RAJENDRA SHAH v. STATE OF MAHARASHTRA WRIT PETITION 1528 OF 2016

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This case[1] deals with the Companies Act, 1956[2] where the contravention of Section 295(4) of the Companies Act, 1956 came into the picture.In this writ petition before the Bombay High Court, the petitioner who was the original accused No.6 challenged the order of issuance of process dated 3.11.2015. and prays to set aside all the proceedings and orders in the Criminal Case No. 3847/SS/15 from the Court of Metropolitan Magistrate at Girgaum, Mumbai.

FACTS OF THE CASE

 In this case, Respondent No.2, the Registrar of Companies, has filed this complaint under Section 295 (4)[3] of the Companies Act, 1956 for contravention of Section 295(4) of the Companies Act, 1956. U/s 295(4) of the Companies Act, 1956, a company needs to take prior sanction for giving loans to the other parties. However, there is a violation of the provisions under Section 295 of the Companies Act, 1956 as the loans were disbursed by accused No.1 company to its sister concern. Accused Nos.7 and 8 are the companies to whom the loan is disbursed by the company, namely, M/s.Baron International Ltd. of which accused Nos.1 to 6 are the Directors. During inspection of the company’s books of accounts and the records taken on 3.11.1999 by the concerned officer from the Office of the Registrar of Companies, it was found that this disbursement of loans to accused Nos.7 and 8 was without prior sanction of the Registrar of Companies and therefore, criminal complaint is lodged on 24.5.2002.

ISSUE OF THE CASE

1.Whether there is delay in filing the complaint in the Court?

2..Whether the petitioner was an active partner and having the knowledge of not taking prior approval for the disbursement?

1.Whether the process issued by the learned Metropolitan Magistrate under Section 295(4) of the Companies Act, 1956 and order issued are valid?

CONTENTION OF THE PARTIES

Contention of the applicant/accused:-

The applicant/accused has submitted that the order of issuance of process against the applicant/accused is illegal and bad in law on the following grounds:

i)He submits that the applicant/accused is not an Executive Director but he was an alternate Director. He submits that in the averments made in the complaint, no substantial role is attributed to accused No.6, who is an advocate and solicitor by profession and is a senior partner in the firm M/s.Crawford Bayley & Company, advocates & Solicitors. He is not a signatory of the cheque which is subject matter of the prosecution. In the complaint also, it is specifically mentioned that the original accused No.2 has signed and issued the said cheque. The averments are mainly against the accused Nos.2 to 4 and not against accused No.6.

ii)In the balance sheet of 30.6.1999, the amount of Rs.112,240/- has been shown as the loan amount due from Jaykaba Trading and Investment Ltd., accused No.8 and Rs.26 lakhs has been shown as amount due from Shakun Mulchanani and Kabir Mulchandani of M/s.Sprite Electronics Private Ltd. of which accused Nos.2 and 3 are the directors. The petitioner is not connected with those companies.

 He further submitted that as per the Advocates Act[4], the applicant/accused, being an advocate, is not supposed to sign any balance sheet or cannot be a witness in any proceedings. Moreover, a mere signature is not to be taken that he had approval and knowledge about such disbursement of loans and whether this disbursement is without sanction? He submitted that accused No.6 was an alternate Director and not Managing Director. He signed as an alternate

director on the balance sheet and not as a Managing Director. On the balance sheet, the signatures of a Chairman and accused No.2 as a Managing Director are appearing. Therefore, the signature of applicant/accused appearing on the balance sheet is in fact insignificant and no vicarious liability can be saddled on accused No.6 in this company affair. He also pointed out that company is not a party to the proceedings. 

He has submitted that in para 2, the complainant has mentioned that accused Nos.1 to 6, at the relevant time, were the officer in default of the company as per Annexure A. The learned Counsel relied on the definition of officer, who is in default, under Section 5 of the Companies Act. He argued that he does not fall in the category of a, b, c, d, e and f. In clause (g), he may fall, however, accused No.2 is working as a Managing Director and, therefore, clause (g) will not be attracted to the present applicant/accused.

 He further argued that the inspection has taken place in 1999; the complaint was filed in 2002 i.e., after more than 2 years and, therefore, as per Section 468 of the Criminal Procedure Code, cognizance of this offence can be taken only within one year where the punishment is of one year. In the present case, the punishment is prescribed for one year and so, the complaint filed is beyond limitation and the trial Court ought not to have taken cognizance of this complaint.

Contention of the respondent No.2 :-

While opposing this application, the respondent contended that in the present case, the petitioner is admittedly a Director of the said company. It is also admitted that the loans were disbursed to the respondents/ accused Nos.7 and 8 without taking prior sanction of the government, which are the sister companies of the company. He submitted that there is no delay in filing the complaint because time was taken for show-cause notice dated 3.1.2002 issued by the office to accused No.6 and it was received by the wife of the accused on 26.5.2005 and it was served. The show-cause notice was served immediately at the residence of respondent No.6. The learned Counsel submitted that there is no delay in filing the complaint because the sanction to launch prosecution by the respondents was obtained by the complainant on 12.10.2002 and immediately in 2002. Then, the complaint was filed in May, 2002.

DECISION

 The Court after hearing both the parties and taking into consideration all the cases which the parties relied upon and after analysing the Sections of the Companies Act, 1956 and the decisions of the Court in different cases stated that :-

(i)In the present case, the inspection was carried on 3.11.1999 by the Income Tax department and the complaint was filed in May 2002. The view taken by the Madras High Court in the case of R.M. Subramaniam (supra) is different than the view taken by the Bombay High Court. However, it is also true as laid down in the case of Bhupinder Kaur Singh (supra), it is a matter of mixed question of law and facts. Therefore, this issue can be kept open in the complaint.

(ii)The other point in respect of the status of the petitioner as an active partner and was having knowledge of not taking prior approval for disbursement, is not made out in the averments. A specific role is attributed to accused Nos.1 and 2. Accused No.2 is a Managing Director and therefore, he has signed the cheque. The petitioner had not signed the books of accounts but he has signed the balance sheet. The submissions of the applicant that the said balance sheet was signed in a routine manner as the signature of the Managing Director and the chairman were appearing, carries substance. Thus on the basis of only signature, it cannot be said that there is enough material to show the knowledge of the petitioner of disbursement of the loan without prior approval. A significant circumstance also to be addressed to is that the accused Nos.1 and 2 are the Directors of those companies in whose favour the loans were disbursed. Thus, the accused Nos.1 and 2 had direct interest in the disbursement of loan. There is nothing to show that the petitioner has any interest or any connection with the other two companies. In view of these facts and the submissions of both the parties, the Court that no case is made out to issue process under Section 295(4) of the Companies Act, 1956 is made out to swaddle the vicarious liability on the petitioner.

(iii)Hence, the process issued by the learned Magistrate under Section 295(4) of the Companies Act, 1956 on 24.5.2002 and the summons dated 3.11.2015 are quashed and set aside. Rule is made absolute accordingly.

SECTIONS DISCUSSED

  • Section 295[5] of the Companies Act, 1956:-

 Loans to directors, etc.

  • Save as otherwise provided in sub- section (2), no company (hereinafter in this section referred to as” the lending company”) without obtaining the previous approval of the Central Government in that behalf shall directly or indirectly,] make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to, or to any other person by-
  • any director of the lending company or of a company which is its holding company or any partner or relative of any such director;
  •  any firm in which any such director or relative is a partner;
  • any private company of which any such director is a director or member;
  • any body corporate at a general meeting of which not less than twenty- five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors together; or
  • any body corporate, the Board of directors, managing director, managing agent, secretaries and treasurers, or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
  • Sub- section (1) shall not apply to-
  •  any loan made, guarantee given or security provided-
  •  by a private company unless it is a subsidiary of a public company, or
  •  by a banking company;
  •  any loan made-
  •  by a holding company to its subsidiary, or

(ii) by a company which is the managing agent or secretaries and treasurers of another company to that other company;

  •  any guaranty given or security provided-

(i) by a holding company in respect of any loan made to its subsidiary, or

(ii) by a company which is the managing agent or secretaries and treasurers of another company in respect of any loan made to that other company.]

  •  Where any loan made, guarantee given or security provided by a lending company and outstanding at the commencement of this Act could not have been made, given or provided, without the previous approval of the Central Government, if this section had then been in force, the lending company shall, within six months from the commencement of this Act or such further time not exceeding six months as the Central Government may grant for that, purpose,either obtain the approval of the Central Government to the trans- action or enforce the repayment of the loan made, or in connection with which the guarantee was given or the security was provided, notwithstanding any agreement to the contrary.
  •  Every person who is knowingly a party to any contravention of sub- section (1) or (3), including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to five thousand rupees or with simple imprisonment for a term which may extend to six months:

 Provided that where any such loan, or any loan in connection with which any such guarantee or security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed under this sub- section; and where the loan has been repaid in part, the maximum punishment which may be imposed under this sub- section by way of imprisonment shall be proportionately reduced.

  •  All persons who are knowingly parties to any contravention of sub- section (1) or (3) shall be liable, jointly and severally, to the lending company for the repayment of the loan or for making good the sum which the lending company may have been called upon the pay in virtue of the guarantee given or the security provided by such company.
  •  No officer of the lending company or of the borrowing body corporate shall be punishable under sub- section (4)[6] or shall incur the liability referred to in sub- section (5)[7] in respect of any loan made, guarantee given or security provided 1 after the 1st day of April 1956  in contravention of clause (d) or (e) of sub- section (1)[8], unless at the time when the loan was made, the guarantee was given or the security was provided by the lending company, he knew or had express notice that that clause was being contravened thereby.
  • Section 5[9] 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.
  • Section 468[10] of the Code of Criminal Procedure, 1973:-

Bar to taking cognizance after lapse of the period of limitation.

  •  Except as otherwise provided elsewhere in this Code, no Court shall take cognizance of an offence of the category specified in sub- section (2)[11], after the expiry of the period of limitation.
  • The period of limitation shall be-

(a) six months, if the offence is punishable with fine only

(b)  one year, if the offence is punishable with imprisonment for a term not exceeding one year;

(c) three years, if the offence is punishable with imprisonment for term exceeding one year but not exceeding three years.

  • For the purposes of this section, the period of limitation in relation to offenses which may be tried together, shall be determined with reference to the offence which is punishable with the more severe punishment or, as the case may be, the most severe punishment.

ANALYSIS

  This was a case taking multi-dimensional fields of law into consideration, including taxation, Companies Act as well as CrPC.  This case talked about the limitation period as well as the status of the petitioner that whether he was an active partner and having the knowledge of not taking prior approval for disbursement. After taking the facts of this case into consideration where it was attributed that the main role related to the loan disbursal was played by the accused no.1 and 2, and not by the petitioner. Accused No.2  was a Managing Director and on that position, he signed the cheque related to that. So,the petitioner here had not signed the accounts books, however the balance sheet was signed by the petitioner. But it is to be noted that the said balance sheet was signed by the petitioner in a routine manner. Therefore, only on the basis of the signature, it cannot be proved that there was knowledge of the petitioner of disbursement of loan without the prior approval. This case took every minute detail of the facts of the case and therefore, took a view proving the innocence of the petitioner in this case and therefore, after taking every aspect into consideration, the Court granted the relief which petitioner sought in the form of setting aside the proceedings and the order from the Court of Metropolitan Magistrate, Girgaum, Mumbai.

CONCLUSION

This decision was taking the details of the fact into consideration, where the Court agreed the point of the applicant as he proved his point correctly before the Court and by using the various case laws, the petitioner proved his point and the Court took the well-known decision consisting many dimensions of law.


[1] Rajendra Shah S/O Ambalal Shah v. The State of Maharashtra,writ petition 1528 of 2016

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

[3] The Companies Act, 1956, s. 295 (4).

[4] Advocates Act, 1961.

[5] The Companies Act, 1956, s. 295.

[6] The Companies Act, 1956, s. 295(4).

[7] The Companies Act, 1956, s. 295(5).

[8] The Companies Act, 1956, s. 295(1).

[9] The Companies Act, 1956, s. 5.

[10] The CrPC, 1973, s. 468.

[11] The CrPC, 1973, s. 468(2).

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