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TMI Blog2009 (2) TMI 467X X X X Extracts X X X X X X X X Extracts X X X X ..... e not liable for being prosecuted for alleged non-compliance of the duty to furnish the statement of affairs. The objections come through : (i) persons claiming to be ex-directors; (ii) persons who claim to have retired from the office of director of the company more than one year prior to the "relevant date"; (iii) persons whose names do not find a place in Form No. 32 ; and (iv) nominee directors of financial institutions, who are not acquainted with the day-to-day activities of the company and who enjoy certain immunities under specific enactments. 2. The list is not exhaustive but illustrative of some of the applications finding instances of persons falling in the above category. 3. The point to be resolved is not so much a matter of an academic exercise but an attempt to lay down specific guidelines for the official liquidator to follow before resorting to action under section 454(5) and (5A) of the Companies Act, 1956. It is made clear that the specific details contained in each and every one of the cases which are pending are not addressed in this order but in terms of the guidelines passed hereunder, the actions will follow. (II) The relevant provisions : 4. Section 454 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point. (4) Any person making, or concurring in making, the statement and affidavit required by this section shall be allowed, and shall be paid by the official liquidator or provisional liquidator, as the case may be, out of the assets of the company, such costs and expenses incurred in and about the preparation and making of the statement and affidavit as the official liquidator may consider reasonable, subject to an appeal to the Court. (5) If any person, without reasonable excuse, makes default in complying with any of the requirements of this section, he shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to one hundred rupees for every day during which the default continues, or with both. (5A) The court by which the winding up order is made or the provisional liquidator is appointed, may take cognizance of an offence under sub-section (5) upon receiving a complaint of facts constituting such an offence and trying the offence itself in accordance with the procedure laid down in the Code of Criminal Procedure, 1898 (5 of 1898), for the trial of summons cases by Magistrates). (6) Any person stating himself in writing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his appointment and in a case where no such appointment is made on the date of winding up order. The reference to sub-section assumes significance that it is not every person who holds the office as director that would be liable and the crucial date would always be whether during the relevant date the person holds such office to make him liable giving the statement of affairs. (III) Raison d'etre for statement of affairs of company in liquidation : 7. The starting point for the activities of the official liquidator in collecting the statement of affairs from the director assumes enormous significance from the fact that the details that are enumerated alone provide the basis for securing all the assets of the company and carry out the duties under sections 529A and 530 of the Companies Act. The director of the company is compelled to make a co-operative effort to make possible the satisfaction of the claim of several persons. Having regard to the significance of this primary duty, the law casts the duty of preparation of statement of affairs on the pain of criminal prosecution and for incarceration and fine, if the duty is not discharged. Since it is a criminal process that is iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a tether, of a liquidator that represents the whole body of creditors and all other persons interested in the liquidation of the company and the directors of the company who are perforce to participate in the exercise and divulge information. The conflict is many a time real, for, the person who has long since ceased to be a director cannot be compelled to give a statement of affairs when he had not known what the affairs of the company were. Since the section imposes serious penal consequences, the attempt is always of the person who has the relevant details but who does not want to divulge information to plead that he has ceased to be the director of the company either on the relevant date or he does not fulfil any of the descriptions of the persons on whom the duty is cast. (V) Definition of "director" is wide and inclusive : 11. The definition of a "director" contained under section 2(13) of the Companies Act which is an inclusive definition reads : "Director includes any person occupying the position of director, by whatever name called". It is an elastic term that does not classify the person's liability by the tag that he has, but by the position that he occupies. 12. Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company; (b) who have taken part in the formation of the company at any time within one year before the relevant date ; (c) who are in the employment of the company, or have been in the employment of the company within the said period, and are, in the opinion of the official liquidator, capable of giving the information required ; and (d) who are or have been within the said year officers of, or in the employment of a company which is, or within the said year was, an officer of the company to which the statement relates. The period of one year has again a value of obvious significance that only such persons who were associated with the affairs of the company, which is before the relevant date, could be answerable for submission of the statement of affairs and against whom proceedings under section 454(5A) of the Act would become possible. 14. In Rama Fibres Ltd. v. G.R. Hada [2001] 32 SCL 187 (Punj. & Har.), it was held that the expression director in section 2(13) of the Companies Act made no distinction between a nominee director or other directors by simply asserting that he was a nominee director would not absolve the concerned person from liability. The said decision howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employed under other enactments and as regards references under other provisions of the Companies Act are wholly different and the decisions cited in that regard by counsel for the applicants have no relevance at all. 16. In Global Drugs (P.) Ltd. v. M. Venkatanarayana [2008] 141 Comp. Cas. 9352, the Andhra Pradesh High Court ruled that the directors not falling under the category of persons falling within clauses (a) to (d) of section 454(2) and who cannot file the statement of affairs cannot be subject to any issue of show-cause notice. The Andhra Pradesh High Court was dealing with the cases of winding up order that was passed on 4-5-2005 and there was evidence to show that some of the persons against whom notices have been issued had ceased to be directors with effect from 2001, itself. 17. Learned counsel for the official liquidator refers also to decisions of various courts where even ex-directors have been found to be liable for prosecution. Kothari (Madras) Ltd. v. Myleaf Tobacco Development Co. (P.) Ltd. [1985] 57 Comp. Cas. 690 (Kar.), where the court said that ex-directors cannot disclaim liability on the ground that they were only nominee directors. It interpreted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the various applicants also make reference to the fact that if any proceedings are taken under section 454(5) and (5A), that can be done only after express permission from the court. This interpretation is made in the context of what is stated in section 454(2) that the official liquidator's demand against the director to submit and verify the statement shall be, "subject to the directions of the court". This expression is sought to be interpreted to him that without such express directions, the official liquidator shall have no power to either require the persons to furnish the statement of affairs or take proceedings for their alleged failure to submit the same. 21. In Altos India Ltd. v. Dadan Bhai [2001] 2 PLR 461, this court dealt with the inter play of section 454(2) to (8) and had ruled that the communication of the official liquidator could be made only with the prior approval/direction of the court. Adverting to rule 125 of the Companies (Court) Rules, 1959, the court said that the official liquidator must apply to a company court for order to direct any person who in his opinion is liable to furnish the statement of affairs under section 454. Without any application b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interpretation that ought to be adopted. I am of the humble view that the expression "subject to the direction of the court" occurring in section 454(2) of the Companies Act does not mean "prior approval" and the official liquidator need not obtain any sanction from the company court before lodging a complaint for an offence under section 454(5) of the Act. I, therefore, reject the contention of counsel for the various applicants that previous permission of the court is necessary. (VII) "Without reasonable excuse" and burden of proof : 23. The question of "without reasonable excuse" is invariably a matter of evidence. There could be instances where a person who is no-longer connected with the company and who had ceased to be associated with the affairs of the company could be prosecuted on the basis of mere failure to furnish the statement of affairs and the issue of process under section 454(5A) cannot be thwarted even at the threshold that the person was not in anyway connected with the affairs of the company by reference to the entries in Form No. 32 or his own letters of resignation from the company even before the relevant date. 24. The Full Bench of the Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minal prosecution. (VIII) Immunity under specific enactments - extent of : 27. The effect of immunity granted under certain legislation will have also to be understood in its proper light. The immunity for instance provided under section 41A of the State Financial Corporations Act, 1951, reads as follows : "41A. Protection of action taken by persons appointed under section 27 or section 32A.-No suit, prosecution or other legal proceedings shall lie against any person appointed as director, administrator, managing agent or manager by the Financial Corporation in pursuance of section 27 or section 32A for anything which is in good faith done or intended to be done by him as such director, administrator, managing agent or manager." 28. It can be easily seen that the reference is only for acts done in good faith and it is a general indemnity of all types of situations. Learned counsel for the official liquidator also contended that the expression is only for acts done and not for any omission. According to him, the non-submission of the statement of affairs is an act of omission which, if it is not specifically expected by reference to the said Act, the immunity under section 41A i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of the following principles : (i)The date of winding up or the order of appointment of provisional liquidator shall first be ascertained. (ii)Any person who shall answer the description of a director coming within the definition of section 2(13) of the Companies Act and the classes of persons as detailed under section 454(2), clauses (a) to (d), shall be answerable to give the statement of affairs of the company. (iii)Production of copy of resignation letter or entries in Form No. 32 shall not be conclusive evidence of whether a person was a director or not at the relevant time. It would be a matter of proof of fact that the official liquidator shall consider before lodging a complaint and at times, may itself be a subject of adjudication at the trial. (iv)The liability of such director shall be within 21 days from the relevant date or within such time not exceeding three months from the date as the official liquidator or the court may grant for special reasons. The action of the official liquidator shall be merely subject to the directions of the court and will require no prior sanction to initiate action. (v)If there is a default on the part of the person liable to give ..... X X X X Extracts X X X X X X X X Extracts X X X X
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