Pre-prosecution relief under Companies Act section 633(2), retrospective approval, and exemption defeated alleged company-law defaults.

Section 633(2) of the Companies Act, 1956 can be invoked before criminal proceedings begin, because it allows a director or officer to seek relief on apprehension of proceedings and is meant to prevent undue hardship. The alleged defaults under Sections 211, 292 and 370 were not sustained on the facts: the deposits were treated as fixed-term interest-bearing deposits rather than portfolio management scheme investments, post facto board approval was accepted as sufficient compliance for the Section 292 issue, and a governmental exemption with retrospective approval removed the basis for the Section 370 allegation. The show cause notices and consequential proceedings were quashed.

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Issues: (i) whether a petition under Section 633(2) of the Companies Act, 1956 was maintainable before commencement of criminal proceedings; (ii) whether the impugned deposit transactions could be treated as portfolio management scheme investments so as to attract alleged contravention of Section 211 and Schedule VI, and whether post facto approval could cure the alleged default under Section 292; (iii) whether the alleged contravention under Section 370 survived in view of the governmental exemption and retrospective approval.

Issue (i): whether a petition under Section 633(2) of the Companies Act, 1956 was maintainable before commencement of criminal proceedings

Analysis: Section 633(2) empowers an officer who apprehends that proceedings may be brought against him for negligence, default, breach of duty, misfeasance or breach of trust to apply to the High Court for relief. The provision confers on the High Court the same power to relieve the officer as the court would have had if proceedings had already been brought. The section is intended to prevent undue hardship in deserving cases and does not require the applicant to wait until a complaint is filed.

Conclusion: The petition was maintainable and the preliminary objection was rejected.

Issue (ii): whether the impugned deposit transactions could be treated as portfolio management scheme investments so as to attract alleged contravention of Section 211 and Schedule VI, and whether post facto approval could cure the alleged default under Section 292

Analysis: The decisive factor was the real nature of the transaction, not the description adopted in the balance sheet. The deposits placed with the bank were fixed-term interest-bearing deposits and were not shown to constitute portfolio management scheme investments on the material available. The RBI guidelines on portfolio management were addressed to banks and their subsidiaries, and non-banking companies could not be treated as violators merely because a bank may have handled funds in a particular manner. As to Section 292, the absence of prior express language barring subsequent ratification allowed post facto board approval to operate as sufficient compliance in the facts of the case.

Conclusion: No sustainable contravention of Section 211 or Section 292 was made out.

Issue (iii): whether the alleged contravention under Section 370 survived in view of the governmental exemption and retrospective approval

Analysis: The record showed that the competent ministry had granted exemption/permission covering the relevant period and permitting the company to make the deposits subject to the stated limits. The approval operated retrospectively and removed the basis for insisting that the alleged excess investment remained unauthorised. In these circumstances, continuation of the show cause proceedings was unwarranted.

Conclusion: The alleged breach of Section 370 did not survive.

Final Conclusion: The show cause notices could not be sustained and were quashed, with the consequential proceedings also failing.

Ratio Decidendi: A High Court may grant relief under Section 633(2) before prosecution is launched, and alleged company-law defaults will not be sustained where the real transaction is not what the notice assumes or where subsequent board approval or retrospective governmental sanction removes the legal foundation of the charge.

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