1991 (5) TMI 202 - HC - Companies Law

Winding up Power of court to assess damages against delinquent, directors, etc. and Petitions

Issues Involved:
1. Whether the heirs and legal representatives of the deceased, Shri V. N. Bhaskar, should be joined or substituted as parties in the present petition under sections 397 and 398 of the Companies Act.

Detailed Analysis:

Issue 1: Substitution of Heirs and Legal Representatives
The appeal was directed against the order of a learned single judge who dismissed the petitioner's application to bring the heirs and legal representatives of the deceased, respondent No. 2, on record. The learned judge relied on the observations in J.K. Investment Trust Ltd. v. Muir Mills Co. Ltd., concluding that in a petition under sections 397 and 398 of the Companies Act, the legal heirs and representatives of the deceased are neither necessary nor proper parties. The judge observed that the acts of oppression alleged against the deceased could not be ascribed to his legal representatives, and no cause of action existed against them.

The petitioner alleged that the deceased had diverted the company's funds to support his family's concerns at the detriment of the company. The specific averments included:
- Diversion of company funds to various family concerns.
- Use of company resources for family concerns at nominal costs.
- Accommodation of family concerns within the company's premises.
- Payment of salaries and expenses for managing directors engaged in other family concerns.
- Payment of commissions to a family paper concern.
- Other undisclosed interests and transactions prejudicial to the company.

The prayer clause in the petition sought:
- A winding up order on grounds of oppression and mismanagement.
- Purchase of shares issued to B.N. Bhaskar Cement Products P. Ltd.
- Reconstitution of the board of directors.
- Alternative winding up of the company.

The appellant's counsel argued that under sections 397 and 398, allegations of misfeasance, misapplication of funds, and breach of trust should be investigated, and necessary orders under section 402 could affect the heirs and legal representatives of the deceased. He contended that the scope of sections 397 and 398 is broad, and orders under section 402 affecting anyone's rights necessitate hearing those affected, including the heirs and legal representatives.

The court examined whether the heirs and legal representatives should be joined under section 543, which empowers the court to assess damages against delinquent directors. Section 543 allows applications for relief during winding up proceedings if misconduct is found. Rule 11 of the Companies (Court) Rules, 1959, also provides for applications under section 543 during proceedings under sections 397 and 398. The court concluded that an application under section 543 requires a specific prayer for compensation or restoration of money or property, which was absent in the present petition.

The court referred to the decision in Official Liquidator v. Parthasarathi Sinha, where an application under section 543 was allowed against the heirs of a deceased director. However, in the present case, there was no such prayer, and thus, the heirs and legal representatives need not be joined for relief under section 543.

The respondent's counsel argued that heirs of a deceased director are not required to be substituted in an application under sections 397 and 398, citing a Division Bench decision of the Allahabad High Court. The court observed that liability under sections 539 to 544 can be enforced only against a living director and not against heirs and legal representatives without recourse to section 406.

The court also considered a specific prayer in the petition for the purchase of shares issued to B.N. Bhaskar Company P. Ltd. and shares transferred from the R.N. Bhaskar group to the B.N. Bhaskar group. Such an order under section 402 could affect the rights of the heirs and legal representatives, necessitating their hearing to avoid violating principles of natural justice. Therefore, the court concluded that the heirs and legal representatives should be substituted and joined as parties to allow them an opportunity to meet the petitioner's case regarding the share purchase.

Conclusion:
The appeal was allowed, setting aside the learned single judge's order and permitting the substitution of the heirs and legal representatives of the deceased, Shri V. N. Bhaskar, as respondents. No order as to costs was made.

← Previous Next →