors, managing director and this again is a question of fact to be decided
by the trial court. It was further emphasised that the paid up capital of the
company was Rs. 1 crore which has gone up to Rs. 860 crores by March 31, 1992.
According to the complaint 63.5 per cent, shares were held by the members of
the public and these members of the public were spread all over India but the
petitioners claim that it is a private placement. Hence, they submitted that
there is a serious question which has to be decided by the court with the
materials to be produced by the parties. He further argued that a duty is cast
on all the directors to perform their functions in the interest of the company.
Neglecting to check fraud being played is also an offence attributable to the
directors. A managing director may be looking after the day-to-day activities
of the business, but the directors are responsible for the entire policy and
affairs of the company. Such being the responsibility of the directors,
non-participation in the board meeting and not taking action wherever necessary
is also an offence. In support of their argument the petitioners placed
reliance on a decision in Kartar Singh
v. State of Punjab [1994]
3 SCC 569, 649, wherein their Lordships have held:
"To
encapsulate, for the discussion above, the expressions 'communication' and
'association' deployed in the definition should be qualified so as to save the
definition, in the sense that 'actual knowledge or reason to believe' on the
part of a person to be roped in with the aid of that definition should be read
into it instead of reading it down and clause (i) of definition 2(1)(a)
should be read as meaning 'the communication or association with any person or
class of persons with the actual knowledge or having reason to believe that
such person or class of persons is engaged in assisting in any manner
terrorists or disruptionists' so that the object and purpose of that clause may
not otherwise be defeated and frustrated."
This
is a case in which the petitioners challenged the constitutional validity of
the "terrorists affected area" (Spl. Courts Act No. 61 of 1984), and
other relevant Acts. While dealing with that Act, their Lordships made
observations. They also further submitted that there should be actual
participation of directors and in support of that argument they placed reliance
on a decision in Girdharilal Gupta v.
D.N. Mehta, Collector of Customs [1971]
3 SCR 748; AIR 1971 SC 28, wherein their Lordships have held that a partner in
charge of the business of a firm is guilty under section 23C(1) of the Foreign
Exchange Regulation Act, 1947, unless he can prove that the contravention of
the Act by the firm took place without his knowledge and he had exercised
diligence to prevent the contravention. From this also it is clear that it is
for the directors to prove that the entire transaction had taken place without
their knowledge and intervention. To further emphasise this, learned counsel
for the petitioner, Sri V.L. Doshi, submitted that he ceased to be the director
of the company. Therefore, he cannot be proceeded against. As stated earlier,
there is absolutely nothing on record to show that he ceased to be the director
of the company during the relevant time. Further, this fact will have to be
established before the court.
They
also placed reliance on a decision in Municipal
Corporation of Delhi v. Ram
Kishan Rohtagi, AIR 1983 SC 67, wherein the Hon'ble Supreme Court has
held that if the necessary ingredients are not made out, the High Court can interfere under section 482 of the Criminal
Procedure Code. In this case, as already stated, there are allegations made in
the petitions. Whether those allegations are sufficient to constitute an
offence is once again a matter to be decided by the court. It is well-settled
law that the complaint is only for initiation of proceedings. It need not
contain all the details but contain such allegations as would be necessary to
constitute an offence. In this case, the allegations are very specific and
based on the preliminary report submitted by the enquiry officer. Therefore,
the complainant will have to establish these facts before the court failing
which the petitioners can take advantage of the same. But it can be said at
this stage that the allegations are not totally lacking to quash the
proceedings. However, in this case the question would be as to whether the
shares held by the members is either public or private (friends or relatives
and business associates) as contended by the petitioners. This can be
established only by trial before the court. Under the circumstances, this
petition also cannot be allowed by quashing the proceedings.
C.C.
No. 678 of 1993: The allegations made in the
complaint are concisely stated in para. 5 of the order. According to this
complaint, the Inspecting Officer reported that the copy of the balance-sheet
as on March 31, 1991, furnished to him at the time of inspection did not
contain the particulars of employees as required to be furnished under section
217(2A) of the Act. Therefore, the complainant claims that the board of
directors committed an offence punishable under section 217(5) of the Act. The
learned advocates appearing for the petitioners submitted that it is only an
executive order and not a statutory requirement. Non-compliance of the same
does not constitute an offence. In support of their argument they placed
reliance on a decision in State of
Karnataka v. Muniswamy (L), AIR
1977 SC 1489; [1977] 3 SCR 113; R.P.
Kapur v. State of Punjab, AIR
1960 SC 866 ; State of Haryana v.
Bhajan Lal [1992] Supp 1 SCC 335; AIR 1992 SC 604. In State of Karnataka v. Muniswamy (L.), AIR 1977 SC 1489, it is held that the High
Court was justified in holding that for meeting the ends of justice the
proceedings against the respondents ought to be quashed. It would be a sheer
waste of public time and money to permit the proceedings to continue against
the respondents, when there is no material on the record on which any tribunal
could reasonably convict them for any offence connected with the assault on the
complainant.
In
R.P. Kapur v. State of Punjab, AIR 1960 SC 866,
their Lordships have held that in dealing with the class of cases, it is
important to bear in mind the distinction between a case where there is no
legal evidence or where there is evidence which is manifestly and clearly
inconsistent with the accusation made and cases where there is legal evidence
which on its appreciation may or may not support the accusation in question. In
exercising its jurisdiction under section 561A, the High Court would not embark
upon an enquiry as to whether the evidence in question is reliable or not. That
is the function of the trial magistrate, and ordinarily it would not be open to
any party to invoke the High Court's inherent jurisdiction and contend that on
a reasonable appreciation of the evidence the accusation made against the accused
would not be sustained.
In
State of Haryana v. Bhajan Lal [1992] Supp 1 SCC 335,
378, their Lordships of the Supreme Court have issued seven guidelines to deal
with the cases under section 482 of the Criminal Procedure Code, by the High Court.
According to learned counsel for the petitioners, this particular case comes
within the third guideline issued by the Supreme Court which reads:
"Where
the uncontroverted allegations made in the FIR or complaint and the evidence
collected in support of the same do not disclose the commission of any offence
and make out a case against the accused."
This
argument of learned counsel as far as this case is concerned, appears to be
justified. It is not disputed by the complainant that the balance-sheet was
produced according to the report, the balance-sheet was produced before the
Inspection Officer and the complaint also discloses that the balance-sheet was
produced before the Registrar at the relevant time. The only allegation as
stated earlier, at the cost of repetition, is the printed copy of the
balance-sheet as on March 31, 1991, filed by the company with the complainant,
containing the particulars of employees which were furnished in a detachable
annexure to the balance-sheet. Paging was not done to the said annexure,
thereby the accused persons have not strictly complied with the requirements of
section 217(2A) of the Act. From a bare reading of section 217(2A), it is clear
that the board's report shall also include a statement showing the name of every
employee of the company. The complaint does not say that there is any violation
in regard to the statement furnished to the inspection report or to the
Registrar of Companies. They also admit that the statements were furnished.
Just because it was not properly numbered, or it was in a blue sheet, etc.
itself cannot be an offence to proceed against the directors. It is an
executive function and the directors cannot be held responsible for this. Such
complaint will have to be quashed as no purpose would be served and the
allegations also do not constitute an offence as such. There is no rule or
bye-law prescribing the mode in which these statements should be furnished.
From a reading of section 217(2A), it is only clear that such statements should
be furnished, which in actual fact, were furnished by the company. Hence, C. C.
No. 678 of 1993, is liable to be quashed.
From
the various grounds urged during the course of the arguments by learned counsel
for the petitioners it is apparently clear that they have insisted upon those
points which are only available to them as defence in the enquiry. They pointed
out the facts which according to them, the learned magistrate should have
noticed at the initial stage of taking cognizance of the offence. It is not humanly
possible for anyone to visualise what would be the probable defence of the
accused. But what has to be done by the magistrate is to see whether the
complaint if taken as a whole constitutes an offence or not, and not to go into
the aspect of probable defence or defects in the complaint. If an overall
reading of the complaint makes out a prima facie case by satisfying the
ingredients of the provisions of law, that itself is sufficient to take
cognizance. At this stage, the court cannot probabilise the defence. It is left
to the accused to take advantage of any lacuna in the prosecution case at the
stage of trial.
It
is also a well-settled principle of law that this court has to find out as to
whether the magistrate has committed any error in taking cognizance of the
case, on the basis of the materials produced before him by the complainant and
not on the documents to be produced in this court for the first time to explain
the case of the accused. This is uncalled for and if this is permitted, this
court would be indulging in a mini trial which is not the object, purpose or
scope of section 482. In other words, the High Court would be usurping the
jurisdiction of the magistrate. With this background, it is also necessary to
refer to the decision of the Supreme Court in K.M. Mathew v. State of
Kerala, AIR 1992 SC 2206, 2208, wherein their Lordships have held
(headnote):
"It
is open to the accused to plead before the magistrate that the process against
him ought not to have been issued. The magistrate may drop the proceedings if
he is satisfied on reconsideration of the complaint that there is no offence
for which the accused could be tried. It is his judicial discretion. No
specific provision is required for the magistrate to drop the proceedings or
rescind the process. The order issuing the process is an interim order and not
a judgment. It can be varied or recalled. The fact that the process has already
been issued is no bar to drop the proceedings if the complaint on the very face
of it does not disclose any offence against the accused."
From
the above decision and also the discussions, it is clear that the accused
persons could approach the trial court for necessary relief. Despite this, the
accused persons have rushed to this court under section 482 of the Criminal
Procedure Code, thereby causing inordinate delay in the disposal of the main
criminal cases pending in the trial court and virtually it would be a futile
attempt in view of the well established principle of law by the Hon'ble Supreme
Court as referred to in the decisions cited above.
In
the result, therefore, I proceed to pass the following:
(a) Criminal
Petitions Nos. 1151 of 1993 and 1464 of 1993 are allowed and the entire
proceedings in C.C. No. 678 of 1993 are quashed.
(b)
Criminal
Petitions Nos. 551 of 1993, 552 of 1993, 595 of 1993 to 598 of 1993, 607 of
1993, 608 of 1993, 626 of 1993, 646 of 1993, 662 of 1993, 663 of 1993 and 1064
of 1993 are dismissed.
[1994] 79 COMP. CAS. 346
(BOM)
v.
U. B. Ltd.
B. N. SRIKRISHNA J.
Notice of Motion No. Nil of 1991 in Suit
Lodging No. 3874 of 1991.
DECEMBER 5 AND 6,
1991
J.I. Mehta, Virendra Tulzapurhar for the plaintiffs.
K.S. Cooper, I.M. Chagla, G.E. Vahanvati, A.K. Desai and V.
Shroff for the defendant.
B.N.
Srikrishna J.—By this notice
of motion, the plaintiffs have sought an injunction to restrain the first
defendants from in any manner disposing of, alienating, transferring,
encumbering or selling 10,712 shares of the company, known as "Kissan
Products Ltd." and 3,600 equity shares of Merryweather Limited. There is
also a prayer that the first defendant-company be directed to carry out certain
acts as detailed in prayer (c),
pending the hearing and final disposal of the suit. The suit is for specific
performance of an agreement dated July 31, 1991, between the plaintiffs and the
first defendants.
The first
defendants hold 10,712 equity shares of the face value of Rs. 100 each, comprising
67% of the paid-up and subscribed capital of Kissan Products Ltd. (hereinafter
referred to as "the KPL") and 3,600 equity shares of the face value
of Rs. 100 each, comprising 90% of the paid-up equity share capital of
Merryweather Limited (hereinafter called "the MW"). The balance of
400 equity shares, comprising 10% of the paid-up equity capital of MW is held
by another company, Herbertsons Ltd. (hereinafter called "the HL").
HL is a subsidiary of the first defendants. HL owns and controls a food
division comprising a plant situate at Bhandup in Bombay, where food products
are manufactured. KPL also holds 10% of the share capital of another company,
Nepal Beverages and Food Products Ltd. (NBFPL) and is engaged in the
manufacture and sale of food products. KPL and MW are owners of several trade
marks, which have acquired wide reputation and are valuable.
By the
agreement dated July 31, 1991, the first defendants agreed to sell their 'food
division' to the plaintiffs. The sale was to be achieved in the following
manner :
(i) The
first defendants undertook to transfer to KPL 100% shareholding of MW held by
them and their subsidiary, HL.
(ii) The
first defendants also undertook to transfer to KPL the food division of HL,
including the Bhandup plant as a going concern, free from all liens, charges
and encumbrances.
(iii) After
the aforesaid had been achieved, the first defendants agreed to sell to the
plaintiffs, as incidental to the sale of the "food business" of the
first defendants, 10,712 equity shares of KPL of the face value of Rs. 100
each, fully paid up.
The said
shares of KPL were agreed to be sold on spot delivery basis for a consideration
of Rs. 6,85,00,000. The consideration amount was to be adjusted by increase or
decrease in the net worth of KPL at the effective date over the net worth as on
March 31, 1989. The effective date was defined as the date on which the
transfer of the said shares to the plaintiffs would be effected.
The
plaintiffs paid a sum of Rs. 3,42,50,000, prior to the execution of the
agreement, as and by way of earnest money. The agreement acknowledges the
receipt of such earnest money and also provides that one nominee of the
plaintiffs would be inducted on the boards of KPL and MW, to facilitate
understanding the business for eventual take over of the management. This has
actually been done, and one nominee of the plaintiffs, Pranab Barua, has been
appointed as additional director of KPL on August 19, 1991, and subsequently
elected as a director at the annual general meeting held on September 26, 1991.
Detailed
manner of ascertaining the net worth, as at the effective date, is provided for
in the agreement. The agreement also provides for the complete list of the
trade marks owned by KPL, MW and HL. It is specifically agreed by clause 8
that, pending the completion of the final details, the first defendants would
ensure that such trade marks are kept alive, renewed and protected, and no
rights or liens accrue in respect of the trade marks in favour of any third
party.
Clause 9 of
the agreement provides that, in the interregnum between the date of the
agreement and the completion of the sale and purchase of the shares, the first
defendants shall ensure and procure that KPL, MW and Bhandup plant shall not do
any of the several acts or deeds specified in sub-clauses (a) to (g), except with the previous written consent of the plaintiffs.
Sub-clause (f), inter alia, refers to the passing of any resolution by the
members in general meeting or making any alteration in the memorandum or articles
of association. The whole purpose of clause 9 appears to be that, pending the
finalisation of the transaction and actual sale of the shares contemplated by
clause 1 of the agreement, the first defendants would ensure that the two other
companies concerned, KPL and MW, would do nothing which would change the
control of the said companies or affect their value or net worth.
Clause 10
provides for transfer of management control of KPL only on completion of the
transaction as a whole, viz.,
transfer of the shares after receipt of statutory approvals, wherever required.
Simultaneously with the completion of the sale, transfer and delivery of their
shares is also agreed. After transfer of the shares, the first defendants
undertook to procure the resignation of the directors of KPL and MW, who
represented or were the nominees of the first defendants, as the plaintiffs may
require.
Clause 11(a) provides for payment of the
balance of the total purchase price within the expiry of 30 days after all the
approvals required for effecting the sale, transfer and delivery of the shares
to the plaintiffs have been completed. The balance of the total purchase price
was to be adjusted by the increase or decrease in the net worth of KPL, as
detailed in clause 2.
Clause 11(b) provides that the first defendants
shall arrange for KPL to transfer the 10% equity shares in NBFPL held by KPL to
another company nominated by the first defendants to ensure severance of KPL
connection with NBFPL before the effective date or within such extended date as
mutually agreed.
Clause 11(c) provides that, if the plaintiffs
commit a default in complying with the provisions of clause 11(a) or of any of their other
obligations under the agreement, the first defendants shall be entitled to
forfeit the earnest money paid by the plaintiffs.
Clause 11(d) provides that, if the first
defendants commit a default (other than due to non-receipt of Government
approvals) in complying with the terms and conditions of the agreement, the
earnest money paid by the plaintiffs should be refunded with interest at 16%
per annum.
Clause 11(e) stipulates that, if the required
statutory provisions for effecting ultimate transfer of the shares by the first
defendants to the plaintiffs are denied, within a period of 9 months from the
date of the agreement, the earnest money paid by the plaintiffs shall become
due and refundable immediately without any interest accruing thereupon. If,
however, the approvals/clearances from Government or other statutory bodies, as
the case may be, are denied so as to make the deal incapable of being put
through, the earnest money shall become due and refundable immediately with
simple interest calculated at 9% per annum from the date of expiry of the
period of 9 months from the date of realisation and credit to the account of
the first defendants of the said money.
As stated
hereinbefore, after the signing of the said agreement and receipt of the
earnest money, the first defendants partly performed their obligations and one
Pranab Barua, an employee of the plaintiffs, was inducted on to the board of
KPL, as a director. The first defendants also represented to the plaintiffs
that they were arranging for necessary applications in Form 37-1 of section
269UC of the Income-tax Act for securing the transfer of the Bhandup factory
from HL to KPL. The plaintiffs were also informed by the first defendants that
they had applied for and obtained necessary approval from the Central
Government under the Monopolies and Restrictive Trade Practices Act for
transfer of shares of MW to KPL, which approval was also got renewed. Meetings
were held from time to time between the plaintiffs and the first defendants
embodied in the agreement and to effectuate all things necessary to implement
the agreement.
The fact of
the impending transfer of the food division by the first defendants to the
plaintiffs was reported widely in the newspapers and was also the subject of
announcements made by the chairman of the first defendants in press statements.
On November 13,
1991, the first defendants addressed a letter to the plaintiffs, in which the
agreement of July 31, 1991, was confirmed and information was provided that the
incremental net worth of KPL stood altered to Rs. 88,652,082 as at March 31,
1991, after incorporation of NBFPL shares. The first defendants formally
confirmed that the purchase consideration would be Rs. 88,652,082 (which was
subject to a further adjustment for the increase in net worth up to the
transaction date) and that it stood apportioned as below :
|
|
Rs. |
|
For MFPL (sic) shares |
16,00,000 |
|
Take over of Bhandup |
6,30,00,000 |
|
For KPL Shares |
2,40,52,082 |
|
|
8,86,52,082 |
The said
letter also enclosed a "repositioned balance-sheet after KPL's take over of
Bhandup Factory (from HL) and shares of NBFPL" along with certain
annexures. The said letter, read with its annexures, makes it clear as to what
is the total consideration and the apportionment thereof.
Some time in
the third week of November, 1991, the plaintiffs learnt that the first
defendants were negotiating with another company, Nestle India Ltd., for
transfer or sale of the food business and transfer of 10,712 shares of KPL to
them as incidental thereto. This information appears to have been conveyed to
the plaintiffs by Nestle India Ltd. In order to set their mind at rest, the
plaintiffs addressed a letter dated November 21, 1991, to the managing director
of Nestle India Ltd., pointing out the circumstances under which an
agreement had been entered into between themselves and the first defendants for
sale of the food division and the transfer of the shares of KPL as incidental
thereto. In the said letter, the plaintiffs put Nestle India Ltd. on notice
that any agreement for the proposed sale of shares of KPL by the first
defendants would be in breach of contract, and that the plaintiffs intended to
enforce their rights, including the right of specific performance of the
contract, if necessary, through recourse to the due process of law.
The plaintiffs also addressed a letter dated November
27, 1991, to the first defendants, in which they put the facts on record as to
their fulfilling their obligations under the agreement of July 31, 1991, and
indicated that an amount of Rs. 2,57,50,000 had already been paid to the first
defendants in part performance of the agreement and the balance of Rs.
85,00,000, as agreed, was to be held as deposit in terms of the first
defendants' letter dated July 18, 1991, till necessary permissions were
obtained from the concerned authorities. The plaintiffs pointed out that,
despite the agreement and the confirmation of the first defendants, as
contained in their letter dated November 13, 1991, the plaintiffs had learnt
that the first defendants had been carrying on negotiations with Nestle India
Ltd., in breach of the agreement dated July 31, 1991, entered into with them.
The plaintiffs called upon the first defendants to stop any such negotiation
with any third party and to confirm that the first defendants will carry out their
obligations under the agreement dated July 31, 1991. Unless such confirmation
was received within 48 hours of the receipt of the notice, the plaintiffs
threatened that they would be adopting appropriate legal proceedings to enforce
the agreement at the first defendants' costs and consequences. The only reply
elicited to this was the letter dated November 28, 1991, from the secretary to
the vice president of the first defendants, which merely stated that the said
executive was "not available in the office" and was likely to attend
the office in the next week. Upon his return to office, a reply was promised.
The plaintiffs filed the present suit on November 29,
1991, and have taken out a draft notice of motion for interim reliefs.
When the notice of motion was moved for ad interim
reliefs in terms of the draft on December 2,1991, the first defendants appeared
and opposed ad interim reliefs being granted on several grounds. The first
defendants also placed reliance on a letter dated December 2, 1991, from the
first defendants, addressed to the plaintiffs, alleged to have been despatched
by registered post acknowledgment due, in which the first defendants had taken up the stand that, on the basis of
legal advice received, they were of the view that the agreement dated July 31,
1991, was illegal and void ab initio, and, therefore, there was no question of
any breach of the same on their part. They also stated that though they were
not liable to make any payment of interest for the amount of Rs. 2,57,50,000
held by them, they deemed it fit, fair and just that the plaintiffs should be
compensated by payment of interest at the rate of 16% per annum, which was the
highest rate which could possibly be claimed by the plaintiffs, even if there
was a breach, which they denied. The said letter purportedly enclosed two
cheques dated December 2, 1991, for the amount indicated therein. In court, a
copy of the notice from the advocate of the first defendants to the advocates
of the plaintiffs, dated December 2, 1991, enclosing the xerox copy of the
first defendants' letter dated December 2, 1991, was also handed over to the
plaintiffs' advocates.
The ad
interim reliefs sought by the plaintiffs are strongly and vehemently opposed by
Mr. Cooper, learned counsel appearing for the first defendants, on the
following grounds :
(i) The
agreement is illegal and unenforceable, as it is contrary to section 293(1)(a) of the Companies Act.
(ii) It
is also illegal and unenforceable, as it is in breach of the provisions of
section 372 of the Companies Act.
(iii) The
contract itself indicates the consequences which would follow the first
defendants' failure to perform their obligations. These were specifically
enumerated in clause 11 of the agreement which did not include or reserve the
right of specific performance. Hence, the parties contemplated that, in the
event of a breach, even if there was one, all that would ensue was the refund
of the deposited earnest money with appropriate interest, as indicated in
clause 11, and no specific performance was contemplated.
(iv) The
contract is vague and incapable of being enforced, as the consideration to be
paid, the purchase price of shares agreed to be sold, was never finalised.
(v) Any
specific performance of the agreement would amount to a direct interference in
the management and internal affairs of KPL, HL and MW, which are neither
parties to the agreement, nor to the suit.
(vi) There
is not even an averment, much less any material, to show that, though not
parties to the contract, KPL, HL and MW had consented to or confirmed
the transaction embodied in the agreement dated July 31, 1991.
(vii) The agreement is illegal, as it is
contrary to the provisions of sections 13 and 16 of the Securities Contracts
(Regulation) Act, 1956.
(viii) The suit for specific performance, at
least at this stage, is untenable, as the conditions requisite for complying
with section 372 of the Companies Act have not been fulfilled, and, therefore',
the contract cannot be specifically enforced at this point of time, and, hence,
no interim relief should be granted.
The first contention is that, under section 293(1)(a), the board of directors of the
first defendants, a public company, is prohibited from selling, leasing or
otherwise disposing of the whole, or substantially the whole of the undertaking
of the company and, hence, the agreement was ultra vires powers of the board of
directors of the first defendants. It is contended that the plaint makes it
clear that what is agreed to be sold is the "food division" of the
first defendants and, hence, what is agreed to be sold to the plaintiffs is a
substantial part of the first defendants' undertaking. There is no consent
obtained to this sale from the first defendant-company in general meeting.
Hence, the agreement is clearly prohibited under section 293(1)(a), as what has been agreed to was
completely beyond the pale of the powers of the board of directors of the first
defendants.
Mr. Cooper placed reliance on D. N. Banerji v. P. R.
Mukherjee, AIR 1953 SC 58 and Secretary,
Madras Gymkhana Club Employees' Union v. Management of the Gymkhana Club, AIR 1968 SC 554, in support of
his contention that the expression "undertaking" used in section
293(1)(a) is not necessarily
limited to some property or asset but would extend to a distinct business
activity. Reliance was also placed on the judgments of the Mysore High Court in
Yallamma Cotton, Woollen and Silk
Mills Co. Ltd., In re : Bank of
Maharashtra v. Official
Liquidator, Mysore High Court [1970] 40 Comp Cas 466 and International Cotton Corporation (P) Ltd. v. Bank of Maharashtra [1970]
40 Comp Cas 1154 in support of this contention.
Banerji's case, AIR 1953
SC 58, was one arising under the Industrial Disputes Act, and the Supreme Court
was concerned therein with the interpretation to be given to the expression
"industry" as used in section 2(j) of the said Act. In connection with the interpretation to be
put upon the said expression, and, while dealing with the expression
"undertaking", which is a part of the said statutory definition, the
Supreme Court observed that the words "undertaking" used in the first
part of the definition, and "industrial occupation or avocation" used
in the second part obviously mean much more than what is ordinarily understood
by trade or business, and that the definition was apparently intended to
include within its scope what might not strictly be called a trade or business
venture. In Madras Gymkhana Club, AIR
1968 SC 554, the Supreme Court was once again concerned with the connotation of
the expression "industry", as used in section 2(j) of the Industrial Disputes Act,
and the Supreme Court commented upon the juxtaposition of the words
"business, trade, undertaking, manufacture or calling of employer" in
the collocation of words in the definition. In my view, neither of these
authorities is of help in deciding the question that has been argued. In any
event, both the authorities were concerned with the meaning of the expression
"undertaking" as used in the definition of "industry" under
section 2(j) of the Industrial
Disputes Act. It is a trite principle of interpretation of statutes that the
interpretation given to a word or expression used in one statute may be of no
avail while interpreting the same expression in another statute, unless the two
statutes are in pari materia. The provisions of section 2(j) of the Industrial Disputes Act are
not in pari materia with the provisions of section 293(1)(a) of the Companies Act, 1956, nor
are the objects of the two statutes identical or similar.
Although the
two Mysore judgments relied upon by Mr. Cooper were both cases which arose
under the Companies Act and, perhaps, could be said to be nearer home, these
judgments are also not of much use in resolving the controversy that has been
thrown up. In Yallamma Cotton's case
[1970] 40 Comp Cas 466, a learned single judge of the Mysore High Court was
concerned with a situation where the official liquidator of the company in
liquidation had impugned the action of the creditor bank in taking possession
of certain assets of the company in apparent exercise of its power as a
mortgagee and charge-holder of the immovable and movable properties of the
company. The mortgage had been created by the ex-director of the company. It
was argued for the liquidator that the mortgage was beyond the powers of the
board of directors under section 293(1)(b),
and further that taking into possession the mortgaged property amounted to an
act which was specifically prohibited by section 293(1)(a) as beyond the scope of the power of the board of directors,
without ratification by the company in general-meeting. In this context, the
learned single judge referred to the word "undertaking" used in
clause (a) of subsection (1) of
section 293, and, as the said word was not defined in the Act, placing reliance
upon the dictionary definition, the learned single judge observed (at page 485)
:
"It is
not in its real meaning anything which may be described as a tangible piece of
property like land, machinery or the equivalent ; it is in actual effect an
activity of man which in commercial or business parlance means an activity
engaged in with a view to earn profit. Property, movable or immovable, used in
the course of or for the purpose of such business can more accurately be
described as the tools of business or undertaking, i.e., things or articles which are necessarily to be used to
keep the undertaking going or to assist the carrying on of the activities
leading to the earning of profits."
The matter
was carried in appeal and, in the decision reported at page 1154 of the same
volume, the appeal Bench upheld the findings of the learned judge and, while
doing so, it also took note of the fact that the expression
"undertaking" as used in section 293(1)(a) of the Companies Act has not been defined. The appeal court,
therefore, fell back upon the meaning of the said word contained in
dictionaries, and observed (at page 1157) :
"The
business or undertaking of the company must be distinguished from the
properties belonging to the company. In this case, it is only the properties
belonging to the company that have been dealt with by the board of directors
under the deeds of hypothecation and mortgage in favour of the bank. Hence, the
learned company judge was right in holding that no part of the undertaking of
the company was disposed of in favour of the bank."
In my view,
neither of these judgments is of much assistance. In the present case, it is
the contention of Mr. Mehta, learned counsel appearing for the plaintiffs, that
section 293(1)(a) is not attracted
at all, even if one goes by the meaning given to the word
"undertaking" in the authorities cited. He contends that, in order to
attract section 293(1)(a) to
the agreement relied upon by the plaintiffs, it would have to be shown that, by
the agreement, the board of directors of the first defendant-company had sold,
leased or otherwise disposed of the whole or substantially the whole of the
undertaking of the first defendant-company and that, too, without the consent
of the first defendant-company in general meeting.
It is urged
by learned counsel for the plaintiffs that the agreement is merely an agreement
for sale of a specified number of shares of the first defendant. The agreement
neither contemplates nor requires the first defendants to sell a substantial
part of any of their undertakings. Prima facie, this contention appears to be
correct. Notwithstanding the fact that, both in the agreement and in the
plaint, there has been use of expression like sale of "food business"
of the seller to the purchaser and there has been reference to the seller's
"food business" carried on through KPL and HL, prima facie, I am of
the view that the agreement merely contemplates sale of the controlling shares
of KPL. The sale of shares, whatever be their number, even if it amounts to a
transfer of the controlling interest of a company, cannot be equated to the
sale of any part of the "undertaking" so as to come within the
mischief of section 293(1)(a).
The argument of the first defendants leaves me, prima facie, unimpressed.
The next
contention of Mr. Cooper is that the contract is incapable of being
specifically performed, inasmuch as the consideration for the sale of the
shares from the first defendants to the plaintiffs and for transfer to KPL of
the food division of HL (i.e.,
the Bhandup plant) has been left unspecified. The contract is, therefore, vague
and, hence, unenforceable, in the submission of learned counsel. In the first
place, we are not really concerned with the transfer of the Bhandup plant to
KPL as that is an arrangement contemplated between KPL and HL. So far as the
sale of KPL's 100% shareholding of MW held by the first defendants and their
subsidiary and HL is concerned, taking into consideration the confirmation made
by the first defendants' letter dated November 13, 1991, and the annexure
thereto, it is not possible to accept, at this stage at least, that the
consideration for the various acts is vague. As a matter of fact, the first
defendants themselves have indicated in the said letter the apportionment or
the total consideration which is indicated at Rs. 88,652,082. In the face of
this document, prima facie, the contention cannot be accepted.
The next
argument urged for the first defendants is that KPL, HL and MW are neither
parties to the agreement, nor to the present suit, and, therefore, the court
cannot give any interim relief which would amount to compelling them to do any
of the various acts contemplated under the instant agreement. In my view, this
argument is misconceived. The plaintiffs are not seeking any direction against
KPL, HL or MW. All that the plaintiffs contend in the plaint is that the first
defendants, with open eyes and with presumable knowledge as to their
controlling power in the said three companies, entered into an agreement with
the plaintiffs for sale of the specified number of shares and also for transfer
of the food division (Bhandup plant) of KPL to HL. This was envisaged, so that
it would result in the control of the food manufacturing plant ultimately
landing into the hands of the plaintiffs. The plaintiffs are only seeking a
direction against the first defendants that they be required to perform what
had been undertaken as their obligations under the agreement and that the first
defendants be restrained from doing anything that is inconsistent with the
terms of the agreement or likely to defeat the rights of the plaintiffs
thereunder.
It is next
contended that a reading of the contract would indicate that the parties have
themselves contemplated that, in the event of breach of the contract, the
consequence to ensue would only be that of refund of the earnest money with the
stipulated interest on the happening of different contingencies. The terms of
clause 11 are highlighted in this regard. It is also urged that there is
nowhere a stipulation in the contract that the remedies provided under the
contract in the event of a breach by the defendants are to be without prejudice
to any other right that the plaintiffs may have in law. Ergo, the agreement was
not intended to be specifically performed, is the submission of the plaintiffs.
This argument also does not appeal. There is nothing in the contract which
expressly precludes or bars the plaintiffs from seeking specific performance of
the agreement. Merely because return of earnest money deposited and interest
are provided for, it is not possible, at this stage, to come to the conclusion
that the parties did not contemplate that the contract should not be
specifically performed at the instance of either party. The fact that there is
absence of a stipulation that the refund of deposit and interest was without
prejudice to other rights makes no difference whatsoever, in my view, so long
as there is no express stipulation that the contract was not intended to be
specifically performed.
It is then
argued that the contract is illegal, being in contravention of section 372 of
the Companies Act, and, therefore, incapable of being enforced. It is submitted
that section 372, as amended by the 1988 Act, was intended to put restrictions upon
intercorporate investment. Subsection (1) of section 372 prohibits acquisition
of shares by way of subscription, purchase or otherwise or for its benefit or
in its account the shares of any other body corporate, except to the extent and
except in accordance with the restrictions and conditions specified in the
section. Sub-section (2) permits the board of directors of an investing company
to invest in the shares of any other body corporate up to such percentage of
its subscribed equity shares or the aggregate of the paid up equity and
preference share capital of such other body corporate, whichever is less, as
may be prescribed. The percentage prescribed for the purpose of subsection (2)
of section 372 is 25 per cent., as indicated in the notification issued by the
Central Government. It is not disputed by the plaintiffs that the purchase of
the number of shares, as specified in the agreement, would definitely exceed
the percentage prescribed under sub-section (2). What is, however, urged for
the plaintiffs is that the prohibition contemplated under sub-section (4) of
section 372 does not apply at the stage of an agreement. If at all, it becomes
applicable only at the time of investment in the shares of the other body
corporate. Sub-section (4) of section 372 provides that investing company shall
not make any investment in the shares of any other body corporate in excess of
the percentage specified in sub-section (2) and the provisos thereto, unless an
investment is sanctioned by a resolution of the investing company in general
meeting and unless previously approved by the Central Government. That there is
not in existence a resolution of the plaintiffs at the general meeting to
sanction the investment contemplated by the agreement and that such investment has
not been approved by the Central Government previous to the signing of the
agreement is not disputed. It is, however, urged that the section itself is
inapplicable at this stage and that the plaintiffs are perfectly capable of
complying with the section when the time for investment comes. The time for
investment would arise after all the steps contemplated under the agreement are
taken, and the period for getting approval is envisaged as a period of 9
months. The plaintiffs urge that, till such period is over, it is not open to
the defendants to assume that the plaintiffs would be incapable of complying
with the two conditions requisite under sub-section (4) of section 372. It was,
therefore, argued that there has been no contravention of section 372. Prima
facie, I am inclined to accept the contention of the plaintiffs. What is
prohibited by sub-section (4) is "investment" and not "agreement
to invest". Prima facie, the prohibition would arise at the time of
investment, if the two conditions stipulated in sub-section (4), viz., resolution of the investing
company and previous approval of the Central Government, are not obtained.
Their absence at this point of time does not render the contract illegal, void
or incapable of being enforced, as contended for the first defendants.
The next
contention of the first defendants is that the contract, in order to be
performed, depends on the volition of third parties like KPL, HL and MW, and,
therefore, it cannot be specifically performed. That this is an argument of
desperation is obvious. It is inconceivable that seasoned businessmen would
enter into contracts for transfer of shares and for transfer of assets of
companies in which they hold controlling interest, unless they knew that they
were capable of fulfilling the terms of the contract. The argument put forward
is only a ruse to back out of the binding terms of the contract, for
obvious reasons. In support of this contention, reliance was placed by Mr.
Cooper on a judgment of a Division Bench of the Calcutta High Court in East Indian Produce Ltd. v. Naresh Acharya Bhaduri [1988] 64 Comp
Cas 259. It is true that the prayer that was sought in the said case was
somewhat similar and the court did observe that the relief sought could not be
granted, as the performance of the contract depended on the volition of other
parties. What is, however, ignored is the radical difference in the facts of
the Calcutta case. There, an agreement was entered into by respondents Nos. 1
to 6 for purchase of 8,100 shares in a company, the total subscribed capital of
which was 25,000 shares. Though it was represented that 8,100 would be
controlling interest in the company, it was not so shown on the record. Out of
the agreed shares also, it was stated that some of them were held by the nominees
of the seller, some of whom were unknown and untraceable. A number of shares
were themselves untraceable. In these circumstances, the Calcutta High Court
took the view that granting any relief by way of enforcing a vague contract
would also depend for its performance on the volition of third parties. It is
true that the court in the said case accepted the argument that, as the company
itself was not to be a party to the agreement, any order as prayed for would
prejudicially affect the statutory rights of the company, as it involved relief
relating to the management, control and regulation of the assets or the affairs
of the company, and, therefore, the injunction as prayed for ought not to be
granted at the interim stage. In my view, the judgment of the Calcutta High
Court, with respect, is entirely distinguishable on facts. The facts were
somewhat glaringly distinct. In the present case, the facts do show that the
first defendants, without doubt, have controlling interest in the other three
companies, viz., KPL, MW and
HL. There is nothing on the record from which a doubt can arise in my mind as
to the inability or incapacity of the first defendants to stand by and perform
their obligations.
The last contention urged for the first defendants
was that the contract was illegal, as it is hit by the provisions of the
Securities Contracts (Regulation) Act, 1956. It is pointed out that the Central
Government is empowered, under section 13 of the said Act, to apply the said
section by a notification in the Official Gazette, and, upon such declaration,
every contract in the State or area which is entered into after the date of
such notification, otherwise than between members of a recognised stock
exchange, in such State or area or through or with such member, is rendered
illegal. Similar are the provisions of section 16. It is not disputed that such notifications, both under sections
13 and 16, have been issued. Mr. Cooper contended that the only exception to
the operation of section 13 would be a spot delivery contract as defined in
clause (i) of section 2, but
the agreement in question was not a spot delivery contract.
Section 2(i) defines a "spot delivery
contract" as meaning a contract which provides for the actual delivery of
securities and the payment of a price therefor either on the same day as the
date of the contract or on the next day. The contract with the plaintiffs,
though styled as a spot delivery contract, contemplates payment of the purchase
price within a period of 30 days of the completion of the transaction, and,
therefore, is not a "spot delivery contract" within the meaning of
section 2(i), according to Mr.
Cooper. This submission appears to be correct. Mr. Mehta does not seriously
dispute, at this stage at least, that the agreement may not amount to a spot
delivery contract. He, therefore, does not seek the escape hatch provided by
section 18. He contends that the provisions of the Act itself are not
applicable to the present agreement, inasmuch as the agreement is for transfer
of shares of a public limited company, the shares of which are not listed on
the stock exchange.
Mr. Mehta
emphasised the definition of "securities" contained in clause (h) of
section 2, and urged that the expression "other marketable
securities" used in the definition would supply colour to the construction
to be put on the word "shares" used therein. In his submission, the
Act is intended to govern large transactions in the known market, viz., stock exchange. The detailed
provisions of sections 13 and 16 shed considerable light on this aspect of the
matter, as they invest the Central Government with the power of assessing the
situation in the stock exchange and taking remedial action by way of the
declarations contemplated therein. In his submission, the Act was not intended
to apply to a private transaction between parties in respect of shares which
were not "marketable", meaning thereby not sold on the stock
exchange. He relies upon the judgment of the learned single judge of this court
(Mrs. Manohar J.) in Norman J. Hamilton
v. Umedbhai S. Patel [1979]
49 Comp Cas 1 and the judgment of the appeal court, confirming the said
judgment, Dahiben Umedbhai Patel v.
Norman J. Hamilton [1985] 57
Comp Cas 700.
Mr. Mehta
submits that though the issue which the court was concerned with in both the
said judgments was whether transfer of shares of a private limited company by a
private treaty fell within the mischief of this Act, both the judgments of the
learned single judge and the appellate court have approached the matter on principle
and rejected the argument that the concept of "marketability" and
"saleability" must necessarily converge. It is urged that both the
judgments have, after an analysis of the historical background in which the
statute was enacted, taken the view that the Act was intended to govern
transactions in the market, i.e.,
stock exchange, and not intended to apply to transfer of shares of a private
limited company, not listed on the stock exchange, if such transfer was by a
private treaty. Though Mr. Cooper, in fairness, himself pointed out the
observations in these judgments and attempted to pre-empt the impression that
the reading of the general observations might create, I am still left
unconvinced by the argument of Mr. Cooper, at this prima facie stage at least.
In my prima facie view, both judgments point out that the object of the Act was
to control operations on stock exchange. Both judgments have looked at the
mischief in existence hitherto which was sought to be suppressed, the Gorwalla
Committee's recommendations, the objects clause of the Bill, and made
observations which, though made in connection with transactions by private
treaty of shares of a private limited company, are equally applicable to
similar transactions of shares of a public limited company unlisted on the
stock exchange. In my view, at least at this prima facie stage, it is not
possible to accede to the submission of Mr. Cooper that these judgments have no
relevance or application to a transaction of transfer of shares of a public
limited company, unlisted on the stock exchange, by private treaty. On the
contrary, my prima facie view of these two judgments accords with the
submission of Mr. Mehta. I am of the prima facie view that a transaction of
shares of a public limited company, unlisted on the stock exchange, is not
intended to be governed by this Act.
Mr. Cooper
strongly relied on the judgment of the Division Bench of the Calcutta High
Court in East Indian Produce Ltd. [1988]
64 Comp Cas 259 on this issue also. The Calcutta High Court relied on an
earlier judgment of the same High Court in B.K. Holdings (P) Ltd. v. Prem Chand Jute Mills [1983] 53 Comp Cas 367. At that stage, the
judgment of Mrs. Manohar J. was cited before the learned single judge of the
Calcutta High Court. He seemed to take the view that the decision of Mrs.
Manohar J. in Norman J. Hamilton v.
Umedbhai S. Patel [1979] 49
Comp Cas 1, must be confined to a situation of transfer of shares of a private
limited company. So far as the decision of the Division Bench of the Calcutta
High Court in East Indian Produce Ltd.
[1988] 64 Comp Cas 259 is concerned, it seems to follow the earlier
judgment in B.K. Holdings. With
great respect to the learned Judges of the Calcutta High Court, who decided the
aforesaid two cases, even if the matter were not res integra, I would be
inclined to disagree with their observations made therein. However, in the view
I have taken of the judgments of the learned single judge and the appeal
judgment of our court, I consider myself bound to take the view that the
Securities Contracts (Regulation) Act, 1956, is not intended to regulate
private transactions in shares of public limited companies, not listed on the
stock exchange. This contention also, therefore, fails.
During the
course of the arguments, two facts were brought to my notice. First, on
November 29, 1991, a suit, being S.C. Suit No. 8927 of 1991, was filed by a
shareholder of HL in the Bombay City Civil Court. Interestingly, the advocates
representing the first defendant-company were the advocates of HL therein,
which does not seem to have opposed the motion for interim relief, except to
state that it needed time to file a detailed affidavit-in-reply. Consequently,
the learned judge of the Bombay City Civil Court took the view that it was
necessary to maintain status quo as regards completion of sale of the Bhandup
plant or handing over the same to KPL or the present plaintiffs. The motion, I
am told, has been made returnable on December 19, 1991.
Second, a
suit was filed in the Court of the City Civil Judge of Bangalore by two
shareholders of the first defendant-company to restrain them from completing
the sale and acting in pursuance thereof. A motion was also taken out for
interim relief, on which no order has been passed.
Referring to
these developments, Mr. Mehta strongly contended that these were shareholders
who were put up by the first defendants and their subsidiary with a view to
wriggle out of the binding agreement. The fact that, on the date the suit was filed
by the plaintiffs (i.e.,
November 29, 1991), an order of injunction was sought from the Bombay City
Civil Court by the shareholder of HL, and the Bangalore suit, do, prima facie,
support, to some extent at least, the contention of Mr. Mehta that these were
evasive tactics of the first defendants to wriggle out of a binding bargain, on
second thoughts.
The suit is
not frivolous and raises serious issues which require trial.
Looking at the
matter from all aspects, I am of the view that the plaintiffs have made out a
prima facie case for grant of ad interim reliefs. The balance of convenience is
in favour of granting the ad interim reliefs.
P.C. : Leave granted
under rule 147/148 of the High Court of Judicature at Bombay (Original Side)
Rules, 1980, to take out a notice of motion in terms of draft handed in.
Upon the plaintiffs undertaking, through counsel, to
pay to the first defendants such sum by way of damages as the court may award
as compensation for loss or prejudice sustained, in the event of the plaintiffs
failing in the suit :—
(a) Ad
interim order in terms of prayer (b)
in the draft notice of motion.
(b) Pending the hearing and disposal of
the notice of motion, the first
defendants, by themselves or through their servants and agents, are restrained from doing anything or
taking any steps which would be contrary
to or inconsistent with the fulfilment of their obligations under the agreement dated July 31, 1991,
and prejudicial to the rights of the plaintiffs
thereunder.
Leave to amend the plaint. The amendment to be
carried out during the course of the day.
Motion made returnable on January 13, 1992.
Certified copy to be expedited.
[1992]
75 COMP. CAS. 688 (MAD)/[1998] SCL (S)__ (MAD)
Assistant Registrar of Companies
v.
H.C.
Kothari
PADMINI
JESUDURAI J.
OCTOBER 10, 1991
K. Ilias Ali for the Appellant.
S.V. Subramaniam for the Respondents.
Padmini
Jesudurai, J.—This
appeal against the acquittal is filed by the Assistant Registrar of Companies,
Madras 6, challenging the acquittal of the
respondents, tried by the Additional Chief Metropolitan Magistrate —
Economic Offences-II, Egmore, Madras, in C.C. No. 126 of 1985, for an offence
under section 372(2) and (4) read with section 374 of the Companies Act, 1956.
The
appellant filed the complaint against the respondents for the above offence on
the allegation that they were the directors of Investment Trust of India
Limited (hereinafter referred to as "the company") at the relevant
time and an inspection by the Deputy Director (Inspection) attached to the
office of the Regional Director, Company Law Board, Madras, made under section
209A of the Companies Act (hereinafter referred to as "the Act")
revealed that, during the financial years 1980, 1981 and 1982, the investments
made by the company in the shares of other bodies corporate, was in excess of
the 30 per cent, limit prescribed under section 372(2) and the approval of the
Central Government and the required resolution under section 372(4) of the Act
had not been obtained. After issue of show-cause notices, the complaint was
filed.
During
the trial, on behalf of the prosecution, the Inspecting Officer was examined as
PW-1 and a Senior Technical Assistant in the office of the Registrar of
Companies, Madras, was examined as PW-2. The printed balance-sheets for the
years 1980, 1981 and 1982 were marked as exhibits P-1 to P-3 respectively. The
letter dated August 24, 1984, from the Regional Director, Company Law Board,
Madras, to the Registrar of Companies, Madras, was marked as exhibit P-4 and
the copy of the show-cause notice sent to the company and its directors as
exhibit P-5 and the reply, covering letter, further replies and covering
letters as exhibits P-6 to P-10, and the printed copy of memorandum and
articles of association of the company as exhibit P-11.
The
respondents, when questioned, denied having committed the offence and claimed
that their company was an investment company. Though no defence witness was
examined, the office copy of the reply sent by the company to PW-1's letter
dated August 31, 1983, was marked as exhibit D-1 and the letter dated January
6, 1982, sent by the Registrar of Companies, Madras, to the company was marked
as exhibit D-2. The learned Magistrate acquitted the respondents on the ground
that the prosecution was barred by limitation and that the company was an
investment company within the terms of section 372(10) and as such the
limitation regarding the investment would not apply to the company. Aggrieved
with the acquittal, the complainant has filed this appeal.
Thiru
Ilias AH, learned counsel for the appellant, contended that the findings of the
learned Magistrate were erroneous, that there was nothing to indicate that the
Registrar of Companies had knowledge prior to August 28, 1984, about the
commission of the offence and it was only after PW-1's inspection report
reached him that he got knowledge and as such the prosecution was within time.
On the second ground, learned counsel submitted that, in 1980, 1981 and 1982,
the investments of the company were not on shares but the activities had been
diversified and the company was investing in hire-purchase, leases, etc., and
that during the above period, the company could not be described as an
investment company, though its original memorandum and articles of association
still continue to have investing in shares and securities as the principal
business of the company. According to learned counsel, the income from other
sources Was more than the income from investments and as such the company could
not be described as an investment company. The appeal had, therefore, to be
allowed.
Per
contra, Thiru S.V. Subramaniam, learned senior counsel for the respondents,
would submit that exhibits P-1 to P-3 was duly sent to the Registrar of
Companies and received by him on June 9, 1981, May 12, 1982, and May 30, 1983,
respectively, and the period of limitation would start running for each of
these offences from the date of. the receipt and as such the complaint was
barred by limitation and the trial court had rightly held it to be so. The
enlargement of the objects clause of the memorandum is to empower the company
to undertake certain other activities like hire-purchase, leasing, etc.
Investment in shares and securities continued to be the main object and
exhibits P-1 to P-3 and also the other records of the company proved that this
was so. Learned counsel further urged that income from investments was not the
real test and that the real test would only be the extent of investment made.
Learned counsel, therefore, justified the acquittal.
The
question that arises for consideration is whether the acquittal of the
respondents by the learned Magistrate, can be sustained.
It
is seen that respondents Nos. 4 and 5 have since died and the charge abates as
against respondents Nos. 4 and 5. This appeal is dismissed against them on the
above ground.
Taking
up the first point, namely, limitation, we find that the offence under section
372 read with section 374 of the Act is punishable only with fine and as such,
under section 468(2)(a), the
period of limitation is six months. The relevant part of section 469(1),
Criminal Procedure Code, relating to the commencement of the period of
limitation is as follows:
"469.
Commencement of the period of
limitation.—(1) The
period of limitation, in relation to an offender, shall commence ...
(b) where the commission of the
offence was not known to the person aggrieved by the offence or to any police
officer, the first day on which such offence comes to the knowledge of such
person or to any police officer, whichever is earlier;"
According
to the appellant, as mentioned in para 8 of the complaint and as spoken to by
PW-1, the Registrar of Companies had knowledge of the commission of the
offences only on August 28, 1984, when PW-1's inspection report was received.
The complaint had been filed on February 2, 1985, and was thus within the
period of limitation. According to learned counsel for the respondent,
limitation starts running from June 9, 1981, May 12, 1982, and May 30, 19831
when exhibits P-l to P-3 were respectively received by the Registrar of
Companies. The prosecution, therefore, had been instituted-beyond the period of
limitation. The question, therefore, would arise as to when the Registrar of
Companies could be said to have had knowledge of the commission of the
offences.
The
concept of limitation in criminal matters is of recent origin. As the Supreme
Court has pointed out in State of
Punjap v. Sarwan Singh [1981]
Crl LW 293; AIR 1981 SC 1054, 1055:
"The
object of the Criminal Procedure Code in putting a bar of limitation on
prosecutions was clearly to prevent the parties from filing cases after a long
time as a result of which, material evidence may disappear and also to prevent
abuse of the process of the court by filing vexatious and belated prosecutions
long after the date of the offence. The object which the statutes seek to
subserve is clearly in consonance with the concept of fairness of trial as
enshrined in article 21 of the Constitution of India. It is, therefore, of the
utmost importance that any prosecution, whether by the State or a private
complainant, must abide by the letter of the law or take the risk of the prosecution
failing on the ground of limitation."
Though
in the single complaint alleged violations for three years— 1980, 1981 and
1982—are clubbed together, we fail to see how there could be a joint trial for
these three offences. Violation of section 372(2) for each year is a distinct
and separate offence which, under section 218 of the Criminal Procedure Code,
calls for a separate trial. Exhibit P-1, the printed balance-sheet for the
financial year 1980, has reached the Registrar of Companies, Madras, on June 9,
1981, exhibit P-2 on May 12, 1982, and exhibit P-3 on May 30, 1983. According
to the appellant, limitation would not start running from these dates for each
of the offences, since the Registrar of Companies did not have knowledge about
the commission of the offence. The appellant cannot contend that, in spite of
the receipt of exhibits P-1 to P-3, the Registrar of Companies had no knowledge
about the commission of the offence and that it was only after the report of
PW-1 was received, that knowledge was obtained. It is not disputed that the
contents in exhibits P-1 to P-3 are true and correct and that they were
received on the dates stated above. While so, it cannot be urged that the
Registrar of Companies—which definition in section 2(40) of the Act means an
additional or a Joint or a Deputy or an Assistant Registrar performing the duty
of registering companies under the Act—had no knowledge of the contents of
exhibits P-1 to P-3 or of the offence. The Registrar of Companies is deemed to
have knowledge of the contents of exhibits P-1 to P-3 and of the offence on the
day when they are received by him.
After
receiving the balance-sheets, it is not open to the Registrar to keep these
balance sheets in cold storage, keep his eyes closed to them and then to deny
knowledge of these contents, thereby defeating the law of limitation. The very
object of the bar of limitation would be defeated if the contention of the
appellant is accepted. When the balance-sheets are received by the Registrar of
Companies, he is deemed to have knowledge about the contents of the
balance-sheets and, consequently, of the offence, and limitation will start
running from that day onwards. The complaint relating to the year 1980 will
have to be filed within six months from the date of receipt of exhibit P-1,
namely, June 9, 1981, the complaint for the offence relating to the year 1981
within six months from the date of receipt of exhibit P-2, namely, May 12,
1982, and the complaint relating to the year 1982 within six months from the date
of receipt of exhibit P-3, that is, May 30, 1983. The present complaint is
filed only on February 2, 1985, which is far beyond the period of limitation.
The trial court had rightly held it to be so. Further, in the instant case,
exhibit D-2 shows that, regarding the financial year 1979, the Registrar of
Companies had sent a letter to the company on this very same issue on December
24,1981, and a reply has been received from the company on January 29, 1982.
During this period, exhibit P-1 had already been received by the Registrar of
Companies. After the reply dated January 29, 1982, there had been no response
and no further action. On August 12, 1983, PW-1 writes to the company and on
August 31, 1983, exhibit D-1 reply had been received. This issue under section
372 is also one of the matters on which clarifications had been sought for and
yet the complaint is filed only on February 2, 1985. The first contention is
answered against the appellant.
Regarding
the second ground for acquittal, namely, that the company is an investment
company and as such is entitled to exemption under sub-section 13 of section
372, it is not denied by the respondent that the aggregate of the investments
made by the company in other corporate bodies exceeds 30 per cent, of the subscribed
capital of the company. The respondents, however, would seek protection under
the exception in subsection (13) which exempts investment companies from
sub-sections (2) and (5) of section 372. The question, therefore, is whether
the company is an investment company. The term "investment company"
has not been defined in the Act, though a description of an investment company
is found in sub-section (10) of section 372 of the Act. Sub-section (10) is as
follows:
"(10)
Provided that in the case of a company whose principal business is the
acquisition of shares, stocks, debentures and other securities (hereinafter in
this section referred to as 'an investment company')".
An
investment company is, therefore, a company whose principal business is the
acquisition of shares, stocks, debentures or other securities. It is clear that
the income derived from the business is not the criteria. The test would rather
be, as to what the principal business of the company is. A balance-sheet should
show what the principal business of the company is.
In
the instant case, exhibit P-11 is the printed memorandum and articles of
association. The object of the company is shown as "to carry on the
business of an investment trust and to buy, underwrite and invest in and acquire
and hold shares stocks, debentures, debenture stocks, bonds, applications and
securities issued or guaranteed by any company constituted for carrying on
business", and so on. Sub-clauses (2) and (5) also make it clear that the
object of the company is to acquire shares, debentures, securities and so on.
No doubt in 1975, the objects clause of the memorandum has been enlarged to
empower the company to undertake certain other activities like, hire-purchase,
leasing, etc. However, it is seen that, in 1980, out of the share capital of
Rs. 30 lakhs, investment in shares was Rs. 20.72 lakhs, in 1981 out of the
subscribed capital of Rs. 50.83 lakhs, investment in shares was Rs. 21.38 lakhs
and in 1982 out of the subscribed capital of Rs. 59.83 lakhs, investment in
shares was Rs. 24.87 lakhs. This shows that investment in shares and securities
continued to be one of the main activities of the company, even after the
company had diversified into other activities. No doubt, on a percentage basis,
there has been a reduction in investment in shares. However, as the test for an
investment company is whether its principal business is acquisition of shares,
etc., the facts and figures show that acquisition of shares continued to be the
principal business of the company. While so, the company is an investment
company within the proviso to section 372(10). It could also be stated that,
even in the directory for the year 1985 made by the Directory of Joint Stock
Companies in India, published by the Research and Statistics Division of the
Department of Company Affairs, Ministry of Industry, Department of Company
Affairs, this company has been classified as an investment company. In the 1980
Directory also, the same classification is made. The trial court, therefore,
had rightly held that the company is an investment company and as such is
entitled to the benefit of the exemption.
Finding
both the grounds of acquittal to be legally and factually sustainable, this
appeal against the acquittal is to be dismissed.
In the result, this appeal, in so far as it relates to respondents Nos. 4 and 5, is dismissed as the charge having abated and, in so far as it relates to the other respondents, it is dismissed.