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Dilip Kapur And Others v. Registrar Of Companies
Factual and Procedural Background
The directors of M/s. Auberge Hotels P. Ltd. filed a petition under section 633(2) of the Companies Act, 1956, read with rules 11(a)(23) of the Companies (Court) Rules, 1959, seeking to quash proceedings initiated against them for alleged contravention of section 628 of the Companies Act. The proceedings arose from a show-cause notice issued on November 16, 2010, alleging that the directors provided incorrect information in Form No. 23AC accompanying the company's balance-sheet. Specifically, although the balance-sheet was signed by two directors, Form No. 23AC indicated it was signed by all four directors. The company had filed its balance-sheet electronically with the Registrar of Companies, fulfilling the requirements under section 220 of the Companies Act. The petition challenged the initiation of prosecution on these grounds.
Legal Issues Presented
- Whether providing incorrect information in Form No. 23AC, regarding the number of directors who signed the balance-sheet, constitutes an offence under section 628 of the Companies Act, 1956.
- Whether the prosecution can be initiated against directors for such an alleged misstatement absent any false or misleading statement in the balance-sheet itself.
- The applicability and interpretation of section 633(2) of the Companies Act, 1956, in quashing proceedings initiated against company directors.
Arguments of the Parties
Petitioners' Arguments
- The alleged incorrect information in Form No. 23AC does not amount to an offence under section 633 as the balance-sheet itself contained no false or misleading statements.
- Section 628 requires false material particulars in the balance-sheet that mislead third parties; mere errors in accompanying forms do not fulfill this requirement.
- The false information must be known to the directors signing the balance-sheet, implying a motive to mislead, which is absent here.
- Under section 220, the balance-sheet must be signed by the managing director/directors, which was duly complied with; Form No. 23AC is only a forwarding document.
- The error arose due to a misunderstanding of a changed form requirement, without any intent to mislead.
- Cited the Calcutta High Court judgment in S.B.I Home Finance Ltd., In re, which held that no false or misleading statement attracting penalty under section 628 was made and that the High Court’s jurisdiction under section 633(2) includes acquittal or exoneration if no offence is found.
Respondent's Arguments
- The petitioners have only been issued a show-cause notice and may still provide an explanation to the Registrar of Companies, making the petition premature.
- The information in Form No. 23AC is misleading and incorrect, as it states the balance-sheet was signed by four directors when only two signed.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| S.B.I Home Finance Ltd., In re [2007] 138 Comp Cas 106 : [2007] 77 CLA 283 (Calcutta High Court) | Clarification that penalty under section 628 applies only to false or misleading statements in the balance-sheet, and that the High Court under section 633(2) has jurisdiction to acquit or exonerate if no offence is committed. | The court relied on this precedent to conclude that no false or misleading statement was made in the balance-sheet and that the proceedings against the directors were not maintainable. |
Court's Reasoning and Analysis
The court examined the requirements of section 628 of the Companies Act, which penalizes directors for false or misleading statements in the balance-sheet known to them with intent to mislead third parties. The court noted that the balance-sheet was duly signed by two directors as required under section 220 and filed correctly. The alleged error pertained only to Form No. 23AC, a forwarding document accompanying the balance-sheet, which incorrectly stated that all four directors had signed it.
The court emphasized that a typographical or clerical error in Form No. 23AC does not amount to an offence under section 628, as there was no false or misleading statement in the balance-sheet itself. The court found no evidence of motive or knowledge by the directors to mislead. The court also referred to the precedent set by the Calcutta High Court in S.B.I Home Finance Ltd., which clarified the scope of section 628 and the High Court's jurisdiction under section 633(2).
Accordingly, the court held that the issuance of the show-cause notice and initiation of prosecution proceedings were a misuse of power. Instead of prosecution, the appropriate remedy would have been to direct correction of the form.
Holding and Implications
The petition is allowed and the show-cause notice along with subsequent proceedings against the directors are quashed.
The direct consequence is that the directors of M/s. Auberge Hotels P. Ltd. are relieved from prosecution under section 628 for the alleged incorrect information in Form No. 23AC. The court did not impose any costs and closed the related company application. No new precedent was established; the decision affirms that mere clerical errors in accompanying forms without false statements in the balance-sheet do not attract penal provisions under the Companies Act.
C.P No. 3 of 2011 and C.A No. 38 of 2011
Decided on June 14, 2011
The Judgment of the Court was delivered by
Vinod K. Sharma, J.:— This petition under section 633(2) of the Companies Act, 1956, read with rules 11(a)(23) of the Companies (Court) Rules, 1959, has been filed by the directors of M/s. Auberge Hotels P. Ltd., for quashing the proceedings initiated against the directors for the alleged contravention of section 628 of the Companies Act, 1956, in pursuance to show-cause notice No. DN/884/209A/628/2010 dated November 16, 2010, issued by the respondent.
2. The petitioners are the directors of M/s. Auberge Hotels P. Ltd., engaged in the business of a hotel. Sri Dilip Kapur is the managing director of the company. The other two directors are also his family members. The company filed a balance-sheet duly approved by the board of directors in the annual general meeting, with the Registrar of Companies. The requirement of section 220 was fulfilled as the requisite documents were filed and the balance-sheet was signed by two of the directors. The balance-sheet was required to be accompanied by e-Form No. 23AC as the balance-sheet was filed electronically with the Registrar of Companies.
3. Though there is no allegation of any mis-statement or mis-leading information in the balance-sheet, the allegation against the petitioners is that they have given wrong information in column 3 of Form No. 23AC which reads as under:
“3 (a) *Date of balance-sheet as at 31-03-2009 (b) “Date of board of directors' meeting in which balance-sheet was approved 31-03-2009
(c) Details of directors), managing director, manager, secretary of the company who have signed the balance-sheet
Following details are to be entered only in case date of balance-sheet is on or after 1st July, 2007
Provide director identification number (DIN) in case of director, managing director and income-tax permanent account number (income-tax PAN) in case of manager, secretary
4. The allegation are that though the balance-sheet was signed by two of the directors only, but in Form No. 23AC, it was shown to have been signed by all the four directors.
5. Learned counsel for the petitioners challenged the notice and subsequent proceedings thereto, primarily on the ground, that the allegation even if we take to be correct on their face value, it does not constitute an offence under section 633 of the Companies Act.
6. It is contended that in order to attract the provisions of section 633, false material particulars should be with regard to contents in the balance-sheet, so that the third party be not misled with regard to status of the company.
7. Furthermore, false information so disclosed should be as such which should be known to the directors, who sign the balance-sheet. The purpose of using the word “knowing it to be false” in the section clearly shows that there should be a motive with the directors to mislead the public at large with regard to the status of the company.
8. The fact that instead of two directors, the names of the four directors are mentioned in Form No. 23AC cannot be a ground to prosecute the directors of the company by alleging it to be a violation of section 628 of the Companies Act.
9. It is also the contention of learned counsel for the petitioners that under section 220 of the Companies Act, the balance-sheet is required to be signed by the managing director/director of the company. It is not disputed that the balance-sheet is duly signed by the directors and filed with the Registrar of Companies. In the absence of any false or mis-statement in the balance-sheet, the provision of section 628 would not be attracted.
10. It is also the contention of learned counsel for the petitioners that no motive can be attributed to the petitioners for the reason that the error occurred because of change of form. The petitioners wrongly believed that the name of the directors is required to be mentioned in Form No. 23AC. Form No. 23AC is a forwarding document accompanying the balance-sheet.
11. In support of the contentions, learned counsel for the petitioners placed reliance on the judgment of the hon'ble Calcutta High Court in the case of S.B.I Home Finance Ltd., In re, [2007] 138 Comp Cas 106 : [2007] 77 CLA 283, wherein the hon'ble Calcutta High Court has held as under (page 109):
“There is, in my view, no misdeclaration that would attract the penalty under section 628 of the Act. I do not see any false or misleading statement having been made. Notwithstanding the show-cause notice not having relied on the second limb of section 628 inasmuch as the same has been urged, I take that into consideration. In the context of the report, there is no material concealment of information by such statement. In any event, the directors report is contained in reports which detailed the financial position of the company and anyone interested could have skipped over the pages to come to the schedule to the balance-sheet in order to ascertain the financial status of the company…
Upon an application being filed under section 633(2) of the Act, the High Court assumes the power and jurisdiction as the court before which the proceedings threatened to be instituted may have been brought. In such a case, the criminal court would have the jurisdiction to acquit the accused, to exonerate the accused or to find him guilty and to sentence him. Section 633(2) does not merely give the discretion to the High Court to pardon a person upon his admission of negligence or breach of trust or misfeasance or default or breach of duty. Upon the High Court coming to the conclusion that the apprehension referred to in the opening words of sub-section (2) was genuine, the High Court, willy-nilly becomes the criminal court in which the complaint against the petitioner may have been brought. The jurisdiction of the High Court in such a case is not limited to pardon the defaulter upon default being admitted or being found. The High Court in such a case may acquit or exonerate the petitioner upon arriving at a conclusion that there was no offence committed. In this case, I find that there was no false or misleading statement contained in the sentence, which has been made the subject-matter of the notice relating to the violation under section 628 of the Act.”
12. Learned counsel for the respondent vehemently contended that the petitioners have only been issued show cause notice. It is always open to the petitioners to approach the Registrar of Companies with an explanation. The present petition therefore is premature.
13. It is also the contention of learned counsel for the respondent that in this case, admittedly information given in Form No. 23AC is misleading and not correct, as it has been mentioned that the balance-sheet has been signed by four directors, whereas it is signed by two directors only.
14. On consideration, I find force in the contention raised by learned counsel for the petitioners.
15. The reading of section 628 shows that the directors of the company, can be prosecuted for misleading statement in the balance-sheet, but typographical error cannot be a ground to prosecute. Admittedly, under section 220 of the Act, balance-sheet is not required to be signed by all the directors.
16. In the absence of any allegation of mis-statement or concealment of fact, in the balance-sheet, it was not open to the respondent to initiate prosecution proceedings against the petitioners, without specific allegation of mis-statement with due knowledge.
17. The ingredient of section 628 are not fulfilled, in the case in hand, therefore, issuance of notice and subsequent proceedings thereto are nothing but misuse of powers under the provisions of the Companies Act. Instead of initiating the prosecution, it would have been sufficient to ask the directors to correct Form No. 23AC by deleting the names of two directors who had not signed the balance-sheet.
18. Consequently, this petition is allowed. Show-cause notice and subsequent proceedings were ordered to be quashed. But with no order as to costs. Company Application No. 38 of 2011 is closed.
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