PROSECUTION - COMPANIES ACT CASE STUDY

[CA DEV KUMAR KOTHARI]

A CASE STUDY:

Un-necessary litigation on deemed crimes of technical or procedural irregularities or delays - causing wastage of time of police and administration- a rethink is necessary.

M. SHANMUGHA VADIVEL, Versus THE ASSISTANT REGISTRAR OF COMPANIES, 2013 (3) TMI 165 - KERALA HIGH COURT

SOME SUGGESTIONS TO REDUCE CRIMES make police and courts friendly service providers of public. http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=2000

Prosecutions on technical grounds:

We find provisions for prosecutions for technical and venial defaults or irregularities under various laws. Even in cases where default was for some time and has been made good by belated compliance, authorities launch prosecutions. This creates un-necessary litigation and burden on police, administration and courts.

Where compliance has been made though belatedly, and compensation by way of damages, interest or fine or penalty is prescribed, there should not be indulgence by way of launching prosecution on matters which have already been   regularized.

Reduce un-necessary burden on Police:

Services of Police Force should be used only where it is necessary and un-necessary burden on police should be avoided by making changes in law to restrict deemed crimes and by allowing more time to regularize technical lapses, defaults, delays etc. before a criminal case is launched about deemed crime on technical, procedural and monetary issues involving some lapses, delays or default without intention to commit a fraud. 

Un-necessary burden on police and courts handling criminal matters:

Police and courts are un-necessarily burdened with matters where police can hardly do anything, and where there is no real crime but just deemed defaults or crime. Just few examples:

Criminal cases for technical or procedural lapses, defaults, and delays etc:

Criminal cases for technical or procedural lapses, defaults, and delays in corporate, business, tax, labor law matters etc. should be avoided to reduce burden on police. For example , prosecution can be launched if a company made late  deposit of PF , Tax, or failed to deduct tax,  or belatedly filed annual report , annual return  or there was some technical default in taking or repaying loan otherwise than by banking channel  etc. On such matters prosecutions are launched on individual, company and its directors and other principal officers, partners of firm etc. Large number of cases are launched about such defaults and most of them are futile exercise but causes lot of wastage of time of courts.

Cases in which there was only delay and same has been regularized also by filing documents or depositing money and paying interest etc. launching of prosecution / criminal cases serve hardly any purpose.

Loss of productive time:

When prosecution is launched against companies or their directors, there is lot of wastage of time of directors also. They are disturbed and feel harassed, for some delays like delay in deposit of TDS/ TCS or delay in filing of returns or documents. Due to such prosecutions there is destabilization of business also. When compliance has already been made, generally courts also take sympathetic view and levy minimum penalty or fine.

Many cases are not launched properly:

Prosecution cases are launched in routine and mechanical manner. We also find that many cases are not filed properly and they fail due to technical reasons and defaults.

Recent case:

In case reported as M. SHANMUGHA VADIVEL, Versus THE ASSISTANT REGISTRAR OF COMPANIES, 2013 (3) TMI 165 - KERALA HIGH COURT, the prosecution was launched for the reason that the company had not appointed a full time qualified company secretary as required under section 388A of the Companies Act. The prosecution was launched against some persons alleged to be director of company. Whereas the fact reveled that petitioner had ceased to be director of the company before the period for which complaint was made and prosecution was launched.

In this case the case of the petitioners was that they had submitted their resignations earlier and are not liable to be prosecuted for the violation or non-compliance of the provisions of the Companies Act for the year 2003. This was accepted by the Court and in light of this finding entered by the Court, it was held that the prosecution in these cases also cannot be sustained, since the petitioners had submitted their resignation in August 2000 itself, whereas the non-compliance or violation alleged is of the year 2003-2004.

In some complaints allegation was about default in not appointing full time company secretary.

In some complaints other allegations as to not holding of annual general meeting within prescribed time and not filing three sets of annual reports were made out.

All these related to period from 2001- to 2004. The Criminal Revision Petition has been dismissed on 15.10.2012.

It is also noted that against the same persons thirteen complaints for failure to comply with provisions of the companies Act were made. Nine of such complaints were quashed by the Court earlier.

In the intervening period the company had also been wound-up.

Making complaints against persons who were not even directors shows carelessness with which prosecution was launched. Furthermore, prosecution was launched on mere technical grounds of defaults or delays etc. When such irregularities or delays were complied with, there should not be prosecution to avoid un-necessary litigation and cost involved etc.

Appointment of Company Secretary:

It is true that law require to appoint full time company secretary if a company has more than prescribed amount of paid-up share capital. However, non-appointment itself should not be a ground for penalizing the company and its directors. If directors have knowledge and experience and /or they have made suitable alternate arrangements for compliance of legal requirements, then they should not be prosecuted for not appointing a full time company secretary. It may be case that though company has more than prescribed paid-up share capital, but considering the number of shareholders, limited or few procedural requirements for compliance, having alternate arrangements for compliance etc. a full time company secretary may not really be required for compliances and doing corporate legal work. In such circumstances, even if a full time company secretary is appointed, he will not find much work to do and will remain idle for most of time. Therefore, merely having a paid-up share capital exceeding limits, should not be a reason to force upon companies to appoint full time company secretary. And for such matters at least prosecutions should not be launched. In such cases for a successful prosecution it must also be shown that due to non appointment of full time company secretary, the company has failed to comply with legal requirements in a proper manner.

In the case before the Court this contention was not raised because it was not necessary for the reason that the prosecution was launched based on wrong facts and for wrong reasons and against wrong persons- person who was not a director at the time of alleged default.

Similarly for delay in holding general meeting or delay in filing of annual report there should not be prosecution, particularly when compliance have been made, with some delay.

Even if jailed, it will not be economically beneficial for the nation:

This case is an eye opener about futility of the prosecutions launched. Let us assume that in some cased directors of company are sent to jail and they undergo rigorous imprisonment.

The question is whether it is proper for sending to jail a director or promoter merely because there was some procedural delay on part of company in compliance of some of provisions. For such defaults, there is hardly any loss to the society , even the complaints that is concerned authority is not a sufferer. The society has not significant sufferings from such delayed compliance.

If the directors are sent to jail, the company, company’s employees and stake holders will suffer and there will be hardly any benefit to the society by sending to jail the directors or other officers of companies for technical delays, defaults or irregularities which have already been rectified and compliance has been made.

Therefore, as a policy, prosecutions should not be launched where compliances have been made and there is only technical default or lapse or irregularity and there is no case of fraud, cheating or other crime of real nature.

Discussions to this article

[MARIAPPAN GOVINDARAJAN]

This is very good article.

 

M. Govindarajan