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Title : Bhupinder Kaur Singh and Others v Registrar of Companies
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Delhi High Court

25 January 2007

Bhupinder Kaur Singh and Others

v
Registrar of Companies
Case No : Cr.M.M. No. 3241 of 2002 & Cr.M.M. No. 3242 of 2002

Bench : A. K. SIKRI

Citation : 2007 Indlaw DEL 1272, [2010] 159 Comp Cas 92, 2007 (142) DLT 277

Summary : Criminal - Practice & Procedure - Corporate - Code of Criminal Procedure, 1973, ss. 468(2),
482 - Companies Act, 1956, ss. 62, 68, 628 - Public issue - Summons - Misutilisation of Funds - Lack of
evidence - Registrar of Companies/ROC filed two complaints against petitioners impleading them as
accused persons - Alleged that accused persons promoted company raised public issue - Prospectus was
signed by petitioners - Cleary mentioned in prospectus that money collected by way of public issue
should be utilized and invested in leasing business which was going to be main activity of company -
Funds collected by way of public issue were not utilized in leasing business as stated or promised in
prospectus - Petitioners made false statement in prospectus which was punishable u/ss.63 and 628 of
Act - Instead of utilizing money in leasing business, Company made huge investments in unproductive
shares and securities and mis utilized/siphoned funds by failing to utilize same as promised in
prospectus - Summoning orders had been passed - Petitioners challenged summoning orders - Hence,
instant petitions - Whether criminal complaint u/s.62 of Act filed by ROC would be maintainable - Held,
defence of petitioners were petitioner No.1 was 65 years of age and petitioner No.3 was 83 years old
were not directors of company at relevant time was justified - Petitioners were not directors when funds
in question were allegedly utilized for purpose other than that mentioned in prospectus, petitioners could
not liable - By no stretch of imagination could not be treated as criminal liability - Criminal complaint
u/s. 62 of Act by ROC would not be maintainable - No doubt penalty for fraudulently inducing persons to
invest money, which was prescribed u/s.68 of Act - Complaint had failed to proved involvement of
petitioners in utilization of fund - Any complaint was not received from any persons alleging that they
had suffered any loss - Provisions of ss. 62 and 68 of Act were not attracted on basis of allegations made
in complaint - Summons order was issued in criminal complaint was quashed - No merit in complaint
was rejected - Petitions disposed of.

The Judgment was delivered by : HON'BLE JUSTICE A. K. SIKRI

1. Both these petitions raise identical issues and, therefore, are heard and decided by this common
judgment.

2. The Registrar of Companies (ROC) has filed two complaints against the petitioners herein
impleading them as accused persons. Complaint No. 698/2002 is filed under Sections 63 and 628 of
the Companies Act, 1956 (for short, 'the Act') alleging that the accused persons in the year 1996
promoted a company, namely 'Tactful Investments Ltd.' and raised public issue. In the prospectus,
which was signed by the petitioners, it was mentioned that the money collected by way of public
issue shall be utilized and invested in leasing business, which was going to be the main activity of
the company. However, the funds collected by way of public issue were not utilized in the leasing
business as stated or promised in the prospectus and, thus, the petitioners had made false

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statement in the prospectus, which act was punishable under Sections 63 and 628 of the Act. The
public issue was of 24, 00, 000 equity shares of Rs. 10/- each aggregating to Rs. 240 lacs and the
following objects were mentioned in the prospectus for this public issue:

"(a) To augment the long terms resources for the working capital requirement for leasing and
investments.

(b) To get shares of the company listed on Stock Exchange; and

(c) To meet the expenses of the public issue."

Thus, primarily the purpose was to utilize the funds collected for leasing and investment. Instead of
utilizing the money in leasing business, the company made huge investments in unproductive shares
and securities amounting to Rs. 3.13 crores and Rs. 7.18 crores during 1995-96 and 1996- 97
respectively, which was much beyond the limit of Rs. 90 lacs and Rs.100 lacs set out for this purpose
in the prospectus. This investment remained blocked till 31.3.2001 and yielded very meagre income
and hardly any return by way of dividends. The company did not undertake any leasing and
consultancy activities as promised in the prospectus. In this manner, funds were not utilized for the
purpose mentioned in the prospectus and the company also failed to achieve the profitability
projections as under:

PROJECTED ACTUAL

(in lacs) (in lacs)

Total Income

95-96 28.42 4.86

96-97 208.38 39.00

97-98 378.71 1.01

Profit after Tax

95-96 4.01 0.032

96-97 60.20 00.256

97-98 78.31 (---.271)

Even for subsequent years, namely 1998-99, 1999-2000 and 2000-2001, the company managed to
earn meagre profit and on this basis it is alleged in the complaint that the company
misutilized/siphoned the funds by failing to utilize the same as promised in the prospectus.

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3. Insofar as the complaint bearing No. 699/2002 filed under Sections 62 and 68 of the Act is
concerned, it is founded on the same allegations. It is stated in this complaint that the company is,
thus, liable for penalty under Sections 62 and 68 of the Act on two counts, namely (a) for paying
compensation to every person who subscribed any shares or debentures on the faith of prospectus
and suffered losses; and (b) for fraudulently inducing persons to invest money.

In both these complaint cases, summoning orders have been passed and challenging those
summoning orders the present petitions are filed.

4. The grounds for challenge, which are common in both these petitions, may first be noted:

(a) it is stated that the petitioner No. 1 is 65 years of age and the petitioner No. 3 is 83 years old,
who have been named as accused persons in the complaint knowing fully well that they were not the
directors of the company at the relevant time when the funds were to be utilized by the company. It
is stated that on 1.7.1996 the petitioners resigned as directors and Form-32 was submitted with the
ROC on 9.9.1996. Therefore, the petitioners were not the directors when the funds in question were
allegedly utilized for a purpose other than that mentioned in the prospectus and, therefore, cannot
be held liable;

(b) as per the requirement the petitioners signed the prospectus wherein all the details pertaining to
the promoters and risk factors were indicated. It was specifically stated in the prospectus that the
petitioners, who were promoters, did not have any experience in leasing business, which would be
the main activity of the company with many other facts as to the risks involved. It was also stated
that the petitioners as promoters did not make substantial investments in the share capital, which
fact was specifically stated in the prospectus of the company and as the petitioners are not having
major share holding, they were forced to resign and, therefore, have no control over the business of
the company;

(c) it is also contended that leasing was one of the object mentioned in the prospectus and the other
business object was investment. The company had admittedly utilized the funds in the investment
business and, therefore, there was no misutilization of funds as the funds were invested in one of
the activities mentioned in the prospectus;

(d) it is also submitted that the non-commencement of the leasing business cannot amount to
making of any false statement in the prospectus, amounting to inducement or misleading any
person especially when in the prospectus it was specifically mentioned that 'the proposed
deployment of funds is merely indicative and the company will review the same keeping in view the
market opportunities and the interest of the shareholders';

(e) it is also alleged that the complaints filed by the respondent are time barred. Prospectus was
signed in November 1995 for the issue which was opened on 29.1.1996 and closed on 8.2.1996.
However, the complaint was filed six years thereafter, i.e. in the year 2002, which was barred by
limitation as per Section 468(2), Cr.P.C. as the limitation period was three years.

5. In addition, in respect of the complaint bearing No. 698/2002 under Sections 63 and 628 of the
Act, it is contended that Section 63 of the Act envisages that where a prospectus issued includes any
untrue statement, every person who authorised the issue of the prospectus shall be punished as
provided under the said section. However, in the entire complaint there is no averment as to which

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statement of the petitioners in the prospectus is untrue. Further, the statement which is alleged to
be false has to be a statement, which on the date of signing the prospectus was a false statement to
the knowledge of the petitioners. However, no such averment has been made in the complaint. On
the basis of the alleged misutilization of funds that took place on subsequent dates, it cannot be
alleged that there was a false statement in the prospectus and complaint under Sections 63 and 628
of the Act was prima facie not maintainable.

6. Insofar as the complaint bearing No. 699/2002 under Sections 62 and 68 of the Act is concerned,
in addition to the common submissions noted above, further specific contentions raised are the
following:

(a) under Section 62 of the Act it is the shareholder or debenture holder who is entitled to institute a
civil action if aggrieved by any act of the directors as stated therein. Further, it prescribes only a civil
action and no criminal action can be instituted;

(b) likewise, Section 68 of the Act stipulates that where any person either knowingly or recklessly
makes a statement, promise or forecast which is false or thereby induces any person to invest in the
company shall be punished as provided in this Section. In the entire complaint there is no specific
averment stating that any particular statement in the prospectus is false or untrue or which
statement in the prospectus had induced the public to invest or whether any shareholder had made
a complaint.

7. Learned Counsel for the complainant, on the other hand, submitted that the facts mentioned and
allegation made in the complaints prima facie made out the offence, the violation whereof was
imputed against the petitioners. It was submitted that statement in the prospectus was that the
funds were proposed to be deployed for leasing business and for making investments and further for
purchasing miscellaneous fixed assets for which Rs.206 lacs and Rs.10 lacs respectively were
earmarked in the prospectus for the year 1995-96. However, contrary thereto, the company made
huge investment in unproductive shares and securities amounting to Rs. 3.13 crores and Rs. 7.18
crores during 1995-96 and 1996-97 respectively, much beyond the limit of Rs. 90 lacs and Rs. 100
lacs set out for this purpose in the prospectus. It resulted in much less profitability than projected. It
was submitted that whether false statement is made in the prospectus or not could be proved only
from the utilization of the funds which would naturally happen on a subsequent date. It is only when
the funds in the subsequent years were utilized for a purpose other than that promised in the
prospectus that it could be inferred that the statement in the prospectus was false and had the
effect of misrepresentation. Reliance was placed on the judgment of the Supreme Court in S.R.
Nayak & Anr., etc. v. Union of India & Ors., 1991 Indlaw SC 616. It was further submitted that once
it is prima facie established that there was a misrepresentation in the prospectus, all the petitioners
being signatory to the said prospectus were liable for prosecution and their subsequent retirement
would be of no effect. It was further submitted that what was stated by the petitioners could be a
matter of defence, which was to be led at the stage of trial, and the Court could not consider such
aspects in a petition under Section 482, Cr.P.C.

8. Countering the arguments of limitation raised by the petitioners, it was submitted that the
complainant received communication from the Department of Company Affairs vide letter dated
13.3.2002 permitting the respondent/complainant to launch complaint against the petitioners.
Therefore, show-cause notice dated 24.2.2002 was issued and, thereafter, complaint filed. The
complaint was, thus, not time-barred as it was filed immediately on receiving the permission from
the Department of Company Affairs. It was also submitted that in a case under Section 473 of the
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Cr.P.C. the Courts had power to take cognizance of an offence even after the expiry of the limitation
period if the delay is properly explained. Since the offence came to the notice only afterwards,
limitation was to be counted from that date, as held by the Supreme Court in Registrar of Companies
v. Rajshree Sugar and Chemicals Ltd. & Ors., IV 2000 SLT 666 =III 2000 CCR 21 )= 2000 (6) SCC
138 and by the Karnataka High Court in the case of The Registrar of Companies in Karnataka v.
Fairgrowth Agencies Limited, MANU/KA/8084/2006.

9. I have considered the submissions of both the parties. Let us first understand the genesis of the
complaint. Allegation is that there is a mis-statement in the prospectus issued by the petitioners
while raising public issue inasmuch as it was stated in the objects of the said issue that the funds
raised would be utilized primarily for leasing business. Insofar as investments and purchasing
miscellaneous fixed assets is concerned, only a sum of Rs. 206 lacs and Rs. 10 lacs respectively
were earmarked in the prospectus for the year 1995-96. It is sought to be contended that the funds
were ultimately utilized by making huge investments in unproductive shares and securities and as
the funds were utilized for a purpose other than what was stated in the prospectus, it should be
inferred that statement made in the prospectus was false. The case is, therefore, not for misutilizing
the funds. The case set up is that by the manner in which the funds were utilized, which was not the
same as that stated in the prospectus, it is clear that the statement made in the prospectus was not
true as there was no intention to utilize the funds for the purpose stated in the prospectus. It was
contended by learned Counsel for the complainant that the allegation that mis-statement was made
in the prospectus could be proved only by showing that the funds were utilized for some other
purpose, which event would naturally take place in subsequent years. The investments were made in
unproductive shares and securities amounting to Rs. 3.13 crores and Rs. 7.18 crores during 1995-96
and 1996-97 respectively, which remained blocked till 31.3.2001. Once we look into the complaint
from this angle, as rightly projected by learned Counsel for the complainant, most of the arguments
of the petitioners stand answered. Learned Counsel for the complainant is right in his submission
that the complainant can prove mis-statement in the prospectus only by showing that the funds
were not utilized for the purpose stated in the prospectus and this can be done only when these
funds were utilized in the subsequent years. Thus, looking the matter from this angle, one can
clearly come to the conclusion that a case has been made out, prima facie, of mis-statement in the
prospectus. When that is the case, the persons who were incharge at the time of the public issue
and who made statement in the prospectus would be responsible Admittedly, all three petitioners
were the promoters and had signed the prospectus in which statement was made stating the objects
for which the public issue was to be raised. Whatever is the other defence stated by the petitioners,
they will have to prove at the time of trial by leading appropriate evidence. No doubt, the petitioners
can still raise a valid defence that at the time when the public issue was raised, there was a genuine
and truthful statement made in the prospectus that the funds were to be deployed in leasing
business, etc. and that the funds are not subsequently utilized for the said purpose by the directors
who were in control of the affairs at that time since the petitioners had resigned by that time. If they
are able to establish this defence, ultimately they may not be found liable. However, as mentioned
above, that would be a matter of trial where the petitioners would be required to establish this kind
of defence. There may be cases where on the basis of material on record it can be justified by the
accused persons that utilization of funds for purpose other than in the public issue was bona fide and
proper and in those cases the complaint can be dismissed. This happened in M.P. Mehrotra v.
Registrar of Companies, Crl.M.C. No. 2759/2004 decided on 11.7.2006 wherein summoning order
was quashed by me after taking note of the following factors:

"6. May be, if the funds are utilised for some purpose other than what is stated in the public issue, a
presumption can be drawn only if the ROC had pleaded that funds were utilised for the purpose

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mentioned in the prospectus for the years 1994-95, 1995-96 and thereafter. As mentioned above,
allegation of making untrue statement in this prospectus is based on the income shown in the
annual accounts of the company for the year 1998-99. However, the events which took place
between 1994 and 1998 and which were well within the knowledge of the complainant are totally
ignored in the process.

7. It could not be denied that the Extraordinary General Meeting of the company was held on
25.3.1998 and the company changed its business from leasing to Infotech. For this purpose not only
the name of the company was changed to M/s. Cyber Space Infosys Ltd. but alteration in the object
clause was also made by including Infotech business. This change was specifically approved by the
Department of Company Affairs. The change was notified with the ROC as well. Obviously, after such
a change in the object clause if the company started Infotech business as well and earned the
income from software business, it cannot be said that statement made in the prospectus in the year
1994, while making the public issue, was false. There may be various reasons for changing the
object clause and the line of business. It is a matter of common knowledge that the leasing, finance
which was lucrative in the early 1990s was not so in the late 1990s. It is also a matter of common
knowledge that the software business started picking up during those years, which is the position till
date. If in these circumstances a policy-decision was taken to change the line of business and to
start a business which was more promising and beneficial to the company and the shareholders
voted for the same in its Extraordinary General Meeting which include those shareholders who
subscribed to the shares in the public issue in the year 1994, it cannot be said that these
shareholders were, in any way, duped or misled."

10. In the present case, as there is no such material on record and the petitioners will have to
establish their evidence at the time of trial, it is not a case where the Court can interfere at this
stage.

11. Coming to the question of limitation, again this is a mixed question of law and fact. As
mentioned above, falsity/mis-statement in the prospectus can be proved by showing that funds were
utilized ultimately for some other purpose, which event would happen subsequently and only when
this is brought to the notice of the complainant and the complainant gets knowledge thereof that the
period of limitation would run [See Rajshree Sugar (supra); Anita Chadha v. Registrar of Companies,
96 1999 CC 265; Thomas Philip v. Asst. Registrar, being Crl.M.C. No. 4113/2002 decided by the High
Court of Kerala; Manganese Ore (India) Ltd. v. Municipal Council through its Chief Officer, Uttarwar,
MANU/MH/0613/ 2002; and State of Rajasthan v. Sanjay Kumar & Ors., IV 1998 Indlaw SC 854 =II
1998 Indlaw SC 854 (SC)= 1998 Indlaw SC 854.

Therefore, at this stage the complaints cannot be thrown out on the ground of limitation and this is
the issue which will have to be decided by the trial Court after the evidence is led by the parties.
Discussion up to this stage would take care of Crl.M.M. No. 3241/2002 which pertains to the criminal
complaint No. 698/2002.

12. Insofar as criminal complaint No. 699/2002, which is under Sections 62 and 68 of the Act, is
concerned, let me discuss the specific argument raised by the petitioners which has already been
noted above. Submission was that Section 62 raises civil liability. This submission of the petitioners
is well founded. Sub-section (1) of Section 62 of the Act reads as under:

"Civil liability for mis-statements in prospectus.-

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(1) Subject to the provisions of this section, where a prospectus invites persons to subscribe for
shares in or debentures of a company, the following persons shall be liable to pay compensation to
every person who subscribes for any shares or debentures on the faith of the prospectus for any loss
or damage he may have sustained by reason of any untrue statement included therein, that is to
say, -

(a) every person who is a director of the company at the time of the issue of the prospectus;

(b) every person who has authorised himself to be named and is named in the prospectus either as
a director, or as having agreed to become a director, either immediately or after an interval of time;

(c) every person who is a promoter of the company; and

(d) every person who has authorised the issue of the prospectus:

Provided that where, under Section 58, the consent of a person is required to the issue of a
prospectus and he has given that consent, or where, under Sub-section (3) of Section 60, the
consent of a person named in a prospectus is required and he has given that consent, he shall not,
by reason of having given such consent, be liable under this Sub-section as a person who has
authorised the issue of the prospectus except in respect of an untrue statement, if any, purporting to
be made by him as an expert.

xx xx xx"

The very heading of the section makes mis-statement in the prospectus as civil liability. Liability is of
the persons mentioned therein which is to pay compensation to every person who subscribes for any
shares or debentures on the faith of the prospectus for any loss or damage he may have sustained
by reason of any untrue statement included in the prospectus. Two things which follow are -(i) it is
the person who has subscribed for shares or debentures on the basis of representation made in the
prospectus who can ask for compensation; and (ii) compensation has to be for any loss or damage
which he has sustained by reason of such untrue statement. Thus, not only the liability is civil
liability, the right is given to the person, who has suffered, to prove the loss or damage which he has
suffered and filed recovery proceedings for such compensation. By no stretch of imagination it can
be treated as criminal liability and, therefore, criminal complaint under Section 62 of the Act, that
too by the ROC, would not be maintainable.

13. No doubt, there is also penalty for fraudulently inducing persons to invest money, which is
prescribed under Section 68 of the Act. Whether the infraction of Section 68 of the Act is made out
in the complaint can be appreciated after taking note of the language of this provision, which reads
as follows:

"Penalty for fraudulently inducing persons to invest money.-Any person who either by knowingly or
recklessly making any statement, promise or forecast which is false, deceptive or misleading or by
any dishonest concealment of material facts, induces or attempts to induce another person to enter
into, or to offer to enter into- f

(a) any agreement for or with a view to acquiring, disposing of, subscribing for, or underwriting
shares or debentures; or
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(b) any agreement the purpose or pretended purpose of which is to secure a profit to any of the
parties from the yield of shares or debentures, or by reference to fluctuations in the 9 value of
shares or debentures, shall be punishable with imprisonment for a term which may extend to five
years, or with fine which may extend to one lack rupees, or with both."

What is to be proved is that by such false, deceptive or misleading statement, etc. there has been
inducement to persons to invest money. At least two factors which need to be established are-(i)
false, deceptive or misleading statement or dishonest concealment of material facts of the nature
mentioned in Section 68; and (ii) by such false statement, etc. any person is induced or attempted
to be induced into doing any of the acts mentioned therein, including subscribing for shares or
debentures.

14. In the complaint No. 699/2002 filed by the complainant, there is not even a whisper of such an
inducement given to the persons, except making the following averments:

"As such the persons named above being the persons who authorized the issue of the prospectus are
liable for penalty on two counts namely for paying compensation to every person who subscribed or
any shares or debentures on the faith of the prospectus suffered losses and secondly for fraudulently
inducing persons to invest money and accordingly they are liable for penalty as contemplated under
Sections 62 and 68 of the Companies Act, 1956."

It is not at all stated that there was any complaint received by the ROC or the Department of
Company Affairs from any persons who alleged that they were induced to buy the shares on the
basis of mis-statement/ representation in the prospectus. It is also not stated that any complaint is
received from any persons alleging that they had suffered any loss. Therefore, ex facie, provisions of
Sections 62 and 68 of the Act are not attracted on the basis of the allegations made in the
complaint.

15. The upshot of the above discussion would be to dismiss Crl.M.M. No. 3241/2002 filed for
quashing the summoning order issued in the criminal complaint No. 698/2002 and which is under
Sections 63 and 628 of the Act, and quash the summoning orders passed in the complaint No.
699/2002 (Crl.M.M. No. 3242/2002) and dismiss the complaint. Insofar as the complaint No.
698/2002 is concerned, the learned trial Court shall proceed with the same on merits.

O.ed accordingly.

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