Dr. Sailendra Nath Sinha And Another vs Jasoda Dulal Adhikari And Another

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Criminal Appeal No. 28 of 1956

Decision Date: 11 September, 1958

Coram: J.L. Kapur, Syed Jaffer Imam, P. B. Mukherji

In the case titled Dr. Sailendra Nath Sinha and another versus Jasoda Dulal Adhikari and another, the Supreme Court of India delivered its judgment on 11 September 1958. The opinion was authored by Justice J. L. Kapur, who was joined on the bench by Justice Syed Jaffer Imam. The petitioner in the appeal was Dr. Sailendra Nath Sinha together with another individual, and the respondents were Jasoda Dulal Adhikari and another person. The citation for the decision appears as 1959 AIR 51 and 1959 SCR 1263, with a citator reference of D 1960 SC 576 (25). The matter concerned the statutory powers of an Official Liquidator to prosecute a director of a company under the Indian Companies Act, 1913 (VII of 1913), specifically sections 179 and 237(1). The headnote summarised the procedural history: the Official Liquidator filed a criminal complaint before the Presidency Magistrate under sections 120‑B, 406, 467 and 477A of the Indian Penal Code against two appellants, one a former director and the other the managing director of Bank of Commerce Ltd., which was in compulsory liquidation. The appellants sought dismissal of the complaint on the ground that the Official Liquidator lacked authority because no sanction from the Company Judge had been obtained. The magistrate rejected that application. Subsequently, the appellants approached the Calcutta High Court, requesting that the criminal proceedings be set aside on the basis that the prosecution was void ab initio due to the absence of a prior judicial direction under section 237(1) of the Companies Act. The High Court also rejected the petition.

The Supreme Court held that a direction of the court under section 237(1) of the Companies Act was not a condition precedent to the Official Liquidator’s prosecution of the appellants. The Court observed that, in fact, a valid and proper direction had already been issued by the court under section 237(1) authorising the Official Liquidator to prosecute. It further explained that when the court gives a direction under this provision, it may do so ex parte and is not required to provide the appellants an opportunity to be heard before issuing the direction. The Court then referred to section 179 of the Companies Act, which governs the powers of liquidators to institute or defend legal proceedings with the sanction of the court, and to section 239(1), which empowers the court to issue directions for the prosecution of delinquent directors and similar persons. In the present case, the court had earlier made an order under section 179 granting the Official Liquidator liberty to institute or defend legal proceedings. Consequently, the Official Liquidator was entitled to lodge the criminal complaint against the appellants even without a separate direction under section 237(1). The judgment concluded that the prosecution was not void for lack of a prior direction, and the appellate challenge was dismissed.

The judgment was delivered in the criminal appellate jurisdiction concerning Criminal Appeal No. 28 of 1956, which was taken by special leave from the Calcutta High Court’s judgment and order dated 21 June 1954 in Criminal Revision No. 811 of 1953. Counsel for the appellants were represented by senior advocates, while counsel for the respondents also appeared. The opinion of the Court was written by Justice Kapur, and the decision affirmed the authority of the Official Liquidator to proceed with the prosecution under the statutory framework.

The dispute centered on the meaning of section 237 of the Indian Companies Act. Appellant No 1 had previously served as a director of the Bank of Commerce Limited, which was then in liquidation, and Appellant No 2 had been its Managing Director. The High Court of Calcutta ordered the winding up of the Bank on 7 August 1950, and subsequently appointed G K Dutt, a barrister, as the Official Liquidator. On 7 September 1950 the Official Receiver was substituted for Mr Dutt as the liquidator of the Bank.

On 23 July 1952 Respondent No 1 lodged a complaint before the Court of the Presidency Magistrate, charging the appellants under sections 120B, 406, 467, 477A of the Indian Penal Code, and section 182A of the Indian Companies Act. The complaint was filed on the authority of the Official Liquidator, who, according to the complaint, had obtained directions from the High Court permitting the filing of the charge.

On 5 May 1953 the appellants moved before the I‑Residency Magistrate to have the complaint dismissed on the ground that it lacked the sanction of the Company Judge. Their submission was that the Official Liquidator, acting in his official capacity, could not prefer the complaint because the statute limited his powers to those expressly conferred, and therefore he was incompetent to initiate the prosecution without a prior direction under the Act. The Presidency Magistrate rejected this application on 13 June 1953.

Following that refusal, the appellants approached the High Court seeking to set aside the criminal proceedings on the basis that the prosecution was void from the outset because no earlier direction had been issued by the High Court under section 237(1) of the Indian Companies Act. The High Court ruled against the appellants and dismissed their petition.

The learned Chief Justice observed that the provisions of section 237(1) do not bar a liquidation proceeding brought by the liquidator. He held that nothing in the nature of the judicial proceedings made the order invalid as a direction under section 237(1). He stated: “There can be no question in the present case that the relevant facts were all placed before the Company Judge, because they are all set out in the report of Adhikary and the affidavits annexed there to which the order expressly refers and with reference to which the liberty to bring legal proceedings was expressly given. In view of those circumstances, it is impossible to say that the Company Court had not before it all the facts on which the prosecution is based or that it did not apply its mind to the considerations relevant to section 237(1).”

He further held that clause (a) of section 179 authorises the liquidator to institute or defend legal proceedings in the name of the company, and that this provision concerns the liquidator’s powers, whereas section 237 addresses the Court’s power to give directions. Justice P B Mukherji delivered a concurring judgment, referring to the historical background of section 237 and affirming the same conclusions.

In reviewing the history of section 237, the Court observed that the provision allowed the Company Judge to act ex parte and did not require the Judge to hear the director or officer against whom a complaint was made. The Court further held that a direction issued under that section was not a condition precedent to any prosecution initiated by the official liquidator, and that the provision was not intended to encroach upon the powers of a criminal court under the Code of Criminal Procedure. After the Calcutta High Court refused leave to appeal, the appellants approached the Supreme Court seeking special leave. The official liquidator, Bachawat J., had on 15 January 1951 issued an order that was to be regarded as made under section 179. That order expressly granted the liquidator liberty to institute or defend any suit or prosecution, whether civil or criminal, in the name and on behalf of the Bank, to continue all pending suits and execution proceedings against the Bank, to engage advocates, vakils and other lawyers, and to pay from the Bank’s assets all costs and incidentals of such proceedings. Later, on 22 July 1952, the official liquidator obtained from Bannerji J. an order which the High Court correctly classified, and which the Supreme Court agreed, as an order made under section 237(1) of the Companies Act. The order authorised the liquidator to take any civil or criminal proceedings he deemed necessary based on the report of Jasoda Dulal Adhikary, together with the affidavits of H. Sen Gupta and Nepal Chandra Mitra as set out in Exhibit A. The passage quoted from the Chief Justice’s judgment demonstrated that all material facts were before the Company Judge because they were fully detailed in the affidavits placed before him. A complaint was subsequently filed on 23 July 1952. While the complaint was pending, the appellants appealed the Company Judge’s order dated 22 July 1952, but the appeal was dismissed on the liquidator’s objection that the order was administrative rather than judicial. On 5 August 1953, the official liquidator instituted misfeasance proceedings under section 235 of the Companies Act. The appellants then applied to the High Court to quash the criminal proceedings already commenced, arguing that the initiation of proceedings under section 235 barred the criminal action. That application was also heard together with the rule issued on 29 June 1953, and it was dismissed by the same judgment that discharged the rule on 21 June 1954.

The judgment explained that the overall design of the Companies Act requires the Court to retain full authority over every proceeding that occurs during a winding‑up. Consequently, it was submitted that the official liquidator does not possess the power to act independently unless the Court either sanctions the act or gives specific directions. Section 179 of the Act enumerates the powers that may be exercised by the official liquidator, stating that the liquidator shall have power, with the sanction of the Court, to do the following things: to institute or defend any suit or prosecution or other legal proceeding, civil or criminal, in the name and on behalf of the company, and so on. Section 180 empowers the Court to authorize the official liquidator to exercise any of the powers listed in Section 179 without requiring further Court sanction or intervention. Section 183 governs how the liquidator’s powers are to be exercised and controlled. Sub‑section 3 of that provision allows the liquidator to apply to the Court for directions on any specific matter that arises during the winding‑up. Sub‑section 4 provides that the official liquidator may use his own discretion when administering the company’s assets and when distributing those assets among creditors. Sub‑section 5 adds that if any person is aggrieved by any act or decision of the official liquidator, that person may apply to the Court, and the Court may confirm, reverse or modify the complained‑of act or decision, and may make any order it thinks just in the circumstances. These clauses collectively demonstrate that Section 179 sets out the basic powers of the liquidator, while the other sections define the circumstances in which the Court may intervene or delegate authority.

The Court further noted that Section 235 confers on the Court the authority to assess damages against directors who have acted delinquently. Under that section, the Court may, upon an application by the liquidator, a creditor, or a contributory, investigate the conduct of a director and compel the director to pay money, restore property, or contribute a sum to the company’s assets as compensation for any misfeasance, regardless of whether criminal liability also exists. Section 237 deals with the prosecution of delinquent directors. Sub‑section 1 of that provision provides that if, during a winding‑up supervised by the Court, it appears to the Court that any past or present director, manager, other officer, or member of the company has committed an offence for which he is criminally liable, the Court may, either on an application by any interested person or on its own motion, direct the liquidator either to prosecute the offender himself or to refer the matter to the registrar. Sub‑section 2 states that if, in the course of a voluntary winding‑up, the liquidator discovers that any past or present director, manager, other officer, or member of the company has been guilty of an offence in relation to the company for which he is criminally liable, the liquidator must report the matter to the registrar.

The provision stipulated that when a liquidator became aware that a past or present director, manager, officer, or member of a company was liable for a criminal offence, he was required to promptly report the matter to the registrar. The liquidator also had to furnish the registrar with any information and to grant access to, and facilities for inspecting and copying, any documents that were in the liquidator’s possession or control and that related to the issue in question, as the registrar might require. If a report was made under sub‑section (2), the registrar could, at his discretion, refer the matter to the Central Government for further enquiry. Upon such a referral, the Central Government was obliged to investigate the matter and, if it considered it appropriate, could apply to the Court for an order granting any person designated by the Central Government the powers of investigating the company's affairs that are provided by the Act in the context of a Court‑supervised winding‑up. In the event that, after receiving a report under sub‑section (2), the registrar concluded that the case did not merit proceedings by him, he was required to inform the liquidator of this assessment. Subject to prior sanction of the Court, the liquidator could then, on his own initiative, commence proceedings against the offender. Moreover, if during a voluntary winding‑up the Court discovered that a past or present director, manager, officer, or member had committed an offence and that the liquidator had not made a report to the registrar, the Court could, either on its own motion or upon application by any interested person, direct the liquidator to submit such a report. Once the report was made, the provisions of the section would operate as if the report had been made under sub‑section (2). Additionally, where any matter was reported or referred to the registrar under this section, the registrar was to place the documents before the Advocate‑General or the public prosecutor and, if advised, to institute criminal proceedings. This was subject to a proviso that no prosecution could be instituted without first giving the accused person an opportunity to make a written statement to the registrar and to be heard on that statement. The appellants relied on this section to argue that, absent a Court order, the official liquidator could not lodge a criminal complaint against a former director and that any such complaint would be void from the outset. They emphasized that sub‑section (1) merely required the Court, if it found a director guilty in the course of winding‑up, to either on an application by an interested party or on its own motion direct the liquidator to prosecute the offender.

The Court observed that the liquidator had the power either to prosecute the offender himself or to refer the matter to the registrar. In the situation where the registrar is approached, the registrar could institute prosecution only after finding that a prosecution ought to be instituted and only if the Advocate‑General or the public prosecutor advised such step. Counsel for the appellants stressed the proviso contained in the statute, arguing that no prosecution could be undertaken without first granting the accused an opportunity to make a written statement to the registrar or to be heard. They further contended that, because the registrar could not commence prosecution without first allowing the accused to file an explanation, a judge likewise could not give any direction for prosecution unless the accused were first permitted to present an explanation. The Court rejected this contention, holding that under section 237(1) the Court may direct the liquidator to prosecute the offender himself or to refer the matter to the registrar, and that providing an opportunity to the offender before the Court issues such a direction is not a prerequisite under subsection (1). The Court noted that subsection (6) requires the registrar, after a direction has been made, to give the offender an opportunity to show cause before a prosecution is undertaken. This requirement, the Court explained, does not imply that section 237(1) obliges a judge to provide the offender an opportunity prior to issuing the direction for prosecution by the liquidator or for reference to the registrar.

The Court also addressed the argument that, pursuant to subsection (4), in a voluntary liquidation the liquidator must obtain the Court’s sanction before proceeding, and therefore the liquidator could not institute criminal proceedings without such sanction in a winding‑up ordered by the Court. While recognising that subsection (4) imposes a sanction requirement in voluntary winding‑up, the Court clarified that subsection (1) of section 237 makes no such provision when the liquidation is compulsory. The Court then referred to the commentary in Sircar & Sen, 1937 Edition, noting on page 624 that the object of the section is to guard against abuses and indiscriminate commencement of prosecutions, and that for the first time the provision allows prosecutions to be conducted as crown prosecutions. On page 628 the commentary states that before the Court can exercise its jurisdiction it must conclude that, in the course of winding up, the person intended to be charged under the section has been guilty of an offence relating to the company for which he is criminally liable, and that such a finding must not prejudice the accused in his trial, as quoted from Chitty J. in re Charles Denham & Co. Ltd. L.T. 570 at 571. The Court further reproduced the procedure outlined in the same source for section 237(1), which requires that an application be made by a petition verified by an affidavit containing material sufficient to make a prima facie case.

The Court observed that the statutory language required the liquidator to set out a prima facie case in the petition. The law did not clarify whether the liquidator must give notice to any other person before filing the application. Generally, the application was to be made ex parte, although the Court retained a discretion to order that notice be given to anyone it considered entitled to be heard. The passages cited by the appellant therefore did not support the contention that a prior sanction of the Court was required before a prosecution could be instituted against a former director. The appellant’s counsel then referred to an observation of Buckley J. in In re London and Globe Finance Corporation, reproduced in Sircar and Sen’s text at page 625. In that passage the principles guiding the Court in ordering prosecutions were set out: the Court must consider the principles under which it exercised the power given by section 167 of the Companies Act 1862 to direct the official receiver to institute and conduct a prosecution at the expense of the company’s assets; no one may institute a criminal prosecution for personal profit; a prosecution must not be motivated by vengeance; and the sole purpose of any prosecution must be to punish the offender, to enforce the law for the benefit of the State, and to deter similar conduct. The appellant argued that this passage required the offender to be given an opportunity to be heard before the Judge could give directions, but the Court found that the passage did not impose such a requirement, nor did it limit the liquidator’s power to commence a prosecution or the criminal court’s power to entertain a complaint filed by the liquidator. The Court then turned to a commentary by Buckley on section 334 of the English Companies Act 1948, which corresponds to section 237 of the Indian Companies Act. The commentary stated that proceedings would be taken by the Director of Public Prosecutions or the Lord Advocate, or not at all, because the express wording of section 334 authorised only a judicial direction for the liquidator to refer the matter to the appropriate public prosecutor. The English Act contained a special provision permitting private prosecutions in England, a provision that did not exist for Scotland, and the appellant’s reliance on the Scottish omission was therefore irrelevant. Finally, the appellant relied on English case law concerning the method of giving directions. In In re Northern Counties Bank Limited the Judge ordered the liquidator to solicit creditor views by circular; when the creditors opposed the prosecution, the Court held that (i) there was insufficient evidence that an offence had been committed and (ii) because two‑thirds of the creditors opposed the application, the prosecution should not be ordered, as the costs would have to be borne by the creditors’ assets.

In the earlier case, the Court observed that an order for prosecution could not be made because the expenses would have to be paid out of the money belonging to the creditors. The principal issue for determination in that case was whether the prosecution could be funded from the assets of the company, although the competence of the liquidator to bring the complaint was not contested. The judgment then referred to Palmer's Company Precedents, 1952 Edition, Volume II, to discuss the circumstances in which leave to prosecute should be granted, and concluded that the authority did not support the appellants' position. At page 605, the text states: “The summons will be ex parte, and should be supported by affidavit showing a strong case for prosecution, and also the extent of the assets and liabilities. The court is not willing when the assets are small, to sanction proceedings which may swallow up or largely reduce those assets.” The form on page 607 does not indicate that, under the English Companies Act, once permission to prosecute is given the accused person must be heard. It merely requires the court to issue its order based on the affidavits and other documents filed before it, and it may also direct that the costs and charges incurred by the liquidator be paid from the company's assets. The argument was then advanced that, although the wording of section 237 was not expressed in the negative, its practical effect was that no prosecution could be instituted without the liquidator obtaining the court’s sanction. To support this submission, counsel cited The Queen v. Cubitt, reported in (1) (1883) 31 W.R. 546, a case under the Sea Fisheries Act where section 11 provided that “the provisions of this Act… shall be enforced by sea‑fishery officers,” and the court held that only a sea‑fishery officer could prosecute an offence under that Act. No comparable limitation language exists in section 237. In Taylor v. Taylor, reported in (2), the statutory language spoke of persons “entitled to the possession or the receipt of the rents and profits,” and the court held that an order could be made only upon a petition fitting that description; if no such person existed, no order could be issued, a decision again based on the specific wording of the statute. Counsel also relied on Nazir Ahmad v. Crown, reported in (3), where the court held that when a statute authorizes an act in a particular manner, the act must be performed in that manner or not at all. The substance of Mr. Choudhuri’s argument, therefore, was that the complaint filed by the official liquidator was invalid because it lacked a direction under section 237 and did not follow the procedure prescribed in that section.

Section 237(1) of the Companies Act does not prescribe any specific procedure for the issuance of directions by the court, and the provisions that relate to the actions taken by the registrar are unrelated to what the court must consider before it issues such directions. The English authorities cited by the parties do not go as far as holding that a criminal prosecution cannot be instituted without first obtaining a sanction from the court. Those cases only address the circumstances in which a judge may give directions for a prosecution and may authorize the enlargement of a company’s assets in connection with that prosecution. Moreover, none of those authorities state that the court is barred from granting directions unless the accused persons have first been given an opportunity to be heard, nor do they declare that a judge’s directions constitute a condition precedent to the lawful commencement of criminal proceedings by an official liquidator. The cited English decisions, namely (1) (1889) 22 Q.B.D. 622, (2) (1875) 1 Ch. 426 and (3) (1936) L.R. 63 I.A. 372, 381, therefore do not support the argument that a direction from the court is a prerequisite for instituting a prosecution.

In contrast, the position under section 179 of the Indian Companies Act is that no court sanction is required to commence a prosecution. This principle was affirmed in the decision of Jaswantrai Manilal Akhaney v. The State of Bombay, where the official liquidator filed a report with the police against the managing director of a bank, and the police subsequently filed a charge‑sheet before a magistrate. Justice Sinha, at page 502 of the judgment, observed that the statutory provision defines the powers of the official liquidator, who must act under the directions of the court that supervises the liquidation. One of the liquidator’s powers is to institute prosecutions in the name of the company with the sanction of the court; however, the section does not intend to restrict the criminal court’s authority to entertain a prosecution that is brought in the ordinary course under the Code of Criminal Procedure. The judgment also pointed out that section 179 contains no language comparable to that of the Drug Control Order, 1943, which was held to be a condition precedent for prosecution in Basdeo Aggarwalla v. King‑Emperor, nor does it contain prohibitory words similar to those found in sections 196 and 197 of the Criminal Procedure Code. Those latter provisions require prior sanction of the Provincial Government and bar a court from taking cognizance without such sanction. Two Indian High Court decisions support the respondents’ submission. In Emperor v. Bishan Sahai, the court held that the Companies Act does not provide that a criminal prosecution can be instituted only after a judge’s directions. In Mrityunjoy Chakravarti v. Provot Kumar Pal, the court concluded that neither section 179 nor section 237 imposes a requirement that the liquidator obtain a court direction before taking action. The citations for these authorities are (1) [1956] S.C.R. 483, (2) [1945] F.C.R. 93, (3) I.L.R. (1937) All and (4) A.I.R. 1953 Cal. 153 respectively.

In this part of the judgment, the Court referred to the decision reported in A.I.R. 1953 Cal. 153 and observed that a direction from the Court would not render the liquidator’s action illegal, invalid, or incapable of supporting a prosecution. The Court therefore concluded that, based on the language of section 237(1) as well as the binding precedent, the complaint filed by the liquidator against the appellants did not contain any defect that could make the proceedings null and void.

The Court noted that section 237(1) does not contain any wording that would prohibit a liquidator from instituting a criminal prosecution without the prior sanction of a Judge, nor does it prevent the Court from taking cognizance of a complaint in the absence of such sanction or direction. The Court further explained that section 179, as correctly highlighted by the learned Chief Justice of the Calcutta High Court, sets out the powers of liquidators to commence or defend legal actions, but only when they have the Court’s sanction. In contrast, section 237(1) confers on the Court the authority to issue directions for the prosecution of delinquent directors and similar persons.

The respondents contended that, in the present case, a proper direction under section 237(1) had indeed been issued. The High Court’s judgment confirmed that, before the learned Judge gave his direction on 22 July 1952, all necessary materials were before him, making his sanction perfectly valid, legal and proper. Moreover, the order of Judge Bannerji was preceded by an earlier order dated 15 January 1951 issued by Judge Bachawat under section 179. Consequently, when the liquidator authorized his assistant, identified as respondent No. 1, to institute the proceedings, the liquidator acted within his authority.

The Court emphasized that even if such directions had been absent, the legality of the criminal proceedings that were instituted would not have been affected. The Court clarified that nothing expressed in this judgment should be taken as an opinion that alters the Judge’s control over winding‑up proceedings or over the actions of liquidators. Accordingly, the Court dismissed the appeal.