Penalty - For false statements

HIGH COURT OF CALCUTTA Deba Prasad Roy v. Regional Director, Department of Company Affairs SANJIB BANERJEE, J C. P. NOS. 15, 16 AND 24 OF 2005 May 11, 2007 Section 628, read with section 211 of the Companies Act, 1956 - Penalty - For false statements - State Bank of India promoted company along with some other banks and financial institutions - Company applied to National Housing Bank (NHB) for relaxation of prudential norms relating to provisioning and capital adequacy applicable to company - NHB granted exemption subject to condition that promoters of company would bring in equity share capital of Rs. 25 crores and compulsorily convertible preference share capital of Rs. 25 crores - Company availed of concession and directors’ report of company acknowledged requirement for a sum of Rs. 50 crores being infused by way of additional equity and preference shares - However, no further shares in company were issued and no further funds were received by it - Registrar thus issued notice to company alleging violation of provisions of sections 211 and 628 - On instant application, it was seen that company could not infuse funds, as law applicable to State Bank of India did not permit to make further investments in the company’s capital - However, to comply with requirement of NHB, State Bank of India adopted alternative route and took over bad debts of company and thereby difference between debits and credits of company became more favourable to it - Whether, on facts, not only was substance of NHB condition complied with, State Bank of India did more than NHB condition required - Held, yes - Whether, therefore, even though petitioners could be found guilty of understating theirs and State Bank’s contribution, there could have been no mala fides or ill motive in underplaying company’s substantive compliance with NHB condition that would bring second limbs of clauses (a) and (b) of section 628 into play - Held, yes - Whether, consequently, petitioners were to be absolved of all liabilities in respect of alleged offence complained of by Registrar - Held, yes FACTS The State Bank of India promoted the company and along with some other banks and financial institutions held the entire paid-up capital of the company. The promoter who was in control through its officers as nominated directors of the company found the home finance business a different kettle of fish than the routine banking business and ran the company aground. The company applied to the National Housing Bank (NHB), the apex body controlling companies engaged in such business, for relaxation of the prudential norms relating to provisioning and capital adequacy applicable to the company. By a letter of 7-4-2000, the company further sought diverse exemptions and detailed a roadmap that the company proposed to follow during the financial years 1999-2000 to 2003-04. In the synopsis appended to the letter the company indicated that it proposed to infuse capital for the year 2000-01 Rs. 25 crores by way of equity and a further Rs. 25 crores by issuing preference shares. The NHB accorded its consent to the exemptions sought subject to conditions that the promoters would bring in equity share capital of Rs. 25 crores and compulsorily convertible preference share capital of Rs. 25 crores. The company availed of the concession and acknowledged the same in its annual report for the year 1999-2000. In the directors’ report for the relevant financial year, the restructuring package for the company was referred to as was the approval of the NHB to the relaxation of the applicable prudential norms. The directors’ report of that year acknowledged the requirement for a sum of Rs. 50 crores being infused by way of additional equity and preference shares. The relevant resolutions were also carried out at the general meeting. However, no further shares in the company were issued and no further funds were received by it though the NHB’s first condition required the shareholders making further investments in the company. Thus, the Registrar issued show cause notice to the company alleging violation of both sections 211 and 628. On application: HELD Whether the disclosure made by the company, or by the petitioners, in the relevant papers complained of by the Registrar were adequate, would, depend on the first condition being established as a condition precedent. If, indeed the relaxation would not have applied if such condition was not first met, the company and the petitioners were guilty of not disclosing a relevant fact. Even then, for an offence under section 628 to be established, it would require something more than the casual omission of a material particular or an apparent misstatement. Clauses (a) and (b) of section 628 require, in addition, for it to be established that the false statement was made knowing it to be false or for the omitted material to have been ignored with knowledge that it was material. In the Registrar’s subjective and partly justifiable opinion the fact that the company obtained relaxation of the strict norms applicable to it upon the condition set therefore by the NHB, should have been mentioned in the relevant documents. But the Registrar had not been able to establish that the alleged misstatement was deliberately made or that the omission was made with the idea of concealing the same. True, the Registrar would have had opportunity to establish the second limbs of either clause found in section 628 if the matter went to trial, but he could have attempted to establish the same in these proceedings. [Para 29] The petitioners had relied on the company’s annual report for the year 2003-04 and the balance-sheet and profit and loss accounts for the relevant financial year that had been finalized on 24-4-2004, and placed before the company’s general meeting on 24-5-2004, long prior to the issuance of the show-cause notice of 31-12-2004, by the Registrar. It appeared from the directors’ report and from the accounts that by the close of the financial year ended 31-3-2004, all public deposits had been fully paid off by the company and loans made available by State Bank of India were completely wiped out from the company’s books. In addition, the company’s assets portfolio comprising commercial loans/investments, the prospects of recovering which were far from encouraging, were assigned to the State Bank of India at a consideration of Rs. 3891.65 lakhs against assets of book value of Rs. 11458.03 lakhs. Schedules 3 and 4 to the accounts for the relevant financial year revealed that all secured loans that remained outstanding as at 31-3-2003, had been repaid by 31-3-2004, and that all unsecured loans and public deposits had also been repaid. [Para 30] It appeared that the Registrar had missed the wood for the trees in insisting that an offence had been committed and that the petitioners were liable to be faced trial therefor. The NHB required additional funds to be brought into a company whose net worth had been substantially depleted. The object of the exercise was to ensure that the credit side in the company’s books of account climbed up to meet the debit entries in its books. Such objective of balancing the two sides was to reduce the difference between the debit side and the credit side. The NHB suggested that the company pull up the credit side to bring it closer to its cumulative debts. The company could not infuse funds, as the laws applicable to the State Bank of India did not permit to make further investments in the company’s capital. But the State Bank of India did not lose sight of what the NHB sought to achieve. The State Bank of India had the company assign its NPA to the bank and therefore reduced the debit side on account of bad or suspected debts in the company’s accounts. Whichever way the matter was looked into, the difference between the debits and credits of the company became more favourable to the company upon the State Bank of India taking over the bad debts of the company. NHB’s objective was achieved, though not strictly in terms of the letter of its requirement. [Para 31] The petitioners were all nominees of the State Bank of India on the company’s board and participated in the State Bank of India taking over the company’s NPAs. The petitioners did not flout the NHB condition because they chose to, the limits that State Bank of India was required to restrict its investments to, dictated that. The company and the petitioners adopted the alternative route to achieve the same purpose. [Para 32] That State Bank of India took over the company’s NPAs appeared in the company’s documents and was a fact that was not controverted by the Registrar. Not only was the substance of the NHB condition complied with, the State Bank of India did more than the NHB condition required it. [Para 33] There was no substantive violation by the petitioners of the provisions complained of. If the petitioners could be faulted, it was on the score of not making this explicit in the relevant documents and thereby giving the Registrar room to doubt their conduct and assail their motives. It was not as if the Registrar took a pedantic view, he was well within his rights to raise the point. The petitioners ought to have explained better in the relevant documents that the spirit behind the NHB condition had more than been complied with. [Para 34] If such was the conclusion that could be drawn, then the petitioners could be found guilty of understating theirs and the State Bank’s contribution. And there could have been no mala fides or ill motive in underplaying the company’s substantive compliance with the NHB condition that would bring the second limbs of clauses (a) and (b) of section 628 into play. [Para 35] The petitions were allowed. The petitioners were absolved of all liabilities in respect of the alleged offence complained of by the Registrar. [Para 36]