J.K MEHRA, J.— By this order I will dispose of petitions Nos. C.P 211/90, and C.P 13/91.
This is a petition filed on behalf of M/s Ashok Bhatia, Samir Ghosh, Arup Kumar Banerji, Nirmal Kumar Ghoshal, Surakashit Kumar Mittal, Yogesh Chandra Deveshwar, Mrs. Nandita Sen, Jnanendra Nath Banerji and M/s Pinnacle Investment Ltd. against the Registrar of Companies, Delhi and Haryana and the Registrar of Companies, West Bengal under Section 633(2) of the Companies Act.
The petitioner No. 9 is an existing Company within the meaning of the Companies Act, 1956 and is carrying on the business of investment, financing and investment financing company etc. One of the main objects of the said company is financing of industrial enterprises and investment in shares of the company.
The contention of the company is that Section 370 of the Companies Act, 1956, which stipulates limits up to which loan can be granted by a body corporate to other corporate bodies had no application to intercorporate deposits. The contention of the petitioner is that though transactions in question amounted to deposits, the company through a bonafide mistake inadvertently often described the said deposit transactions as loans and this according to them was done primarily to prepare the balance sheet in accordance with schedule-VI of the Act which did not have any heading titled “deposits”.
The petitioners further contended that Section 370(2)(a)(v) of the Companies Act excludes loans made by the companies established with the object of financing of industrial enterprises from the scope and operation of the Section 370 of the Act. Since one of the main objects of the petitioner company was financing including financing of industrial enterprises, they were of the bonafide view that the said Section had no application to the petitioner company. The petitioners had also obtained legal opinion to the same effect.
However, the Act underwent certain amendments by virtue of the companies (Amendment) Act 1988 and the said amendment Act also brought about certain amendments to Section 370 of the said Companies Act, 1956. This amendment came into force on 17th April, 1989. On such amendment coming into force the Company again took legal opinion about the availability of exemption to the Company under Section 370(2)(a)(v). The Compnay was advised that the said exemption continued to be available to it under the aforesaid provisions, even after amendment of Section 370 of the Companies Act.
The books of accounts of the petitioner company were being kept at Virginia House, 37 Chowringhee, Calcutta which was the Registered Office of the holding company, pursuant to a Board Resolution dated 26th June, 1983 under Section 209 of the said Act. The authorities under the companies act, in this case the Regional Director, Eastern Region, had an inspection of the books and records of the company carried out under the provisions of Section 209 A of the Act. Following such inspection, the Regional Director, Company Law Board, Calcutta issued letter, which was served on all the Directors including the petitioners 1 to 7 and the Secretary of the Company the petitioner No. 8 and another Director, namely, Mr. F.R Vevaina who is the petitioner in C.P No. 12/91, wherein contravention of Section 370 on the part of the company was complained of for the years ended March 31, 1988, March 31 1989 and March 31, 1990. The said letter was replied to by the company. The explanation of the company did not satisfy the authorities and it resulted in, inter-alia, issuance of another letter from the authorities dated 2nd July, 1990. The said letter was replied to by the Company in detail setting out therein its contentions. One of the contentions raised by the Company was that even after the amendment of the Act. in 1988, the exemption under Sections 370(2)(a)(v) and Section 370(b)(v) continues to remain available to the company and it was contended by the company after obtaining legal opinion of an eminent senior counsel. This conduct shows that what an average man of ordinary prudence is expected to do in the conduct of the business of the company including the law applicable to the various transcations, had been done by the petitioners 1 to 8 and Mr. Vevaina. The company obtained legal opinion both before and even after the amendment of the Act in 1988 and on each occasion the legal opinion expressed was that Section 370 of the Companies Act, 1956 had no applicability to the transactions in question. The Department of Company Law Board, however, has not accepted this interpretation of the said section and have contended that the exemptions under Sections 370(2)(a)(v) and 370(2)(b)(v) are not available to the Company, and in fact according to the Department the Company has contravened the provisions of Sub-section (1) of 370 of the Companies Act, 1956 by not passing any special resolution of its members and by not obtaining the appropriate approval of the Central Government for giving such loans to bodies corporate in excess of the limits prescribed under Section 370(1) of the Act.
It is in the light of above facts that the petitioners 1 to 8 and the Company have moved the present petition under Section 633(2) of Companies Act praying among other things that the petitioners and the company be excused from the default on the part of the petitioners, if any, as the petitioners acted honestly, reasonably and bonafide at all points of time and the petitioners ought fairly to be excused and relieved from all consequences of any such alleged default in compliance with the Section 370 of the Companies Act. 1956. The petitioners have also prayed for interpretation of and the true and correct construction to be placed on Section 370 of Companies Act, 1956. Mr. F.R Vevains, who is one of the Directors and was not a party to this petition No. C.P 211/90, had filed a separate petition being C.P 13/91 seeking the same reliefs. The petitioners have relied upon Ponnwalt India Ltd. and others v. The Registrar of Companies, Maharashtra and others, reported as 1988 vol 2 Company Law Journal 208. wherein the distinction between loan and deposit was considered and it was held that the expression loan in Section 370 cannot be given wider interpretation than what is meant by actual word used therein and it was held that loan connot be said to include deposits. In that ruling the Division Bench of Bombay High Court had relied upon among others two decisions of privy counsel in the cases of Suleman Haiji Ahmed Umer v. Haji Abdulla Haji Rahimultulla reported as 42 Bombay Law Reporter 971 (PC) and the case of Nawab Major Sir Mohammad Akbar Khan v. Attar Singh reported as 38 Bombay Law Reporter 739, wherein the distinction between the terms deposit and loan was clearly brought out.
On notices of the petition being served on the respondents they have filed a reply refusting the allegations of the petitioners and raising certain preliminary objections. The respondents in their reply have disclosed that one of the main contentions of the department is that Section 370(2)(v) does not apply to the case of the company, petitioner No. 9. since it is not the sole and the dominant object in the Memorandum of Association of the company to finance industrial enterprises. According to the Department the said exemption is not applicable to the companies who are engaged in the business of general financing. It is contended on behalf of the Department in reply to Para-19 that the petitioners have contravened the provisions of Section 370 of the Companies Act, 1956 and that they are not covered by the exemption under Section 370 (2)(a)(v).
They have also contended that if is not open for the petitioners in a petition under Section 633(2) of the Act to contend that the provisions of Section 370 of the Companies Act 1956 are not applicable to the transactions in question.
I have heard the parties. The petitioners in support of the aforesaid contentions have also cited a number of rulings including Sri Krishna Parshad and Others v. Registrar of Companies Delhi and Haryana reported as 1978 Vol. 48 Company Cases, 397 and S.P Punj and others v. Registrar of Companies Delhi reported as (1991) 1 Company Law Journal 167 (Del). Counsel for the Department did not address any arguments or deal with the aforesaid authorities nor did he cite any authority wherein the term ‘loan’ had been equated with the term deposit.
The respondents have also contended that the petition is pre-mature as the authorities had not yet made up their mind to initiate prosecution and in the absence of initiation of any prosecution, the counsel for Department contended that no petition of the present nature could be filed. In reply to this my attention has been drawn to reply to para-19 of the petition wherein the respondents have clearly disclosed their mind that in their opinion the contravention of Section 370 of the Companies Act has taken place. If such conclusion is reached by the authorities it cannot be contended that the authorities are not contemplating any action against the petitioners for such alleged contravention, Action would normally and logically include initiation of prosecution. In these circumstances, it cannot be reasonably contended that the petitioners apprehension of any prosecution being launched is baseless. Therefore, this contention of the Department is not acceptable, because after initiation of the prosecution, application under Section 633(2) of the Companies Act cannot lie and this Court will have no jurisdiction to allow such an application. In that event an application under Section 633(1) only is contemplated. I find support for this view from an earlier pronouncement of this Court in the case of Shri Krishna Parshad and Others v. Registrar of Companies Delhi and Haryana reported as 1978 Vol 48 Compay cases, 397. The counsel for the Department has not pointed out any ruling to the contrary.
For the purposes of deciding the present application it is not necessary for me to express any opinion on the interpretation of or to go into the questions relating to the construction of Section 370 of the Companies Act. Such questions can be more appropriately dealt with by the Court which will be seized of the matter if any proceedings are initiated against the company after going into evidence and considering other material that may be placed before that Court.
For the purpose of present case, this Court is mainly concerned with the question as to whether the said Directors and the Secretary of the company who have petitioned to this Court have acted honestly and reasonably having regard to all the circumstances of the case and as to whether they in the given circumstances apprehend that any proceedings are likely to be brought against them in respect of the alleged default, breach of duty etc. As already held herein-above that, in the circumstances of the case, the apprehension of the said Directors cannot be stated to be baseless. I have also held above that the Directors acted with ordinary prudence and had taken reasonable care to ensure that there was no conscious violation of the provisions of law. In the circumstaness, I am of the considered opinion that petitioners 1 to 8 in C.P 211/90 and Mr. F.R Vevaina, petitioner No. 1 in C.P 13/91 have acted honestly and reasonably and that having regard to all the circumstances of the case they ought fairly to be excused and are hereby relieved from their liability in any action that may be brought by the Company Law Board or any other authority under the Companies Act, subject however to the condition that the said petitioners will render full co-operation to the authorities in investigation prior to the initiation of action against the company. As regards the company I am of the view that the protection under Section 633 of the Companies Act is not available to the company and is confined only to the officer/officers of the company. For that reason the petition to the extent seeking relief in favour of the company is dismissed.
The petition is disposed of in the above form with liberty to the parties to seek any further directions.