Case Law: Atul B. Munim vs. Registrar of Companies & Ors. (2000)102 BOMLR 288

The petition was filed under the provision of Section 482[1] of the Criminal Procedure Code, 1973[2] for quashing the complaint which was filed by Respondent No.1, i.e. the Registrar of the Companies in the Court of Additional Chief Metropolitan Magistrate, Esplande, Bombay according to the provisions of Section 73(2B) and (3) of the Companies Act, 1956[3].

Facts of the Case

In this case, it was found that a company named M/s. Murablack India Limited  which was located at Bombay issued prospectus on 08.04.1994 for issuing of its shares, those shares were applied for the subscription by the members of the public. Though the applications along with application money were sent to the Company but the allotment letters were not issued to the public neither the application money was refunded to the public within the prescribed time. The issue regarding this was opened on 05.05.1992 and was already decided to be closed on 08.05.1992, not beyond 15.05.1992, in case delays happened.

It is also alleged in this case that some of the subscribers received the allotment letters but share certificates did not come to them. This problem took the serious form and several complaints got received by the Registrar of Companies. Therefore, taking the things into concern, Registrar of Companies issued show-cause notice to the Company. After this, the prosecution was executed agaisnt the Company as well as the Managing Director, Company Secretary and other directors of the Company.

The petition in this Court was filed by the accused No. 7, who was the alternate Director to Dr. F. Hartmann, who was a foreigner. The petitioner was appointed as the alternate Director in the Company on 26.02.1992 and resigned on 20.0801993 according to the petition submitted in the Court. The petitioner challenged the process issued in the said complaint citing that the petitioner being an alternate director was not an officer who was in default  under the  meaning of Section 5[4] of the Companies Act, 1956 and  in addition to that he was not liable under the provisions of Section 73(2A) for the repayment of the money to the subscribers or for depositing the subscription amount in a Scheduled Bank, that is the reason that no process could have been issued against him.

Contention of the Parties

Contention raised by the petitioner:- The petitioner contended that he was appointed as the alternate director  and being an alternate director, he was not an officer who was guilty under Section 5 of the Companies Act,1956 and therefore, no proceedings against him could have been initiated as he was not the one liable under Section 73(2A) of the Companies Act for the money repayment to the subscribers.

Analysis

Let’s look at different sections and their provisions to find out whether the contention put by the petitioner was right or not:-

1. Section 73(2A)[5] of the Companies Act, 1956:-

Where permission has been granted by the recognized stock exchange or stock exchanges for dealing in any shares or debentures in such stock exchange or each such stock exchange and the moneys received from applicants for shares or debentures are in excess of the aggregate of the application moneys relating to the shares or debentures in respect of which allotments have been made, the company shall repay the moneys to the extent of such excess forthwith without interest, and if such money is not repaid within eight days, from the day the company becomes liable to pay it, 1 the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate, not less than four per cent. and not more than fifteen per cent., as may be prescribed, having regard to the length of the period of delay in making the repayment of such money.

This in short meant that “ where the liability related to the subscription amount or the subscription amount in the bank arises, those liabilities would lie upon the Company and every director of the Company, who is an officer in default”.

The other facet which considered by the Court in this case was Section 5 of the Companies At,1956, which defined the officer in default.

• Section 5[6] of the Companies Act, 1956:-

Meaning of  “ officer who is in default”. For the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression” officer who is in default” means all the following officers of the company, namely:-

•  the managing director or managing directors;
• the whole- time director or whole- time directors;
• the manager;
• the secretary;
• any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act;
• any person charged by the Board with the responsibility of complying with that provision;

Provided that the person so charged has given his consent in this behalf to the Board;

•  where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors;

Provided that where the Board exercises any power under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.

This was easy to make a clearer picture for the Court to decide that which type of directors would be considered as the officer in default. This section clearly mentioned it. Therefore, being an alternate director clearly did not make the petitioner a part of the officers in default.

Even through the title of the complaint, it was clear that the complainant of the case was aware that the petitioner was an alternate director only. That is the reason, the petitioner does not fall under the clauses (a) to (d) of the Section 5. In addition to this, it is not even averred in the complaint that the petitioner falls within the ambit of the Clauses (e) to (g) of Section 5. The petition listed the names of the Executive as well as the whole-time Director of the company and also the name of the Company Secretary and therefore, the contingency contingency contemplated under Section 5 (g) did not arise.

The petition also mentioned that the petitioner was not the whole time Director or an Executive Director of the Company and therefore, there was no reason to stand the petition against the petitioner.

• The petitioner also drew the attention of the Court towards the Circular issued by the Department of the Company Affairs which was interpreting the definition of the officer in default in Section 5 of the Companies Act.

That Circular while interpreting the definition of the officer in default stated that:-

“ Where the Companies Act penal provisions provide for the punishment of officers in default, the prosecution needs to be filed against the managing director or the whole- time director or manager, apart from secretary, if any, and the company. It is only where there is no requirement of filing of managerial personnel prosecution against all directors, apart from secretary, if any, and the Company.

Decision of the Case

After taking into consideration all the facets mentioned in the petition, which were not denied even by the Respondent No.1, i.e. the Registrar of Companies, though served, and the provisions of the Companies Act,1956,  it was clear in the case that the Company did have an Executive and whole-time Director and that is the reason that the petitioner being an alternate director was not liable to be prosecuted for the violation of Section 73(2A) and (3) of the Companies Act. In that scenario, the petitioner ought not to have been made accused at the first instance and even if it was done, the Magistrate ought not to have issued proceedings against him.

The Court also stated that a Public Officer like Registrar of Companies should had acted with greater sense of responsibility and also the Additional Chief Metropolitan Magistrate should had applied his mind to the facts of the case and the provisions of the law before issuing the process mechanically for the asking, which was going to result in the wrong prosecution of a citizen.

Therefore, the decision came in favor of the petitioner and the petition was allowed and rule was made absolute as per the Prayer Clause (a) of the petition.

Basics to be Known

In this case, we found the reference of many types of directors who have distinction in terms of their duty and liability towards the Company. Therefore, we will try to find out the types of directors as per the recent Companies Act of 2013 to have a clarity in this regard.

• Directors:-  Directors are a part of a collective body which is termed as Board of Directors. The Directors are responsible for the control, management and for providing direction to the affairs of a company.They are considered to be the trustees of the properties and money of the company. They even act as agents of the company in the transactions in which they enter into by themselves on behalf of the Company.

There are duties and obligations attached to the post of the Directors of a company. These duties and obligations, they are expected to perform as a rational and diligent person while using skills, knowledge, and experience.  Therefore a director plays multiple roles in a company.

• Number of Directors:-  As per the Company Law, every company must have at least 3 directors in a public limited company; If its a private limited company, minimum 2 directors are required to be there in that and in case of one person company, at least 1 director must be appointed.

The maximum number of directors a company can have is 15 in number. A company can have 15 directors at maximum,but it can be exceeded by passing the special resolution in the general meeting of the Company.

• Types of Directors:-

1. Residential Director:-  There is a requirement as per the company law, that every company needs to appoint a director who has resided in India and stayed here in India for at least 182 days in a previous calendar year, not less than that.

• Independent Director:- The Independent directors are non-executive directors in a company. They help to improve the corporate credibility as well as help in enhancing the governance standards of the company. The non-executive directors are the directors which do not have any relationship with the company, just to avoid the influencing of the independence of his judgement. They are not the part of the company in terms of taking interests out of the profits of the company, but they mark their presence in the Board of Directors to have a scrutiny in the affairs of the company and also to manage that the corporate governance is not being taken at stake in the company.

The tenure of the Independent directors is up to 5 consecutive years. However they are entitled for reappointment if a special resolution related to it is passed with the disclosure in the Board’s report.

The Public companies with paid-up capital of INR 10 Crores or more, Public companies with turnover of INR 100 crores or more, Public companies with total outstanding loans, deposits and debenture of INR 50 crores or more have the requirement of appointing at least two independent directors in their company.

• Women Director:-  It is required for a company whether its private or a public company to appoint at least one woman director in the company if the company is a listed company and its securities are there listed on the stock exchange of India or the paid-up capital of such company is INR 100 crore or more with a turnover of INR 300 crore or more. In these two scenarios, its mandatory for the company to appoint minimum one woman director in the Board of Directors of the company.

• Additional Director:- A person can be appointed on the post of Additional Director in the Company. The person appointed on this post can hold this post until the next Annual General Meeting is conducted. The term of the Additional Director would conclude on the date on which the Annual General Meeting should have been held in absence of the Annual General Meeting in the Company.

• Alternate Director:- Alternate Director which was mentioned in this case as well, as per the Company law refers to a personnel who is appointed by the Board of Directors to fill the space of a director who might be absent due to his non-availability in the country, for more than 3 months.

• Nominee Directors:- The Nominee directors can be appointed by a specific class of shareholders, banks or lending financial institutions, or even by third parties by contracts, or by the order of the Union Government in the case of oppression or mismanagement in the company. This is a nominee of the entity who appointed him in the Board of Directors. This is also the one who keep a scrutiny over the affairs of the company.

• Liabilities of a director:-

The position of the director as officers or agents of the Company gives rise to the liability of the director. The directors being the trustees of the company and also sharing a fiduciary relationship with  the company and its shareholders are the reasons as well for the directors’ liabilities. Since under the doctrine of corporate veil, the company and its Director are two separate entities, therefore, a director does not have any personal liability on behalf of the company. However, under certain specific scenarios, a Director might be held liable, those scenarios are mentioned below:

1. Liability for Tax:  In case, there’s tax due by any private company in regard to an income of any previous year which isn’t recovered from the private company yet, in such scenario, every director of such company in the relevant previous financial year will be held liable, severally and jointly, for payment of such tax under the Income Tax Act.
2. Misstatement in the prospectus of the Company: There is a possibility of imposition of  civil liability on the directors in case any false statement is presented in company’s prospectus, if he was the Director while issuing of the prospectus of the Company, unless,the director proves that before the issue of the prospectus, he had withdrawn his consent, or

That the prospectus was issued without his consent, knowledge or authority, or

That, after he got the knowledge about the false statement. he withdrew his consent and released a public notice of the same, or

He proves that he was having this belief that the doubted statements are true.

• Debts of the Company:  A director isn’t personally liable for the debt of a company until and unless fraud on the part of Director gets established.
• Fraudulent Business Conduct: In case a director knowingly becomes a party to the fraud while carrying out the business of the company, he might be held personally liable for it.
•  Application money refund: Directors of a company will be held personally liable along with the company for repaying the application money of the shares collected from the public or the surplus application money received, in case, it is not repaid within the specified  period.
• Liability of payment of qualification shares: If the Director of the company does not acquire the qualification shares, which he ought to acquire within the stipulated time frame and therefore, the company after the expiry of that stipulated time goes into the liquidation. In that case, the Director will be called upon by the Official liquidator to pay for such shares which he should have acquired.

Conclusion

Through this case a clarity was tried to be brought upon by the Court to stand it clear that if there is a contravention of the duty conducted by the company, then for that directors should be held liable but not all the directors, the ones who are specifically mentioned in the Company Law as the officers in default, those can only be dragged upon in the court for the proceedings. An alternate director or some another director who is not mentioned in the Company Law as officers in default should not be dragged with the whole community of the directions in the case of contravention.

References:

[1] CrPC, 1973, s. 482.

[2] CrPC, 1973

[3] Companies Act, 1956 (Act No. 1 of 1956)

[4] Companies Act, 1956, s. 5.

[5] Companies Act, 1956, s. 73(2A).

[6] Companies Act, 1956, s. 5.