M.O.Vergese Case

Introduction to Case

The above-mentioned case[1] was dealt with by Justice M.U. Issac of the Kerala High Court on June 29, 1970. The case was related to the contravention of Section-299,[2] petition filed under Section-633,[3]cessation of directorship under Section-283(1) (i)[4] and liabilities that arose from the contravention, under the Companies Act, 1956 (hereinafter, “the Act”). The case was between a director and a company which was accompanied by the Registrar of Companies.

Facts of Case

The petitioner in the case was a director of a company named Thomas Stephen & Co. Ltd. (hereinafter, “the Company”).He was re-elected as a director to the company on August, 1968. His father’s company had also been doing business with the company. The father passed away in 1960 which made the petitioner, a co-owner in his father’s company. The business of sale and purchase of goods still went on as per the agreement. On March, 1969, an inspection was done upon the company by the Inspection Directorate of the Company Law Board. A letter was sent by the Registrar of Companies, to the company. The letter stated that the petitioner had failed to disclose his interest with the father’s company, with whom the company had transactional relation. Such disclosure was an obligation as under Section-299 of the Act.  Therefore, the petitioner was to be ceased from his director post. In addition, the letter required the company to notify cessation of his post to the Registrar and to recover remuneration (salary) obtained by the petitioner since the date of contravention of Section-299. The petitioner apprehended that a proceeding would be taken against him and filed a petition under Section-633 (2) and sought :

• for a declaration that he had not contravened Section-299 and
• to relive him of liabilities arising from the contravention, if such declaration couldn’t be made.

Issues Dealt by the Court

1. Existence of such interest was recorded in minutes of the Board of Directors, dated 31/01/1968 and 07/04/1969. Was the claim of contravention of Section-299 defeated by these minutes?
2. Was accepting fault necessary to be excused of the liability under Section-633?
3. Was it possible to provide relief to the director from cessation of directorship, under Section-633?

Contentions in the Case

The respondents contended that after the end of financial year on 31/12/1968, the first board meeting was held on 09/01/1969 but the disclosure was done on 07/04/1969, which didn’t comply with the requirement of Section-299 (2) (b). To this claim, the counsel to the petitioner contended that the said provision didn’t apply to contracts which had existed before the person became a director. They drew this conclusion from the wording of the clause, “after the director becomes concerned or interested in the contract or arrangement”. They contended that the provision dealt with interests of a director, for with directorship was necessary and in the present case, the interest was there before the petitioner became a director.

For relief sought by the petitioner under Section-633 (2), the respondents contended that for a person to seek relief from liability, he must admit his guilt first. When it came to prevention of cessation of directorship under the relief provided by the section, petitioner contended that cessation was also a liability arising from contravention of Section-299 while the respondents contended that cessation was not covered by the relief.

Summary of Decision by the Court

Justice M.U. Issac held that there had been violation under Section-299 (2) (b) as the petitioner had failed to disclose his interest in the father’s company on 09/01/1969, when the first board meeting was conducted after the end of fiscal year 1968. The contention provided by the counsels of the petitioner was heavily criticized. Court also decided that it didn’t have any power under Section-633 to make a declaration that Section-299 (2) (b) had not been contravened, as sought by the petitioned. Further, it was decided that for the person seeking for relief, it is not compulsion to admit that he is guilty in the first place. Finally, the court judged that even if relief was to be provided under Section-633, cessation of directorship could not be prevented as it was statutory consequence and not a liability arising from the contravention.

Analysis by the Court

Section-633 lacked any mention of a declaration as sought by the petitioner. Therefore, it was simply concluded that the court had no power to make such declaration as the very provision based on which such claim was made, didn’t give the court the required power.

The respondent contended that a person who denies any claim of being guilty can’t seek for relief under Section-633 and for relief to be sought under the said section, a person must first accept guilt. The court decided that, Sub-section (2) must be read along with Sub-section (1), which provided that a person can be granted relief if, during the proceeding, it is seen that he “is or may be liable” to such relief. Strict ground of acceptance of being guilty was not required as relief itself was provided on a flexible ground. Further, it was seen that, High Courts under Sub-section (2) could exercise power just as the courts under Sub-section (1). In the present case, relief was being sought under Sub-section (2), which in-turn depended upon Sub-section (1), wherein, acceptance of guilt was not required – a conclusion derived from the use of the phrase “may be liable” to get the relief.

Once the relief was provided, liability to be prosecuted under Sections-299 (4) and 283 (2A) and liability to refund remuneration from the date of contravention of Section-299 (1),were quashed. Nevertheless, cessation of directorship under Section-283 (2A) was not done away with. The court reasoned that losing an office wasconsequence of statutory mandate and not a liability. The court referred to Justice P.B. Mukharji’s decision in the case, In re, Coal Marketing Co.[5] He had decided that the relief of liability applied to both sub-section (1) and (2) of Section-633.Nevertheless, the court could only provide relief from the consequences arising from the contravention, namely fines and penalties. Relief from consequences did not mean that functioning of the Companies Act can be excused.Therefore, the court directed that the petitioner shall not be liable for prosecution and repayment, as he had acted fairly and reasonably and ought to be excused,[6] but he shall lose his directorship, under Section-283 (1) (i).

In dispute regarding Section-299, concerning disclosure of interest, court decided that the petitioner was bound by Section-299 (2) (b). Clause (a) of the said section provided for disclosure of “proposed” contract or agreement while clause (b) provided for disclosure of “other” contract or agreement, on the first meeting after being interested in it. Contract was done before the petitioner got his post, and didn’t fall under “proposed” contract but fell under “other” contracts. The court denied the petitioner’s contention that disclosure should be done for the contracts which a person enters only after being a director and concluded that disclosure should be done for interests existing before having gotten the post of director. The requirement was therefore, to disclose pre-existing interest on the first meeting after getting directorship. In the present case, the petitioner was re-elected on August, 1968 and the first meeting was held on 9/1/1969 while disclosure was done on 7/4/1969, which violates Section-299. By virtue of re-election, the disclosure on 31/01/1968 didn’t fulfill requirement set in Section-299 (2) (b).

Additional Analysis

Re-election invites new members in the Board of Directors as well. Further, such boards practice secrecy in their matters. Therefore, new directors are unknown to the matters of the Board. Disclosure after re-election is therefore important. Disclosures made previously doesn’t make aware the new directors. Therefore, the court was right in deciding that disclosure not done on 9/1/1969 violates Section-299 (2) (b) while disclosure made prior to the re-election can’t be an excuse to the said section. The court didn’t take literal interpretation of the said section as contended by the petitioner. Disclosure of interest acquired only after being director and not for interests acquired before being a director can cause further complications, as Board of Directors require full transparency of their directors’ interests. Therefore, by not choosing literal interpretation, the court has prevented inconveniences and absurdity.

The contention by the respondents about admitting guilt violated the basic concept of law that a person is innocent until proven guilty. The wording of Section-633 (2) itself provides that a person can seek relief if he apprehends a proceeding against him. In the present case, the apprehension by the petitioner was reasonable. Here, the relief was sought prior to a proceeding against him,and a person couldn’t be said to be guilty ifno court has decided so.[7]Further, there was no need to admit guilt before seeking relief.[8]

If the use of words under a section are clear and unambiguous, a court should follow the meaning provided by the words despite the complication that might arise. If two interpretation of the provision are possible, the court shall adopt the one which ensures smooth functioning and do away with the interpretation which violates basic principles of law and cause inconvenience.[9] Therefore, interpretation of provisions is to be done so as to abide by basic principle of law while also preventing inconvenience.

The court, taking literal interpretation of Section-633, decided that the court only had power to grant relief but had no power to make a declaration that contravention of Section-299 had not taken place, as sought by the petitioner. Further, it is already clear that a contravention had taken place. Literal interpretation of the said section had already imposed some inconveniences in the past. While providing literal interpretation to the Section-633 in many other cases, the use of the phrase “any proceeding” had created a lot of complications. Did the section provide for relief of liabilities under any act? Some cases decided in affirmative[10] while some decided in negative.[11] If relief under Section-633 was provided even in liabilities arising from acts other than Companies Act, 1956, misuse of the section was possible. Therefore, in these cases, literal interpretation was not done and limitation was provided to the said section i.e. relief can’t be provided for liabilities arising from other acts.The present case adds to the limitation of the said section.

Courts, while dealing under Section-633 (2), has the same power as acting under Section-633 (1).Therefore, the high court derives its power from sub-section (1), which provides that the court “may” provide relief. This shows discretionary power the High Court has.[12]Previous cases have decided that the courts can provide relief as it deems fit. Courts have the power to relive the petitioner wholly or in part, as well.[13]This helps to prevent misuse of the section. Here again, we see literal interpretation of the word “may”.

Cessation of directorship can’t be excused under Section-699 as it is a statutory consequence and not a liability arising from the contravention of Section-299. Had there been no contravention of the section in the first place, cessation of directorship would have been prevented. Cessation is not a liability for contravention of Secion-299, it is a statutory mandate. Further, relief from liabilities are limited to fines and penalties.[14] Section-633 was held to have exceptional power and was to be exercised carefully.In the present case, the court’s discretion and decision that cessation of directorship wasnot possible as a relief, is well-decided. This decision has been referred by various cases and has limited confusion as the case has provided with useful interpretation to the words and expression used in the sections.

Conclusion

The provisions of Section-633 of the Companies Act, 1956 still exists as Section-463[15] of the Companies Act, 2013. Certain changes have been made to Section-299 of the Companies Act, 1956. In Section-184 (1)[16] of the present Companies Act of 2013, they have precisely indicated the circumstances for a director to disclose his interest. It has done away with the limited use of language in Section-299[17]. The current act provides that disclosure of interest shall be done on the first meeting after getting directorship, then at meeting of the board in every financial year. If the interest is subject to changes, the same shall be disclosed to the board at the first meeting conducted after such changes. Therefore, there is clarity in the present act when it comes to disclosure provision.

The court in the case discussed, had sorted to literary interpretation where required. If such interpretation caused confusion and violated pillars of law, the court abstained itself from using such interpretation. Expressions and words used in Section-633 had been carefully judged and interpreted. In dealing withSection-299, the court didn’t follow grammatical interpretation so as to prevent confusion. The court’s decisions were maintained with principles of law and justice. Acceptance of guilt, declaration of non-contravention and relief from cessation were not provided or required. Nonetheless, relief from liabilities were provided for honest and reasonable act by the petitioner. The case acts as a reference, even in the present, to many other cases as it cleared the confusion created by the section providing relief, which is still present in the act of 2013 as it was in the act of 1956.

References:

[1]M.O. Vergese v. Thomas Stephen and Co. Ltd.,AIR 1971 Ker 223(India).

[2]Companies Act §299 (1956).

[3]Companies Act §633 (1956).

[4]Companies Act §283 (1) (1956).

[5] In re: Coal Marketing Co. India, AIR 1968 Cal 119 ¶¶ 11-12(India).

[6] Robert Roland & Pennington, Company Law679-680 (5th ed. 1985).

[7] In Re: TolaramJalanAndOrs., AIR 1959 Bom 245¶5 (India).

[8]SitaramBiyani and Ram Niwas Saboo v. Registrar of Companies, (1985) 58 CompCas 870¶7(India).

[9]State of Punjab v. Ajaib Singh, AIR 1953 SC 10 ¶15(India).

[10] Om Prakash Khaitan v. Shree Keshariya Investment Private Limited, (1978) 48 CompCas 85 Delhi(India).

[11] Trustee of WB Official v. SachindraNath Chatterjee, 1969 AIR 823 (India); Regional Provident Fund v. Rabindra, (1990) 1 CALLT 373 HC (India); GD Bhargav v. Registrar of Companies and Others, (1970) 40 CompCas 664 All (India); Jagannath Prasad Jhlani and Others v. Regional Provident Fund Commissioner (Haryana), (1987) 62 CompCas 571 Delhi (India).

[12] In re: Coal Marketing Co. India, AIR 1968 Cal 119¶10 (India).

[13] In re: Coal Marketing Co. India, AIR 1968 Cal 119¶10 (India).

[14] In Re: TolaramJalan And Ors., AIR 1959 Bom 245¶¶9-11 (India);In re: Coal Marketing Co. India, AIR 1968 Cal 119 ¶¶1011-13(India).

[15] Companies Act §463 (2013).

[16] Companies Act §184 (1) (2013).

[17] Companies Act §299 (1) (1956).