2007 (1) TMI 270 - HC - Companies Law

Prospectus - Civil liability for mis-statements in prospectus, Criminal liability for mis-statement in,

Summary

Issues Involved:
1. Alleged false statements in the prospectus under Sections 63 and 628 of the Companies Act, 1956.
2. Liability under Sections 62 and 68 of the Companies Act, 1956 for misutilisation of funds and fraudulent inducement.
3. Validity of the summoning orders.
4. Limitation period for filing the complaints.
5. Specific contentions regarding the responsibility of the petitioners as former directors.

Detailed Analysis:

1. Alleged False Statements in the Prospectus (Sections 63 and 628 of the Companies Act, 1956):

The Registrar of Companies (RoC) filed complaints alleging that the petitioners promoted "Tactful Investments Ltd." and raised a public issue with a prospectus stating that the funds would be used for leasing and investment. However, the funds were allegedly misutilised in unproductive shares and securities, contrary to the prospectus, thus constituting false statements punishable under Sections 63 and 628 of the Act. The petitioners argued that the prospectus mentioned both leasing and investment as business objects, and the funds were used for one of the stated purposes. They also contended that the non-commencement of the leasing business did not amount to making false statements.

2. Liability under Sections 62 and 68 of the Companies Act, 1956:

Complaint No. 699/2002 alleged liability under Sections 62 and 68 for paying compensation to subscribers and for fraudulently inducing persons to invest. The petitioners contended that Section 62 prescribes only civil liability, not criminal, and that no specific averment in the complaint indicated any false statement or inducement. The court noted that Section 62 indeed raises civil liability for compensation and not criminal liability. Therefore, a criminal complaint under Section 62 by the RoC was not maintainable. For Section 68, the court found no specific allegations of inducement or complaints from shareholders, thus not attracting the provisions of Section 68.

3. Validity of the Summoning Orders:

The petitioners challenged the summoning orders on the grounds that they were not directors when the funds were allegedly misutilised. The court noted that the petitioners, as promoters and signatories of the prospectus, were responsible for the statements made therein. The court held that the arguments regarding their resignation and lack of control over the company were matters of defense to be proved at trial.

4. Limitation Period for Filing the Complaints:

The petitioners argued that the complaints were time-barred, as they were filed six years after the prospectus was issued, exceeding the three-year limitation period under Section 468(2) of the Code of Criminal Procedure, 1973. The court held that the limitation period would start from when the complainant became aware of the misutilisation of funds, which could be proved only by subsequent events. Therefore, the issue of limitation was a mixed question of law and fact to be decided at trial.

5. Specific Contentions Regarding the Responsibility of the Petitioners as Former Directors:

The petitioners contended that they had resigned as directors before the alleged misutilisation of funds. The court acknowledged this defense but stated that it needed to be established at trial. The court referred to a previous case where the change in business object and subsequent approval by the Department of Company Affairs led to the dismissal of the complaint. However, in the present case, no such material was on record, and the petitioners would have to prove their defense during the trial.

Conclusion:

The court dismissed the petition to quash the summoning order in Criminal Complaint No. 698/2002 under Sections 63 and 628 of the Act, allowing the trial to proceed on merits. However, the court quashed the summoning orders and dismissed Criminal Complaint No. 699/2002 under Sections 62 and 68 of the Act, as the allegations did not attract the provisions of these sections.