1981 (3) TMI 200 - HC - Companies Law

Summary

Issues Involved:
1. Misstatements in the prospectus.
2. Liability under Section 633 of the Companies Act, 1956.
3. Reasonableness and honesty of directors' actions.
4. Appointment and role of the managing director.
5. Evidence and investigation regarding the fraud.
6. Relief from liability under Section 633.

Issue-Wise Detailed Analysis:

1. Misstatements in the Prospectus:
The prospectus issued by Tri-Sure India Ltd. contained two incorrect statements: (1) that 30% of the company's production in 1972-73 was exported, and (2) inflated figures of sales and profits for the year ending 31st August, 1974. These misstatements led to a show-cause notice from the Registrar of Companies, indicating potential prosecution under Sections 62 and 63 of the Companies Act for issuing a prospectus containing untrue statements.

2. Liability under Section 633 of the Companies Act, 1956:
The petitioners sought relief under Section 633, which allows the court to excuse a director from liability if it is proven that they acted honestly and reasonably. Section 633(1) states that the court may relieve an officer from liability if they acted honestly and reasonably and ought fairly to be excused. Section 633(2) allows directors to apply for relief if they apprehend proceedings against them.

3. Reasonableness and Honesty of Directors' Actions:
The court first found that all petitioning directors acted honestly. However, it questioned whether they acted reasonably. The factors considered included:
- Tri-Sure's perennial money problems.
- Failure to account for moneys received against pro forma invoices.
- Phenomenal increases in sales figures.
- Failure to send production returns to New York.
- Hegde's independent actions and reluctance to provide information.
- The directors' confidence in Hegde as reflected in his appointment as managing director.

4. Appointment and Role of the Managing Director:
Hegde was appointed managing director on 21st January, 1975, despite previous irregularities. This appointment indicated the directors' confidence in him, which was seen as a reflection of his perceived trustworthiness. The directors' reliance on Hegde and other officers was considered reasonable given his role and responsibilities.

5. Evidence and Investigation Regarding the Fraud:
The fraud involved inflating sales figures and falsifying records. The directors acted promptly upon discovering the fraud. They initiated a special investigative audit by Ferguson & Co., which revealed extensive fabrication of accounts. The directors offered to refund share moneys to misled shareholders, indicating their honesty and efforts to rectify the situation.

6. Relief from Liability under Section 633:
The court found that Parker and Grundy acted reasonably and excused them from liability. However, it was not satisfied that Parish and Wheaton acted reasonably, as they failed to pursue doubts about the accuracy of the prospectus statements. The court emphasized that directors must exercise reasonable care and diligence, especially when there are grounds for suspicion.

Conclusion:
The court granted relief to Parker and Grundy under Section 633, excusing them from liability for the misstatements in the prospectus. The petition was dismissed for Parish and Wheaton, who were found not to have acted reasonably. The judgment highlighted the importance of directors exercising due diligence and being vigilant in their oversight responsibilities. The court also noted that this decision should not influence any potential prosecution against Parish and Wheaton, which should be decided independently based on the evidence presented in those proceedings.