1986 (2) TMI 273 - HC - Companies Law

Summary

Issues Involved:
1. Misapplication or retention of company funds by directors.
2. Misfeasance or breach of trust by directors.
3. Ultra vires business activities by the company.
4. Failure to recover sundry debts.
5. Directors' remuneration despite company losses.

Issue-wise Detailed Analysis:

1. Misapplication or Retention of Company Funds by Directors:
The official liquidator alleged that the directors retained large cash belonging to the company and utilized it for their own purposes, even when the company's bank balance was overdrawn. The auditor's report indicated that there was a heavy cash balance of Rs. 1,07,763.19 on 30th Chaitra, 1370 B.S., and questioned whether this amount was deposited in the bank. However, the auditor admitted that the cash was deposited within a few days and that the delay in depositing daily cash collections did not constitute misfeasance.

2. Misfeasance or Breach of Trust by Directors:
The auditor suggested that the directors were guilty of misfeasance because the company operated at a loss for several years. However, it was determined that running a business at a loss does not equate to misfeasance unless there is evidence of deliberate misconduct or misapplication of funds. The auditor's assertion that low gross profit margins indicated misfeasance was not supported by concrete evidence.

3. Ultra Vires Business Activities by the Company:
The official liquidator contended that the company engaged in speculative business, which was ultra vires the objects clause of the memorandum of association. The auditor claimed that the company indulged in speculative transactions, but there was no evidence that these transactions were wagering contracts. The court noted that speculative business is treated separately under the Income-tax Act, and there was no evidence that the Income-tax Officer treated the company's business as speculative. The court concluded that engaging in ultra vires business activities alone does not constitute misfeasance unless it results in a breach of trust or actual loss to the company.

4. Failure to Recover Sundry Debts:
The auditor alleged that the directors failed to take steps to recover sundry debts amounting to Rs. 43,120, resulting in these debts becoming bad. However, it was noted that the directors had taken steps to recover the debts, including filing suits against some debtors. The court found that the auditor did not adequately investigate the specifics of the sundry debtors and their outstanding amounts.

5. Directors' Remuneration Despite Company Losses:
The auditor criticized the directors for taking remuneration when the company was not making a profit. Each director received Rs. 250 per month. The court held that directors are entitled to remuneration for their services and that the amount received was neither unreasonable nor excessive. The court found the auditor's statement on this issue to be beyond the scope of his appointment.

Conclusion:
The court dismissed the application with costs, finding that the allegations of misfeasance and breach of trust were not substantiated by the evidence. The court criticized the official liquidator and the auditor for their conduct and emphasized that such actions should not be repeated in the future.