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Judgment
G.R. Majithia, J.—Petition u/s 633(2) of the Companies Act, has been moved by Messrs Prestolite of India Ltd., through its Managing Director and Directors, seeking the following reliefs:-
(a) That the petitioners be excused and relieved from all proceedings Criminal in nature including that of FIR No. 143 of 1981, F.I.R. No 134 of 1982 and F.I.R. No. 39 of 1983 in respect of the alleged non deposit of the contributions towards the employees shares and stay further proceedings pending in the court of Miss Raj Rani, Judicial Magistrate 1st Class, Faridabad in respect of the said FIR;
(b) stop all other proceedings pending with the Collector, Faridabad for recovery of employers shares of provident funds ESI and also stay further proceedings at the hands of Regional/Director, Employees State Insurance Corporation for the alleged contravention of ESI Act and the scheme framed thereunder and or any contravention of the income Tax Act with reference to the tax deducted at source in respect of the company and its employees.
(c) relieve the petitioners from all pending actions which are likely to be converted into criminal prosecutions and or pass such other orders as may be deemed fit under the facts and circumstances of the case after giving notice to the Registrar of Company as required under law.
The facts briefly stated in the petition are that the Company was originally started with technical collaboration of Messrs Prestolite International, Chio, U.S.A. in the year 1962 by Maharaja Patiala and since then the Company has been regularly engaged in the manufacture of electrical automobile and electrical part component. It is a sapplier of electrical automobile components to all the manufacturers of automobiles such as:-
(i) Hindustan Motors Ltd.;
(ii) Bajaj Auto Ltd.;
(iii) Premier Automobiles Ltd.;
(iv) Mahindra & Mahindra Ltd.;
(v) Automobile Products of India Ltd.;
(vi) Enfiled India Ltd.;
(vii) Punjab Motors Tractors Ltd.
It is also catering to the requirement of about 1400 direct demanding officers, the Army Base Workshops, situated in various parts of the country. It is also registered with the Director General, Supplies & Disposal for the annual rate contract. The present market value of the assets of the Company including the value of the land and buildings would be approximately Rs. 6.25 crores. It had taken financial assistance from the Union Bank of India through its Branch situate at Faridabad. The Company had been doing regular business till 1977. In June, 1977, a theft was detected in the pledged godown of the Company under the lock and key of Union Bank of India and the goods worth Rs.5 lakhs were stolen from there. An F.I.R. was lodged with the local police bearing No. 216 of 1977, and during investigation it was revealed that the then Godown Keeper of the Union Bank of India was involved with one foreman of the Company, namely, Harnam Singh, and during the course of investigation, the godown keeper and Harnam Singh were arrested. On June 29, 1977, the local police brought Harnam Singh in the factory premises for spot verification and when he was passing through the electo-platting department he quickly swallowed cynide and he died instantaneously. There was, commotion in the workers of the Company. They went on lightening strike. This was followed by a general strike in the entire industrial complex of Faridabad. It was rumoured that the officials of the Company had beaten said Harnam Singh to death. In the spree of false rumours, a large number of miscreants including outsiders and antisocial elements set the company building at fire and the Administrative Block of the Company was completely got damaged on account of the fire. The record was completely burnt. The Government of Haryana appointed a Commission of enquiry headedgby Mr. Justice C.G. Suri, who held enquiry in the matter for a period on one year and the workers also attended the hearing and they would not take interest in the production work of the Company. The Commission ultimately held that Harnam Singh had died on account of taking a poisonous substance in the factory premises and none of the officials of the Company were involved or were instrumental in causing his death.
The Commission also found that goods worth Rs. 5 lakhs were stolen from the pledge godown of the Company, under the lock and key of the Union Bank of India. On the basis of the report of the Commission, the Company filed a suit for recovery of Rs. 5 Lakhs against Union Bank of India and also impleaded the Insurance Company as one of the parties. The, action of the Company was taken with a pinch of salt by the Union Bank of India and they created obstacles in the smooth working of the Company. They placed liquidity constraints by squeezing the working capital and caused hardships in not presenting the documents of title negotiated through the Bank to the third parties for realization of the amounts as per the instructions of the Company. Extra-ordinary margins, unheard of in banking history were imposed by the Bank on the Company so much so that on an average sale of goods worth Rs. 100/-, the bank would retain margin of approximately 35 to 45% which gradually resulted into choking of the liquidity assets of the Company. The bank stopped releasing the goods lying in the godown at their pledged value and started making flimsy demands of interest on the pledged value of the goods in the year 1979.
The Company''s imported and other raw material procured for the manufacture of automobile parts valuing Rs. 70 Lakhs was still lying in the godowns of the Bank, but the Bank stopped releasing the goods which created impediments in the normal smooth production of the Company. The Company protested against the abnormal behaviour of the Bank. As a measure of counter blast, the Bank filed suit against the Company for recovery of Rs. 2,27,58,343.70 paisa, and the suit is pending in the Court of Subordinate Judge 1st Class, Faridabad. The said Bank also got a suit filed by the consortium New Bank of India for recovery of Rs. 65,000,00/- and the said suit is also pending in the Court of Senior Sub Judge, Faridabad. The banks totally stopped their operations with the Company since the year 1980. There was a complete chocking of the financial assistance from the two Banks, the Company faced difficulties in repayments to other unsecured creditors some statutory dues in the form of provident funds (employees'' and employer''s shares) payable under the Provident Funds and Miscellaneous Provisions Act could not be deposited despite using due diligence, care and caution on the part of the Managing Director, Directors and officials of the Company.
The Provident Funds Inspector from the office of the Regional Provident Funds Commissioner filed a complaint under Sections 406 and 409 of the Indian Penal Code against the Company for non-depositing contributions towards employees'' shares for the period November, 1980 to June, 1981 approximately amounting to Rs. 72.000/-. Another complaint was filed for non-depositing of the employees'' sharers amounting to Rs. 1,00.168/- F.I.Rs. No. (sic) of 1981 and 134 of 1982 were registered at Police Station, Old Faridabad. The local police sought non bailable warrants of arrest against all the Directors of the Company including the official nominee, namely, Dr. K.S. Balain and two foreign Directors namely Mr. Karion N. Anthonini and Mr. Walter F Leach. The Directors applied for anticipatory bail which was declined by the Sessions Judge, Faridabad, and by the High Court. Ultimately, they surrendered before the Court of Judicial Magistrate, Faridabad, who enlarged them on ball.
The workers resorted to illegal strike during the month of May, 1982, which lasted upto June. 1982, and during his period, the workers did not earn any wages. The matter has also been referred to the Industrial Tribunal, Haryana, for adjudication it was also alleged that the Collector, Faridabad is constantly threatening the Directors and officials of the company to cause arrest and detention for non-deposit of employers shares of Provident Fund, E.S.I. and other sundry dues. It was also pleaded that the Registrar of Companies has also launched criminal prosecutions against the Company as well as its Directors and officials on the ground that the company has not filed the annual returns The failure to file the annual returns was attributed to the failure of the Union Bank of India and New Bank of India to supply statement of accounts to the Company. The accounts could not be squarred up and balance-sheets could not be prepared beyond the year 1980 and, thus, could not be filed before the Registrar of Companies.
The Company was facing difficulties, but since it claims special expertise in the filed of automobile and electrical components, it has vast scope in the future years. The company can have a minimum turn over of Rs. 5 crores per annum considering the pending orders and in view of the substantial expansion programme of the automobile industries during the 6th Five Year Plan of the Government of India. In these circumstances, the indulgence of this Court was sought for staying the proceedings referred to above.
Written statements have been filed on behalf of respondents Nos 1, 2, 3 and 4. Respondent No. 1 took preliminary objection to the maintainability of the petition on the ground that no relief can be granted with regard to the proceedings which have already been launched against the petitioner and are pending adjudication either in the Court of Chief Judicial Magistrate or Judicial Magistrate, Faridabad. It was further pleaded that the past performance of the Company for non compliance with the provisions of the Companies Act, for not filing the statutory returns, such as balance sheets and annual returns disentitle them from the discretionary relief of this Court. The following complaints for delayed filing of balance-sheets have already filed:-
Sr. No.
Complaint/Prosecution
For Balance Sheet as at
In the Court
1.
Under Section 210
30.6.1979
Chief Judicial Magistrate, Faridabad
2.
-do-
30.6.1980
-do-
3.
-do-
30.6.1981
-do-
Respondent No. 3 in the written statement pleaded that the Bank had filed 32 cases in the various Courts at Chandigarh, Faridabad and Calcutta against the petitioner Company for recovery of Rs. 22 Crores and 25 Laks. It pleaded that the applicant Company deducted large sum of money from the wages of its employees. The money was not deposited in accordance with law and was misappropriated. Cases were registared under sections 406 and 409 of Indian Penal Code against the Company. They gave the descriptions of the F.I.Rs. which are as under:-
F.I.R. No.
Period
Amount
1.
143/81
11/80 to 6/82
Rs. 72916.50
2.
134/82
7/81 to 4/81
Rs. 100168.00
3.
39/83
5/82 to 7/82
Rs. 23780.75
4.
97/83
8/82 to 12/82
Rs. 40217.25
Investigation was under progress in the F.I.Rs. referred to above. It also pleaded that 57 complaints have been filed against the petitioner Company u/s 14 of the Employees Provident Funds and Miscellaneous Provisions Act, 1952, for non deposit of provident fund due payable by it. The Company and the Directors were named as accused in the complaints and they have been summoned.
Respondent No. 4 in their written statement pleaded that the petitioner defaulted in the payment of contributions payable under the Employees State Insurance Act and the Employees State Insurance Corporation launched three prosecutions against Shri Surjit Singh Sahni, Managing Director of the Company u/s 85 of Employees State Insurance Act and these were pending in the Court of Chief Judicial Magistrate. Chandigarh relating to the contribution for the period January, 1981 to March, 1981, and in the Court of Chief Judicial Magistrate, Faridabad relating to the periods January, 1982 to March, 1982, respectively, and the accused have been summoned. It was further pleaded that the Corporation had levied damages u/s 85-B of Employees State Insurance Act and issued recovery certificates to the Collector for recovery of Rs. 3,66,017.40 for the periods November, 1975 to March, 1982. The petitioner Company filed Special Leave Application in the Supreme Court of India against the levy of damages amounting to Rs. 51,857 40 in respect of the period July, 1977 to March, 1978, and the Hon''ble Supreme Court allowed the stay of recovery of the amount on the condition that the company deqosits Rs. 30,000/- in the Court, but the amount was not deposited.
From the pleadings of the parties, the following issues were framed:-
Whether the present petition is maintainable qua proceedings already initiated in the criminal Courts as mentioned in paragraphs 1 and 2 of the preliminary objections in the written statement of respondent No. 1; paragraph 14 of the written statement of respondent No. 3; and paragraph 5 of the written statement of respondent No. 4? O.P.P.
Whether the petitioners have reason to apprehend that they are going to be prosecuted further? O.P.P.
If issue No.2 is decided in favour of the petitioners, whether the petition qua such proceedings is not maintainable? O.P.P.
Whether the petitioners have acted honestly and reasonably in the discharge of their duties? If so, with what effect? O.P.P.
Relief.
The petitioner led evidence and in rebuttal Deputy Insurance Commissioner, E.S.I. Corporation, Delhi appeared as RW1 and Shri Manohar Lal, Provident Fund inspector, Haryana, was examined as RW2. RW3 Shri V.N. Sharma appeared for Registrar of Companies. Shri Surjit Singh appeared as PW2 and practically reiterated the facts stated in the petition.
RW 2 stated that 58 complaints were filed against the petitioner Company u/s 14 of the Employees Provident Fund Act, 1952. Out of these, 17 were dismissed against which revision petitions are pending in the High Court and the rest are pending at the trial stage. Out of 57 complaints, 9 were filed after the institution of the instant petition and the rest prior thereto.
RW 3 Shri V.N. Sharma, Technical Assistant in the office of Registrar of Companies, New Delhi stated that Registrar of Companies had already filed 4 criminal complaints against the Directors of the petitioner Company and these complaints were filed u/s 210 of the Companies Act for non-adoption of the annual balance sheet Balance sheet has been filed relating to the year 1979-80. No balance sheets have been filed relating to the years thereafter. All the complaints were filed before the institution of the present petition except the one which was filed on December 22, 1983, and the complaints are still pending.
I have heard the learned counsel for the parties.
Issues No. 1 to 4.
Issues No. 1 to 4 will be discussed by me together.
Section 633 of the Companies Act (for short referred to as the Act) invoked by the petitioners runs thus:-
633(1). If in any proceedings for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company, it appears to the court hearing the case that he is or may be liable in respect of the negligence, default breach of duty, misfeasance or breach of trust, but that he has acted honestly and reason-ably, and that having regard to all the circumstances off the case, including those connected with his appointment, he ought fairly to be excused the court may relieve him, either wholly or partly, from his liability on such terms as it may think fit:
Provided that in a criminal proceeding under this sub-section, the court shall have no power to grant relief from any civil liability which may attach to an officer in respect of such negligence, default, breach of duty, misfeasance or breach of trust.
(2) Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance of breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a court before which a proceeding against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1).
(3) No court shall grant any relief to any officer under sub-section (1) or sub-section (2) unless it has, by notice served in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted.
A perusal of the various provisions of the Act reveals that it imposes a number of obligations upon officers of the Company. It also makes provisions for initiating, before a court of law, proceedings against the officers of the company for negligence, default, breach of duty, misfeasance or breach of trust. The object underlying Section 633 of the Act obviously is to avoid hardship to officers of the company in deserving cases and to relieve them of their liability in cases where they are technically guilty if they are able to convince the court that they had been acting honestly and reasonably and that having regarding to the circumstances of the case, they, in all fairness, ought to be excused from the charge or charges made against them. This section enables the concerned officer to apply to the court for making an order relieving him of the liability incurred by him either after the proceedings have commenced against him or by way of preventive action before commencement of the proceedings. Whereas, according to sub-section (1) of Section 633, in case where the proceedings have commenced, the application for relief in this regard has to be made to, and is to be considered by, the court before which the proceedings are pending, sub-section (2) enables the High Court to exercise such jurisdiction in cases where the proceedings are going to be, or are likely to be initiated. This section does not empower the High Court to grant any relief to any officer of the company in case where the proceedings against an officer have already been initiated and are pending
It is not disputed that the applicants are under an obligation to call a general meeting in every calendar year and they were under a statutory duty to lay the balance-sheet and the profit and loss account of the company before that meeting. The statute further provides that the company and its directors shall forward copies of the balance-sheet and the profit and loss account laid before the general meeting to the Registrar of Companies within the stated time. Failure to do either has been made punishable and is treated as a company offence No reasonable explanation has been furnished for rot holding the annual general meeting of the company. The averment made in the petition that the Bank will not furnish them with a statement of accounts is no ground for not holding the meeting of the company. Even if that so was, it could not have prevented the petitioners from inspecting the documents with the permission of the Court. I am not satisfied that the petitioners took steps to get the balance sheet and profit and loss statement prepared as required by the Companies Act. The duties attaching to the office of director of a company required him to call an annual general meeting and to see that the requisite balance-sheet and profit and less account are prepared and, after being laid before the general meeting, they are forwarded to the Registrar in accordance with law. The petitioners were, thus, liable for not complying with the mandatory provisions of the Companies Act, and they were at fault.
A further question that requires to be considered in this connection is whether the court ought to excuse them from their default in exercise of its power u/s 633 of the Act. The Court has discretion to relive an officer of the company from liability if it is satisfied that he has acted honestly and reasonably. The failure of the applicants to hold the general meeting and to file balance-sheet and the profit and loss account with the Registrar within the prescribed time, were acts done in violation of their statutory duties as directors. They could not, therefore, be said to have acted honestly, that is, bona fide or reasonably, which is the same thing as acting with due care and diligence expected of a person holding a responsible office.
As regards the provident fund, and the Employees State Insurance Corporation contribution, financial stringency was no ground for not complying with the provisions of the Provident Fund Act, which was a social legislation. In this connection, it will be useful to refer to the decision of the Supreme Court in Organo Chemical Industries v. Union of India AIR 1979 S.C. 1883. In this case, there was a challenge to the provisions of section 14-B of the Provident Funds Act which authorised the Central Provident Fund Commissioner or such other officer as might be authorised by the Central Government to recover damages not exceeding the amount of arrears where the employer made default in payment of any contribution under the Provident Funds Act. The Court repelled the contention that the provisions of section 14-B were unconstitutional. The Court observed that the reason for enacting section 14-B was that employers be deterred and thwarted from making defaults in carrying out statutory obligations to make payments to the provident fund and that the object and purpose of the section was to authorise the Regional Provident Fund Commissioner to impose exemplary and punitive damages and thereby to prevent employers from making defaults My Lord Justice Krishna Iyer dealt with the scheme of the Provident Funds Act and observed as under:
Briefly and broadly and lopping off aspects unnecessary for this case, the scheme of the Act is that each employer and employee in every ''establishment'' falling within the Act do contribute into a statutory fund a title, viz., 6 1/4% of the wages to swell into a large fund wherewith the worker who toil to produce the nation''s wealth during their physically fit span of life may be provided some retrial benefit which will ''keep the pot boiling'' and some source wherefrom loans, to face unforesean needs may be obtained. This social security measure is a human homage the State pays to articles 39 and 41 of the Constitution. The viability of the project depends on the employer duly deducting the workers'' contribution from their wages, adding his own little and promptly depositing the mickle into the chest constituted by the. Act The mechanics of the system will suffer paralysis if the employer fails to perform his function. The dynamics of this beneficial statute derives its locomotive powers from the funds regularly flowing into the statutory till.
The pragmatics of the situation is that if the stream of contributions were frozen by employers defaults after due deduction from the wages and diversion for their own purposes, the scheme would be demnified by traumatic starvation of the fund, public frustration from the failure of the project and psychic demoralisation of the miserable beneficiaries when they find their wages deducted and the employer get away with it even after default in his own contribution and malversation of the workers'' share.
It was further observed:
The measure was enacted for the support of a weaker sector, viz., the working class during the superannuated winter of their life. The financial reservoir for the distribution of benefits is filled by the employer collecting, by deducting from the workers'' wages, completing it with his own equal share and duly making over the gross sums to the fund. If the employer neglects to remit or diverts the money for alien purposes the fund gets dry and the retirees are denied the meagre support when they most need it. This prospect of destitution demoralises the working class and frustrates the hopes of the community itself. The whole project gets stultified if employers thwart contributory responsibility and this wider fall-out must colour the concept of ''damages'' when the court seeks to define its content in the special setting of the Act. For judicial interpretation must further the purpose of a statute. In a different context and considering a fundamental treaty, the European Court of Human Rights, in the Sunday Times case, observed:
The Court must interpret them in a way that reconciles them as far as possible and it most appropriate in order to realise the aim and achieve the object of the treaty.
The only ground for non-deposit of the statutory funds/dues is attributed to financial stringency. Financial stringency per se cannot be a ground for non-deposit of statutory dues. This could be so particularly when it comes to deposit of the contributions of the employees which had been deducted from their wages Non deposit of the contributions of provident fund as well as Employees State Insurance Corporation in respect of each employee every month is a distinct default in itself and so also non-deposit of the T.D.S. from the salary of an employee every month is a distinct default. The petitioners, will, therefore, have to explain with regard to each and every default if they have acted reasonably and honestly, and a general statement that the company is passing through financial crisis or is a sick industry is certainly no answer The Court has to relieve the petitioners in respect of each default on its satisfaction that the petitioners acted honestly and reasonably The petitioners gave no particulars and led no evidence for the court to relieve them of the liability incurred thereby. Further, there are different considerations for the defaults committed under different Acts.
Provisions of sub-section (2) of section 633 of the Act are exceptional as these relieve an officer of the company from the consequences of a default, whether penal or otherwise, before he is asked to face the proceedings of either levying penalty or of prosecution. The Court has, therefore, to be cautious in its approach before exercising discretion in favour of the delinquent officer though, no doubt, the discretion has to be a judicial one. Before exercising any such discretion, the court has to be reasonably satisfied that the requirements of section have been met. In this case, I do not think that this has been done.
Consequently, I decide these issues against the petitioners.
Relief.
In view of my above findings, this petition is dismissed. I, however, leave the parties to bear their own costs.