In Re: St. Mary''s Finance Ltd., In Provisional Liquidation <BR> M. Ahmed Kunju, Provisional Liquidator, St. Mary''s Finance Ltd. (Under Liquidation)

R. Rajendra Babu, J.—The Official Liquidator, who was appointed as the provisional liquidator of the company under liquidation proceedings, M/s St. Mary''s Finance Limited, filed this criminal complaint against the first accused, the managing director and accused 2 to 4,--the directors, of the above company, alleging the commission of an offence u/s 454(5) of the Companies Act.

It was alleged in the complaint that the first accused was the former managing director and other accused were the directors of the above company, St. Mary''s Finance Ltd., at the time of appointing the Official Liquidator as the provisional liquidator of the company by the order of this Court dated 28.9.1999. It was further alleged that the provisional liquidator had gone to the registered office of the company at Nedumchalil Building, Mullassery Canal Road, Kochi, and locked and sealed the office in pursuance of his order of appointment and on 28.10.1999, the above office was inspected, in the presence of the representatives of the first accused and others and at that time the current records, registers and securities of the company were not available in the office, that though the first accused had undertaken to produce the current records, registers, valuable securities and other documents before the Official Liquidator, the accused did not care to produce the same. It was further alleged that the accused failed to submit the statement of affairs within the statutory period of twenty one days from the date of appointment of the provisional liquidator and even after the issue of notice demanding the accused to submit the statement of affairs, and thereby they failed to furnish the statement of affairs without any reasonable excuse and committed the offence u/s 454(5) of the Act.

When the accused appeared, the substance of accusation were read and explained to them and they pleaded not guilty to the above allegations. On the side of the complainant the Official Liquidator was examined as PW1 and Exhs. P1 to P25 were marked. The incriminating evidence were brought to the notice of the accused u/s 313 Cr. P.C. and they denied the commission of the offence. The third accused was examined on the defence side as DW1 and Exhs. D1 to D3 and D3(a) were marked. The first accused got himself examined as DW2. The learned counsel appearing for all the accused and the agent of the Official Liquidator were heard.

The points for consideration are :

Whether the accused failed to furnish the statement of affairs without any reasonable excuse and had committed the offence u/s 454(5) of the Act ?

If the accused are found guilty, what is the sentence to be imposed ?

Point No. 7

4.1 St. Mary''s Finance Ltd. was a company declared u/s 620A of the Act as a Nidhi company. The company had collected huge deposits from thousands of depositors. The assets of the company as on 31.12.1998, as disclosed by the company, were [in the sum of] Rs. 18,40,41,319 which included ''loans and advances-considered good'' of Rs. 10,36,41,412. The first accused was the managing director of the company. Accused 2 to 4 are the wife, brother and daughter of the first accused respectively. The company itself has come up before this court u/s 391(1) of the Act for sanction of a scheme of compromise or agreement. While so, some of the creditors of the company also filed CP 18/99 for winding up of the company. This court while considering those petitions had already found that an amount of Rs. 6,67,37,784 had been diverted by the accused to a sister concern, namely, St. Mary''s Properties Ltd. (the first accused is the managing director of the above company also) in violation of the rules and the standing orders of the Reserve Bank of India and without the sanction or knowledge of the Registrar of Companies. The above diversion of fund was during the period from 4.7.1998 to 20.7.1999. In fact, the above diversion was in the nature of advancing Joans to Mr. Vinod P. Jacob without getting any security from them. This court did not either sanction the scheme of compromise proposed by the company or order winding up of the company, but formulated a scheme for the working of the company and appointed the Official Liquidator as the provisional liquidator and directed him to take over the entire assets, records and securities of the company, and to function in the same office of the company as it was functioning and to carry on the business of the company without receiving fresh de-posits from depositors until the company was wound up as per the provisions of the Act. An agent was allowed to be appointed to assist the provisional liquidator and, accordingly, Advocate Sri C Khalid was appointed as the agent. The provisional liq- uidator was allowed to release the gold pledged with the company on receipt of the principal amount advanced with the interest thereon. The first accused was directed to give all assistance and co-operation to the provisional liquidator.

On 21.10.1999, the provisional liquidator proceeded to the registered office of the company at Nedumchalil Building, Mullasery Canal Road, Kochi, and the above office was got locked and sealed in the presence of the first accused. The accused had not informed the Official Liquidator that they had shifted their registered office of the company to St. Mary''s Castle or elsewhere. When the registered office was opened on 25.10.1999 in the presence of the representatives of the accused and the Depositors'' Association and others, the current records, the securities and other relevant records of the company were not there. The first accused informed the Official Liquidator and the agent, Advocate Sri. C. Khalid that the securities and current records of the company are kept in the office of the auditors and Advocates and he shall make them available before the Official Liquidator within a week. As the names and details of debtors and their address were not available, the provisional liquidator could not proceed with the business of the company in accordance with the scheme formulated by this court. Without the statement of affairs and the current registers and account books of the company, the provisional liquidator could not comply with the scheme formulated by this court. The scheme was formulated for protecting the interest of the entire [body of] depositors. The company had collected nearly Rs. 18 crores as deposits. It is in above background, the present criminal complaint has to be considered. As the criminal complaint is a confirmation of the proceedings pending before this court for winding up of the company, the previous proceedings before this court and the orders passed by this court are relevant factors to be considered.

The provisional liquidator when examined as PW1 had given evidence that the accused, who were bound to furnish the statement of affairs within twenty one days from the date of appointment of the provisional liquidator, failed to furnish the statement of affairs and though he issued Exh. P1 notice directing the accused to furnish the statement of affairs, they did not comply with the above demand. Exh. P1 notice was issued on 15.10.1999. It appears that on 15.11.1999, the first accused filed an application for extension of time for filing the statement of affairs and it was rejected by the Official Liquidator by Exh. P2 dated 17.11.1999. This court by order dated 15.10.1999, directed the provisional liquidator to carry on the business with a view to protect the best interests of the depositors. It was further directed to collect the loan advanced mainly to St. Mary''s Properties Limited, and the huge amounts advanced to other debtors and the interest thereon. It was in the above circumstances that the provisional liquidator directed the accused to file the statement of affairs. It would be relevant to note that all the current records, accounts, registers, securities including gold and other documents were not furnished by the managing director to the provisional liquidator. The provisional liquidator is bound by law to take all securities, books of accounts and other assets of the company from the possession of the former directors. Though the first accused had undertaken to produce the current records, registers and other securities before the Official Liquidator, he had not complied with the above assurance. Likewise, he did not furnish the statement of affairs in time even after the demand made by the provisional liquidator. Accordingly, the agent of the Official Liquidator filed report [Exh. P3] before this court on 24.11.1999 stating that the accused had not produced the statement of affairs as well as the current records, registers and securities of the company before the official liquidator. It was specifically mentioned that on 4.11.1999, the accused had informed the provisional liquidator that he would not hand over the current records and securities as he had filed an appeal before the Division Bench of this court challenging the earlier order of the Company Court. On 15.11.1999, the first accused informed the agent of the provisional liquidator that the records of the company were in the custody of his iawyer and he needed some more time to file the statement of affairs. In the above report it was further mentioned that the former directors of the company were playing fraud and were obstructing the business and deliberately concealing and withholding the books of accounts and securities, etc. When the provisional liquidator initiated proceedings and approached the District Magistrate u/s 456(1A) of the Act for the search and the seizure of the records, securities and other documents, the first accused approached the Company Court by filing CA 453/99 and this court passed an order permitting the accused to produce all the records, books of accounts, registers and securities before the Official Liquidator. Even after the passing of the above order, the accused did not furnish the statement of affairs, the current records, account books, securities and other registers of the company before the Official Liquidator.

On 7.12.1999, the first accused produced a statement of affairs before the Official Liquidator. On verification, it was found that the above statement of affairs was incomplete and it did not contain all the details as contemplated by law. Section 454(1) of the Act says that the statement of affairs should contain the details specified in Clauses (a) to (e). As the statement of affairs did not contain all the details as prescribed in Section 454(1) of the Act, it was returned and Exh. P4 mahazar was prepared for the same. As the first accused failed to comply with the directions of this court and failed to furnish the proper statement of affairs, the Official Liquidator filed report [Exh. P5] before the court on 13.12.1999. The above report would reveal that the statement of affairs furnished by the accused was incomplete and unacceptable and the registers produced were forged and created for the purpose of producing before the provisional liquidator.

The first accused, the managing director of the company, was examined as DW2 and the registers produced by him before the provisional liquidator were marked as Exhs. P15 to P18. DW2 had admitted that he prepared Exhs. P15 to P18 registers just before producing before court referring to the computer outstandings and the two floppy discs. He did not produce the computer extract of the above accounts. Later, on the basis of the incomplete statement of affairs furnished by the first accused, the liquidator preferred certain claims and notice also had been issued to the debtors. In many of the cases, notice could not be served as the addresses were not correct, they contended repayment of the amount and in many of such cases, they produced the receipts issued by the employees of the company. But, those repayments were not at all entered in the registers produced before court and those registers were created only for the purpose of producing the same before the provisional liquidator for a formal legal compliance and those were not the original registers maintained by the company. This court had the occasion to consider the genuineness of the above registers and found that those were not genuine and maintained in the regular course of the business, but forged for the purpose of producing before the provisional liquidator. Though this court had prohibited the company from making any transactions, the company violated the order and collected money from several debtors and discharged its liabilities to certain creditors of their choice without any proper documents for an amount of nearly Rs. 2.8 crores. This court had directed the crime branch to register a case and to investigate into the matter in accordance with law and to seize the original registers, gold securities and all other records. Even though the first accused was arrested and detained for some time, he did not produce the registers, securities, books of accounts, etc., before the police. It is regrettable to say that the police also had not shown much interest in the proper investigation of the case. The documents would show that the first accused wanted time to produce the current records and other documents, which according to him were before the Auditors and Advocates. It would be relevant to note that a proper statement of affairs cannot be prepared on the basis of the registers produced by the first accused before the provisional liquidator, viz., Exhs. P15 to P18. Though the first accused was having the original books of accounts, he did not produce the same so far and had wilfuly concealed the same. Likewise, the statement of affairs furnished by him was incomplete and was unacceptable and the Official Liquidator had rejected the same. Till now the directors, viz., the accused did not care to furnish the proper statement of affairs and to produce the proper and genuine books of accounts, registers, etc. of the company. Hence, the provisional liquidator could not proceed to comply with the scheme formulated by this court to protect the interests of the large number of depositors.

When the first accused filed the company application before this court for sanction of a scheme of compromise u/s 391 of the Act, he disclosed that there were gold securities worth more than Rs. 2 crores. But, he did not produce any gold securities before the provisional liquidator. DW2, when examined by the agent of the provisional liquidator, admitted that as per Exh. P20 statement furnished by him there were 3,710 gold pledgers. DW2 admitted that he had collected nearly Rs. 1.29 crores and interest thereon and released the gold securities after the prohibitory order passed by this court. DW2 further stated that he paid off the liability of nearly Rs. 2.90 crores to different persons by settlement. The release of gold securities and the payment of the money to some of the depositors of his choice was in violation of law and the order of this court. In fact, he did not produce proper receipts or records for the discharge of those liabilities also. This court had already directed an investigation of the matter by the crime branch and they were directed to file statements in every fortnight regarding the progress of the investigation. The police reports would reveal that the contention of discharge of liabilities of some of the creditors as stated by the first accused was not true or real. The first accused wilfully abstained from producing the genuine records of the company before the provisional liquidator as he was sure that his fraud would be disclosed, if those records were produced. It was a case where nearly Rs. 18 crores had been collected from thousands of depositors and no reliable documents were produced before the provisional liquidator to consider their claims and this court also was not in a position to afford any effective relief to them. The interests of the depositors are still in peril. The fate of the depositors to get back their money is even now uncertain. This court is not certain whether they will get back at least a portion of the deposit amount in view of the attitude of the accused. In fact, all orders and attempts made by this court for giving relief to the depositors were flouted and defeated in one way or other by [he accused. It was a case where documents also had been forged and genuine documents were concealed. It was a case where the directors wilfully abstained from filing the statement of affairs as contemplated by law with ulterior motives.

The main argument advanced by the learned counsel for the accused was that the accused were not having the accounts with them for filing the statement of affairs and it could be filed only if the current books of accounts were available. An unfounded allegation had been raised by the accused against the provisional liquidator that all the records had been seized by him, and hence they could not file the statement of affairs. The available evidence could get only some old and irrelevant records when the registered office of the company was searched and an inventory was prepared. There was absolutely no reason for the provisional liquidator or the agent of the provisional liquidator to withhold any of the records. The first accused wanted time to produce the current records and yet he did not produce the genuine current records. All those books of account, registers, etc., are still with the first accused and all the accused were aware of the same forged registers were produced before the provisional liquidator with ulterior motives, and to defeat the orders passed by this court and to divert the course of investigation by the police. Accused 2 to 4 are none other than the wife, brother and daughter of the first accused respectively and it is not possible to hold that they were not having any access to the records. The available evidence and circumstances would establish that the accused failed to furnish the statement of affairs wilfully with ulterior motives and there was no reasonable excuse for not filing the same.

Another argument advanced by the learned counsel for the accused was that a statement of affairs was filed and though it was not accepted, the accused were not informed for the grounds why it could not be accepted. It was further submitted that even though the first accused informed the provisional liquidator to specify the grounds for rejecting the statement of affairs, the provisional liquidator did not reply and inform the first accused why the statement of affairs was rejected. It was further argued that sufficient time also was not granted for filing the statement of affairs and request for time was rejected. The statement of affairs did not conform to the requirements as contemplated by law. The details to be furnished by the directors were not furnished, but the statement contained the wrong endorsement ''not applicable'', though the directors had to furnish the details. The names and addresses of debtors and creditors were incomplete and inaccurate. The details of securities were not furnished. Those defects were already intimated to the first accused who filed the statement of affairs.

From the very inception of the proceedings, the first accused was violating the orders of this court and collecting the money from debtors and discharging the liabilities of creditors of his choice. The scheme formulated by the court had to be implemented to safeguard the interest of creditors. The grant of further time for filing the statement of affairs would be adverse to the interest of thousands of depositors who invested nearly Rs. 18 crores. Money had been diverted ignoring the law and the directions of Reserve Bank of India. The circumstances would further establish that the time sought for was for forging documents. Taking into consideration of the peculiar circumstances of the case, the provisional liquidator is fully justified in rejecting the application for time for filing the statement of affairs. Even now, the accused did not file proper statement of affairs. Hence, the above arguments advanced by the learned counsel for the accused cannot be accepted.

Another argument advanced by the learned counsel for the first accused was that the complaint was filed by the provisional liquidator in his personal capacity and not in his official capacity. The complaint would show that the provisional liquidator has filed the complaint in his official capacity. There is no merit in the above contention.

The evidence would establish that the accused wilfully failed to file the statement of affairs before the provisional liquidator with ulterior motives and the provisional liquidator has established that the accused failed to file the statement of affairs, without reasonable excuse and thereby committed the offence u/s 454(5) of the Act. Hence, I find accused 1 to 4 guilty of the offence u/s 454(5) of the Act and convict each of them of the above offence.

14.1 Accused were heard about the sentence. All the accused submitted that the sentence may be limited to fine. The learned counsel for the accused also submitted that considering the nature and circumstances of the case, sentence of imprisonment may be avoided, and it may be limited to fine. But, I do not find any reason for accepting the above request made by the accused or the argument advanced by the counsel. The genuine registers showing the deposits collected from thousand of depositors amounting to nearly Rs. 18 crores and the diversion or utilisation of the above funds were not so far produced before this court even after repeated directions, and police investigation and all the efforts made by this court for procuring those registers were rendered ineffective. It is not sure whether the depositors will get back their money at any point of time as a result of the attitude of the accused. Here is a case, where the maximum punishment contemplated by law should be awarded to the accused. Hence, the maximum sentence of two years imprisonment with fine should be imposed on all the accused.

14.2 In the result, accused 1 to 4 are sentenced to undergo simple imprisonment for a period of two years each and to pay a fine of Rs. 2 lakhs each or in default of payment of fine to undergo further simple imprisonment for a period of six months each.