TMI Blog2007 (5) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of India promoted the company and along with some other banks and financial institutions held the entire paid-up capital of the company. For reasons not necessary to be gone into, the promoter who was in control through its officers as nominated directors of the company found the home finance business a different kettle of fish than the routine banking business and ran the company aground. The company applied to the National Housing Bank (NHB), the apex body controlling companies engaged in such business, for relaxation of the prudential norms relating to provisioning and capital adequacy applicable to the company. By a letter of 7-4-2000, the company sought divers exemptions and detailed a road-map that the company proposed to follow during the financial years 1999-2000 to 2003-04. In the synopsis appended to the letter of 7-4-2000, the company indicated that it proposed to infuse capital for the year 2000-01, Rs. 25 crores by way of equity and a further Rs. 25 crores by issuing preference shares. 3. A reminder followed from the company to NHB on 17-4-2000, recording discussions and of NHB having required the company to make further provisioning of about Rs. 9 crores mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to in the report thus : " Restructuring package. A restructuring package for the company has now been chalked out. This package envisages infusion of additional equity and preference share capital aggregating to Rs. 50 crores by institutional promoters and a line of credit from its bankers. As a result the company has recommenced its loaning activities which are presently confined to individual housing loans only. With the increase in the volume of business the company is confident of making operating profits in the next two to three years. Relaxation of prudential norms by the National Housing Bank based on the restructuring package as above, the National Housing Bank was approached by your company for granting exemptions from the applicability of the prudential norms relating to provisioning and capital adequacy for a while. The NHB has since accorded their approval for these relaxations for the period under review. The company proposes to approach National Housing Bank at the end of the next year for extension of the same facility." 7. Along with the annual accounts for the year ended 31-3-2000, the company forwarded, as is customary, the notice convening t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in paragraph 7 to Schedule 16 of the balance-sheet for the financial year 2001-02 the contention of the company is not acceptable and statement given in the director s report under the heading net worth of the company is a false/misleading statement attract penal action under section 628 of the Act." 11. The second notice speaks of violation of both section 211 and section 628 of the Act on the following basis : "During the financial years 1999-2000 and 2000-01 the company has not made provision/write off of Rs. 64.44 crores as per the prudential norms and finally the same was provided in the financial statement of the year 2001-02. The board of directors in their report and notes on account dated 29-6-2000 and 17-8-2001, attached with the balance-sheet for the years 1999-2000 and 2000-01 have made statement regarding relaxation of prudential norms by National Housing Bank which omits material facts knowing it to be material, which is knowingly omission of material particular in the directors report under the heading relaxation of prudential norms by the National Housing Bank therefore the management of the company violated the provisions of section 628 read with sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be achieved. I do not see any misstatement of fact in the sentence. 10. Again, that sentence appearing in the directors report has to be seen in the context of the material in the report preceding it. As has become the accepted format for such reports, the summary of the financial results of the company for the relevant financial year with a comparison with the corresponding figures of the previous financial year have been set out. There is this mandatory declaration as to dividend following the summary of the results. Such declaration provides that in the absence of profits no dividend could be issued. Thereafter, the operations of the company have been detailed and in such details the financial position of the company has been mentioned. 11. From the matters referred to under the heading operation and from the summary of the financial results of the two years, it is evident that the company has been suffering losses. 12. It is in this context that the directors found it prudent to mention that the networth of the company could have been improved by infusion of funds but in view of the statutory restrictions on the promoter company, SBI Capital Markets Ltd., fresh c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or need not, have been met. The Registrar attacks not so much the company s justification for not meeting such condition, as the complete omission thereof. It is in such omission that such Registrar finds that there has been violation, irrespective of the acceptability of the excuse for non-infusion of further capital. 17. The thrust of the petitioners initial argument has been that the condition could not have been met as the State Bank of India, as the majority shareholder in the company was barred by law to have more exposure in the company s capital. But that is not the Registrar s point. The Registrar s understanding is that if relaxation was permitted upon a condition first being met then a statement ought to have been made that the relaxation applied without the condition precedent being required to be satisfied. There is substance in the distinction made by the Registrar. 18. The petitioners fall back on the ultimate defence of a criminal charge, there was no mens rea and, in any event, no one suffered by reason of such alleged omission of a material fact or an alleged misstatement. The petitioners show from additional material permitted to be brought on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner may cite before a High Court under section 633(2). Just as a criminal court has been given discretion under section 633(1), such discretion is at large in a petition under section 633(2). 22. In the East India Hotels Ltd., In re case ( supra ), a Single Judge of this court excused officers of the company upon the company failing to repay depositors on the ground that the default was subsequently made up and that the officers had acted honestly and bona fide. In M. Meyyappan s case ( supra ), a Single Judge of the Madras High Court expressed the view that the High Court has the same power to decide a matter under section 633(2) as if it were a court before which proceedings against an officer of a company for negligence, default, breach of duty and breach of compliance had been brought under sub-section (1). There is no argument with such proposition and the same view is found in the order dated 7-12-2006, in C.P. No. 23 of 2005 [ S.B.I. Home Finance Ltd. In re case ( supra )]. 23. The Andhra Pradesh High Court considered the misstatement in a prospectus in the case of Progressive Aluminium Ltd. ( supra ). The facts and the conclusion in favour of the petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticularly so because this could be categorised as an economic offence, where wrongful pecuniary gains is the main consideration, which is conspicuous by its absence in this case." (p. 158) 24. The failure of the company to pay its depositors and the culpability of its officers therefor, fell for consideration in the G.M. Mohan s case ( supra ), where the fact that the depositors had been paid weighed with the court in requiring the Registrar not to proceed with the relevant show-cause notice. In the Division Bench judgment of this court in Pulin Chandra Daw s case ( supra ), section 282 of the 1913 Act and an offence thereunder was considered. The Division Bench found that the language used by section 282 of the 1913 Act imported an element of mens rea when it spoke of the relevant statement being known to be false. A passage from a Privy Council decision was relied upon to the following effect : ". . . unless a statute by itself or by necessary implication rules out mens rea as a constituent part of a crime, a person should not be found, guilty of an offence against the criminal law unless he has got a guilty mind." (p. 126) 25. The old Bombay case in P.D. Sham ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omp. Cas. 720 (Cal.), were placed. In referring to such authorities, it is urged that it has first to be ascertained whether an offence has been committed before the discretion to pardon can be exercised. The following paragraphs of the first of the three decisions need to be quoted to appreciate the Registrar s contention : "It appears that neither the Act nor the rules framed thereunder has laid down any procedure for such an enquiry. Section 4(2) of the Code of Criminal Procedure, 1973 ( Code for short), provides that all offences under any other law (other than the Indian Penal Code) shall be investigated, inquired into, tried and otherwise dealt with, according to the provisions of the Code, but subject to any enactment for the time being in force regulating the manner or place of investigating, inquiring into, trying or otherwise dealing with such offences. In the absence of any provision in the Act or the rules framed thereunder, the enquiry under section 633(1) has, therefore, to be held according to the provisions of the Code. It was, however, contended that the inquiry contemplated under section 633(1) of the Act was not an enquiry in respect of an offence and, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication under section 633(1) of the Act. This is all the more necessary as, under the Code, the Court s finding as to whether an offence has been committed or not has to be based on evidence to be adduced through examination of witnesses, except where provision has been expressly made in the Code to adduce such evidence through affidavits, namely, sections 295 and 296 of the Code." 27. In the Sanatan Ganguly s case ( supra ) the complaint was on account of an alleged offence under section 210(5) of the Act. Before the Magistrate, Sanatan Ganguly filed an application under section 633(1) of the Act and contended that other directors were inimically disposed towards him and in spite of his best efforts, he could not persuade them to comply with the requirements of section 210(1) and (3) of the Act, for which prosecution had been launched. The Magistrate rejected the application following which Ganguly applied to this Court. Even though this Court required the regular procedure contemplated under the Code of Criminal Procedure, 1973, to be applied to ascertain whether Ganguly had committed any offence, it appears that Ganguly had admitted that an offence as complained of had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned in the relevant documents. But the Registrar has not been able to establish that the alleged misstatement was deliberately made or that the omission was made with the idea of concealing the same. True, the Registrar would have had opportunity to establish the second limbs of either clause found in section 628 if the matter went to trial, but he could have attempted to establish the same in these proceedings. 30. The petitioners have relied on the company s annual report for the year 2003-04 and the balance-sheet and profit and loss account for the relevant financial year that had been finalised on 24-4-2004, and placed before the company s general meeting on 24-5-2004, long prior to the issuance of the show-cause notice of 31-12-2004, by the Registrar. It appears from the directors report and from the accounts that by the close of the financial year ended 31-3-2004, all public deposits had been fully paid off by the company and loans made available by State Bank of India were completely wiped out from the company s books. In addition, the company s assets portfolio comprising commercial loans/investments, the prospects of recovering which were far from encouraging, wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India did more than the NHB condition required it. 34. There is no substantive violation by the petitioners of the provisions complained of. If the petitioners can be faulted, it is on the score of not making this explicit in the relevant documents and thereby giving the Registrar room to doubt their conduct and assail their motives. It is not as if the Registrar took a pedantic view, he was well within his rights to raise the point. The petitioners ought to have explained better in the relevant documents that the spirit behind the NHB condition had more than been complied with. 35. If such is the conclusion that can be drawn, then the petitioners can be found guilty of understating theirs and the State Bank s contribution. And there could have been no mala fides or ill motive in underplaying the company s substantive compliance with the NHB condition that would bring the second limbs of clauses ( a ) and ( b ) of section 628 into play. 36. The petitions are allowed. The petitioners are absolved of all liabilities in respect of the alleged offence complained of by the Registrar. 37. There will, however, be no order as to costs. - - TaxTMI - TMITax - Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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