1978 (6) TMI 150 - HC - Companies Law

High Court quashes complaint against directors for alleged Companies Act breach

M Velayudhan Versus Registrar of Companies

M Velayudhan Versus Registrar of Companies - [1980] 50 COMP. CAS. 33 (KER.) Issues Involved:1. Quashing of the complaint filed under Section 482 of the Cr. P.C.2. Contravention of Section 372 of the Companies Act, 1956.3. Applicability of Section 372(14)(d) of the Companies Act.4. Definition and control of a 'holding company' and 'subsidiary' under Section 4 of the Companies Act.5. Exercise of inherent powers by the High Court under Section 482 of the Cr. P.C.Detailed Analysis:1. Quashing of the Complaint Filed under Section 482 of the Cr. P.C.:The petitioners, directors of M/s. Sudarsan Trading Company Ltd. ('Sudarsan'), sought to quash a complaint filed by the Registrar of Companies alleging contravention of Section 372 of the Companies Act, 1956. The petitioners argued that the facts averred in the complaint did not make out a case for prosecution and that there was no basis for taking action by filing the complaint before the Chief Judicial Magistrate. They contended that they would face considerable hardship if action was taken on the complaint, and thus, it would be appropriate for the High Court to quash the complaint pending before the Chief Judicial Magistrate, Kozhikode.2. Contravention of Section 372 of the Companies Act, 1956:The complaint by the Registrar of Companies was based on the allegation that Sudarsan acquired more than 54% of the subscribed capital of M/s. West Coast Industrial Gases P. Ltd. ('West Coast Gases') without the prior approval of the Central Government and the resolution of the general body as required under Section 372(4) of the Companies Act. The acquisition was said to have violated the provisions of Section 372(2) read with Section 372(4) of the Act, as it involved investing more than 10% of West Coast Gases' subscribed capital and more than 30% of Sudarsan's own subscribed capital.3. Applicability of Section 372(14)(d) of the Companies Act:The petitioners contended that the acquisition of shares in West Coast Gases by Sudarsan was exempt from the restrictions of Section 372(2) because it was an investment by a holding company in its subsidiary, as per Section 372(14)(d) of the Companies Act. They argued that Sudarsan controlled the composition of the board of directors of West Coast Gases, making it a subsidiary. The court examined whether Sudarsan had the power to control the composition of the board of directors of West Coast Gases, as stipulated in the agreement dated September 19, 1976.4. Definition and Control of a 'Holding Company' and 'Subsidiary' under Section 4 of the Companies Act:The court analyzed the definitions of 'holding company' and 'subsidiary' under Section 4 of the Companies Act. According to Section 4(1)(a), a company is deemed to be a subsidiary if another company controls the composition of its board of directors. Section 4(2) further clarifies that control over the composition of the board of directors is established if the controlling company can appoint or remove the majority of the directors without the consent or concurrence of any other person. The court found that the agreement between Sudarsan and West Coast Gases conferred absolute power on Sudarsan to nominate the majority of the directors, thereby establishing control over the composition of the board of directors.5. Exercise of Inherent Powers by the High Court under Section 482 of the Cr. P.C.:The court considered whether it was appropriate to exercise its inherent powers under Section 482 of the Cr. P.C. to quash the complaint. The court referenced the Supreme Court's rulings in State of Karnataka v. L. Muniswamy and Madhu Limaye v. State of Maharashtra, which outline the principles for exercising inherent powers. The court concluded that the ends of justice would be served by quashing the complaint, as the prosecution was based on a misinterpretation of the legal relationship between Sudarsan and West Coast Gases. The court held that the complaint filed by the Registrar of Companies constituted an abuse of the process of the court and quashed the proceedings pending as S.T. 211 of 1977.