1993 (1) TMI 202 - HC - Companies Law

Winding up Liability for fraudulent conduct of business, Power of court to assess damages against delinquent, directors, etc.

Summary

Issues Involved:

1. Whether the proceedings initiated against a director under section 543 of the Companies Act would come to an automatic termination on the death of the director, and whether the court has jurisdiction to continue the proceedings against the legal representatives of the deceased director.
2. Whether the court has inherent power to reject the application under section 543 of the Act in limine or it is bound to hold a regular enquiry on the application filed under section 543 of the Act.
3. Whether the official liquidator has made out a case to foist liability on respondents Nos. 1 to 9 for the alleged loss that may have been caused by the company in liquidation.

Issue-wise Detailed Analysis:

Point No. 1: The court addressed whether the misfeasance proceedings against a deceased director could continue against his legal representatives. It was established that respondent No. 1, a former director, died on March 23, 1987. The court noted that misfeasance proceedings are inherently personal and involve inquiry into personal conduct. The maxim "actio personalis moritur cum persona" (a personal action dies with the person) was applied, indicating that such proceedings cannot continue posthumously. The court referenced the decisions in *Official Liquidator v. Maganlal Hirachand Shah* and *Mrs. Joselin v. Official Liquidator, Alwaye Chit Funds (P.) Ltd.*, concluding that the proceedings against the deceased director abate upon his death. Consequently, the court ruled that the proceedings could not continue against the legal representatives of the deceased director.

Point No. 2: The court examined whether it has inherent power to reject an application under section 543 of the Companies Act in limine. It was argued that the court should conduct an inquiry by taking evidence as per rules 260 to 262. However, the court held that it has inherent powers under rule 9 of the Companies (Court) Rules to reject an application if the allegations, even if taken at face value, do not constitute misconduct. The court emphasized that misfeasance proceedings are quasi-criminal and serious, and thus, the court has discretion to decide whether to proceed with an inquiry based on the merits of the application.

Point No. 3: The court analyzed whether the official liquidator made out a case against respondents Nos. 1 to 9 for the alleged loss caused to the company. Section 543 of the Companies Act pertains to assessing damages against delinquent directors for misfeasance or breach of trust. The court noted that mere negligence does not constitute misfeasance unless it amounts to gross negligence resulting in loss to the company. The court referenced the decision in *Official Liquidator, Madras Oils and Fertilizers P. Ltd. v. G. Shanmugham*, which emphasized the need for prima facie proof of negligence bordering on misfeasance and breach of trust.

The court examined each allegation made by the official liquidator:

- Advances to Mysore Machinery Manufacturers Ltd.: The court found that the advances were commercial decisions approved by the board and shareholders, and there was no personal gain by the directors.

- Advances to A. J. George: The court noted that the advances were for liaison work, and the decision to write off the amount was approved by the board and shareholders.

- Transfer of Amounts to C. Appu Rao: The court found no specific allegations of misfeasance or personal gain by the directors.

- Write-off of Amounts Due from D. Kamesh: The court found that the decision to write off the amount was justified as D. Kamesh left no assets.

- Advance to C. P. Dhawan: The court held that the decision to write off the amount was a commercial decision approved by the board and shareholders.

- Advance to V. C. Khanna: The court found that the decision to write off the amount was due to the government's refusal to transfer the site and was approved by the board and shareholders.

- Land Registered in K. T. Cherian's Name: The court found that the land was used by the company and the advance was shown in the books of the company.

- Write-off of Amounts Due from S. V. Rajaratnam: The court found that the decision to write off the amount was justified due to premature termination of services and was approved by the board and shareholders.

- Shortage of Sulphur: The court found that the liquidator did not consider the clarifications provided by the directors, which indicated no shortage of sulphur.

The court concluded that the allegations did not constitute misfeasance or breach of trust by the directors. The court held that the directors were not liable for any misfeasance, misapplication, or breach of trust under section 543 of the Companies Act. Consequently, the judge's summons was dismissed, and the prayers (a), (b), (c), (d), (e), and (f) were rejected. No order as to costs was made.