2014 (5) TMI 942 - HC - Companies Law

Court rules in favor of former directors in compliance case, quashing proceedings despite alleged non-compliance.

The court ruled in favor of the petitioners, former directors of a company in liquidation, in proceedings related to compliance with Section 454 of the ... Extension of time period to furnish documents - Company already under liquidation - Held that:- day to day affairs of the company were managed by a director, who had resigned from the directorship even before the winding up order. Since the present petitioners had not taken steps to withdraw from the management of the company formally for all purposes, in that, one was old and infirm and was a resident of Mumbai while the other, who was also a resident of Mumbai, is no longer resident of India and is abroad and therefore, had not participated in the management of the affairs of the company for all purposes. It is only by virtue of the said petitioners shown on record as the ex-directors of the company, that proceedings have been initiated. Hence, there would be no purpose served in proceeding against the petitioners, as if they had, in fact, committed default in withholding the records of the company - Decided in favour of appellants. Issues:1. Compliance with Section 454 of the Companies Act, 1956.2. Allegations of non-compliance under Section 454 of the Act.3. Offences under Section 538(1)(c) of the Act.4. Availability of books of account and records of the company in liquidation.Compliance with Section 454 of the Companies Act, 1956:The petitioners, who were directors of a company in liquidation, had submitted various documents, including books of account, balance sheet, and statements of affairs, to the respondent pursuant to a notice under Section 454 of the Companies Act. They sought an extension to produce any additional documents. The respondent filed a complaint against the petitioners for non-compliance, leading to proceedings before the Special Court for Economic Offences. However, the petitioners argued that they had rectified the defects in the statement of affairs, which was acknowledged in a previous order. Consequently, they contended that the proceedings against them should be closed as they had complied with the requirements of Section 454.Allegations of non-compliance under Section 454 of the Act:The Official Liquidator contended that crucial books of account and records of the company in liquidation were not provided by the petitioners. Despite this, the petitioners argued that since they were not actively involved in the management of the company, and other directors had resigned before the winding-up order, proceeding against them for non-compliance with Section 454 would serve no purpose. The court accepted this argument, leading to the quashing of the proceedings initiated against the petitioners under Section 454.Offences under Section 538(1)(c) of the Act:The petitioners, along with other directors, were accused of failing to comply with the directions related to filing statements of affairs, leading to a complaint under Section 538(1)(c) of the Act. However, the petitioners, in their defense, highlighted their limited involvement in the company's affairs due to disability and non-participation. They also pointed out that the proceedings against them were rendered infructuous based on previous orders. Consequently, the court quashed the proceedings initiated for the offense punishable under Section 538 of the Act.Availability of books of account and records of the company in liquidation:The Official Liquidator raised concerns about the unavailability of crucial books of account and records related to the company in liquidation. This issue was considered in conjunction with the petitioners' argument regarding their limited involvement in the company's management and the resignation of other directors. Ultimately, the court accepted the petitioners' contentions and allowed the petition, leading to the quashing of the proceedings initiated against them under Section 538 of the Act.