THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN
COMPANY APPEAL Nos.1 AND 2 OF 2012
Both these appeals, under Section 10F of the Companies Act, 1956, are filed by the appellants herein aggrieved by the order of the Company Law Board (hereinafter called the CLB) in C.A.Nos.233 and 234 of 2010 dated 16.12.2011.
The aforesaid two applications were filed before the CLB under Section 621A of the Companies Act, consequent upon a complaint being filed by the department of Serious Fraud Investigation for Economic Offences,
Hyderabad, which were subsequently numbered as Calendar Case Nos.394 and 400 of 2009 before the Court of the Special Judge for Economic Offences at . While C.C.No.400 of 2009 related to violation of the provisions of Section 220(1) read with Section 162 of the Companies Act, C.C.No.394 of 2009 was for violation of the provisions of Section 309 of the Companies Act read with Section 629-A thereof. The punishments specified under the Companies Act (hereinafter called the “Act”), for the offences alleged in C.C.Nos.394 and 400 of 2009, is only “fine”. Hyderabad
The applications in C.A.No233 and 234 of 2010, filed before the CLB, were for compounding of the offences alleged against the appellants herein, in C.C.Nos.394 and 400 of 2009; and the jurisdiction of the CLB, under Section 621A of the Act read with Regulation 44(1) of the Company Law Board Regulations, was invoked. The CLB, in the order under appeal, noted that a total of seven cases were filed against the appellants herein, and the other accused; they had allegedly paid Rs.2.66 Crores as professional charges to one of the Director of the company; this payment was over and above the salary that was being paid to him; failure to obtain approval of the Central Government in this regard had resulted in violation of Section 309(1) of the Act; the said person was appointed as a Director only in order to facilitate siphoning of funds; violation of the statutory provisions under the Companies Act was not merely technical in nature; and the averment, that the company was also a victim of the fraud perpetrated by the erstwhile management, was not a ground to permit compounding of the offence; and it could be ascertained only upon conclusion of the trial. The CLB further held that the Company Secretary (applicant No.2) was equally responsible for violation of the provisions of the Act; the offence was a continuing one; the same was brought to light only upon investigation; the applicants had not been candid in the matter of placing of materials and facts, and had not complied with the rule of full disclosure; and, as such, the present compounding applications could not be entertained. The CLB noted that applicant No.2 had admitted that he had committed a bonafide error in not filing the auditor’s report with the balance sheet for the relevant two years thereby violating Section 220(1) of the Act; the Registrar of Companies, Hyderabad, vide letter dated 26.8.2009, had confirmed that the Company’s Balance sheets, in respect of the period 31.3.2006 to 31.3.2008, did not contain several crucial and mandatory details; in the light of the objection raised by the SFIO, these offences could not be termed as purely non-compliance of the laid down provisions; the issue involved was a question of fact which needed to be enquired into during trial; there was considerable force in the contention of the SFIO that there was a fundamental inter-linkage between the seven cases filed by them on the basis of investigation, followed by the confession of Sri B.Ramalinga Raju, Ex-Chairman of the company which revealed large scale falsification of accounts of the company for several years prior to 7.1.2009; and the offences mentioned in C.C.Nos.394 and 400 of 2009 were also required to be tried along with the other cases. The CLB, therefore, declined to exercise its discretion under Sections 621A of the Act, and dismissed both C.A.Nos.233 and 234 of 2010. Aggrieved thereby, the present appeals.
Sri S.Ravi, Learned Senior Counsel appearing on behalf of the appellants, would draw attention of this Court to the letter dated 21.7.2011 addressed by the Deputy Director - Ministry of Corporate Affairs, to the Director-Serious Fraud Investigation Office, New Delhi wherein, while drawing his attention to the Ministry’s instruction in its letter dated 13.11.2009, the Deputy Director stated that prosecution for violation of Section 309(1)(b) read with Section 629-A and Section 220 of the Act, instructed to be filed against the company i.e., company only, may be withdrawn, and an action taken report be furnished after compliance. Learned Senior Counsel would also draw attention of this Court to the letter addressed by the Joint Director, CBI dated 7.7.2011 informing the present Chairman of the company that the Company Secretary Sri G.Jayaraman had been cited as a prosecution witness in RC.4(S)/2009-Hyd relating to the Satyam Scam case; he had been examined as a prosecution witness, and his cross-examination had been completed; the investigation carried out by the CBI did not reveal the role of Sri G.Jayaraman in the fraud perpetrated by the then Chairman Sri B.Ramalinga Raju and others in the company; this had no bearing on investigation being carried out by other agencies; and investigation, with regards diversion of funds of the company by Sri B. Ramalinga Raju and others, was in progress. Reliance is also placed by the Learned Senior Counsel on the supplementary investigation report of the SFIO dated 23.10.2009, under Section 235 of the Companies Act, wherein it is recorded that their investigation had not revealed the involvement of Company Secretary in the act of falsification; he had signed the said statements believing it to be the true and correct picture of the financial status of the company; as per the terms of his employment he had nothing to do with the preparation of the said accounts; therefore the Company Secretary may be excluded from such proceedings; similarly the company, being a juristic person, had acted through its directors and managerial persons, and was itself a victim of fraud; such directors, and managerial persons, had acted in a malafide manner and had falsified the accounts of the company; and, therefore, the company, being a victim of the fraud, could also be excluded. Learned Senior Counsel would also draw attention of this Court to the letter addressed by the DIG, CBI, ACZ,
to the Chief Finance Officer of Mahindra Satyam that the culpability of Sri G.Jayaraman, Company Secretary, had not come to their notice during the course of investigation. Hyderabad
Learned Senior Counsel would submit that, as Sri G.Jayaraman, (Company Secretary) was a prosecution witness; and the aforesaid letters disclose that he was not involved in the fraudulent acts of the erstwhile Chairman and Directors of Satyam Computer Services Ltd, the CLB had erred in placing reliance on the other cases, (wherein the erstwhile Chairman and Managing Director and other Directors of Satyam Computer Services Ltd were involved), for refusing to exercise its jurisdiction under Section 621A of the Act. Learned Senior Counsel would submit that, since M/s Mahindra Satyam had, at the behest of the Central Government, invested in the equity share capital of the company and had taken over its management, it was evident that the company itself was a victim of the fraud; and prosecuting the victim, when Section 621A conferred jurisdiction on the CLB to compound such offences, was wholly illegal. Placing reliance on Official Liquidator v. Dharti Dhan (P) Ltd, Learned Senior Counsel would contend that Section 621 A is mandatory, and does not confer any discretion on the CLB to refuse to compound offences where the punishment prescribed for violation of the specified provisions of the Act was mere fine, and not imprisonment.
On the other hand Sri M. Ravindran, Learned Addl. Solicitor General appearing on behalf of both the Union of India and the Registrar of Companies, would submit that, while these two case (C.C.394 and 400 of 2009) filed for violation of the provisions of Sections 309 and 220 of the Companies Act read with Section 162 and 629A prescribe a penalty of fine only and not imprisonment, these two applications for compounding of the offences is just a prelude for applications to be filed later by the erstwhile Chairman and Directors of the company who are arrayed as the accused in the five cases in C.C.Nos.395 to 399 of 2009. Learned Addl. Solicitor General would submit that, while C.C.No.398 of 2009 was filed for violation of the provisions of Sections 205 and 205(8) of the Companies Act which prescribes punishment of fine only, in the other four cases (C.C.No.395 to 397 and 399) the punishment stipulated under the relevant provisions of the Act is fine or imprisonment or both. Learned Addl. Solicitor General would draw attention of this Court to Section 274(1)(d) of the Act whereunder a person shall not be capable of being appointed as a director of a company if he has been convicted by a Court of any offence involving moral turpitude, and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence. He would also refer to Schedule XIII of the Act whereunder no person shall be eligible for appointment as a Managing Director or a Whole-time Director or a Manager of a company unless he satisfies the condition of not being sentenced to imprisonment for any period, or to a fine exceeding of Rs.1000/-, for the conviction of an offence under any of the sections of the Companies Act. Learned Additional Solicitor General would submit that since a person whose offence is compounded does not suffer the disqualification of a conviction, the CLB has the discretion to refuse to compound the offences in an appropriate case and require the accused to face the trial in the criminal case instituted against him; a discretion is conferred under Section 621A and the CLB is not bound to compound offences in all cases involving fine; and it can, in appropriate cases and for just and valid reasons, exercise discretion to refuse to compound the offences.
On being asked whether C.C.Nos.394 and 400 of 2009 have either been clubbed, or are being heard together, with the other five cases referred to hereinabove, Learned Addl. Solicitor General would fairly state that evidence was recorded in each of these cases separately, and the other five case are not clubbed either with C.C.No.394 or with C.C.No.400 of 2009. He would also concede that though Sri G.Jayaraman, the Company Secretary, also continues to be the Senior Vice-President of the Company, neither does he fall within the definition of a Managing Director, a Whole-time Director or a Manager of the company.
The amendment to Section 621A of the Act, by the Companies Second Amendment Act, 2002 (Amendment Act 11 of 2003), has not yet come into force; and, as such, the said provision, as it stood prior to its amendment, is applicable to the cases on hand. Under Section 621A(1), notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence punishable under the 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, may, either before or after the institution of any prosecution, be compounded by the CLB on payment or credit by the company or the officer, as the case may be, to the Central Government of such sums as that Government may prescribe. Under the first proviso thereto the sum so specified shall not, in any case, exceed the maximum amount of the fine which may be imposed for the offence so compounded. Section 220 of the Companies Act (violation of which is alleged in C.C.No.400 of 2009) requires the balance sheet and the profit and loss account to be laid before a company at the Annual General Meeting, and to be filed with the Registrar of Companies within 30 days thereafter. Failure to comply with Section 220 attracts the penal provision of Section 162 whereunder the company, and every officer of the company who is in default, shall be punishable with fine which may extend to Rs.500/- for every day during which the default continues. Under the proviso to Section 309(1) of the Act any remuneration for services rendered by any director in any other capacity shall not be so included if (a) the services rendered are of a professional nature and (b) in the opinion of the Central Government, the Director possesses the requisite qualifications for the practice of the profession.
The case of the prosecution, in short, is that the fees paid to Sri Krishna G Palepu, who was hitherto appointed as the Director of the Company, could not have been paid in the absence of permission being granted by the Central Government under Section 309(1)(b) of the Act. Under Section 629-A of the Companies Act, where no specific penalty is provided elsewhere in the Act, if a company or any other person contravenes any provision of the Act or any condition, limitation or restriction, the company, and every officer who is in default or such other person, shall be punishable with fine which may extend to Rs.5000/-, and where the contravention is a continuing one with a further fine which may extend to Rs.500/- for every day during which the contravention continues. Even on conviction by a competent Criminal Court, both Sections 162 and 629A (which are the penal provisions applicable for violation of Section 220 and 309 of the Act), merely require payment of fine, and not imprisonment. Even if C.C.Nos.394 and 400 of 2009 end in conviction of the accused, the punishment which can be imposed by the Criminal Court is merely imposition of fine, which under Section 621-A of the Act, the CLB itself is empowered to impose on the offences being compounded. It is no doubt true that, on the offences being compounded by the CLB, the accused, in whose cases the offence is compounded, would not suffer the consequences of a conviction by a competent Criminal Court. As the first appellant is the company, the consequences of conviction, as stipulated under Section 274(1)(d) and Schedule XIII of the Act, would not be attracted. Whether the aforesaid statutory provisions would be attracted in case the 2nd appellant (the company secretary is convicted in C.C.Nos.394 and 400 of 2009) is a matter for the CLB to examine while exercising its discretion under Section 621-A of the Act.
It is wholly unnecessary for this Court to go into the question whether Section 621-A is mandatory or whether the said provision confers a discretion on the CLB to refuse to compound the offences where the penalty prescribed, for the offences alleged to have been committed, is merely a fine as, even if this Court were to proceed on the premise that the CLB has the discretion to refuse to compound the offences, such exercise of discretion can only be for just and valid reasons, and refusal to compound the offences cannot be at the mere whim and fancy of the CLB or for reasons which are wholly extraneous or irrelevant to the aspects required to be taken into consideration while exercising such discretion. As noted hereinabove C.C.Nos.394 and 400 of 2009 have not been clubbed with the other five cases (C.C.Nos.395 to 399 of 2009) nor has evidence been recorded in all these seven cases together. All these cases have been dealt with separately, though they are said to be listed on the same day. The letters to which Sri S.Ravi, Learned Senior Counsel, has drawn the attention of this Court to does indicate that the Ministry of Corporate Affairs of the Union of India, the CBI and the SFIO itself had no reason to suspect the involvement of Sri G.Jayaraman, Company Secretary in any of the offences in which the Chairman and Managing Director and other Directors of Satyam Computer Services Limited are said to be involved in. While it may not be appropriate for this Court to examine the authenticity of those letters, which have been relied upon by the appellants, (since these are matters which the CLB is required to examine while exercising its discretion under Section 621-A), it cannot, however, be lost sight of that, in one of the letters addressed by the CBI, it is stated that Sri G.Jayaraman had appeared on behalf of the prosecution, and was examined as a prosecution witness. The submission of Sri S.Ravi, Learned Senior Counsel, that the erstwhile Chairman and Managing Director, and the other erstwhile Directors of the company, are no longer involved in the company’s management; and the company itself was a victim of the fraud played by them, cannot be said to be without merit. These are relevant factors which the CLB should take into consideration while exercising its discretion to compound/not to compound the offences in exercise of its jurisdiction under Section 621A of the Act. Though Section 621A confers discretion on the CLB to also determine the quantum of the compounding fee, Sri S.Ravi, Learned Senior Counsel, would fairly state that the appellant company was ready and willing, if so ordered by the CLB, to pay the maximum amount prescribed under Section 621-A of the Act for compounding of such offences.
The impugned orders of the CLB, in C.A.Nos.233 and 234 of 2010 dated 16.12.2011, are set aside, and the said applications are remanded back to the CLB for its consideration afresh in accordance with law. Since the trial in C.C.No.394 and 400 of 2009 is said to be at an advanced stage, it is but appropriate that the CLB decides C.A.Nos.233 and 234 of 2010 at the earliest, in any event not later than four weeks from the date of receipt of a copy of this order. It is made clear that this Court has not expressed any opinion on merits. It has merely noted the contentions, and has broadly indicated the aspects which the CLB should bear in mind while exercising its discretion whether or not to permit compounding of the offences alleged against the appellants in C.C.Nos.394 and 400 of 2009.
Both the C.As. are, accordingly, disposed of at the stage of admission.
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