Corporate Laws

Subject : Clarification with regard to provisions of Corporate Social Responsibility (CSR) under section 135 of the Companies Act, 2013.

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Case Law No. 1

[2014] 182 Comp Cas 243(Cal.)

[In the Calcutta High Court]

Simplex Infrastructures Ltd. and Banwarilal Bajoria and others vs. Registrar of Companies, West Bengal

Court can grant relief to directors for any proceedings initiated for negligence, default or breach of duty, if there is no specific allegation of dishonest intent and that same is a technical default and does not affect any person or is not opposed to public policy

Brief Facts

The Petitioners are the directors of the Company. The Registrar of Companies, West Bengal (“RoC”) had issued several show cause notices to the Petitioners for various non-compliances and non-disclosures in the audited accounts as required under Section 211 of the Companies Act, 1956 (“Act”). The show cause notices indicated the following non-compliances and non-disclosures:

a.      The loss on account of exchange fluctuation not being provided in the Company’s accounts.

b.      Advance received on account of work in progress not being shown separately.

c.       Not disclosing the cancellable and non-cancellable lease separately.

Company had duly replied to all the show
cause notices and had given proper explanation and justification as to all non–contraventions.

In anticipation of any action which may be taken against the Company and its directors, the Petitioners filed this application under Section 633 of the Act.  Section 633 refers to powers of a court to grant relief in case of any proceedings for negligence, default, breach of duty, misfeasance or breach of trust against an officer of the company.

The argument from the Respondent is that although, the powers exercised by the Court under Section 633(2) is discretionary, the same should be exercised with great caution.

Judgment and Reasoning

The Hon’ble Court allowed the petition. While allowing the petition, the Court noted that for relief to be granted under Section 633, the Petitioners should have shown to have acted in a manner in which any man of affairs with reasonable care could be expected to act in the case and circumstances of the facts. The court also noted the replies given to the said show cause notices of the RoC. The Court also relied on the judgment in the case of Bhagwati Foods
P. Ltd vs. Registrar of Companies, West Bengal [2008] 143 Comp Cas 531 (Cal.),
  in which it was held that the show cause notice should not only contain an exact offence but also a specific allegation of dishonest intent. The Court noted that a technical default, if it does not affect any person or is not opposed to public policy, can be excused under Section 633(2) of the Act.

Case Law No. 2

[2014] 182 Comp Cas  467 (Delhi)

[In the Delhi High Court]

Sunita Bhagat vs. Securities and Exchange Board of India.

Unless directors prove that an offence committed by the Company is without his knowledge or he has exercised all due diligence to prevent the commission of the offence, he is liable for punishment

Brief Facts

The Accord Plantation Ltd. (“Company”) had collected monies from various investors under Collective Investment Scheme (“CIS”). As per Section 12(1B) of the SEBI Act, 1992, which came into force on January 25, 1995, no person shall sponsor or caused to be sponsored or carry on any venture capital fund or CIS, unless it obtains a certificate of registration from the SEBI. Any person carrying out CIS prior to the above-stated period, must provide certain information to the SEBI as well as obtain registration. The Government of India asked the SEBI to form a CIS regulation and conveyed that instruments like agro bonds, plantation bonds, etc. shall be treated as CIS.

One of the objects of the Company is to carry business of agricultural, horticultural, floricultural and forestry related activities. The standard application form and brochure issued to
prospective investors contain names of four persons as directors.

Based on SEBI’s request, the Company provided the information on monies collected under the CIS. While communicating to SEBI, the Company conveyed that it had not floated any CIS and that they were not collecting any additional money under the current scheme. Subsequently, when the Company provided the information, it was observed that the Company had collected additional funds during these periods.

The SEBI notified the CIS regulation in October 1999 and the same was informed to the Company.  In its reply, the Company disclosed that they are not interested in CIS registration and will return the monies to the investors upon maturity. The reply shows that during the period 2001-2004, the Company intended to raise additional funds and pay part of it. As the Company has not registered under the CIS, SEBI had sent the show cause notice.  Upon several communications from the SEBI that the Company was not complying with the CIS regulation and after giving personal hearing to the Company, the SEBI Chairman passed an order directing the Company to pay amount to investors within one month from the date of the order.  During these periods, letters sent to the Company were returned undelivered. After due process of law, SEBI filed compliant before the ACMM, Delhi. ACMM passed an order against the Appellants. As per the said order, Appellants were sentenced for rigorous imprisonment for six months and pay a fine of Rs. 10 lakhs each. If the fine was not paid, then an additional imprisonment of
3 months for punishment as stated above would be applicable.

The appeal is filed by the Appellants against the order of ACMM, Delhi. The main contention of the application is that whether they are liable at the time the provisions of Section 12(1B) and / or CIS regulations were contravened by the Company and were they responsible for the Company’s business?  Further, the SEBI had to also prove that the offence by the Company was committed with the consent or connivance of any of the Appellants or attribute to their negligence.

Judgment and Reasoning:

The Court rejected the application of the Appellants. The Court perused the report of Dave Committee and the judgment in Paramount Bio-Tech Industries Ltd. vs. Union of India [2003] Law Suit (All) 1206; [2004] 120 Comp Case 18 (All) as to activities falling under CIS. The Court has also observed that the Company had not complied with various requirements of CIS regulations. The Court also noted that no receipt of refund of monies to the investors or books of accounts to that effect were produced. The Court also noted from the witness of one of the directors that some of the investors had filed winding up petition against the Company for not refunding their money. The Court also reviewed its judgment in Vishnu Prakash Bajpai vs. Securities and Exchange Board of India [2010] 154 Comp Cas 147 (Delhi) [2010] 2 Crimes 394 (Delhi), that offence is continuous offence under Section 24 of the SEBI Act till the time the Company complies with the CIS regulations.  The Court also looked into events date wise and the position of the directors at that point of time. The Court also observed that till the Company complied with the requirements as to refund of monies to the investors, the offence would continue and thus all the directors during such periods, even though resigned or appointed in between, are liable.




Case Law No.1

[2013] 181 Comp Cas 417 (Bom.)

[In the Bombay High Court]

Etisalat Mauritius Ltd. vs. Etisalat DB Telecom P. Ltd and Others.

A deadlock, lack of faith and probity resulting in complete breakdown between the main shareholders could be a just and equitable cause under section 433 (e) of the
Companies Act, 1956 for filing winding up petition

Brief Facts

Etisalat Mauritius Ltd. (“Petitioner”) has filed this winding up petition against Etisalat DB Telecom P. Ltd. (“R1”) under the provisions of Companies Act, 1956 (“Act”).

The reason for filing this petition is that as per petitioner, it is “just and equitable to wind up the Company on the grounds that (1) due to cancellation of 2G licences by Supreme Court, it has incurred losses. (2) Dysfunctional board of directors due to withdrawal of directors by R2 and (3) Company is insolvent and cannot pay its dues.

R1 Company was originally incorporated in the name of “Swan Telecom P. Ltd.” and changed its name to current name Majestic Infracon P. Ltd., a company owned and controlled directly or indirectly by Shahid Balwa and Vinod Goenka. (“R2”). R2 is under investigation for its role in the 2G scam.

R2 had approached the petitioner for investing in R1 and gave all representation and warranties as to validity of license held by R1. Upon investment, petitioner is holding 44.73% of share capital of R1. The Petitioner had claimed that the capital contribution made by them was used by R1 for repayment of bank loans which had been funded for 2G licenses cost.

Petitioner also submits that there was a management services agreement between R1 and Petitioner Group Company for the management of R1 but all management functions were handled by R2 and their directors.

Petitioner has invested additional sum of Rs. 209.70 crore for acquiring 2 equity shares in R1. The said capital contribution is used for acquiring 2G license for Rajasthan and Haryana. Subsequently, additional sum of Rs. 106.95 crore invested by the Petitioner for which 1 equity share was allotted to it. Upon filing of Public Interest Litigation as to allocation of 2G spectrum allocation, various actions were taken by CBI upon directions issued by the Supreme Court of India including registering of an FIR for illegal gratification against Group Company of R2. CBI charge sheet claims that R1 was ineligible for obtaining 2G license and that R2 promoters entered into a criminal conspiracy with R-ADAG, a company of Reliance Anil Ambani group to cause the DoT to allot 2G licence to R1.

In 2011, R2 had filed petition before CLB under sections 397 and 398 against R1 and petitioner and alleged that (1) petitioner failed to bring its expertise and management skills for R1 business, (2) failed to comply with the capital call made by R1 and)(3) petitioner is responsible for the financial losses of R1.

However, said petition was withdrawn by the R2 and claimed that same was filed by his lawyer without their consent or concurrence. Upon cancellation of license, the board of directors has decided to shut down operation and said decision was also supported by director nominated by R2. Another Reliance company had also filed claim of
Rs. 1679 crore against R1. The Petitioner had also filed a civil suit against R2 and its promoters for loss of investment due to fraudulent representation and misrepresentation. Upon another application filed by a bank, the Debts Recovery Tribunal, had passed an ex parte order for attachment of all the assets of R1 and appointed a receiver in respect of the same. Meanwhile, R2 has invoked the arbitration process against the Petitioner under the shareholders agreement, which was denied.

Upon various applications made by Petitioner, R2, employees and creditors of R1 and consented by the parties, the High Court of Bombay appointed an authorised person (“AP”) to preserve and protect the assets of
R1 and to mitigate and minimise the cost and liabilities.

The two banks have supported the present winding up petition. The main contention of the petitioner is that 2G licence was the only tangible asset of R1 and without it, it has no commercial enterprise.  Whereas R2 has submitted that R1 still had another three valid telephone licence for International Long Distance (ILD), National Long Distance (NLD) and Internet Service Provider (ISP). Further, R1 can apply for fresh 2G
licence when it already had necessary infrastructure.

In its opposition for winding up petition, R2 has contended various points such as (1) Petitioner has wrongly relied on events post the filing of the petition and relied on judgments in Seth Mohan Lal vs. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and others. (2) Petitioner has not issued statutory notice under section 434(1)(a) in alleged capacity as creditor for substantiating claim under section 433(e) of the Act. (3) Petitioner has provided network equipment as very high cost and not provided management support. (4) Petitioner did not pay call money.

Judgments and Reasoning

The Court admitted the winding up petition. The Court rejected the application by R2 for staying the operation of admission of the Petition. It has also observed that there exists a dead lock between the main shareholders of R1 and
lack of faith and probity, resulting in irretrievable breakdown between the major shareholders.

The Court also observed that the R1 has to recover several huge amounts from the statutory authorities as well as banks. R1 also required to answer various show cause notices of regulatory authorities. On objection raised by R2 regarding petition filed under section 433(e) of the Act and that the same required the issuance of notice under section 434(1)(a) of the Act, which was not complied with. The Petitioner’s submission as per judgments in Pandam Tea Co. Ltd. vs. Darjeeling Commercial Co Ltd. [1977] 47 Comp Cas 15 (Cal.), N.N. Valechha vs. I.G. Petrochemicals Ltd. [2008] 143 Comp Cas 122 (Bom.) was accepted by the Court. Another contention of R2 that since Petitioner had filed a civil suit and thus, selected an alternative remedy, it could not file winding up petition on just and equitable ground was also rejected.

Case Law No. 2

[2014] 182 Comp Cas 13 (AP)

[In the Andhra Pradesh High Court]

Dr. T.H. Chadary vs. Registrar of Companies and Another

A liability for mis-statement in prospectus cannot be attributable, if company did not invest the monies in the manner as promised in the prospectus. The directors will be liable for punishment if the statements in the prospectus are not true and cannot made liable if, the said statements have not been adhered to.

Brief facts

This petition is filed by Dr. T.H. Chadary (‘Petitioner”) against the complaint made by the Registrar of Companies (“R1”) for prosecuting Dr. T. H. Chadary (‘Petitioner”) for committing offence under section 63, section 68 and section 628 of the Companies Act, 1956.

Petitioner is one of the directors of Sibar Software Services (India) Ltd. (“Company’). The Company had issued prospectus for public issue of 35,00,000 equity shares. The complaints were based on the following allegations.

a.     Company had issued prospectus with an object to establish a software centre at Hyderabad and Vijayawada.

b.     Invest in Mauritius subsidiaries and other foreign countries for marketing support;

c.     To purchase hardware and software;

d.     Working capital margin money;

e.     Listing of shares on recognised stock exchanges.

Based on the scrutiny of audited balance sheet for the years 2000 to 2003 of the Company, it was observed that no investment in overseas companies was made. The investment made in local company and increased over the period in which one of the directors has special interest. Also, investment was made as intercompany deposits. The Company had not given complete break up of utilisation of funds in the director’s report and thus made untrue statements.

Based on the above, as per R1, the statement made in the prospectus are knowingly false, so much, that all the accused including the petitioner are liable for punishment under section 63 (“Criminal Liability" for misstatements in prospectus), section 68 (penalty for fraudulently inducing persons to invest money”) and section 628 (“Penalty for false statements”) of the Act.

The maximum penalty under section 63 and section 628 is imprisonment up to 2 years, whereas penalty under section 68 is five years.

The submission made by the petitioner for quashing the complaint against the petitioner is as follows.

a.     Two of the complaints are barred under section 468(2)(c ) of the Code of Criminal Procedure, 1973 (“CrCP”) and

b.     No specific facts as to alleged criminal activities against the petitioner were made.

It was submitted that for launching prosecution, the time limit was 3 years. The prospectus was issued on December 2, 1999 and the complaint was made on March 10, 2010. Thus, said complaints were barred by limitation.

R1 contended that period of limitation did not commence till the filing of the balance sheet for the year 2006 on October 12, 2007. Thus, filing of complaint is well within time.

Judgments and reasoning

Court allowed the petition and quashed the complaint and consequently the prosecution of petition under sections 63, 68 and 628 of the Companies Act.

Court has reviewed the provisions of section 63 and section 68 of the Act and submission of the Petitioner that no specific allegations were made. Court also observed that under section 63, it is a case of strict liability in the absence of any contrary evidence. It has further observed that section 68 and 628 require mens rea as to making statement knowingly or recklessly and that statement should be known to be false. On investment in foreign subsidiaries, it was noted that Cost of Projects and means of cost is appraised by the Bank of Madhura Ltd. and not claimed by the directors and company.  The Court looked at the judgment of Kerala High Court in K. Gopi Nair vs. K Ramukutty [2003] 115 Comp Cas 59 (Ker.) under section 428 of Cr. PC and noted that if the allegation as set out in the complaint and if it did not reveal any offence, it would be open to court to quash the complaint. Court has also referred to the judgment in Hemendra Prasad Nag Chowdary vs. Registrar of Companies [2010] 158 Comp Cas 21 (AP); [2010] 1 ALD (Crl.), 1004 where it was held that offence under sections 63, 68 and 628 of the Act have not been made out merely because the prospectus gave an encouraging state of affairs of the company.


Subject : Clarification with regard to holding of shares or exercising power in a fiduciary capacity - Holding and Subsidiary relationship under Section 2(87) of the Companies Act, 2013.

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