India: Wrongful Withholding Of Property – Are Family Members Of An Employee Liable?

Last Updated: 16 March 2004

G.P.Sahi; General Counsel & Co. Secretary; CJ International Hotels Limited

Introduction

Many business organisations in the corporate world, public as well as in the private sector, provide residential accommodation to their officers and employees as a condition of their service to attract better talent, and thereby as a necessity, purchase residential flats/bungalows in large cities and towns for the use of such officers and employees during the course of their employment. It, at times, so happens that these employees (or their relatives) on termination of their employment with the company do not vacate the premises and thereby wrongfully withhold the property of the company. The entitlement of an officer to the property of the company is contingent on the right and capacity of the officer by virtue of his employment which is transformed into the actual possession of the property and the duration of such right would be co-terminus with the term of employment and the right would stand extinguished with termination of the employment giving rise to an obligation to hand over the property back to the company. If the property is held back, the retained possession would amount to wrongful withholding of the property of the company.

Section 630 of the Companies Act, 1956, provides penalty for wrongful withholding of the company property. The object of this section is to ensure that the property of the company is preserved and is not used for purposes other than those expressed or directed in the Articles of Association of the company or as authorised by the provisions of the Act. The provision, no doubt penal, has been purposely enacted by the Legislature with the object of providing a summary procedure for retrieving the property of the company. It provides quick relief to the company where the property is wrongfully obtained or wrongfully withheld or wrongfully applied by an employee or ex-employee. The section embraces within its ambit wrongful withholding of movable and immovable property.

The capacity, right to possession and the duration of occupation are all features which are integrally blended with the employment and the capacity and the corresponding rights are extinguished with the cessation of employment and the obligation arises to hand over the allotted property back to the company. Where the property of the company is held back whether by the employee, past employee or any one claiming under them, the retained possession would amount to wrongful withholding of the property of the company, actionable under section 630 of the Act. The legal heirs or representatives in possession of the property may acquire the right to occupancy in the property of the company, by virtue of being family members of the employee or officer and not on any independent account. They may, therefore, derive their color and content from the employee or officer only, and they have no independent or personal right to hold on to the property of the company.

Section-630 of the Companies Act, 1956, reads as follows:

"(1) If any officer or Employee of a company –

      1. wrongfully obtains possession of any property of a company; or
      2. having any such property in his possession, wrongfully withholds it or knowingly applies it to purposes other than those expressed or directed in the Articles and authorised by this Act:

He shall, on the complaint of the company or any creditor or contributory thereof, be punishable with fine which may extend to ten thousand rupees.

(2) the court trying the offence may also order such officer or employee to deliver up or refund, within a time to be fixed by the court, any such property wrongfully obtained or wrongfully withheld or knowingly misapplied, or in default, to suffer imprisonment for a term which may extend to two years."

The section begins with the words ‘if any officer or employee of the company’. A plain reading of the section will suggest that the provisions get attracted only when the property in question is wrongfully held by either an employee or officer of the company and, accordingly, a person who has ceased to be an employee or officer of the company and is still in custody of the company property will be outside the realm of this section as he is no longer the officer or employee of the company. The section further states that officer or employee wrongfully obtains possession of the property or having any such property in his possession, wrongfully withholds it. The term ‘wrongful’ has been defined in the Webster’s Revised Unabridged Dictionary, 1998, as full of wrong; injurious; unjust; unfair; a wrongful taking of property; wrongful dealing. The dictionary meaning of the word ‘withholding’ is to hold back; to keep back; to restrain or decline to grant. The holding back is not an isolated act, but is a continuous process by which the property is not returned or restored to the company and the company is deprived of its possession. If the officer or employee of the company does any act by which the property given to him is wrongfully withheld and is not restored back to the company and the company is deprived of its possession, it will clearly amount to an offence within the meaning of section 630 of the Act. It is, thus, only the present officers and employees who can secure possession of any property of a company and it is possible for such an officer or employee to take away possession of such property after termination of employment. Though clause (a) of sub-section (1) refers to the existing officers and employees, it also takes within its purview any officer or employee who wrongfully obtains possession of such property during the course of his employment, and it is this wrongful withholding of property of the company after the termination of the employment which is an offence under section 630(1) (b) of the Act. It can, therefore, be said that the provisions of this section will regulate both present and past officers and employees of the company. (Baldev Krishna Sahi v. Shipping Corporation of India Ltd. (1987) 3 Comp LJ 57 (SC) : (1987) 4 SCC 361) Also, the non-compliance or non-observance of order of the court regarding delivery or refund of the property will result in making the person so directed liable for being awarded a substantive sentence of imprisonment.

Conflicting Judgments

In Abhilash Vinodkumar Jain (Smt) v. Cox & Kings (India) Ltd. (1995) 2 Comp LJ 193 (SC) : (1995) 84 Comp Cas 28 (SC), the court took the view that once the right of the employee or officer to retain possession of the property either on account of termination of service, retirement, resignation or death gets extinguished, they (persons in occupation) are under an obligation to return the property back to the company and on failure to do so, they render themselves liable to be dealt with under section 630 of the Act for the retrieval of possession of the property. The object of this section is to retrieve the property of the company where the wrongful holding of the property is done by an employee, past or present, or heirs of the deceased employee or officer or any one claiming the occupancy through such employee or officer.

The court in J.K. (Bombay) Ltd. v Bharti Matha Mishra (2001) 1 Comp LJ 376 (SC): (2001) 2 SCC 700 held that such family members of a deceased employee who are not his legal heirs according to the personal law applicable to him – cannot be prosecuted under section 630 of the Act for wrongful withholding of the property. The expression ‘officer or employee of a company’ would include past officers or employee of the company or his legal heirs or representatives but does not include other members of his family and that the provisions cannot be liberally construed so as to rope in family members, other than the legal heirs or representatives of such past officer or employee. The bench observed that a penal law cannot be interpreted in a manner to cover within its ambit such persons who are left out by the legislature and the position of the legal heirs of a deceased employee cannot be equated with the family members of an erstwhile employee against whom admittedly, the criminal prosecution has been launched and is pending. The court concluded,

"We are of the firm opinion that all family members of an alive ‘officer’ or ‘employee’ of a company cannot be proceeded with and prosecuted under section 630 of the Act."

In view of the apparent conflict between the two decisions of the Supreme Court, the matter was referred to a larger bench. The Court in Lalita Jalan v. Bombay Gas Company Limited (2003) 3 Comp LJ 75 (SC) was seized with some interesting issues.

    1. Can the relatives, other than legal heirs and representatives of a deceased employee, in custody of the company property originally held by the employee, be held liable under Section 630 of the Act?
    2. Will prosecution of family members of a former employees living with him result in violation of Article 21 of the Constitution?
    3. Is it that a statute enacting an offence or imposing a penalty is to be strictly construed, is not a universal application?

  1. The Apex Court in the matter of Lalita Jalan’s case (2003) 3 Comp LJ 75 (SC) observed that if an erstwhile of former employee is prosecuted under section 630 of the Act on account of the fact that he has not vacated the premises and continues to remain in occupation of the same even after termination of his employment, in normal circumstances, it may not be very proper to prosecute his wife and dependant children also as they are bound to stay with him in the same premises. The position will be different when the erstwhile or former employee is himself not in occupation of the premises either on account of the fact that he is dead or he is living elsewhere. In such cases, all those who have come in possession of the premises with the express or implied consent of the employee and have not vacated the premises would be withholding the delivery of the property to the company and, therefore, will be liable to be prosecuted under section 630 of the Act. This will include any one else who has been inducted in possession of the property by such persons who continue to withhold the possession of the premises as such person is equally responsible for withholding and non delivery of property of the company. If it is held that other members of the family of the employee or officer or any person not connected with family who came into possession through such employee would not be covered by section 630 of the Act since such a view will defeat the quick and expeditious remedy provided therein.
  2. There are several pronouncements wherein the Supreme Court has held that the award of sentence by the order of court cannot amount to violation of any of the fundamental rights guaranteed by the Constitution. In Triveniben v. State of Gujarat (1989) 1 SCC 678, a Constitution bench while considering the validity of death sentence held that it is well settled that a judgment of court can never be challenged under Article 14 or 21 of the Constitution and, therefore, a judgment of the court awarding the sentence of death is not open to challenge as violating Article 14 and 21 of the Constitution, and the only jurisdiction which could be sought to be exercised by the prisoner for infringement of his rights can be to challenge the subsequent events after the final judicial verdict is pronounced, and it is because of this that on the ground of long or inordinate delay, the condemned petitioner could approach the court. The Apex court in Lalita Jalan’s case (2003) 3 Comp LJ 75 (SC), supra, held that the prosecution of the family members of a former employee living with him would not violate Article 21 of the Constitution. The possession of such property by any employee or by any one claiming through him of such property is unlawful, and the recovery of the same cannot be said to be irrational or unreasonable or unfair so as to attract the rigours of Article 21 of the Constitution.
  3. In Tolaram v. State of Bombay AIR 1954 SC 496, 499 it was held that if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than one which imposes penalty. It is not competent to the court to stretch the meaning of an expression used by the legislature in order to carry out the intention of the legislature. Where penalties for infringement are imposed, it is not legitimate to stretch the language of a rule, however, beneficent its intention, beyond the fair and ordinary meaning of its language. In other words, if there are two reasonable constructions, one must adopt the more lenient construction.

The Companies Act, 1956, contains provisions relating to incorporation, share capital, management and administration, allotment of shares and debentures, oppression and mismanagement, compromise, amalgamation, etc. The provisions of this Act are different from legislations dealing squarely with offences and punishments like Indian Penal Code, TADA etc. Considering the object of section 630 and the contents of the Companies Act, it can be stated that withholding of property would imply an offence against the society at large. While the object of criminal justice is to award punishment, the characteristics of crime and punishment are not present in section 630 of the Act. The punishment for wrongful withholding is also fine only as imprisonment is awarded only in a situation where the court order is violated. It is a fact that having regard to the purpose for which the section had been enacted, it is not possible to hold it as a penal provision. The offence cannot be said to be one against the society at large, nor is the object of awarding sentence is prevention of reformation. In such circumstances, the principle of interpretation relating to criminal statues that they shall be strictly construed - will not be applicable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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