2006 (6) TMI 222 - HC - Companies Law

Issues Involved:
1. Resignation of directors and their liability post-resignation.
2. Allegations of non-filing of statutory returns and balance sheets.
3. Allegations of misuse of public funds and non-fulfillment of promises made in the prospectus.
4. Validity and sufficiency of show-cause notice.

Issue-wise Detailed Analysis:

1. Resignation of Directors and Their Liability Post-Resignation:
The petitioner, who was a director of M/s. P.K. Vaduvammal Finance and Investment P. Ltd., resigned on November 14, 1996. The resignation was duly registered with the Registrar of Companies on November 15, 1996. New directors took over the management, and the petitioner had nothing to do with the company's affairs post-resignation. Despite this, the Economic Offences Wing issued notices to the erstwhile directors for non-filing of returns from April 1, 1997, onwards. The court noted that the petitioner had co-operated with the investigation and provided all necessary details. The court emphasized that the petitioner could only be held liable for statutory obligations until their resignation date.

2. Allegations of Non-Filing of Statutory Returns and Balance Sheets:
The show-cause notice alleged that the company failed to file balance sheets and annual reports since its incorporation. The petitioner argued that all statutory returns were filed until the management change. The court found that the notice lacked particulars about why the petitioner's statement on compliance was not verified. The court noted that the company had not filed any balance sheet after March 31, 1997, and the petitioners had resigned from the board on November 14, 1996. Therefore, the allegations in the notice were not sustainable as the petitioners were not responsible for compliance post-resignation.

3. Allegations of Misuse of Public Funds and Non-Fulfillment of Promises Made in the Prospectus:
The show-cause notice accused the company of not implementing business plans as promised in the prospectus and misusing public funds. The court examined the allegations and found no material evidence to support the claim that public money was diverted for purposes other than those stated in the prospectus. The respondent admitted that there were no complaints from the public or shareholders regarding fund utilization. The court emphasized that allegations must be based on definite materials and not mere surmises. The court found the notice lacked a rational connection between the reasons and the materials, making the allegations unsustainable.

4. Validity and Sufficiency of Show-Cause Notice:
The petitioner argued that the show-cause notice was vague and lacked specific allegations. The court agreed, stating that the notice did not disclose the basis of the opinion or view, making it unsustainable. The court highlighted the principle that notices proposing punitive action must disclose basic and primary facts to establish a link between the material and the alleged offense. The court cited the Supreme Court ruling in ITO v. Lakhmani Mewal Das, emphasizing that reasons for forming a belief must have a rational connection with the material facts. The court found the notice lacked such a connection and allowed the petition, rejecting the respondent's plea for liberty to issue a fresh show-cause notice.

Conclusion:
The court quashed the show-cause notice, finding it unsustainable due to the lack of specific allegations and material evidence. The petitioners were not held liable for statutory non-compliance post-resignation, and the allegations of fund misuse were not substantiated. The court emphasized the need for definite materials to support punitive actions and rejected the respondent's plea for liberty to issue a fresh notice, stating that each case must be considered on its individual merits.

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