- (1.) PETITIONER Totalal, who at the relevant time, was a Director of the Edward Mills co. Ltd. , Beawar (hereinafter called the Mills) incorporated and registered as a public limited company under the provisions of the Indian Companies Act, 1882 on 9th August 1906, has been sentenced to pay a fine of Rs. 500/- for an offence punishable under Section 295 (4) of the Indian Companies Act, 1956; in default of payment of fine, he is to undergo simple imprisonment for two months. Along with the petitioner, three other Directors, namely, Chandmal, Rishi Kesh and Lalita prasad, were also convicted for the same offence, but no revision application has been filed on their behalf.
(2.) SECTION 295 of the Indian Companies Act, 1956, runs thus : "section 295. Loans to directors etc.-- (1) Save as otherwise provided in Sub-section (2), no company (hereinafter in this section referred to as "the lending company") shall, without obtaining the previous approval of the Central Government in that behalf, make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to, or to any other person by, - (a) any director of the lending company or of a company which is its holding company or any partner of relative of any such director; (b ). . . . . (c ). . . . . (d ). . . . . (e ). . . . . (2 ). . . . . (3 ). Where any loan made, guarantee given or security provided by a lending company and outstanding at the commencement of this Act could not have been made, given or provided without the previous approval of the Central Government, if this section had then been in force, the lending company shall, within six months from the commencement of this Act or such further time not exceeding six months as the Central Government may grant for that purpose, either obtain the approval of the Central Government to the transaction or enforce the re-payment of the loan made, or in connection with which the guarantee was given or the security was provided, notwithstanding any agreement to the contrary. (4 ). Every person who is knowingly a party to any contravention of Subsection (1) or (3), including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to. . . . . five thousand rupees or with simple imprisonment for a term which may extend to six months : provided that where any such loan, or any loan in connection with which any such guarantee or security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed under this sub-section; and where the loan has been re-paid in part, the maximum punishment which may be imposed under this sub-section by way of imprisonment shall be proportionately reduced". On 8th February, 1942, one Motilal Raniwala by a resolution passed at an extraordinary general meeting of the said Mills was appointed as Agent, Secretary, treasurer and Managing Director for a period of twenty years. This Motilal raniwala was also the proprietor of a concern known as Champalal Ram Swaroop at Beawar and Bombay. It was a joint Hindu Family concern of which Motilal raniwala was the Karta or manager. It appears that on 15th February, 1945, the directors of the Mills by a resolution decided to keep amounts of the Mills to the extent of Rs. 1,50,000/- in current account with Champalal Ram Swaroop for the purpose of Mills business. Copy of the resolution is marked Ex. P. 27. Some more amounts appear to have been advanced as on 1st of April, 1955, when the new act (No. 1 of 1956) came into farce, a sum of Rs. 3,96,000/- was the to the Mills from Champalal Ram Swaroop. The Directors of the Mills in compliance with the provisions of Sub-section (3) of section 295, sought the approval of the Central Government for the continuance of the aforesaid amount in the current account of Champalal Ram Swaroop. On. 11th January, 1957, the Central Government expressed their inability to grant approval in respect of the loans made by the Edward Mills CB. Ltd. to Messrs. Champalal Ram Swaroop at Beawar and further directed them to enforce the repayment of loan by 31st March, 1957. The Mills again asked the Central government to reconsider and the Central Government by their letter dated 6th march, 1957 (Ex. D. 2) expressed their willingness to reconsider the request of the mills proved the Mills fulfilled the following conditions : 1. the loan is fully secured; 2. the loan bears interest at 6%per annum 3. the loan is to be fully repaid before 31st March, 1958; 4. the grant of the loan is approved by the Board of Directors of the mills. By their resolution No. 6, the Board of Directors gave their consent to keep the amount of Rs. 3,96,000/-till 31st March, 1958, with Champalal Ram Swaroop carrying interest at 6% per annum provided they gave security by mortgaging their properties in favour of the Mills (vide Ex. D. 21 ). On 29th October, 1957, the board of Directors of the Mills in compliance with the letter dated 30th July, 1957, of the Central Government passed a resolution to give Rs. 3,96,000/- which were outstanding to the company by Messrs. Champalal Ramswaroop as a fresh loan by debiting the said amount to Rai Bahadur Seth Champalal Ramswaroop, Beawar, and crediting the same to the existing account of Rai Bahadur Seth Champalal ramswaroop so that the existing account be squared up and the amount of Rs. 3,96,000/- be treated as a fresh loan by the company to Rai Bahadur Seth Champalal Ramswaroop, Beawar, in current account upto 31st March, 1958, and to carry interest at the rate of 6% per annum. The Board of Directors further resolved that Rai Bahadur seth Champalal ramswaroop do give security to the company in the manner required by law in respect of their properties mentioned in the resolution. !t was further noted that rai Bahadur Seth Champalal Ramswaroop had also entered into an agreement dated 12 July, 1957, agreeing to repay to the company the said sum of Rs. 3,96,000/- with interest thereon at the rate of 6% per annum from 1st April, 1956, and to execute mortgage in favour of the company in respect of the properties mentioned in the resolution. It appears that some further correspondence between the Directors and the central Government regarding the latter's approval continued and finally on 11th march, 1958 vide Ex. P-13 the Central Government refused to give approval. It was pointed out that the Mills had all along suppressed this fact that the borrowing firm was an associate of the Managing Agent of the company. The company was also advised to enforce immediate recovery of the loan by 31st March, 1958, which under the provisions of law, should have been recovered by the company by 30th September, 1956. Since no steps were taken by the company to enforce repayment of the above sum from Messrs. Champalal Ramswaroop, the Registrar of companies filed this complaint on 9th December, 1958. The two courts below have found the petitioner guilty.
(3.) SUBSTANTIALLY, three questions have been arged on behalf of the petitioner: (1) that the amount of Rs. 3,95,000/- outstanding to the Mills by Messrs. Champalal Ramswaroop on 1st April, 1956, was not a loan requiring the approval of the Central Government or enforcement of repayment as provided in Sub-section (3) of Section 295; (2) that it was not a loan to the persons mentioned in Sub-section (1) (a)but was in the current account of Messrs. Champalal Ramswaroop which was a joint Hindu family concern; (3) that the Directors of the Mills did take steps by calling upon Messrs. Champalal Ramswaroop to pay the said amount and also got a mortgage deed in their favour of their properties on 31st July, 1958, and thus complied with the provisions of Sub-section (3) of Section 295. ;