2017 (7) TMI 1104 - Board - Companies Law

Directors held liable for 40 lakh refund; appeal dismissed under Companies Act, 1956.

The appeal was dismissed, confirming the appellant's liability to refund Rs. 40 lakh with interest jointly and severally with BREDL and other directors. ... Vacation of the office under Section 283(g) of the Companies Act - nothing on record to suggest that Company Secretary was authorised to comply with the obligations relating to the deemed public issue - Held that:- We are concerned with the expression 'officer who is in default' as defined under Section 5 of the Companies Act, 1956. Since the expression 'officer in default' defined under Section 5 of the Companies Act, 1956 is not pari materia with that expression defined under the Negotiable Instruments Act, the Apex Court decision in the case of S.M.S. Pharmaceuticals Ltd. (2005 (9) TMI 304 - SUPREME COURT OF INDIA) would have no relevance to the fact of the present case. Relying on a master circular issued by the Ministry of Corporate Affairs on 29.7.2011 it was contended that in the present case, Since Mr. Jaykrushan Das was appointed as a Company Secretary by BREDL the said Company Secretary could be an officer in default for non compliance of Section 73(2). We see no merit in the above contention, because, there is nothing on record to suggest that Company Secretary was authorised to comply with the obligations relating to the deemed public issue. Hence the argument that the Company Secretary of BREDL ought to have been made liable cannot be accepted. In the present case, it is the case of the appellant that no notice of Board meeting was issued to him. In such a case, question of the appellant remaining absent from the Board meetings does not arise and consequently question of applying Section 283(g) of the Companies Act, 1956 to the case of the appellant does not arise. For all the aforesaid reasons, we see no merit in the appeal and the same is hereby dismissed with no order as to costs. However, it is made clear that the liability of the appellant under the impugned order is restricted to refunding the amount of ₹ 40 lac with interest jointly and severally with BREDL and other directors of BREDL. Issues Involved:1. Liability of the appellant for refunding money collected by BREDL through issuance of redeemable preference shares.2. Determination of the appellant as an 'officer in default' under Section 5 and Section 73(2) of the Companies Act, 1956.3. Applicability of Section 283(g) of the Companies Act, 1956 regarding the appellant's absence from board meetings.4. Relevance of prior case law and circulars to the appellant's liability.Issue-wise Detailed Analysis:1. Liability of the appellant for refunding money collected by BREDL through issuance of redeemable preference shares:The appellant challenged the order directing BREDL and its directors to refund the money collected through redeemable preference shares with interest. The appellant argued that he was not responsible for the issuance of these shares and had no knowledge about the real estate business. However, it was established that BREDL collected Rs. 40 lakh during the appellant's tenure as a director, and the issuance to more than 50 entities required compliance with public issue norms under Section 56 of the Companies Act, 1956. The appellant's contention that he was not responsible for the issuance did not absolve him from the obligation to refund the collected amount with interest, as stipulated under Section 73(2) of the Companies Act, 1956.2. Determination of the appellant as an 'officer in default' under Section 5 and Section 73(2) of the Companies Act, 1956:The appellant argued that he was not an 'officer in default' as defined under Section 5 of the Companies Act, 1956, and that specific officers like Mr. Soumen Majumder and Ms. Shipra Banerjee should be liable. However, the court found no evidence that any specific officer or director was authorized to comply with the public issue norms. According to Section 5(g), in the absence of specified officers, all directors, including the appellant, are considered 'officers in default'. Thus, the appellant, as a director during the relevant period, was held liable to refund the amount jointly and severally with BREDL and other directors.3. Applicability of Section 283(g) of the Companies Act, 1956 regarding the appellant's absence from board meetings:The appellant claimed that he should be deemed to have vacated his office under Section 283(g) due to non-receipt of board meeting notices. The court dismissed this argument, stating that Section 283(g) applies only to a director who absents himself from board meetings despite receiving notices. Since the appellant claimed he did not receive any notices, the provision did not apply, and he could not be deemed to have vacated his office.4. Relevance of prior case law and circulars to the appellant's liability:The appellant cited previous case law and a master circular to argue against his liability. The court found these references irrelevant. The decision in H. Nanjundiah vs. V. Govindan was based on the unamended Section 5 of the Companies Act, 1956, which included 'knowingly and willfully' as criteria, not applicable in the current context. The Supreme Court decision in S.M.S. Pharmaceuticals Ltd. dealt with a different statute (Negotiable Instruments Act), and thus was not pertinent. The master circular issued by the Ministry of Corporate Affairs did not absolve the appellant, as there was no evidence that the Company Secretary was authorized to comply with obligations related to the deemed public issue.Conclusion:The appeal was dismissed, confirming the appellant's liability to refund Rs. 40 lakh with interest jointly and severally with BREDL and other directors. The court upheld the determination that all directors, including the appellant, were 'officers in default' under the relevant sections of the Companies Act, 1956. The appellant's arguments regarding non-receipt of board meeting notices and reliance on previous case law and circulars were found to be without merit.