MADHAVAN NAMBIAR Vs. REGISTRAR OF COMPANIES

JUDGEMENT

(1.) THIS company petition has been moved by the petitioner, the ex-Chairman of Elnet Technologies Limited, a Government of Tamil Nadu company, under section 633(2) of the Companies Act, 1956, to relieve the petitioner from such proceedings as may be initiated against him by the respondent herein. THIS court ordered notice to the respondent on 24 August, 1999. The respondent has been served and the respondent also filed a counter-affidavit. Heard Mr. Arvind P. Datar, learned senior counsel appearing for the petitioner and Mr. K. Sridhar, Senior Central Government Standing Counsel, appearing for the respondent. Case of the petitioner The petitioner is an ex officio Chairman of Elnet Technologies Limited, a company registered under the Companies Act, 1956. The said company is promoted by Electronics Corporation of Tamil Nadu (ELCOT), an undertaking of the State Government and New Era Technologies (P) Ltd., a company promoted and owned by Thiagaraj S. Chettiar. According to the petitioner, the affairs of the company were managed by the then director in-charge, Thiagaraj S. Chettiar, from its inception till the date of his removal from the directorship. At the instance of ELCOT, a management audit was conducted during November/December, 1996, which disclosed several irregularities and the company initiated civil and criminal proceedings against the said Thiagaraj S. Chettiar. The petitioner was served with show-cause notices under sections 29 9, 30 1, 21 1, 292(1)(c ), 11 3, 193(b ), 1 7 and 58A(2 ) of the Companies Act. The violations alleged were said to have been committed during the period when the affairs of the company were managed by the said Thiagaraj S. Chettiar, who was completely in-charge of and responsible for the day-to-day management and affairs of the said company. The said Thiagaraj S. Chettiar was also in charge of New Era Technologies Ltd., which holds 25 per cent of the equity shares of Elnet Technologies Ltd., and the balance shares are held by the public and 26 per cent is held by ELCOT.It is alleged that, without the knowledge of the Board, the said Thiagaraj S. Chettiar committed large-scale irregularities and when the gigantic fraud came to light, he absconded for some months, and was finally traced and arrested at Trivandrum. The individual was also released on bail subsequently. The petitioner who became the Chairman by virtue of the fact that ELCOT had 26 per cent shares in Elnet Technologies Ltd., and which was entitled to nominate certain directors in the latter's board. The petitioner was the Chairman who was completely in the dark about the irregularities and there was neither an occasion nor was there any chance, nor was there a provocation for the petitioner to probe or look into. In fact, with effect from 19 February, 1999, the Government of Tamil Nadu directed Shri K. Gnanadesikan, IAS, to be the Chairman and managing director of ELCOT and he is the ex officio Chairman of Elnet with effect from 13 April, 1999. As a consequence, the petitioner has resigned from the Board of directors of Elnet Technologies Ltd. According to the petitioner, the Chairman of ELCOT is an ex officio appointment. The petitioner submits that he has been the Chairman of Elnet Technologies Ltd., only in an ex officio capacity; the Chairman and Managing Director of ELCOT will normally occupy the post of Chairman, Elnet Technologies Ltd., as per the memorandum of understanding. The Board of directors resolved and conferred substantial powers of management on the said Thiagaraj S. Chettiar, and he became the managing director in terms of section 2(26) of the Companies Act. Once there is a managing director, he along with the whole-time directors and other persons mentioned under section 5 of the said Act will become the officers in default and other non-whole-time directors cannot be made liable for violations, if any. Further, the notices issued are based on highly technical and procedural irregularities, which can fasten liability only on those officers who were in-charge of the company at the time when they were alleged to have been committed.According to the petitioner, the respondent should have ascertained the officers in default in respect of those irregularities during the material period and those in charge are only liable and the ex officio nominee directors cannot be made liable. The petitioner is not responsible for any of the acts mentioned in the notice and, therefore, he must be relieved from liability in respect of the alleged violations on such terms as this court may deem fit. Pursuant to the notice, the Registrar of Companies may proceed against the petitioner for alleged negligence, default, breach of duty, misfeasance or breach of trust on the basis of the show-cause notices. Assuming without admitting that the allegations set out in the notices are true, no action could be initiated against the petitioner as they have been committed without his knowledge, and he was not a party to any of those irregularities. The petitioner was not involved in the day-to-day activities of the company and only attended the board meetings intermittently. Hence the present petition. Case of the respondent The respondent, while denying the allegations and averments set out in the company petition, stated that the petitioner was a director of the company with effect from 27 June, 1996, as seen from the filing of Form No. 32. In the balance-sheet as on 31 September, 1996, 31 March, 1997, the petitioner has been shown as the Chairman of the company. The respondent further states that Thiagaraj S. Chettiar was the director of the company from the date of incorporation and as per Form No. 32 filed on 28 June, 1997, which directorship he had vacated with effect from 14 June, 1997, under section 283(1)(g) of the Companies Act. Show-cause notices for violations of sections 29 7, 29 9, 30 1, 21 1, 292(1)(c ), 11 3, 193(b ), 1 7 and 58 A were issued to the petitioner as he was a director of the company at the time of default. As regards the averment that he was in charge of New Era Technologies (P) Ltd., the Registrar's office has no information, since the said company had not filed any returns after 31 March, 1992. The petitioner was the director of the company with effect from 27 June, 1996. The respondent is not aware of the Board's resolution passed by the company conferring substantial powers of management on the said Thiagaraj S. Chettiar as he was not shown as the managing director of the company as per the records maintained by the respondent. The said Thiagaraj S. Chettiar vacated the directorship with effect from 14 June, 1997. The petitioner is liable to be prosecuted for the violations pointed out as he was director of the company at the relevant point of time of the default. Hence, the respondent has prayed this court to dismiss the company petition as devoid of merit.THIS court has to examine as to whether the petitioner is entitled to an order under sub-section (2) of section 633 of the Companies Act, relieving him from being prosecuted for alleged negligence, default, breach of duty, misfeasance or breach of trust as detailed in the show-cause notices issued by the respondent " The petitioner, a member of the Indian Administrative Service, was the Secretary to the Government during the material point of time. The company being a joint venture company, the State Government had nominated him to be the ex officio director of the company. The petitioner was the Chairman/Managing Director of Elnet Technologies Ltd., between 27 June, 1996, and 13 April, 1999; as seen from the statutory returns filed by the company to the respondent-Registrar. The petitioner was also the Chairman of the said company as seen from the balance-sheets as on 31 March, 1996, 31 March, 1997, and 31 March, 1998. In all, nine show-cause notices were issued to the petitioner calling upon the petitioner to show cause as to why prosecution shall not be launched against him under section 299 of the Companies Act, besides intimating that the offences for which action is being taken are compoundable under section 621A of the Companies Act, 1956. The petitioner submitted a consolidated explanation on 3 April, 1999, for all the show-cause notices dated 24 February, 1999. The respondent once again advised the petitioner through the company to file an application for composition of the offences in respect of the show-cause notices. At that stage, the present company petition has been filed under section 633(2). THIS court called upon the respondent to detail the materials based on which the respondent had issued various show-cause notices on 24 February, 1999, since it was represented that the petitioner was not even a director of Elnet Technologies Ltd. during the material period. The respondent filed a report. The report reads thus :