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Facts of the Case
The respondents in Case, who are also Directors of a company were prosecuted for breaching the provisions of the CompaniesAct[1]. They were accused and prosecuted before the Chief Presidency Magistrate, Bombay for two offenses, for having knowingly and wilfully authorized the failure to file the summary of shares capital for the year 1953[2], because they failed to comply with the requirements, and for willfully and knowingly parties to the failure to lay before the company in a general meeting, the balance sheet containing all profits and loss of the Company as at March 31, 1953[3].
The respondents in their contention posited that there was no default on their part in complying with the requirements of the sections as no general meeting had held for that year. It was held that one who is charged on such grounds and offence cannot rely on his default as a response to the charge in question. Thus, if the respondents were to blame for not calling a general meeting, they cannot then say in their defense that the general meeting have not been called in the first place.
Note that a separate trial was held for each offense. Making recourse to the case of Emperor vs. The Pioneer Clay & Industrial Works Ltd[4], the learned magistrate acquitted the respondents, being of the view that no offense under either section could be committed until a general meeting has been held. Here, it was found that no general meeting of the company had been held in the concerned year. It was said that the learned Magistrate did not go into the merits of the case on the facts. Appeals by the appellant to the High court at Bombay from the orders of the Magistrate were dismissed. The appeals have been heard together at Bombay, after which appeal was allowed and the case was remanded.
Issues for Court’s Determination and Analysis in Case
- Whether there existed an obligation in the performance of such duty in the State of Bombay v. Bandhan ram
- Whether such obligation was breached in the absence of a general meeting in the State of Bombay v. Bandhan Ram
- Whether the Directors willfully and knowingly defaulted in not setting up a general meeting.
The Provisions of the Companies Act (Stipulations and Punishment)
According to the Act[5];
“Every company having a share capital shall once at least in every year make a list of all persons, who, on the day of the first or only ordinary general meeting in the year, are members of the company, and of all persons who have ceased to be members since the date of the last return or (in the case of the first return) of the incorporation of the company”.
This section refers to a company having a general meeting for a year.
On penalties imposed for failure to have a general meeting and other requirements provided for in subsections 2-4, subsection 5 section 32 provides thus;
“If a company makes default in complying with the requirements of this section, it shall be liable to a fine not exceeding fifty rupees for every day during which the default continues, and every officer of the company who knowingly and wilfully authorizes or permits the default shall be liable to the like penalty”.
On the second charge in the State of Bombay v. Bandhan Ram that the respondents were knowingly and willfully parties to the failure to lay before the company in a general meeting, the balance sheet and profit and loss as at March 31, 1953, Section 133(3) of the Act was invoked for non-compliance with penalties. The subsection provides thus;
“If any copy of a balance sheet which has not been signed as required by this section is issued, circulated or published, the company and every officer of the company who is knowingly a party to the default shall be punishable with fine which may extend to five hundred rupees”.
In addition to the above sections to which the charges apply, it seems apposite to evaluate the provisions of section 76 of the Act as well, on default in holding a general meeting which the Act stipulates.
It provides thus; “If a default is made in holding a meeting in accordance with the provisions of this section, the company and every director or manager of the company who is knowingly and wilfully a party to the default shall be liable to a fine not exceeding five hundred rupees.”[6]
The Concept of Knowing and Willful Default/Misconduct
LONGMORE J in National Semiconductors (UK) LTD V UPS Ltd [7]posited that for willful misconduct to be proved, there must be either;
“(1) an intention to do something which the actor knows to be wrong or (2) a reckless act in the sense that the actor is aware that loss may result from his act and yet does not care whether loss would result or not”.
Using a definition which excludes loans, contracts or finances, this simply means a deliberate and conscious failure to perform a task or obligation imposed either by legislation or by official capacity as the case may be. For instance, a secretary that fails to set up meetings or organize the boss’s itinerary[8].
The question that comes to mind is; shouldknowing and willful default be a crime?[9]
Is there a default in complying with the requirements of the provisions of the Companies Act (particularly the concerned sections), until a general meeting is held?
The section requires certain things to be done only after the meeting have been done. For instance, a section requires the Directors of a company, once at least in every calendar year, to lay before the company in a general meeting, a balance sheet and profit and loss account of the company[10].
However, there is no clear-cut stipulation from the language of this section and other sections that directors are obliged to plan the general meeting which never happened that year from which the charges were raised by their default.
Duties of Directors of a Company
Having examined the provision of concerned legislations on penalties imposed for non-compliance, there is a need to examine the duties of directors in a company and whether or not such charge falls within this purview. This includes;
- Planning the budget of the company
- Correspondence with stakeholders on profits, losses and recent development in the company.
- Making Decisions (definitely within their purview) on moves to embark on and activities to prioritize which would be beneficial to the company.
- Reporting back to stakeholders at a set general meeting
- Engaging in risk management analysis
- Meeting all employees at the grass root level and ensuring a structured mode of governance and administration in the company’s affairs.
- Formulating policies which is expected everyone in the company adheres to.
- Advising the Chief Executive Officer (CEO) on actions and inactions.
Conclusion of Case
The main contention in The state of Bombay case was the failure of the Respondents to provide a summary of share capital and a balance sheet at an annual general meeting which never held. The state of Bombay case also showed that on appeal, the case was allowed and remanded. While the law should be readily available to accommodate all charges with plausible reasons, the law should always put into consideration the facts of each case and the application of the law to the fact.
Until it can show that a general meeting was held in that note or an active move was orchestrated by the directors of the company in knowingly and wilfully refusing to present the required summary of shares capital and balance sheet, only then can the offenses provided for in Actbe validly enforced against the respondents[11].
References:
[1] Section 32(5) and section 133(3) of the Companies Act 1913 as amended by Act XXII of 1936
[2]Punishable under Section 32 of the Companies Act 1913 [Act No. VII of 1913].
[3] Punishable under Section 133(3) because of their failure to comply with section 131.
[4] AIR 1948 Bom 357
[5] Section 32(1) of the Companies Act 1913
[6] Section 76(2) of the Companies Act 1913 [Act No. VII of 1913]
[7] (1996) 2 LL Rep 212
[8] Note that willful conduct/default are mostly seen in contracts.TNT Global SPA vs. Denfleet International Ltd (2007) EWCA Civ. 405.
[9] It only becomes a crime where it can be established that it is against any existing legislation with penalties imposed.
[10] Section 131
[11] Section 32(5) and 133(3) of the Companies Act 1913
