1981 (10) TMI 136 - HC - Companies Law

Directors' Liability Beyond Companies Act: Honest and Reasonable Actions Required

The court held that relief under section 633 of the Companies Act extends to liabilities under Acts other than the Companies Act if related to the ... Powers of court to grant relief in certain cases, Principles for interpretation of statutes Issues Involved:1. Jurisdiction of the court under section 633 of the Companies Act to grant relief against liability for negligence, default, breach of duty, etc., under Acts other than the Companies Act.2. Whether the court can draw a distinction among directors based on their technical skill or expertise when granting relief under section 633.Issue-wise Detailed Analysis:Issue 1: Jurisdiction under Section 633 of the Companies ActThe petitioners, who are the current Board of Directors of M/s. Bee Jay Engineers Pvt. Ltd. and M/s. Atlantic Engineering Services Private Ltd., sought relief under section 633(2) of the Companies Act from potential prosecutions under various Acts, including the Employees' Provident Fund Act, Central Excise Act, State Insurance Act, Sales Tax Act, and the Income Tax Act. They contended that they should not be held liable for defaults committed by previous directors.Section 633 of the Companies Act provides protection to company officers against liabilities arising from negligence, default, breach of duty, misfeasance, or breach of trust, provided they acted honestly and reasonably. The court held that this protection is not limited to liabilities under the Companies Act alone but extends to liabilities under other Acts, as long as these liabilities are related to the affairs and functioning of the company. The court emphasized that the language of section 633 is broad, encompassing 'any proceeding,' which includes civil and criminal proceedings. The court concluded that relief under section 633 can be granted for liabilities under other Acts, provided the officer acted honestly and reasonably.Issue 2: Distinction Among Directors Based on Technical Skill or ExpertiseThe petitioners argued for relief based on their roles as directors appointed for their technical skill or expertise. The court examined whether a distinction could be made among directors based on their roles when granting relief under section 633. The court noted that section 633 confers discretion to relieve an officer of a company from liability if they acted honestly and reasonably, considering all circumstances, including those connected with their appointment.The court acknowledged that while the technical skill or expertise of a director might be a relevant factor in determining whether they acted honestly and reasonably, it is not a sufficient ground by itself for exoneration. All directors, regardless of their expertise, must satisfy the court that they meet the criteria for relief under section 633. The court disagreed with the view that directors appointed for their technical skills should be treated differently from those in effective control of the company's management.The court concluded that while the expertise of a director can be considered as one of the circumstances justifying their actions, it cannot be the sole basis for granting relief. The criteria for relief must be strictly followed as laid down in section 633, without importing additional criteria.Conclusion:The court answered both questions in favor of a broad interpretation of section 633, allowing relief from liabilities under other Acts and rejecting a distinction among directors based solely on their expertise. The company petitions were sent back to the learned company judge for disposal in accordance with the law.