2020 (9) TMI 852 - HC - Companies Law

Issuance of summons to the petitioner - petitioner is one of the 287 persons/entities that are accused in the said complaint and against whom summons have been directed to be issued in terms of the impugned summoning order - offences under Sections 128, 129, 448 read with Section 447 of the Companies Act, 2013. HELD THAT - It is clear from the plain language of Section 16A(2)(b) of the Banking Companies (Acquisition and Transfer of Undertakings) Act that a Nominee Director would not incur any obligation or any liability by reason only of his being a director or for anything done or omitted to be done in good faith in discharge of his duties as a director or anything in relation thereto - It is also well settled that a Director cannot be vicariously held responsible for any offence committed by the company unless the relevant statute itself so indicates or there is material to indicate that the particular individual is responsible for perpetrating the said offence. A plain reading of the provisions of Section 448 of the Companies Act indicates that a person would be liable under Section 447 of the Act only if he makes a statement knowing it to be false or omits any material fact knowing that the said fact is material. Thus, knowledge that the statement is false or fails to disclose material fact(s) is an essential ingredient of an offence under Section 448 of the Companies Act - Undisputedly, the petitioner cannot be prosecuted solely for the reason that he was a Director on the Board of BSL at the material time when the Board of Directors had approved the financial statements and the Director s Report for the year ended 31.03.2017. The petitioner cannot be proceeded against for any acts of commission or omission done in good faith in discharge of his duties as a Nominee Director. SFIO s contention that all members of the Board of Directors of BSL can be prosecuted for violating Sections 128(1) and 129(1) of the Companies Act, because no other officer had been charged for maintaining the accounts is plainly unmerited. As discussed above, the obligation to maintain true and fair accounts is that of the Company and the Directors of a Company are not vicariously liable for the acts of the Company in the absence of a statutory provision imputing such liability. They can, of course, be proceeded against if it is established that they had individually committed the offence. Further, Section 16A(2)(b) of the Banking Companies (Acquisition and Transfer of Undertakings) Act expressly grants immunity to a director nominated by a bank for any acts done or omitted to be done in that capacity - Even if it is accepted that the petitioner can be proceeded against for violation of Section 128(1) and/or 129(1) of the Companies Act, on account of the Company not maintaining accounts, books and papers reflecting a true and fair view of the state of affairs of the company, the same can be done only if there is material to allege that the petitioner was aware of the same and had not acted in good faith. Whether there is any allegation in the Investigation Report or any material on record which would indicate that the petitioner has connived or has been complicit with the promoters and/or other entities in perpetuating the fraud by approving financial statements, which he knew to be not fairly and truly reflecting the affairs of BSL? - HELD THAT - It is at once clear that there is no allegation in paragraph 5.12.11 and 5.13.14 of the Investigation report that the Nominee Directors were aware that figures of certain assets had been falsely inflated in earlier years or that they were aware that the accounts had been recast under the guise of compliance with IndAS to correct the inflated values of current assets. There is also no allegation that the Nominee Directors were aware that the statements approved by them did not reflect true and fair view of the affairs of BSL - There is no allegation that the petitioner had knowingly been a party to make false statements or conceal any material fact. There is a material difference between the allegation that a Nominee Director has been negligent or has failed to discharge his responsibility and an allegation that he has connived or has been complicit in approving statements, which he knows to be false or conceal material information. While the latter may constitute an offence under Section 448 of the Companies Act, the former does not constitute any such offence. In this view, it is clear that the SFIO has not made any allegation in its Investigation Report or in its complaint against the petitioner that falls within the scope of Section 448 of the Companies Act. Neither the complaint made by the SFIO nor the Investigation Report submitted by the SFIO contains any specific allegations against the petitioner of being complicit or having acted in bad faith. The reasoning of the learned Court that the petitioner had connived with the Promoters and is liable to be proceeded against, is clearly unsustainable and not supported by the allegations made in the complaint or the Investigation Report furnished by the SFIO - Undisputedly, the scope of examination at the stage of issuing process is limited and the concerned Court is not required to evaluate the evidence in any detail. However, it is well settled that even at the stage of taking cognizance, the concerned Court does not act mechanically or as a post office. The Court must apply its mind to the facts of the case and the law applicable thereto. It must satisfy itself that the allegations made in the complaint constitutes an offence. In the present case, the learned Trial Court has issued summons on the reasoning that it is alleged that the petitioner has connived with the Promoters. However, it is seen that there is no such allegation either in the complaint or in the Investigation Report furnished by the SFIO. Thus, in the given circumstances, this Court does not consider it apposite to relegate the petitioner to approach the Trial Court for seeking a discharge - This Court has confined the examination only to the complaint, Investigation Report and the material placed by the SFIO before the Trial Court to persuade the Court to issue the summons. The impugned summons issued to the petitioner and the impugned order, to the limited extent that it directs issuance of summons to the petitioner, are set aside - Petition allowed.

Summary

Issues Involved:
1. Whether the petitioner can be prosecuted for alleged fraud committed by Bhushan Steel Limited (BSL) and/or its promoters solely due to his position as a Nominee Director.
2. Whether there is sufficient material on record to indicate that the petitioner was complicit in the commission of the alleged offences under Sections 128, 129, 448 read with Section 447 of the Companies Act, 2013.
3. Applicability of Section 16A of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 to the petitioner.
4. Examination of the sufficiency and validity of the summoning order issued by the learned ASJ.

Detailed Analysis:

1. Prosecution of the Petitioner as a Nominee Director:
The petitioner was a Nominee Director of Punjab National Bank (PNB) on the Board of BSL. The main issue was whether the petitioner could be prosecuted for the alleged fraud committed by BSL and its promoters solely because he was a director of BSL. The court noted that the petitioner did not share any executive responsibilities and acted in good faith as a Non-Executive Director. The petitioner argued that there was no material to conclude that he was guilty of any offence and that the summoning order was erroneous and without application of mind.

2. Material on Record Indicating Complicity:
The SFIO's complaint and Investigation Report detailed the fraudulent activities of BSL's promoters but did not specifically allege that the petitioner was complicit or aware of the fraud. The court examined paragraphs from the Investigation Report, which mentioned the petitioner's reliance on audited accounts and his role in approving financial statements. However, it was noted that there was no specific allegation or material indicating that the petitioner knowingly approved false statements or concealed material facts. The court concluded that the petitioner could not be held vicariously liable for the company's actions without specific evidence of his involvement.

3. Applicability of Section 16A of the Banking Companies Act:
Section 16A of the Banking Companies (Acquisition and Transfer of Undertakings) Act provides immunity to Nominee Directors from prosecution for acts done in good faith in discharge of their duties. The court noted that the petitioner, as a Nominee Director, could not be prosecuted for any violation of Sections 128 and 129 of the Companies Act unless it was established that he had not acted in good faith. The court emphasized that a Nominee Director is not involved in the routine management of the company and cannot be held responsible for acts and omissions that the officers of the company are required to comply with.

4. Examination of the Summoning Order:
The court scrutinized the summoning order and the material presented by SFIO. It was found that the learned Trial Court had issued summons based on an incorrect assumption that the petitioner had connived with the promoters. The court highlighted that there was no such allegation in the complaint or the Investigation Report. The court reiterated that at the stage of issuing process, the court must apply its mind to the facts and law to ensure that the allegations constitute an offence. The court concluded that the summoning order was unsustainable as it was not supported by specific allegations or material indicating the petitioner's complicity.

Conclusion:
The court set aside the impugned summons and the order directing issuance of summons to the petitioner. It was determined that the petitioner, as a Nominee Director, acted in good faith and there was no material to support the allegations against him. The petition was allowed, and all pending applications were disposed of.