2021 (9) TMI 817 - HC - Companies Law

Prosecution proceedings - NBFC or not - Inadvertent/typographical error in recording of minutes - it was erroneously recorded in item no. 12 of the minutes that the company submitted application with the Reserve Bank of India for its deregistration as NBFC and registration as a CIC - however, the company was not a registered Non Banking Financial Company (NBFC) at the relevant time - sections 118(2) and (7) read with sections 447/448 of Companies Act - HELD THAT - The key ingredient of the offence is the intent to deceive, gain undue advantage or injure the interest of the company or any person connected thereto. In the case in hand, the complaint lodged by the opposite party does not prima facie reflect such intent on the part of the petitioners. Per contra, though the opposite party has referred to the notice of show cause in the complaint, the reply to the said notice given by the petitioners is conspicuously absent therein. It is also inconceivable that the inspection was held sometime in 2018 and the notice to show cause signed on 24th August, 2018 whereas the instruction of the Ministry to launch prosecution for such violation was issued on 7th December, 2017, i.e., preceding the inspection. The complaint does not prima facie make out an offence under sections 118(2) and (7) read with sections 447/448 Act of 2013. Typographical/inadvertent error in recording of minutes rectified subsequently can under no stretch of imagination be termed as an offence, far less an offence under the provisions of the Act of 2013 as alleged. That the petitioners acted with a malafide intention to deceive, gain undue advantage or injure the interest of the company or any person connected thereto is not reflected in the four corners of the complaint. Allowing the proceeding to continue shall be a futile exercise and abuse of the process of law in view of the fact that the inadvertent error has been sufficiently and adequately explained and does not call for any prosecution. The proceeding in respect of complaint case no. 15 of 2018 is liable to be quashed - Application allowed.

Summary

Issues:
1. Quashing of proceedings of complaint case under sections 118(2) and (7) read with sections 447/448 of the Companies Act, 2013.

Analysis:
The petitioners, a company and its former manager, sought to quash the proceedings of a complaint case filed by the opposite party under sections 118(2) and (7) read with sections 447/448 of the Companies Act, 2013. The petitioners argued that a typographical error occurred in the minutes of a board meeting, erroneously recording the company's application for de-registration as a Non-Banking Financial Company (NBFC) when it was actually applying for registration as a Core Investment Company (CIC). The error was rectified by the company in a subsequent meeting. The opposite party inspected the records later and issued a show cause notice, leading to the complaint. The petitioners contended that the error was inadvertent, rectified promptly, and their explanation was not satisfactory to the opposite party, resulting in the complaint.

The opposite party argued that the erroneous recording violated the Act and warranted prosecution. They claimed that the correction was made only after the show cause notice was issued, making the application for quashing premature. The court examined the relevant sections of the Companies Act, particularly sections 118(2), (7), and (11), emphasizing the importance of accurate minutes of meetings. The court noted that the error in recording the application was inadvertent and promptly rectified by the company. The court analyzed the definition of 'fraud' and the elements of false statement under sections 447 and 448 of the Act, emphasizing the intent to deceive or gain undue advantage. The court found that the complaint did not establish malicious intent on the part of the petitioners and that the error did not amount to an offense under the Act. The court highlighted the absence of the petitioners' reply to the show cause notice in the complaint and the timing discrepancies between the inspection, notice issuance, and prosecution instruction.

The court applied the test of whether the uncontroverted allegations in the complaint made out a prima facie case and concluded that the petitioners did not act with malafide intention. The court exercised caution in invoking its powers under section 482 of the Code of Criminal Procedure, emphasizing that quashing a prosecution should not stifle legitimate cases. Ultimately, the court allowed the revision application, quashing the proceedings of the complaint case pending before the Learned 2nd Special Court, Calcutta. The court directed a copy of the order to be forwarded to the trial court for necessary action, disposing of related applications and ruling no order as to costs.