The Public Prosecutor vs Ananthakrishna Iyer

Byers, J.—This appeal is by the Provincial Government against the acquittal of the respondent by the Sessions Judge of Madura of an

offence punishable u/s 277-L (4) of the Indian Companies Act and of which he had been convicted by the Sub-Divisional First Class Magistrate of

Usilampatti in C.C. No. 195 of 1941 and sentenced to pay a fine of Rs. 1,000 with simple imprisonment for six months in default of payment.

The facts which are undisputed were these. The respondent is a director and also the secretary of a banking company known as the Swarnavalli

Bank, Limited, situated in Periakulam and according to its Articles of association a reserve fund had been created which amounted on the day of

the alleged occurrence to Rs. 20,302 and odd. This sum related to profits earned prior to 1934 and it is common ground that since then no profits

have been earned. Under the Indian Companies (Amendment) Act of 1936, the maintenance of a reserve fund became obligatory for all banking

companies and Clause (3) of Section 277-K of the Act regulates the investment of the reserve fund. Under the proviso to Section 277-K, Clause

(3), however, the mandatory provisions regarding investment did not apply to a banking company incorporated before the commencement of the

Amending Act until after the expiry, of two years. On 15th January, 1939, the company capitalized this reserve fund and distributed it amongst the

then shareholders in the form of shares in accordance with a resolution passed at an extraordinary general meeting of the company held on that

day. Subsequently the Assistant Registrar of Joint Stock Companies, Madura, proceeded against this respondent and other members of the

company for failure to invest the reserve fund in accordance with Section 277-K of the Act. The respondent was convicted by the learned Joint

Magistrate, but was acquitted by the learned Sessions Judge and it is against this order of acquittal that this appeal has been brought.

The view taken by the learned Sessions Judge was that the proviso to Clause (3) of the section applied also to clauses (1)and(2) so that the

provisions of the section did not affect the company until the i6th January, 1939. He took the new that the mandatory provisions of the section did

not apply to any reserve fund which was already in existence on 15th January, 1937, so that when its provisions did come into force on 16th

January, 1939, in relation to companies which were already in existence on 15th January, 1937, there was by then ho reserve fund in existence and

no offence had been committed by the respondent. As pointed out by the learned Public Prosecutor, this view regarding the operation of the

section in relation to a reserve fund already in existence when the Amending Act came into force ignores the clear wording of the section itself. The

proviso at the foot of Clause (3) of Section 277-K is a subsidiary clause to Clause (3) and applies only to sub-clause (3). The learned advocate

for the respondent has contended that the maintenance of a reserve fund was something new in the Indian Companies Act but this ignores

Regulation 99 of Table A in the first schedule of the Act, sample Articles which, u/s 17 of the Act, it is open to a company to adopt either in whole

or in part. Therefore the maintenance of a reserve fund was. nothing new under the Act and the effect of Section 277. K was to make a reserve

fund obligatory and provide for its investment. I am unable to see any force in the argument that Section 277-K did not apply to a reserve fund

which was already in existence and I agree with the contention of the learned Public Prosecutor that the use of the word ""maintain"" in Clause (1) of

the section means ""maintain intact and necessarily prohibits the utilization of that fund in any way other than m accordance with Clause (3) of the

section. Although Article 150 of the Company''s Articles of Association provided for the capitalisation of its reserve fund, this power automatically

came to an end with the Amending Act of 1936.

Regarding the view taken by the learned Sessions Judge that the provisions of the section came into operation so far as the respondent''s bank is

concerned only on 16th January, 1939, Section 5(3) of the General Clauses Act seems to have been ignored. It is in these words:

Unless the contrary is expressed, a central Act or Regulation shall be construed as coming into operation immediately on the expiration of the day

preceding its commencement.

The Amending Act of 1936 was expressed to come into force on the 15th January, 1937. so that u/s 5(3) of the General Glauses Act the

Amending Act was in force throughout the 15th January, 1937. Therefore, one year''s working of the Act expired on 14th January, 1938, and its

second year commenced on the expiry of that day. Thus the second year expired on the 14th January, 1939. Hence it will be seen that on the 15th

January, 1939, when the extraordinary general meeting was held, the Amending Act had already commenced its third year of life and the

provisions of sub-clause (3) were in operation throughout that day and the disposal of the reserve fund contrary to its provisions was thus an

offence pumshable u/s 277-L (4).

The final argument which was advanced before the learned Judge and which has been repeated in this Court is that the conduct of the

respondent has not been wilful but, as pointed out by the learned Magistrate, the correspondence between him and the Assistant Registrar of Joint

Stock Companies shows that the respondent not only knew what he was doing but that he intended to do it at all costs.

In the result, the appeal is allowed, the order of acquittal by the learned Sessions Judge is set aside and the conviction by the learned Joint

Magistrate is restored. The fine of Rs. 1,000 is undoubtedly heavy but the section contemplates a fine not exceeding Rs. 500 for every day during

which default continues and having regard to the fact that the respondent has been mainly instrumental in disposing of the large sum of Rs. 20,000

and odd which would otherwise be available for the shareholders or creditors in case of winding up proceedings, the sentence is not excessive and

is maintained together with the sentence of imprisonment in default of payment.