HIGH COURT OF CALCUTTA
Chandra Kumar
Dhanuka
v.
Registrar of
Companies,
SANJIB
BANERJEE, J.
C. P. NO. 428
OF 2006
AND C. A. NO.
651 OF 2006
July 13, 2007
Section 211, read with section 217 of the Companies Act, 1956 - Forms and contents of balance sheet and profit and loss accounts - Registrar of companies issued various show cause notices to petitioners - In some of notices violation complained of was section 211 (3A) read with one or other accounting standards whereas in other notices there were alleged violations of sections 211(1), 211(2) and 217 read with Schedule VI thereto - Petitioners filed instant petitions challenging validity of aforesaid show cause notices - It was noticed from records that various charges levelled against petitioners and in respect whereof they apprehended criminal proceedings being launched, were all matters of subjective assessment as to whether provisions of, primarily, accounting standards were complied with - None of charges related to any glaring omission and each charge, or denial thereof, was based on rival interpretations of same provisions - Whether accounting standards are, by their very nature, subjective and what is required to be seen is that whether, in relevant accounts, there was complete disregard by petitioners to accounting standards or whether treatment of relevant accounts was such as would be permissible on basis of a possible reading of accounting standards - Held, yes - Whether, since, in instant case it was subjective assessment of Registrar against subjective assessment of petitioners and explanations indicated a possible bona fide view that petitioners had taken, petitioners were to be relieved of all liabilities in respect of show cause notices being subject matter of instant proceedings - Held, yes
The Registrar
of Companies issued 12 show cause notices to the petitioners. In the first three notices the violation
complained of was under section 211(3A), read with one or other accounting
standard. The sixth notice alleged
violation of section 211(1) read with schedule VI thereto. The ninth notice complained of the
petitioners having violated section 211(2) read with part II of schedule VI
thereto. The eight and eleventh notices
complained of violation of section 217 in the matter as to the contents of the
director’s report. The twelfth notice alleged breach of sections 127 and
292. The petitioners had filed instant
petition challenging impugned notices.
The registrar contended that for the provisions of section 633(2) to
apply the petitioning officer must first concede as to default and then seek
pardon by demonstrating that he had acted honestly and reasonably.
Sub-section
(2) of section 633 confers on the High Court the same power as the Criminal
Court in granting relief to the petitioning officer who apprehends that
proceedings might be brought against him in respect of any negligence, default,
breach of duty, misfeasance or breach of trust.
Sub-section (2) in its closing part, identifies the criminal court and
provides that the High Court will have the same powers as the criminal court to
relieve a petitioning officer. The
expression “if it had been a Court before which a proceeding against that
officer…. had been brought under sub-section (1)” makes it clear that the High
Court in exercise of powers under sub-section (2) will have the same powers as
the Court receiving the criminal proceedings.
Such expression does not imply that the High Court will exercise only
such powers under sub-section (2) that the criminal court may, upon the
criminal court finding the charged officer guilty. For the criminal court to relieve the charged
officer, such Court may or may not conclude that the charged officer is liable. There can be no other meaning to the
expression “he is or may be liable” found in sub-section (1). If the criminal court can relieve a charged
officer without coming to any conclusion that the charged officer is actually
guilty or is liable for the offence, so can the High Court. In taking into account the surrounding
circumstances, the criminal court may form a tentative opinion, without a
full-fledged trial, as to whether there may not have been any offence at
all. In considering whether a charged
officer should be relieved, and before conducting the trial at which guilt may
be established, the surrounding circumstances that the criminal court can look
into would include a tentative view of the likelihood of the charge being
established. [
Nothing in
sub-section (2) limits the authority of the High Court thereunder to not
consider whether the petitioning officer against whom proceedings are
threatened has committed no offence at all.
If an officer has to admit first that there is default before invoking
sub-section (2) there would be serious prejudice occasioned to such officer in
the event the High Court did not exercise the discretion to relieve the
officer. In such event, when the
criminal proceedings are instituted by the Registrar, not only can such officer
no longer be relieved by the criminal court under sub-section (1) (as the High
Court has refused it), the default stands proven on admission. There is nothing so harsh as suggested by the
Registrar that appears in sub-section (2).
If an officer of a company petitions the High Court under sub-section
(2) to be relieved as there was no default committed by him as suggested by
the Registrar, merely because he refutes
the charge that may ultimately be brought against him, would not disentitle him
to invoke sub-section (2) or force him to await the rigours of criminal
proceedings before he can plead not guilty. [
In any event,
the various charges levelled against the petitioners and in respect whereof
they apprehended criminal proceedings being launched, were all matters of
subjective assessment as to whether the provisions of primarily, the accounting
standards were complied with. The
Registrar asserted that the accounting standards had been breached by the
petitioners. The petitioners submitted
that in their considered view, they had complied with the requirements of the
accounting standards. None of the
charges related to any glaring omission and each charge, or the denial thereof,
was based on the rival interpretations of the same provisions. accounting standards are, by their nature,
subjective and what is required to be seen is that whether, in the relevant
accounts, there was complete disregard by the petitioners to the accounting
standards or whether the treatment of the relevant accounts was such as would
be permissible on the basis of a possible reading of the accounting standards.
[
The first,
second and third show-cause notices alleged that the accounts of the company
for the relevant year did not comply with the accounting standards. Explanations had been given, and it
did not appear from such explanations that the petitioners had been
completely unmindful of complying with the accounting standards. It was the subjective assessment of the
Registrar against the subjective assessment of the petitioners and the explanations
indicated possible bona fide view that the petitioners had taken. [
The sixth and
ninth show-cause notices alleged that the balance-sheet and profit and loss
accounts of the company for the financial year ended 31-3-2005, did not give a
true and fair view of the state of affairs of the company or its profit and
loss position as at that date. Again, the explanations furnished
indicated a possible bona fide view taken by the petitioner and it did
not appear that the petitioners attempted to conceal anything or that the
petitioners attempted to actively present a different picture of either the
state of affairs of the company or its profit and loss position at the relevant
date other than what actually prevailed. [
Similarly, in
reply to the eighth, eleventh and twelfth show-cause notices the petitioners
had given sufficient explanations to justify the contents of the
directors’ report for the relevant year and as to why, in their view, there was
no violation of the provisions of sections 127 and 292. It might not be out of place to delve a bit
into the charges levelled in the eighth, eleventh and twelfth show-cause
notices. The eighth notice spoke of
non-compliance with rule 2(A) of the Companies (Disclosure of Particulars in
the Report of Board of Directors) Rules, 1988, in that energy consumption
figures relating to production had not been disclosed. But the eleventh show-cause notice complained
of a discrepancy in the energy consumption figures forming part of the
directors’ report and the power and fuel cost appearing in the profit and loss
account of the company. The assertion in
the eighth notice by the Registrar was belied by the complaint in the eleventh
notice. Implicit in the eleventh notice
was the acceptance of the energy consumption figures having been included in
the directors report. As to the
discrepancy between the figures in the directors’ report and the profit and
loss account, there was a simple explanation. The directors’ report required energy
consumption figures given for the process of production of a company. The energy consumed by a company at its
registered office was not for the purpose of the manufacturing activity or the
production process of the company. The
difference between the power and fuel cost appearing in the profit and loss
account and the energy consumption figure for production appearing in the
directors’ report, was account of the energy cost on accounts other than the
production activities of the company. [
By the twelfth
notice the Registrar complained that despite the assets of a transferor company
having merged into the subject company pursuant to a scheme of amalgamation,
there was a requirement under section 127 to file the appropriate form relating
to registration of charge under section 127.
Section 127 requires a company to deliver in the prescribed manner the
prescribed particulars of the charge, if such company acquires any property
which is subject to an existing charge that was required to be registered under
the Act. The transferor company had
furnished particulars of the existing charge and upon the merger of its assets,
under section 394, no further deed or act in respect of such merged asset was
required to be done. Pursuant to the
merger, the property vested in the transferee company and the benefit of the
particulars of the charge filed by the transferor company could be enjoyed by
the transferee company. The charge of violation of section 292 was equally
vague and the explanation furnished was adequate. [
On behalf of the
Registrar, the fourth, fifth, seventh
and tenth charges had been pressed with more enthusiasm than the
others. The company had a subsidiary by
the name of ‘M’ Ltd., and such company ran into rough weather, as it had a
number of tea companies, during the relevant period. The company had invested in shares in ‘M’
Ltd. at a high value and in the accounts for the financial year 2004-05 it
provided for the value of investments at cost though the net worth of the investee
company had by then been substantially eroded and the value of the
investment was then certainly and not
equivalent to the cost of acquisition of the shares. [
In schedule 6
to the balance-sheet, the company indicated the acquisition cost of ‘M’ Ltd.
shares as the value of such investment with a mention in schedule 17 that
long-term investments had been stated at cost as, according to the company,
diminution in value was temporary in nature.
Note 4 of schedule 17 was specifically highlighted in the auditor’s
report on the accounts and in keeping with section 227(3)(e), the
relevant note in the auditor’s report appeared in italics. According to the Registrar, the value of the
investment had greatly diminished and the assessment of the value at cost price
was nothing but an attempt to window-dress the accounts so that the diminution
in value would not detract from the profit and loss figures of the company for
the relevant financial year. Accounting
standards 13 (AS-13) was referred to and it was suggested on behalf of the
Registrar that the company could not have ignored the great fall in the value
of ‘M’ Ltd shares. [
The relevant
accounting standards permit long-term investments to be stated at cost provided
the diminution in value thereof is temporary in nature. The petitioners sought to justify their
conduct by referring to the subsequent improvement in the financial position of
‘M’ Ltd. This, the petitioners could not
do. If the value of ‘M’ Ltd shares had
further dipped, though it was an unquoted share, the petitioners would not urge
such a ground. The issue was whether it
was possible to take a view that the fall in value was of temporary
nature. As to what is temporary and what
is permanent or long-term is not defined in AS-13. Accounting standard No. 13 leaves latitude,
as all guidelines on accounts must, for a company and its officers in the
treatment of accounts. The vicissitudes
in the tea industry over the last decade are all too well known and it could
not be said with any degree of certainty that once booming and now doomed
industry was headed from deep red to bright black or from light red to deeper
red. [
In the same
set of accounts where the profit and loss figures are summarized in one page,
the notes and schedules all appear. If
the company or the petitioners had valued ‘M’ Ltd. shares at cost and had
completely omitted to indicate its then financial position, the Registrar would
have had better grounds to press the charge.
But the company and the petitioners indicated in note 4 of schedule 17 to
the accounts, the financial position of ‘M’ Ltd and the auditor, in keeping
with the amended provisions of section 227 had drawn the attention of anyone
reading the accounts to such note. At
the end of the day, it boiled down to whether the subjective assessment of the
petitioners that the diminution in the value of ‘M’ Ltd. shares was temporary,
was justified or not. There could not be
a black and white answer to this and neither would the subsequent improvement
in financial position of ‘M’ Ltd. exonerate the petitioners nor would the
further erosion of ‘M’ Ltd net worth have confirmed the charge brought. [
The
surrounding circumstances, the indeterminate connotation of the word
“temporary” and the specific inclusion of the relevant fact in schedule 17,
would entitle the petitioner to be relieved, on terms, of the charge that might
have been brought against them by the Registrar without going into the question
as to whether there was any default on their part. The ‘M’ Ltd. matters were covered by the
fourth, seventh and tenth show-cause notices. [
The fifth
show-cause notice complained of violation of section 205(2) and Schedule XIV
thereto in the company having charged full depreciation in the relevant year in
respect of assets each costing below Rs. 5,000 to the company. The company referred to Note 8 under Schedule
XIV to justify the writing off of the full value of the relevant assets during
the relevant financial year. [
Matters
relating to accounts are specialized business and the Registrar had not been
able to demonstrate why reliance on Note 8 of Schedule XIV was misplaced. It was not necessary for the petitioners in
proceedings of the instant kind to conclusively establish that there was no
departure from the guidelines found in the accounting standards. To repeat, such fiscal matters are always
open to interpretation, divergence of opinion and never free from doubt. The petitioners and the auditors of the
company had read Note 8 to justify charging of depreciation in the manner it
had been done during the relevant financial year and there did not appear to be
any palpable lack of bona fides on the petitioners’ part on such score. [
In respect of
the two major heads of charge seriously pressed by the Registrar, the
petitioners appeared to have acted honestly on their interpretation of AS-13
and Note 8 of Schedule XIV. In addition,
the petitioners had specifically mentioned such matters in Note 4 and Note 1(d)
of schedule 17 to the accounts for the relevant year. The petitioners had acted reasonably not only
in complying with the accepted norms but in specifically drawing the attention
of whoever cared to read the accounts to such matters. Even if there were any violation on the part
of the petitioners, and of which there was serious doubt, the petitioners ought
fairly to be excused. [
The
petitioners were relieved of all liabilities in respect of the 12 show-cause
notices being the subject-matter of these proceedings. [
The petition
was accordingly allowed. [