1. V.S. Rao Member. - The petitioner-company is a company registered with the Registrar of Companies, Maharashtra, having its registered office at Room No. 4, Thambai Co-operative Society, Sewri-Koliwada, Sewri(E), Mumbai. The company’s books of account and other records were inspected by the officers of Ministry of Corporate Affairs under section 209A. During the inspection some contraventions of the Companies Act have been identified by the inspecting officers. The company as per its statement has preferred suo motu application for compounding of its offences. Accordingly, the company submitted three applications along
with its officers in default to the Registrar of Companies, Mumbai, for compounding of offences of violation of the Companies Act.
2. The Registrar of Companies, Maharashtra after examining the compounding application received under section 621A of the Companies Act, 1956, for contravention of the Companies Act, has forwarded the same to this Bench with his report which is as follows :
“This office has received an application under section 621A of the Companies Act, 1956, of compounding an offence under sections 81(1A) and 154, Schedule I, Table A, article 29 and Schedule I, Table A of the Companies Act, 1956. The application has been signed by :
1. Mr. Ramesh S. Parmar (on behalf of the company and individual capacity);
2. Mr. Sandeep A. Mehta; and
3. Mr. Arun K. Mehta.”
3. The company was inspected under section 209A of the Companies Act, 1956, show-cause notices were issued to the following directors of the company :
“1. Mr. Viraj A. Patel;
2. Mr. Bipin H. Gandhi; and
3. Smt. Harsha H. Mehta.”
4. But the above-mentioned present directors have applied for compounding.
“The facts of the case are as under :
(1) Section 81(1A) : The company has allotted the equity shares to M/s. Dhanvidhya Impex Ltd. and M/s. Fraternity PetroChem (P.) Ltd., to the tune of 1,00,000 and 50,000 shares, respectively, in board resolution passed on April 20, 2004. But no special resolution has been passed and the opportunity to the existing shareholders has also not been given.
(2) Section 154 : The company has closed its Register of Members from September 23, 2003 to September 30, 2003, September 23, 2004 to September 30, 2004 and September 23, 2005 to September 30, 2005, during the financial years March 31, 2003, March 31, 2004 and March 31, 2005 and fails to issue notice in the newspaper as provided in the said section.
(3) Schedule I, Table A, article 29 : The company has forfeited the share of the registered member of the company who failed to pay call, consideration without following the procedure laid down in the articles of association resulting in violation of Schedule I, Table A, article 29 of the Companies Act.
(4) Schedule I, Table A : As per board of directors meeting held on May 13, 2004, the board has passed the resolution of non-payment of call dues from M/s. Dhanvidhya Impex Ltd. and M/s. Fraternity PetroChem (P.) Ltd., on allotment of money along with an interest rate of 18 per cent per annum from the date of following the last date fixed for payment of allotment money to the date of payment. The said resolution is in contradiction to Table A. Though the article provides that the Table A in the First Schedule to the Companies Act, shall not apply to this company, subject to the exercise of powers by special resolution. Now coming to the article 52 of the articles of association which does not specify the rate of interest on non-payment of dues from the shareholders. Now, where article do not provide, the Table A applies. Now coming to Table A, Schedule I, Sr. No. 16(1), the rate of interest should not be more than 5 per cent per annum or such lower rate, if any, as the board may determine. Therefore, the company has violated the provisions of Schedule I, Table A of the Companies Act. In the circumstances, the application of the applicants may please be disposed of on merits.”
5. The said applications have been received in this Bench from the office of the Registrar of Companies and the same were listed for hearing first time on 16-5-2008, for compounding. On that date along with the representative of the petitioner, Mr. M. V. Chakranarayan, Deputy Registrar of Companies, from the office of the Registrar of Companies, Maharashtra, appeared and opposed the said compounding of offences. The company’s representative objected to the said opposition of the Registrar of Companies, and stated that this is a right given by Parliament to the accused and the officers of the Government have no power to deny the right given and in his submissions he has produced the opinion expressed in the Guide to the Companies Act by A. Ramaiya, a popular law book on the Companies Act, and specifically referred to following paragraph in the commentary given in the said book :
“The power of compounding the offence is discretionary as the expression used in sub-section (1) is ‘may’. It is open to the company or the officer-in-default not to move for composition of the offence complained against and which is pending in a court of law and instead claim to be tried by the court. However, once the company or the officer-in-default opts to seek composition and Regional Director or the Company Law Board, as the case may be, is agreeable therefore, the complainant, i.e., the Registrar or SEBI or the shareholder or the officer of the Central Government authorised in this behalf, cannot enforce the remedy through the court. Once the offence is compounded, no prosecution can be filed in the court for the very same offence.”
6. In view of the above pleadings by counsel for the petitioner, the Registrar of Companies, Maharashtra, was requested to give the reasons for their opposition and accordingly the case was adjourned. The Registrar of Companies, on the next hearing submitted the letter No. RoC/STA(SP)/45976/621A dated 23-5-2008, in which he has stated as follows :
“In respect of above referred matter this office proposed to oppose the matter on the ground that the company is involved in demat scam of M/s. Yes Bank Ltd. However, the Hon’ble Bench may decide the matter on its merit.”
7. A copy of the said letter was also served on counsel for petitioner. Counsel for petitioner immediately took objection to the Registrar’s letter and stated that his company never involved in demat scam of Yes Bank Ltd. As per his opinion the said scam involved multiple applications by single party during the public issue of the Yes Bank Ltd., and he has stated that his client never applied for any shares in the Yes Bank Ltd. Therefore, it cannot be said that he has participated in the said demat scam. However, he said that at the most some of the parties who have taken the loan from his client might have used the said money for applying to the Yes Bank IPO. Therefore, he stated that his client cannot be said to have participated/involved in demat scam. He further stated that the compounding is under section 81(1A) of the Act and not under section 68A of the Act under which demat scam can come under. Therefore, he felt that the Registrar of Companies’s objection is without application of mind. At this juncture the Registrar of Companies was requested to specify the amount belonging to this company is involved into the scam and if so any public interest is affected may be quantified and communicated to this Bench and accordingly one week’s time was given to the Registrar to file his reply.
8. At the next hearing the Registrar of Companies has not filed any reply starting therein the quantum of amount involved or the number of applications made by the company in Yes Bank in demat scam or the public interest involved. However, he has filed a copy of the Order No. 1/121/2006-CL. II dated 16-5-2008, issued under section 235 of the Companies Act ordering investigation into the affairs of the petitioner-company by Central Government and appointing Shri S.K. Sharma, Joint Director, working in the serious fraud investigation office, New Delhi, as the Inspector. Counsel for the petitioner who has been served with a copy of this order has stated that the Registrar is only witch-hunting and he has nothing to prove that the petitioner-company has affected the public interest or participated in the demat scam of Yes Bank Ltd., and therefore further argued that the said contravention by the company is technical in nature where it has collected extra share capital without offering to the existing shareholders as required under section 81(1A) of the Act and he further stated that his is a closely held company and no shareholder has objected to such allotment. He stated that the paid-up capital of his company as of now is Rs. 7,32,000 and shows that the public interest in the said company as shareholder is very negligible and being a technical contravention he said, it should be compounded without hesitation by the concerned authorities. In support of his argument he has referred to a case law Hemal A. Kanuga v. Registrar of Companies [2008] 143 Comp. Cas. 81 (Guj.) which was decided by the Gujarat High Court in January, 2008.
9. It is observed by the Gujarat High Court in the said case, as per counsel for the petitioner:—
“....Looking to the nature of offences alleged against the petitioners and explanation tendered by them in their replies, the court is of the prima facie view that the petitioners have taken all due care and caution in complying with the provisions of the Act and even if there may be minor lapses, those are required to be condoned. For such minor lapses and defaults of technical nature to prosecute the company’s highest ranking officers is not just and proper. To prosecute a person is of a serious consequence.....” (p. 27)
10. Counsel for the petitioner further stated that the other two contraventions identified during the inspection are of technical nature and have no serious consequence either on the company or on the public interest. One of the contraventions identified is violation of section 154 of the Companies Act, 1956. In this section it is alleged that the company indulged in its register of members’ book closure without giving an advertisement in the local newspaper. He stated that the number of shareholders of the company are so small that even by word of mouth they can spread the information to all the shareholders. and therefore in his opinion the advertisement is unnecessary burden on the company but being a public limited company it is supposed to advertise and therefore it has accepted the responsibility and filed the compounding application and promised to advertise in future wherever it is necessary to close the books (Register of Members).
11. The other contravention identified by the inspecting officer is not following of the articles of association of the company while forfeiting the shares of the company. Counsel for the petitioner once again stated that none of the shareholders of the company, not being the shareholders whose shares have been forfeited, have raised any objection and being a very closely held company it should not be seen very seriously about these lapses. He stated that the accounts of the company were approved by the shareholders themselves gives an inherent approval by the shareholders for such technical lapse by the management.
12. The Registrar of Companies in his report stated that the show- cause notices were issued to the three directors, viz., (1) Mr. Viraj A. Patel, (2) Mr. Bipin H. Gandhi; and (3) Smt. Harsha H. Mehta whereas the compounding applications are stated to have been signed and submitted by the following three persons: —
1. Mr. Ramesh S. Parmar;
2. Mr. Sandeep A. Mehta; and
3. Mr. Arun K. Mehta.
13. The compounding is to be done to the officers in default who have preferred to have compounding and not to face court appearance. In this case it is enquired from counsel for the petitioner, who are the officers in default at the relevant period, he stated that those directors have resigned and left and therefore they could not manage the applications from them. But the present directors who are available have signed the compounding application including that of the company. In this case the application of the company for compounding is acceptable. However, the three directors who have submitted the compounding application are not themselves officers in default. Therefore, their applications need to be rejected by the Registrar of Companies himself instead of forwarding them to this Bench for compounding.
14. Taking into consideration the submissions of counsel for the petitioner, I am of the opinion that neither the Registrar of Companies nor the Central Government or SEBI have discretion to reject the compounding request made by accused officers in default. I agree with the opinion expressed in the book Guide to the Companies Act by A. Ramaiya where it is stated that discretion to purchase peace by compounding of offence or face prosecution and prove innocence in the court of law, is with the accused officers in default and once they opt for a particular posture neither the Government nor the Registrar of Companies has any chance except to go with their decision.
15. The Registrar of Companies has wrongly accepted the compounding applications from the present directors of the company and forwarded the same to this Bench for compounding on merit. As stated earlier these present directors are innocent persons who came into the shoes of the ex-directors who are officers in default as defined in section 5 of the Companies Act, 1956. Therefore, the forwarding of the said application should have been stopped by the Registrar himself instead of asking this Bench to express its opinion. The present directors need not face compounding as they are innocent persons. The Registrar of Companies is directed to contact the persons to whom the show-cause notice has been issued and direct them to either opt for compounding or face the prosecution with a time-frame for their response. At this juncture it is important to record that most of the show-cause notices invariably issued by the Registrar of Companies, contain a sentence at the end, i.e., the said offence is compoundable under section 621A of the Act and if party so desires he may compound the offence. When enquired from the petitioner’s counsel he stated that the said sentence is there in the show cause notice issued by the Registrar of Companies in the present case also. Once the Registrar has communicated to the accused while issuing show-cause notice that they can compound the offence, accepted the compounding application and after examination and forwarded the report to the competent authority for compounding of the offence it is not understood how the Registrar can suddenly change his stand and come in middle, i.e., at the time of finally compounding the offence by this Bench, saying that he is opposing the compounding, such power is not given to him by Parliament as read from the section.
16. In view of the above I hereby compound the offences committed by the company by imposing the compoundable fee of Rs. 5,000 for contravention of section 81(1A) of the Act, another Rs. 5,000 for contravention of section 154 of the Act and finally another Rs. 5,000 on the company for contravention of its own bye-laws, namely, the articles of association. All the three persons who have filed their compounding applications are not entertained as they are innocent persons and the Registrar of Companies is to invite proper applications for compounding of offences from the officers in default, examine the same and forward them to the competent authority. Since the applicant-company has remitted the compounding fee of Rs. 15,000 to this Bench, the Registrar of Companies, Maharashtra, is hereby directed to take further necessary action under section 621A(4)(c) and (d) of the Companies Act, 1956.
17. With this order the compounding application is disposed of and no order to costs.