CHAPTER IV

COMPOUNDING OF OFFENCES AND OTHER

RELIEFS
 CHAPTER IV

COMPOUNDING OF OFFENCES AND OTHER RELIEFS

4.1 Introduction

4.2 Compounding of Offences under the Act - Scheme

4.3 Compounding of Offences - Illustrative case laws

4.4 Offences not compoundable

4.5 Compounding of Offences involving public interest

4.6 Relief to officers of companies from trial court / high court

4.7 Illustrative Cases where relief granted / not granted

4.8 Relief otherwise than through Section 633 of the Act:

4.9 Need for review, if any.

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CHAPTER IV
COMPOUNDING OF OFFENCES AND OTHER RELIEFS

4.1 INTRODUCTION

Provisions dealing witli offences against the Act

Part XIII of the Companies Act, 1956 (the Act) contains most of the provisions
regarding offences against the Act. As per Section 621 of the Act, only on a
complaint in writing of the Registrar or of a shareholder of the Company or of a
person authorized by the Central Government in that behalf, a court may take
cognizance of any offence against this Act. As per Section 622 of the Act, no court
inferior to that of a Presidency Magistrate or a Magistrate of the First Class shall try
any offence under this Act. As per Section 624 of the Act every offence under the
Act shall be deemed to be non-cognizable within the meaning of the Criminal
Procedure Code, 1973 (CrPC).

Part XIII of the Act also contains provisions that deal with the procedure to be
followed in respect of complaints and the penalty to be imposed. Section 621A
provides for compounding of offences against the Act and Section 633 contains
provisions regarding certain relief available to officers of companies in certain
circumstances.

Procedure for relief before commencement of trial procedure

Under certain circumstances, a person accused of an offence, may be able to get

relief without being prosecuted through a court of law.

Relief in the case minor defaults by Registrar

On receipt of the explanation from the accused, the Registrar of Companies may
form an opinion and if he is satisfied he may not prosecute cases involving minor
offences where intention of the parties is clear. The Registrar warns the offenders
and closes the file. The company and its directors may take a serious view of the
offences alleged in the show cause notice issued by the Registrar and they may
comply with the relevant provisions immediately. They may pay additional fee and
file the necessary returns and documents. While dispensing with further proceedings
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the Registrar also takes into account tine previous track record of tlie Connpany. Tills
system is based on the policy of the Department of Company Affairs not to harass
the top management of companies, provided the case deserves sympathy and there
is adequate compliance of the provisions of the Act. In some cases the Registrar
may refer the matter to the Regional Director to obtain his concurrence for
dispensing with prosecution formalities.

Other provisions affording relief in deserving cases

The Act provides a relief mechanism called compounding of offences which is

available not only to a company and Its officers, but also to all others liable for
punishments for certain offences against the Act. Under this route the persons who
are liable are relieved of the many troubles they might have to face if the Registrar
launches a prosecution and a trial commences. Compounding of an offence helps
mainly in two ways. The compounding procedure Is also very simple. The
compounding authority levies only a fee. The hgour associated with a criminal
prosecution can be avoided. Officers who have got offences committed by them
compounded will not be branded as a person convicted of an offence. Conviction
may result in the convicted directors Incurring disqualification from becoming a
director.

Officers of companies may seek relief from an appropriate court If they apprehend
any prosecution against them or if there is already a proceeding against them for
any offence under the Act. This provision helps officers who have acted honestly
and reasonably to apply for relief and if the appropriate court grants the relief prayed
for they escape from the difficulties associated with the trial formalities In a criminal
court.

4.2 COMPOUNDING OF OFFENCES UNDER THE ACT - SCHEME

Section 621A contains a provision for compounding of certain offences under the
Act, by which process, on payment of a fee, the compounding authority grants
excuse to the Company and / or its officers in default. Before Section 621A was
Inserted by the Companies (Amendment) Act, 1988, which came Into effect on May
31, 1991, as per Section 621, all offences against the Act have to dealt with only by
the ordinary criminal courts.
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Tracing the background

The Company Law Board (CLB) traced the origin of the provisions of the Act

dealing with compounding of offences and observed as follows:

• Section 621A was inserted on the recommendations of the Sachar Committee.

• The committee suggested substitution of the existing provisions by a system of

penalty with the Registrar, the CLB including the Regional Benches, clothed with
powers of a court so as to empower them to take cognizance of and to impose
penalties for offences under the Act.

• When this section was introduced, the Notes on Clauses stated "this clause
empowers the CLB and the Regional Director to compound offences punishable
with fine, by imposing penalties in lieu of prosecution.

• The recommendations of the Sachar Committee read with the Notes on Clauses
would reveal that there is nothing to indicate that the jurisdiction of the CLB in
exercising the powers to compound is subject to approval of the court either
before or after passing the order of compounding nor is there any indication that
concurrent powers were being conferred on the court.

• The Central Government appointed a committee in 1977 under ttie chairmansiiip

of Justice Sacliar to review the Act and the Companies (Amendment) Act, 1985
and the Companies (Amendment) Act, 1988 were passed based on the
recommendations of the said committee.

1 Hoffland Finance Ltd., In re (CLB), the Company Law Board, Northern Region
Bench [1997] 90 Comp Cas 38
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Salient features

Section 621A provides the code for compounding of certain offences under the Act:
The salient features of the said section are as under:

• The provisions of Section 621A operate notwithstanding anything contained in

the CrPC.
• Any offence punishable under this Act (whether committed by a company or any
officer thereof), not being an offence punishable with imprisonment only, or with
imprisonment and also with fine, is capable of being compounded.
• The offence may be compounded either before or after the institution of any
prosecution.
• The compounding may be done by

a. by the Regional Director, Department of Company Affairs, where the

maximum amount of fine which may be imposed for such offence does not
exceed fifty thousand rupees; or
b. the CLB, in all other cases.

• "Regional Director" means a person appointed by the Central Government as a

Regional Director for the purposes of this Act.
• Every Regional Director shall exercise the powers to compound an offence,
subject to the direction, control and supervision of the CLB.
• The Compounding fee is payable to the credit, by the company or the officer, as
the case may be, to the Central Government Account.
• The compounding authority will specify the sum payable as compounding fee.
• The compounding fee shall not exceed the maximum amount of fine, which may
be imposed for the offence so compounded.
• While compounding of an offence, the compounding authority shall take into
account the additional fee, if any, paid by the company under the sub section (2)
of Section 611 of the Act. Section 611(2) of the Act provides for levy additional
fee up to ten times the normal fee payable for filing a document with the
Registrar of Companies.
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• The application for compounding of an offence siiould be made to the Registrar

of Companies.
• The Registrar shall forward the application, together with his comments thereon,
to the CLB or the Regional Director, as the case may be.
• Where any offence is compounded under this section, whether before or after
the institution of any prosecution, an intimation thereof shall be given by the
company to the Registrar within seven days from the date on which the offence
is so compounded.
• Where any offence is compounded before the institution of any prosecution, no
prosecution shall be instituted in relation to such offence, either by the
Registrar or by any shareholder of the company or by any person
authorised by the Central Government against the offender in relation to
whom the offences is so compounded.
• Where the composition of any offence is made after the institution of any
prosecution, the Registrar shall give notice to the Court in which the prosecution
is pending about the compounding of the offence and there upon the company or
its officer in relation to whom the offence is so compounded shall be discharqed.
• The compounding authority may direct the applicant to comply with the
provisions of the Act before compounding the offence, if the offence relates to
non-filing any document the compounding authority may direct to file or register
the document with the filing or registration fee, and the additional fee, required to
be paid under section 611 in respect of such document.
• Any officer or other employee of the company who fails to comply with any order
made by the CLB or the Regional Director under sub-section (5) shall be
punishable with imprisonment for a term which may extend to six months, or with
fine not exceeding fifty thousand rupees, or with both.
• Notwithstanding anything contained in the CrPC any offence which is punishable
under this Act with imprisonment or with fine, or with both, shall be
compoundable with the permission of the Court, in accordance with the
procedure laid down in that Act for compounding of offences.
• No offence specified in this section shall be compounded except under and in
accordance with the provisions of this section.
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Offences compoundabie

• An offence, which is punishable with fine only, is a compoundabie offence.

• An offence, which is punishable with fine only, or with fine or imprisonment or

both, can also be compounded under the Companies Act.

Pre-requisites for compounding of an offence

• Admission of the offence.

• Proper compliance of the provisions of law to make good the default.

2
• Filing of the document with requisite fee and additional fee. The CLB dismissed

the applications for compounding the offences under Sections 159 and 220 of
the Act as the defaults arising out of a failure to file the balance sheet and annual
return of the company with the Registrar of Companies had not yet been made
good by the company.

• Furnishing an undertaking to comply with the provisions of the Act if such

compliance requires reasonable time. (As a measure of caution, the
compounding authority may direct the applicant to file an affidavit of compliance.
In addition such authority may also direct giving intimation to the Registrar of
Companies concerned for effective monitoring.)

Effect of compounding of an offence

• The Registrar cannot launch prosecution for an offence that has been already
compounded.

^ General Produce Company Limited, In re. (CLB) [1994] 81 Comp Cas 570 (CLB).
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• Where an offence is compounded after the institution of the prosecution, the

Registrar has to bring such fact to the notice of the court and on such notice the
Company or its officer in relation to whom the offence is so compounded shall be
discharged by the trial court.

Permission of court not necessary for compounding of offences

Section 621A of the Act operates notwithstanding the provisions of CrPC. Sub-
section (7) of Section 621A specifically provides that an offence which is punishable
under the Companies Act with imprisonment or with fine, or with both, shall be
compounded with the permission of the court in accordance with the procedure laid
down in the CrPC, for compounding of offences. Often a question arises as to
whether the CLB can decide on an application for compounding of offences, which
are punishable with imprisonment or with fine, or with both. The said sub-section
provides that such offences can be compounded with the permission of the court in
accordance with the procedure laid down in the CrPC, for compounding of offences.

The CLB, Western Region Bench took a preliminary view that for applicants other

than the company, who are punishable with fine or with imprisonment or with both,
the offence can be compounded with the permission of the court and if the court
permits compounding of offence can proceed with the levy of compounding fees.

The applicants approached the Additional Chief Metropolitan Magistrate llird Court,
Esplanade, Mumbai, for such permission. The learned magistrate by his order dated
October 10, 1996, held that the stage of permission to compound had not quite been
reached as the parties had not finally arrived at the terms and conditions of
compounding and it was only after terms and conditions on which compounding is
made are decided, that the stage of permission for compounding can arise.

^ Reliance Industries Ltd and others In re [1997] 89 Comp Cas 67 (CLB)

 125

The material portion of tlie order of the IVIagistrate was as follows:

"There can be no doubt that the compounding indeed signifies a joint action of two
parties and when the offence is said to be compoundable with the permission of the
court all that is meant is that a compromise already arrived at by and between the
parties, should not be given effect to without the approval of the court. If the view
expressed by the learned Member of the CLB were accepted, it would mean that the
accused would obtain the permission of the court before compounding would be
effected. In fact, it would not be certain, if such procedure were adopted, that the
offence would be compounded. It is possible that the parties may disagree with the
terms and conditions on which the compounding is to be made. In that event, the
permission sought from the court would be meaningless".

Taking into account the above view of the Magistrate the CLB held that it has been
invested with the power, authority and jurisdiction to compound the offence and it is
only when such compounding is done that the matter can be brought before the
court for according permission to compound the offences which are punishable with
fine or imprisonment or with both.

In Hoffland Finance Ltd's case cited supra, the question as to whether the need for
seeking permission of the court arises either before or after the compounding by the
CLB was thoroughly examined. The CLB in the said case observed as follows:

• It appears from the provisions of sub-section (4)(a) to 4(d) and also from sub-
section (1) of Section 621A of the Act that the CLB is not debarred in any
manner to compound any offence in accordance with the procedure as
contemplated by Section 621A of the Act.

• While Section 621A of the Act starts with the non-obstante clause
"notwithstanding anything contained in the CrPC", sub-section (7) of Section
621A also provides a non-obstante clause "notwithstanding anything
contained in the CrPC".
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• Under sub-section (7)(a) of Section 621A of the Act, it is provided that any
offence which is punishable under the Act with imprisonment or with fine or with
both shall be compoundable "with the permission of the court" in accordance with
the procedure laid down in that Act, namely, CrPC.

• It appears from sub-section (7)(a), that there is specific wording "with the
permission of the court, in accordance with the procedure laid down in that Act".

• Suppose an offender approaches the CLB for compounding of an offence which

is punishable with imprisonment or fine or with both, before prosecution is
launched and if as per sub-section (7) of Section 621A the permission of the
court is necessary, the immediate question that would arise is, how a court would
take cognizance of an application for permission without any prosecution
pending before it.

• As a matter of fact, sub-section (4)(c) prohibits institution of prosecution after the

compounding is done by the CLB / Regional Director.

• In addition a question would also arise as to who will make the application - the
offender, the Registrar or the CLB.

• In a case where the CLB has exercised its discretion to compound an offence
punishable with fine or imprisonment or with both, and on an application for
permission, if the court refuses to accord permission, then it would mean that the
court is sitting in judgment over the decision of the CLB.

• In the same way, if prior permission is applied for and the court grants the same,
even then, the CLB, at its discretion may not compound the offence, as the
permission granted by the court is not binding on the CLB.

• If the intention of the Legislature were to subject the jurisdiction of CLB to

permission from the court, the same could have been most appropriately
achieved by making the provisions of sub-section (7) a proviso to sub-section (1)
itself.
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• Not only is there no such proviso in that sub-section, but right through up to sub-
section (6) of Section 621 A, there is nothing to indicate to this effect, and all
these sub-sections deal with matters relating to the CLB / Regional Director only.

• When sub-section (4) of Section 621A stipulates that on intimation to the court
about the composition of the offence the accused stands discharged, where is
the question of applying to the court for permission to compound.

• Hence the inescapable conclusion is in exercise of powers by the CLB under

sub-section (1), the CLB is not subject to the provisions of sub-section (7) and
the decision of the CLB in compounding an offence punishable with fine or
imprisonment or with both is final and is subject only to an appeal to the High
Court and the question of obtaining the permission of the court either before or
after the composition does not arise.

Compounding of Offences under the Act Vs Compounding under the CrPC

In Hofflands' case cited supra, the CLB brought out a clear distinction between the
provisions of the Act and those of the CrPC with regard to compounding of offences.
The CLB observed as follows:

The CLB observed that under Section 320 of the CrPC the parties to a criminal
proceeding, with the permission of the criminal court, might compound any
compoundable offence punishable under the Indian Penal Code if prosecution
relating to the offence is pending. Before the introduction of Section 621A of the Act,
the criminal court had no jurisdiction to permit compounding of offences committed
under the Act or any other law.

But the introduction of Sub-section (7) of Section 621A of the Act paved way for the
criminal court to permit compounding of any offence under the Act if there if
prosecution relating to any offence under the Act is pending before it. Sub-section
(7) of Section 621A of the Act is thus an enabling sub-section under
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which compounding of offence may be proceeded with before the criminal court with
the sanction of the court. As per sub-section (8) of Section 621A of the Act
specifically provides that no offence shall be compounded except and in accordance
with the provisions of this section. Thus offences under the Act punishable with
imprisonment or with fine or with both can be compounded in the criminal court
where the prosecution relating to the offence is pending, but such compounding
should be done in accordance with the procedure laid down in the CrPC and with
the sanction of the court.

Compounding of offences under other Acts through CrPC

4
The Andhra Pradesh High Court held as follows;

• Under the Second Schedule to the CrPC, 1898, offences against laws other than
the Indian Penal Code, 1860, were not compoundable.

• Under the First Schedule to the CrPC, 1973, there is no mention about any
prohibition on compounding of offences against other laws as contained in the
Second Schedule to the 1898 code.

• Section 320(9) of the 1973 Code says "no offence shall be compoundable
except as provided by this section", i.e. the prohibition regarding compounding of
offences shall be as mentioned in that section only.

• Therefore, the inference is that the Legislature, while drafting the new Code,
intended to permit offences under other laws to be compounded.

• Therefore, compounding of an offence punishable under Section 138 of the

Negotiable Instruments Act, 1881, is permissible.

4
M.Mohan Reddy v Jairaj D.Bhale Rao (AP) [1997] 90 Comp Cas 142
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4.3. COMPOUNDING OF OFFENCES - ILLUSTRATIVE CASE LAWS

The Duplicate Share certificate case - Reliance Industries Ltd, cited supra

Facts of the Case

A leading listed public company with a huge market captialisation had issued
duplicate share certificates without bearing the distinctive numbers that were
contained in the original certificates. Share certificates used to contain distinctive
numbers before the coming into force of the Depositories Act, which introduced the
concept of dematerialised shares. Dematerialisation involved conversion of physical
share certificates into paperless scrip, where registers are maintained in electronic
form. The issue of duplicate share certificates without the same distinctive numbers
created suspicion that the promoters of the company had indulged in the fraud
called switching of shares. Switching of shares is an expression to denote issue of
duplicate share certificates without bearing the same distinctive numbers. The
promoters may be able to circulate some shares in the capital market and take
advantage of the market situation to make wrongful gain for them by creating
artificial demand for the shares of their company and thereby jack up the price of
shares. Most of the investors hold with them their investment in shares not for any
speculative purposes but for appreciation of capital. Once in a blue moon they sell
those shares off in the market. This means so many number of shares are held by
the investors without trading activity. The promoters in connivance with Registrars
and Transfer Agents could use these idle shares so that they are able to pump those
shares into the market until the actual shares reach the transfer agents. At that point
of time they will stop circulating the same shares. As per Section 84 of the Act, issue
of duplicate share certificates with an intention to defraud is an offence.
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This offence was detected at the time of an inspection by the Department of

Company Affairs. The Company, its Registrars and Transfer Agents, the directors
applied for compounding of the offence under Section 84 of the Act. The CLB held
that having regard to the fact that the original share certificates have either been
cancelled or are lying with the Bombay Stock Exchange and as the possibility of
these shares remaining in circulation in future is unlikely, the alleged offence
under Section 84(3) Act, is compounded on payment of compounding fee as given
below:

(a) Rs.10 Lakhs by the company.

(b) Rs.1 Lakh by Shri.Dhirubhai J.Ambani, Mukesh D.Ambani, Anil D.Ambani,
Nikhil R.Meswani, the directors of the company, each separately from their
personal account.
(c) Rs.10,000/- by Shri.Vinod M.Ambani, Secretary of the company and Mr.Rohit
C.Shah, Assistant Vice-President-Secretarial, separately from their personal
account.
(d) Rs.10 Lakhs by Reliance Consultancy Services Limited, the share transfer
agents of the company.
5
The Contracts with related parties case

The CLB observed as follows:

• The company and its officer have committed default under Section 297 of not
getting the approval of the Central Government in respect of a number of
contracts during the period from April, 1996, to February, 1997.
• The two distinctive features of Section 297 of the Act which reflect the rigour of
the said section are (a) a positive prohibition as reflected by the words "shall not
enter into any contract"; and (b) the requirements of prior approval of the Central
Government in case the paid-up share capital is not less than Rs.1 Crore.

^ Otto Burlingtons Mail Orders Pvt. Ltd. In re [1999] 96 Comp Cas 525 (CLB)
 131

• Such rigorous provision is not supported by appropriate penal provisions in order

to sustain its rigour.
• In case of default in compliance under Section 297, in the absence of specific
penalty, the provisions of Section 692A shall be applicable.
• While compounding the offences the nature of the offence and the financial
position of he company as well as the continuance default should be taken into
account in quantifying the sum to be determined as the compounding fees.
• It is also to be ensured in view of the prohibition contained in Section 297 it may
have to be ensured that having compounded the offence the same violations
have not continued further.
• This has been verified from the contract register of the company and has also
been confirmed by the company that such default is not continued.
• It is also to be kept in mind as to whether the application for compounding is
consequent to the launching of the prosecution or has been sought for
voluntarily.
• In this case the compounding has been sought voluntarily without the pressure of
a prosecution behind it.
• Keeping in view all of the above, it is appropriate that the company should remit
a fee of Rs.2 Lakhs and each director a sum of Rs.20,000 which shall be
remitted by them individually.

4.4 OFFENCES NOT COMPOUNDABLE

Notwithstanding anything contained in the CrPC, any offence that is punishable

under this Act with imprisonment only or with imprisonment and also with fine
cannot be compounded. An offence committed by a company or its officer with a
period of three years from the date on which a similar offence committed by it or him
was compounded under this section cannot be compounded. Any second or
subsequent offence committed after the expiry of a period of three years from the
date on which the offence was previously compounded, shall be deemed to be a first
offence.
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As per the Department of Company Affairs , for companies under liquidation,

compounding of offences is not permissible in view of the provisions of Section 446

of the Act, in so far as the liability on the company is concerned in respect of
offences for the commission of which the company is liable. Compounding of
offences committed by directors of companies in liquidation is permissible, as
Section 446 does not operate as a bar to criminal proceedings against directors of
companies in liquidation.

The following are the offences, which are not compoundable under the Act:
Section Nature of offence Extent of punishment (Fine
indicated in Rs.)
58A(6) Invitation of deposits in Imprisonment for a term, which may
contravention of the provisions extend to 5 years AND shall also, be
of sub-sections (1) and (2). liable to fine.
58A(10) Failure to comply with the Imprisonment which may extend to
order of CLB under sub-section 3 years AND a fine of not less than
(9) with regard to repayment of Rs.500/- for every day during which
deposit. the non-compliance continues.
68A Personation for acquisition of Imprisonment for a term which may
shares, etc. extend to 5 years.
73(2B) Default in refund of application Fine which may extend to
moneys / excess application Rs.50,000/- AND also with an
moneys, where repayment is imprisonment with may extend to 1
not made within 6 months from year.
the expiry of the 8'^ day.

6
General Circular No.6/2002[Fnos.23/75/96-CL-ll & 2/6/2002-CL-V] dated
06/03/2002 [2002] 47 CLA (St.) 90
 133

80A(3) Failure to redeem preference Imprisonment for a term, which may

shares within the specified time extend to 3 years AND also to a
limit. fine.
108-1 a. Transfer of shares in Imprisonment for a term, which may
(4)(a) contravention of any order of extend to 5 years AND shall also, be
Central Government under liable to fine.
Section 1088.
b. Giving effect to any transfer
of shares in contravention of
any direction of Central
Government given under
Section 108D.
c. Exercising of voting rights in
respect of any shares in
contravention of any
direction of Central
Government given under
Section 108D.
207 Failure to distribute dividends Imprisonment for a term which may
within 30 days. extend to 3 years AND with fine
which may extend to Rs.1,000/- for
every day during which the default
continues.
209A(8) Failure to comply with Fine of not less than Rs.50,000/-
provisions of Section 209A. AND also with imprisonment for a
term not exceeding 1 year.
-----+----------- .,..---------
269(11) Contravention of the provisions Imprisonment for a term, which may
of sub-section (10) / any extend to 3 years AND shall also, be
direction given by CLB. liable for a fine, which may extend to
Rs.500/- for every day of default.
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293A Political contributions in excess imprisonment for a term, which may

of prescribed limits or in extend to 3 years AND also to a
contravention of other fine.
requirements of this section.
539 Falsification of books. Imprisonment for a term, which may
extend to 7 years, AND shall also,
be liable to fine.
540 Defrauding creditors. Imprisonment for a term, which may
extend to 2 years, AND shall also,
be liable to fine.
628 Penalty for false statements. Imprisonment for a term, which may
extend to 2 years, AND shall also,
be liable to fine.
629 Penalty for false evidence. Imprisonment for a term, which may
extend to 7 years, AND shall also,
be liable to fine.

4.5. COMPOUNDING OF OFFENCES INVOLVING PUBLIC INTEREST

Sub-clause (b) of sub-section (7) of Section 621A of the Act prohibits compounding
of offences that are punishable with imprisonment only or with imprisonment and
also with fine. However there are certain offences that capable of being
compounded despite the fact that such offences are capable of damaging public
interest since those offences do not fall the prohibition referred above in sub-section
(7).

Under Section 454(5) of the Act, failure to comply with the requirements of this
section regarding statement of affairs and related matters is an offence punishable
with imprisonment for a term which may extend to 2 years or with fine which
may extend to Rs.1,000/- for every day during which the default continues, or
with both.
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Filing statement in affairs is a serious offence in tlie cases of companies ordered to

be wound up. It can be seen that any person, without reasonable excuse, may make
default in complying with the requirements of this section and may still get the
offence compounded. In such a case, imprisonment for a term which may extend to
2 years or a fine which may extend to Rs. 1,000/- for every day during which the
default continues cannot be regarded as punishments having any effect.

Similarly is the offence under Section 240 (3) of the Act arising out of a failure of a
person who without reasonable cause refuses to produce books to / appear before
an inspector and the said offence is punishable with imprisonment for a term
which may extend to 6 months, or with fine, which may extend to Rs.20,000/-,
or with both, and also with a further fine which may extend to Rs.20,000/- for
every day after the first during which the failure or refusal continues.

Under Section 68 of the Act fraudulently inducing persons to invest money in

issue of securities is an offence punishable with imprisonment for a term, which
may extend to 5 years, or with fine which may extend to Rs.1 Lakh, or with
both.

Under Section 538 (1) of the Act commission of certain offences by any past or
present officer of a company in liquidation are punishable with imprisonment for a
term which extend to 5 years, or with fine, or both, and in the case of other
offences imprisonment for a term which extend to 2 years, or with fine, or
both.

Though compounding of an offence is subject to the discretion of the compounding

authority, such offences should be outside the compounding route. Similarly
offences involving 'guilty mind' should not be capable of being compounded.
Wherever the Act introduces the words "knowingly", "fraudulently", "knowing it
to be false" and such other similar words indicating the element of mens rea,
the offences should not be eligible for being compounded. The officers who are
responsible for commission of such serious offences may always take the available
relief from court under Section 633 of the Act discussed in detail in the ensuing
paragraphs.
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4.6 RELIEF TO OFFICERS OF COMPANIES FROM TRIAL COURT/ HIGH COURT

Relief mechanism

If an officer apprehends that a proceeding may be commenced against him in any

court of law in relation to an offence under the Act, he may seek relief under sub­
section (2) of Section 633 of the Act from the High Court. Where a proceeding has
already been instituted he could obtain such relief under Section 633 (1) of the Act
from the trial court. Hence even while the penal clause fixes liability on any director
or officer of a company, it is possible for some or all of them to seek and obtain relief
under Section 633 of the Act.

Salient features of Section 633 of the Act

The salient features are as follows:

♦ In any proceeding for negligence, default, breach of duty, misfeasance or breach

of trust against an officer of a company the court may relieve him if it appears to
the court hearing the case that though he is or may be liable as he has acted
honestly and reasonably and having regard to all the circumstances of 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.
♦ The Court may grant such relief on such terms as it may think fit.
♦ 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.
♦ If any such officer has reason to apprehend that any proceeding might be
brought against him in respect of any negligence, default, breach of duty,
misfeasance or breach of trust, he may apply to the High Court for relief.
♦ 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 had been brought under sub section (1).
 137

• 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.

Why relief and why is it through a court of law

The intention of the legislature can be understood fronn the following two reasons:

i. Corporate Sector as a whole is a special vehicle that propels the economy.

Persons responsible for managing companies should not be harassed in a trial
court for offences against the Act because a trial in criminal court even in a
summons case is a trauma by itself. Such trials should not operate as an
obstacle for the growth of the economy, except in real criminal cases where the
effect of offences in question justifies punishment through a criminal trial as per
the Criminal Procedure Code, 1973.

ii. Courts of law are far removed from material matters, which are the primary
concern of the corporate sector and courts can only act in an impartial way.

Object of granting relief

The avowed object of section 633 of the Act is to relieve a director or officer who
may not take part in the day-to-day affairs of the company in a case where the
offence might have been committed due to inadvertence.

The Punjab & Haryana High Court held that 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 regard to the circumstances of the case, they, in all fairness, ought
to be excused from the charge or charges made against them.

^ Prestolite of India Limited, In re (1990) 69 Comp Cas 556 (P&H)

 138

Scope of Relief

The scope of relief under Section 633 of the Act can be understood from the
g
observation of the Bombay High Court , where the court held as follows:

• Under Section 633, the court has the exceptional power to excuse a petitioner
from prosecution in respect of an act, which has, under the Act, penal
consequences.
• The power must be circumspectly exercised.
• Section 633 does not contemplate adversary proceedings in the ordinary sense.
• A petition under Section 633 cannot be compromised nor can the court relieve
the petitioner by an order made invitum, for the court has to be reasonably
satisfied that the petitioner had acted honestly and reasonably.
• The Registrar may, of course, state that no prosecution would be launched
against the petitioner, in which case the petition would not survive.
g
The Bombay High Court held that the power under Section 633 of the Act should

be very sparingly used and the officers of the company cannot as a matter of right
claim that civil or criminal proceedings should not be instituted against them for the
default.
10
The Punjab and Harayana High Court held as follows:
Upon its plain language. Section 633, the design and object of which is to provide
protection to the officers of a company against certain kinds of liabilities and undue
hardship and harassment in deserving cases, confers a discretion on the court to
relieve an officer from the same, if the officer who had been proceeded against for
any negligence, default, breach of duty, misfeasance or breach of trust, is able to

®Tri-sure India Limited, In Re [1983] 54 Comp Cas 197 (Bom.)

® S.Pandit, In Re [1990] 68 Comp Cas 129 (Bom.)
in
S.P.Chopra & Co.(Muktsar Electric Supply Co.Ltd.), In re [1966] 36 Comp Cas
144 (Punj); 1 Comp LJ 214
 139

satisfy the conscience of the court that he had acted honestly and reasonably
and also, having regard to all the circumstances of the case, he ought fairly to be
excused.
• "Acting reasonably" means acting in the way in which a man of affairs dealing
with his own affairs with reasonable care and circumspection could reasonably
be expected to act in such a case.
• No distinction can be drawn amongst the directors for fastening the liability or
granting a relief from the liability on the consideration that a person is on the
board purely by virtue of his technical skill or because he represents certain
special interests and there are other directors who are in effective control of the
management and affairs of the company.
• Since the criteria for granting relief have been explicitly laid in the section itself,
no other criteria can be imported into it, though the circumstance of a person
being purely on the Board on account of his special skill or expertise may be a
relevant factor in deciding whether he had acted honestly and reasonably in
conjunction with other circumstances of the case.

Appropriate court

Where proceedings have already been instituted before a court having appropriate
jurisdiction, it is that court which is entitled to grant relief. Where proceedings have
not been instituted, but it is apprehended by an officer concerned that a prosecution
will be launched against him, he is entitled to seek relief from High Court.

The appropriate time to determine as to whether a proceeding has already been

launched is the date of filing of the petition before the appropriate High Court under
sub-section (2). In other words, it can be said that the High Court has no jurisdiction
under sub-section (2), if on the date of filing the petition before the High Court, there
is already a proceeding.
 140

11
In an interesting case where by tine time the Andhra Pradesh High Court passed
an order (against the Registrar) directing him not to tal<e any final decision in the
matter of launching prosecution, the Registrar had already launched the
prosecution. The High Court held that on the date on which company petition under
Section 633 of the Act was made, the cause for moving the court under Section 633
of the Act did exist, and, therefore, the petition cannot be dismissed merely on the
ground that subsequent to the filing of the petition, the prosecution had been
launched.
12
The interesting question that arose before the Calcutta High Court was whether
an application under Section 633 of the Act was maintainable before the said High
Court after a complaint had been filed and cognizance of the same had been taken
by the magistrate and as such whether the High Court has jurisdiction to grant the
relief under sub-section (2) of Section 633. The said complaint was filed during the
period when an injunction order against Registrar of Companies, West Bengal, was
in force and operative as issued by the said High court the complaint was filed in
violation of the injunction order and cognizance of the offence was taken by the
Magistrate during the period when the injunction was in force and operative against
the respondents. Therefore the order of the magistrate is of no effect bad and a
nullity and without jurisdiction and hence it cannot be said that any criminal
proceeding was pending.
13
Recently the Bombay High Court had the occasion to consider the maintainability
of an application under Section 633 of the Act at a time when the Registrar had
already filed the complaint and an application for condonation of delay had also

11
Progressive Aluminium Limited and others v Registrar of Companies and another
[1997] 89 Comp Cas147 (A.P.)
""^ Hindustan Wire and Metal Products [1983] 54 Comp Cas 104 (Cal)
13
Jyotindra Manhadal Vakil and another v Registrar of Companies, Maharahstra
[2001] 103 Comp Cas 935 (Bom.)
 141

been filed. The question tliat arose was wtnetlier tine iVIagistrate could be deemed to
have taken cognizance of the offence in view of the application for condonation of
delay. If it is considered as a proceeding, Section 633 of the Act does not confer any
jurisdiction on the High Court and it is the trial court, which alone can grant relief
under Section 633(1) of the Act. The High Court held that Section 633 of the Act
does not talk of "taking cognizance as such". Even an application for condonation of
delay would be a proceeding and therefore, the High Court held that the petition
couldn't be entertained.

While handing down the decision as above, the Bombay High Court had referred to
the decision of the Calcutta High Court in the Hindustan Wire and Metal Products'
case cited supra and categorically stated that Section 633 of the Act does not
contemplate taking cognizance of an offence at all and the said section merely
refers to the existence of an apprehension that any proceeding will or might be
brought against the person seeking relief under the said section. Even an application
for condonation of delay filed by the Registrar under Section 473 of the CrPC would
amount to a proceeding, whether or not the Magistrate has condoned the delay or
not and therefore there is no jurisdiction under Section 633 (2) for the High Court to
grant relief and the power lies with the Magistrate under Section 633 (1) of the Act.

Proceedings
In the Law Lexicon, P.Ramanatha Aiyar, it is stated that the word 'proceedings'
mean as follows:

• An act which is done by the authority or direction of the Court, express or

implied; an act necessary to be done in order to attain a given end;
• A prescribed performance of an act, wholly distinct from any consideration of an
abstract right;
• The form and manner of conducting judicial business before a Court or judicial
officer;
• Regular and orderly progress in form of law, including all possible steps in an
action, from its commencement to the execution of judgement.
 142

In Tamilnadu General Clauses Act, 1891, the expression 'Judicial Proceedings' has
been defined to mean any proceeding in the course of which evidence is, or may be,
legally taken. Most other states have also adopted a similar definition.
14
The Supreme Court held that the expression 'any proceeding' occurring in Section
633 cannot be read out of context and treated in isolation.
15
The Madras High Court held that the expression 'any proceeding' occurring in
Section 633 cannot be read out of context and treated in isolation. It must be
construed in the light of the penal provisions.

Reasons for liability

In order to seek relief under section 633 of the Act, the liability of the officer
concerned should have arisen due to any negligence, default, breach of duty,
misfeasance or breach of trust committed by the officer seeking relief. The officer
seeking relief might be either the person who was actually responsible for the
commission of the offence or by a fiction by virtue of the position he occupies in the
company, he ought to be deemed to be liable.

Relief Discretionary
16

It was held by Bombay High Court that even if all the directors are, in law, liable

for their acts, the question of relieving them is still one of discretion.
If the responsibility of all the directors, whether they perform part time duties or full
time duties, is equal, should any of the directors be relieved from the liability in
respect of negligence, breach of trust, misfeasance, etc? This is always a question
of judicial discretion.

14
Rabindra Chamaria and others v Registrar of Companies and others [1992] 73
Comp Cas 257 (SC)
15
Madhavan Nambiar v Registrar of Companies [2002] 108 Comp Cas 1 (Mad)
16
Jagjivan Hiralal Doshi and others v Registrar of Companies [1989] 65 Comp Cas
553 (Bom)
 143

In Tri-sure India Limited's case cited supra, the Bombay High Court held that the
relief under Section 633 of the Act is, as the use of the word "may" implies,
discretionary, the discretion to be judicially exercised.

In Prestolite's case cited supra the Punjab and Haryana High Court held that the
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 the section have been met.

Relief when available

Relief will be granted only to deserving officers and to borrow from sub-section (1) of
Section 633, the following two important factors have to be established:

a. the officer should have acted honestly and reasonably and

b. having regard to all the circumstances of the case including those relating to his
appointment, the officer ought fairly to be excused.

The Madras High Court , while refusing to grant relief, held when the petitioners

were fully aware of the change in the activities of the company and they cannot
claim to have acted honestly or reasonably. They ought to have taken care to follow
the provisions of the amendments in the Act and the guidelines given by the
Registrar of Companies.

""^ D.C.Kothari v Asst. Registrar of Companies [1993] 78 Comp Cas 520 (Mad)
 144

Admission of offence is not necessary for grant of relief

18 19
The Calcutta High Court referred to the decision of the Kerala High Court ,
where it was held that under sub-section (1) of Section 633 of the Act in order to
grant relief to a person against whom a proceeding is pending, it is not necessary
that he should confess or admit his guilt or that the court must find him guilty. It is
sufficient if it appears to the court "that he is or may be liable". In other words, the
court can relieve him of the liability in a case in which it appears to the court that he
may be liable.

Service of notice

As per sub-section (3) of Section 633 of the Act, a notice is required to be given to
the Registrar of Companies and such other person, if any as the court thinks
necessary. The notice must be given by the court before which the proceeding for
negligence, default, breach of duty, misfeasance or breach of trust has already been
instituted or by the High Court while considering an application for relief by an officer
of a company. It is the duty of the court to serve the notice in such manner as it
thinks fit and it is for the purpose of requiring the Registrar of Companies and such
other person, if any, to show cause as to why such relief should not be granted.

As already stated, as per Section 621 of the Act, a complaint for an offence under
the Act may be instituted by any one of the following as provided in Section 621 of
the Act:
• The Registrar of Companies.
• Shareholder.
• An officer authorised by Central Government.
• An officer authorised by SEBI.

18
Sitaram Biyani and another v Registrar of Companies [1985] 58 Comp Cas 870
(Cal)
19
M.O.Varghese v Thomas Stephen and Co.Limited [1970] 40 Comp Cas 1131
(Ker); AIR 1971 Ker223
 145

Hence if the proceeding lias been instituted or is likely to be instituted by any one of
the above, service of notice on the Registrar and such other person is necessary.

Relief may be in full or In part

As per sub-section (1) of Section 633, the officer seeking relief may be relieved,
either v^/holiy or partly, from his liability on such terms as the court may think fit.

Relief not available to companies

Section 633 of the Act cannot provide any relief to a company. The plain meaning of
the words "negligence, default, breach of duty, misfeasance or breach of trust"
would suggest that except default and breach of duty all other things cannot be
attributed to an artificial person. None can say that an artificial person was negligent
or has a committed breach of trust. But wherever the Act casts a duty upon the
company to comply with a requirement of any provision of the Act, it is possible for
the company to have committed a default or breach of duty.
20
The Allahabad High Court observed that it is significant to note that sub-sections
(1) and (2) of Section 633 of the Act does not contemplate any order relieving the
company from any of the liabilities incurred by it.

Relief under Section 633 vis-a-vis part time directors

Sub-section (1) of Section 633 of the Act refers to an officer of a company. Section
2(30) of the Act, defines the expression "officer". The expression 'officer' includes
any director, manager or secretary or any person in accordance with whose
directions or instructions the Board of Directors or any one or more of the directors is
or are accustomed to act. Hence a director is an officer of a company. The Act does
not distinguish between a whole-time director or a part time director, in so far as it
pertains to the liabilities of a person, holding the office of a director in a company.

20
Mau Cold Storage and Khandsari Sugar Factory (P) Limited and others v
Registrar of Companies and others [1985] 57 Comp Cas 37 (All)
 146

In Jagjivan Hiralal Doshi's case cited supra, the Bombay High Court held as follows:

• The definition of "Officer' which makes no distinction based on part time

performance of duties, the equality to the responsibilities of the members of the
board of directors and the definition of "director" which admits of no
differentiation between part-time and full-time directors.
• For this purpose, one must ask the question: Does any interpretative criterion
point away from what these sections mean?
• If there is nothing to modify, nothing to alter, nothing to qualify the language,
which a statute contains, the words and sentences must be construed in their
ordinary and natural meaning (Halsbury's Laws of England, Fourth Edition,
Volume 36, Para 585).
• The plain meaning of director is the person occupying the position of director -
call him a part time director or a full time director.
• The rules of construction do not call for any modification or qualification of this
meaning.
• Any distinction based on part time performance of duties is unrealistic, opposed
to the usage of English prose and would lead to absurd results.
• What are the cases in which part-time directors should be relieved? The answer
would depend upon the circumstances of each case and no rigid formula can be
laid down.
• The directors who perform part time functions may be relieved from liability
because no evidence of the fact that they had exercised any control in the matter
has been brought forth.
• Where evidence about their knowledge of the facts, which constitute negligence,
breach of trust, misfeasance, etc., may be brought forth, they should not be
relieved from liability for acts of negligence, misfeasance, etc.

The Court further said that in proceedings for negligence, default, breach of duty,
misfeasance, breach of trust, the Act and the rules admit of no distinction between
members of the Board of Directors based on their part time or full time performance
of duties. Their liability for any proceedings for such acts is equal.
 147

Relief under Section 633 to professional-directors

21
The Delhi High Court was concerned with a solicitor-director's petition. He was
also the company's legal adviser. The court held that since the object of Section 633
appeared to be to provide against undue hardship in deserving cases, it was proper
to give relief from liability to persons, who though were liable in law, ought to be
excused rather than subjected to legal proceedings.

In Tri-sure India Limited cited supra, the Bombay High Court held that a distinction
has to be made between directors who are on the Board purely by virtue of their
technical skill and those who are in effective control of the management and affairs
of the company. It would be unreasonable to fasten liability on independent directors
for defaults and breaches of the company where such directors are appointed by
virtue of their special skill or expertise and who do not participate in the
management.

Relief under Section 633 for Government Officers / Public Servants

The Madras High Court in Madhavan Nambiar's case cited supra, observed that
being a member of the Indian Administrative Service and in the cadre of
Secretary to Government when appointed as a director on the orders of Government
to a Government company or a joint venture company, he is expected not only to
discharge his usual functions, but also to see that the company complies with
the provisions of the Companies Act and the rules framed there under. The
court further said that the contention of the petitioner that he is only a nominee or
appointed by the State Government and therefore he cannot be proceeded against
at all could not be sustained in law.

The said court further held that in proceedings under Section 633 of the Act there is
no distinction between whole-time or part time director or nominated director or co-
opted director. The liability for acts of commission or omission is equal. There
cannot be a blanket direction or a blanket indemnity favouring the petitioner or other
directors who are nominated by the Government either ex officio or otherwise.

21
Om Prakash Khaitan v Shree Kesharia Investment Limited [1978] 48 Comp Cas
85 (Del)
 148

Relief under Section 633 for BIFR cases

Whether a sick industrial company within the meaning of the Sick Industrial
Companies (Special Provisions) Act, 1985 would be entitled for any relief or
extension of time under Section 633 (2) of the Act is a pertinent question.
22
The Rajasthan High Court held that in larger public interest, it is necessary that
the time limit for prosecution is extended for a period of two years. The court has
granted relief for a limited pehod of two years.

The relief granted by the said court should be sufficient for the prosecuting
agency to file the complaint after the extended period of time and such filing
will not be hit by the period of limitation specified under Section 468 of the
CrPC.
23
The Rajasthan High Court directed the petitioners who were directors of a sick

industrial company to file the audited balance sheet as required under Section 220
of the Act within six months of the company's revival and until then no prosecution
should to be initiated against them. While granting the above relief, the court
observed the following facts:
• The company had been declared sick under the Sick Industrial Companies
(Special Provisions) Act, 1985 (SICA).
• The company had been closed from 1987.
• The Board for Industrial and Financial Reconstruction (BIFR) had recommended
winding up in 1990.
• An appeal had been filed and stay of the operation of the order of the BIFR had
been obtained.
• Pending the appeal, the petitioner had sought police help to enter the premises
of the company to prepare the accounts, but was unable to do so.

22
Oriental Power Cables Ltd and others v Registrar of Companies and others,
[1995] 83 Comp Cas 447 (Raj)
Sanjay Modi v Registrar of Companies [1995] 82 Comp Cas 651 (Raj.)
 149

The efforts of prosecution for punishing those who violate provisions of the Act
should not be allowed to be thwarted on the ground that the company is sick if the
directors are otherwise liable. While genuine industrial recession and sickness would
require sympathetic consideration, there is no denying fact that there are many
cases of sickness caused due to mismanagement of affairs of companies, diversion
of funds and reckless investments. This cannot be appreciated by a court in a
petition under Section 633 of the Act unless an investigation is carried out. Hence
there is the need for care and caution.

Civil Liability

The proviso under sub-section (1) of Section 633 of the Act provides that the
criminal court, which may grant relief under this sub-section, has no power to grant
relief to an officer from any civil liability for the same negligence, default, breach of
duty, misfeasance or breach of trust. Sub-section (1) talks about a proceeding
already launched against an officer of a company for negligence, default, breach of
duty, misfeasance or breach of trust. Sub-section (1) also deals with such a
proceeding where an officer of a company may be liable in respect of the
negligence, default, breach of duty, misfeasance or breach of trust. There may be a
civil case or a criminal case against an officer of a company in respect of any
negligence, default, breach of duty, misfeasance or breach of trust. What the proviso
intends to clarify is that in a criminal proceeding, the trial court before which such a
proceeding has been instituted has no power to grant relief from any civil liability for
which the officer in question may be liable.

In Rabindra Chamaria's case cited supra the Supreme Court held that the court
granting relief under Section 633 has no power to grant relief from any civil liability.

But sub-section (2) is quite different and the proviso does not operate for sub-
section (2). The court having power under sub-section (2) is the High Court. The
word 'proceeding' used in sub-section (2) includes any proceeding instituted in any
 150

civil court also. Therefore where it is apprehended by an officer of a company that a

proceeding may be instituted for negligence, default, breach of duty, misfeasance or
breach of trust, the High Court may relieve such officer if it is thought fit by the High
Court, irrespective of whether the relief sought is in respect of a civil liability or a
criminal liability.

Relief for offences against other Acts

There are not many verdicts regarding granting of relief under Section 633 of the Act
for an offence punishable under a law other than the Act.

In Prestolite's case cited supra, the petitioner had sought relief from the court under
Section 633, inter alia, for an offence committed by an officer of a company under
the Employees Provident Fund and Miscellaneous Provisions Act, 1952. The Punjab
and Haryana High Court did not give any decision regarding the power of the court
to release an officer under Section 633 of the Act for an offence under the said Act.

The High Court said that there are different considerations for the defaults
committed under different Acts. As petitioners gave no particulars and had not led
any evidence to relieve them of the liability incurred, the court refused to grant the
relief sought for by the petitioners without categorically saying that Section 633
permits granting relief for offences under enactments other than the Act also.

In Rabindra Chamaria's case cited supra, the Supreme Court held that the penal
clauses under the various other Acts would be rendered ineffective by application of
Section 633 of the Act. If Parliament had intended that Section 633 of the Act should
have coverage wider than the Act, it would have specifically provided.

The Supreme Court in the said case further held that if the interpretation that Section
633 of the Act covers liabilities under other Act also was to be accepted, it would
cover not only the existing laws, but all legislations to be enacted in future.
 151

While examining tlie ambit of Section 633 of tine Act in the context of relief for
24
offences under other Acts, the Bombay High Court held that there is an intrinsic

indication in sub-section (3) of Section 633 to hold that exercise of powers under
sub-section (2) must be restricted in respect of proceedings arising out of violations
of the Act. Sub-section (3) provides that relief under sub-section (2) shall not be
granted without notice being served in the manner specified to the Registrar and
such other person to show cause why the relief should not be granted. The
expression "such other person" would cover shareholders of the company or the
person authorized by the Central Government to launch a prosecution.

It should be understood that sub-section (1) or (2) must be read in conjunction with
sub-section (3). In sub-section (3) it should be noted that a notice must be sent to
the Registrar and such other person, if any. It is the conjunction 'and' used between
the words "Registrar" and "such other person, if any", that enables one to conclude
that notice must go to the Registrar, whether it is an application sub-section (1) or
sub-section (2) irrespective of whether the complaint in question is filed by the
Registrar or any other person.

For illustration, in the case of an officer of a company prosecuted for an offence

under Section 138 of the Negotiable Instruments Act, 1881, if it is construed that he
can seek relief under sub-section (1) of Section 633, one would wonder as to why
the notice required under sub-section (3) should be sent to the Registrar of
Companies in that case.

The words "such other person" used in sub-section (3) of Section 633 of the Act
would mean only those persons who are entitled for filing a complaint under the Act.
Therefore, a person against whom a proceeding has been launched under
Negotiable Instruments Act, cannot seek relief under Section 633 of the

24
Hareshchandra Maganlal and others v Union Bank of India and others [1991] 71
Comp Cas 69 (Bom)
 152

Companies Act, merely because, the accused happens to be an officer within the
meaning of Section 2(30) of the Companies Act. It would be absurd to think of
serving a notice to Registrar of Companies in relation to a compliant under the
Negotiable Instruments Act, 1881.

Usual Clause in the Articles of Association

The Articles of Association of a company usually contains a clause to indemnify an

officer or agent against any liability incurred by him in defending any proceedings,
whether civil or criminal, in which judgment is given in his favour or in which he is
acquitted or he is able to get relief under Section 633 of the Act. A person who gets
relief under Section 633 of the Act should be deemed to have acted honestly and
reasonably and therefore he should be entitled for reimbursement of all expenditure
incurred by him in connection with any proceeding for an offence involving
negligence, default, breach of duty, misfeasance or breach of trust.

4.7. Illustrative Cases Where Relief granted / not granted

Relief granted

In Progressive Aluminium's case cited supra, the Andhra Pradesh High Court held
that the prosecution deserves to be quashed at the threshold, for the reason that the
statements (alleged to be untrue statements) made in the prospectus cannot be
treated as wholly untrue. It suffered only from a clarification. In fact in the said case
the High Court has assumed jurisdiction by passing an order for the said purpose,
which literally ousted the jurisdiction of the criminal court before which the
prosecution was originally launched. After taking note of the facts, the High court
allowed the petition for relief under Section 633 of the Act and quashed the
proceedings before the Magistrate.

The facts of the case were as follows:

• Progressive Aluminium Ltd was originally incorporated as a private limited
company.
• The company issued a prospectus for issue of shares to the public.
 153

• As per the prospectus, Progressive Constructions Ltd (PCL) was one of the
promoters of the company and PCL had been described to be a large
construction company engaged in construction activity for 2 Vi decades.
• Moreover, it was also stated that the company is expected to go for trial run in
October, 1990 and begin commercial production in November, 1990.
• The Registrar of Companies issued a show cause notice to the company stating
that the statement in the prospectus with regard to two and a half decades'
experience included in the prospectus could be termed as an untrue statement in
terms of Section 63(1) of the Act, and therefore every person who authorised the
issue of prospectus had incurred the liability of being punishable with
imprisonment for a term which may extend to two years or with fine which may
extend to Rs.5,000/- or with both.
• In reply to the show cause notice, it was pointed out that due to circumstances
beyond the control of the company, the production could not be commenced as
mentioned in the prospectus. The petitioners further stated that there was no
intention to whatsoever to mislead the public and whatever experience they had
mentioned is that of the partnership firm of which they were the partners right
from 1966.
• After analysing the facts and circumstances of the case, the High Court observed
that the statement with regard to two and a half decades' experience included in
the prospectus could not be termed as an untrue statement mainly because it
was not besmeared with any mala fide intention of practicing fraud upon the
subscribers apart from the fact that the statement cannot be altogether branded
as a false statement.

Relief not granted

25
The facts of a case before Madhya Pradesh High Court were as follows:
• The first respondent-company entered into certain contracts with the
Government of the Soviet Union, but could not execute the contracts.

25
Shivkumar Dalmia and others v Mangalchand Hukmichand Industries (M.P.) Pvt.
Ltd. and others [1996] 86 Comp Cas 366 (M.P)
 154

The second and third respondents (who were at that time the directors) approached
the appellants for help.
• Pursuant to two agreements, the appellants in 1966 were appointed directors of
the company.
• For the years 1967 to 1969, the company failed to file with the Registrar of
Companies, its balance sheet and profit and loss accounts, and complaints were
filed against all the directors.
• The appellants were directed by the court to submit the relevant documents
within two months.
• They did not comply with this direction.
• Consequently, a prosecution under Section 614A(2) of the Companies Act, 1956,
was initiated.
• The appellants, pleading that they were not in actual management, but were
directors only for purposes of the Russian contracts filed petitions in the High
Court for relief from liability in terms of Section 633 of the Act.
• A single judge dismissed the petition holding that so long as the petitioners
continued to be the directors of the company, they were expected to comply with
the provisions of the Companies Act and that if they had any grievance they
could approach the Magistrate concerned for relief.

On appeal to a Division Bench of the High Court, the Division Bench, dismissed the
appeal as there was no unsoundness or arbitrariness in the decision of the single
judge.

4.7. RELIEF OTHERWISE THAN THROUGH SECTION 633 OF THE ACT

Statutory immunity not granted to a Nominee director - A Case Study

26

The Calcutta High Court in a misfeasance proceeding initiated by the Official

Liquidator, had the occasion to deal with a petition for relief by a nominee director.

26
A Stock and Co. (In liquidation) v Dilip Kumar Chakraborty and others [1996] 87
CompCas139(Cal)
 155

He was in the Board of a company by virtue of the powers of the Industrial

Reconstruction Bank of India to nominate its representatives in the Board of
companies assisted by it. Section 64 of the Industrial Reconstruction Bank of India
Act, inter alia, provides that no suit or other legal proceedings shall lie on an official
of the IRBI authorised to disregard the function under this Act for any loss or
damage caused or likely to be caused which is "in good faith" done or intended to be
done.

As per the facts of the case, the respondents have misappropriated a lot of money of
the company as given below:

• A sum of Rs.1,11,00,260.18 being the money lent and advanced by secured

creditors.
• A sum of Rs.39,14,443.75 being the unsecured loans collected mostly from
various customers as and by way of advance.
• They have failed and neglected to discharge the various liabilities including
statutory liabilities to the extent of Rs.14,36,282.62 and they have
misappropriated by withdrawing the said sum on various heads of expenditure.
• They have failed and neglected to collect various sums from the sundry debtors
of the company to the extent of Rs.4,64,565.31.
• They have failed and neglected to deposit the Employees' State Insurance
Corporation, Provident Fund, Sales Tax, Professional Tax, and other statutory
liabilities to the extent of Rs.3,30,391/-.
• The respondents and each of them have failed and neglected to deposit arrear,
sales tax arrears, ESI contribution and arrears of salary, income tax for which
separate cases have been instituted by the competent authorities for realisation
of the said dues amounting to Rs.41,961.

The Liquidator claimed that the respondents and each of them are bound to restore
the said sums together with interest thereon at the rate of 18 per cent per annum
being the prevailing rate charged by the nationalized banks from the date of
liquidation until realization.
 156

The Respondent No.3 who was a nominee director claimed relief on the strength of
Section 64 of the Industrial Reconstruction Bank of India Act. The Calcutta High
Court held as follows:

• Being a director of a company the nominee-director has a statutory obligation

cast upon him under the Companies Act, 1956. Whether such duties and
obligations have been complied with and have been performed "in good faith" is
a question of fact to be decided on trial.
• The official liquidator is ready and willing to expedite the matter so that once and
for all the matter is decided to thai.
• The preliminary issue may be decided at the time of final hearing of the
misfeasance proceedings.
• It was the incumbent duty of the nominee director to look into all the affairs of the
company including the day-to-day affairs as he was a director nominated by IRBI
and as such he had a double responsibility.

• The first responsibility was to watch and control the affairs of the company and to
see that nothing goes and / or happens, which is to discharge the duty as a
faithful watchdog.

4.8. NEED FOR REVIEW, IF ANY

Compounding of offences is a discretionary power vested in compounding

authorities. Public interest should not be jeopardized in the garb of compounding of
offences. Cases involving 'mens rea' or where the offence has been knowingly
committed, the scheme of the Act should be amended, so that compounding is not
taken for granted. As the power to compound is not vested with a court, there should
a cautious approach. If a person fraudulently induces persons to invest money or if a
person issues duplicate share certificates with an intention to defraud, there should
not be any scope for compounding. The above example covers offences under
Sections 68 and 84 which are compoundable offences merely because the
punishment prescribed under the respective sections fall within sub-section (7)(a) of
Section 621A of the Act. But such offences may jeopardize public interest severely.
 157

The Act, at present, provides a scheme for compounding of offences merely based
on the punishment prescribed without malting real distinction between serious and
non-serious offences. This requires a rethinking.

Similarly there has to be a review of the scheme under Section 633 of the Act to
make a proper ascertainment of the position of the company, the fact as to whether
the directors in question have acted honestly and reasonably and thereafter it should
be decided whether relief ought to be granted or not. As the power to grant relief lies
with the judiciary, there is no serious threat. Section 633 of the Act provides clearly
circumstances subject to which alone relief may be granted. Granting relief should
not shadow the role of the directors in letting the company slip into the red and
arrange for a declaration under the SICA so that companies may enjoy immunity
conferred upon the company under SICA from being sued against its properties.
This requires an in depth analysis on a case-to-case basis.

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