2002 (12) TMI 501 - HC - Companies Law

Issues Involved:
1. Misfeasance and breach of trust by the directors and promoters.
2. Liability for fraudulent activities and misapplication of company funds.
3. The legality of the official liquidator's proceedings under sections 542 and 543 of the Companies Act.
4. The necessity of cross-examination in the proceedings.
5. Applicability of section 545 of the Companies Act for prosecution.

Detailed Analysis:

1. Misfeasance and Breach of Trust by the Directors and Promoters:
The official liquidator alleged that the business of the company in liquidation was carried on with the intent to defraud creditors and that the directors and promoters misapplied company funds. The court found that the directors and promoters, including respondent Nos. 8 to 10, were guilty of misfeasance and breach of trust. The court noted that the company was run like a partnership firm, with decisions being taken unilaterally by respondent Nos. 8 to 10, who acted as de facto managers despite not being formally appointed as directors. The court concluded that these respondents were pivotal in the company's affairs and thus liable for the misapplication of funds and breach of trust.

2. Liability for Fraudulent Activities and Misapplication of Company Funds:
The court examined the report of the official liquidator and the auditors, which detailed various fraudulent activities, including the diversion of funds to sister concerns, issuance of false promissory notes, and mismanagement of loans. The court found ample evidence to support the allegations, including the statement of P.C. Varghese and various documents showing the involvement of respondent Nos. 8 to 10 in these activities. The court held that the company lost Rs. 18,32,39,002 due to these fraudulent activities and that respondent Nos. 1 to 10 were jointly and severally liable to compensate for this loss.

3. Legality of the Official Liquidator's Proceedings Under Sections 542 and 543 of the Companies Act:
The respondents argued that the proceedings under sections 542 and 543 were quasi-criminal and required a higher standard of proof. The court, however, found that the official liquidator had discharged the burden of proof by providing clear, credible, and reliable evidence. The court referred to the Supreme Court's decision in Official Liquidator v. Raghawa Desikachar, which supports the view that the liquidator's report and the auditor's findings were sufficient to establish liability under these sections.

4. Necessity of Cross-Examination in the Proceedings:
The respondents contended that their right to cross-examine witnesses was violated. The court, however, held that cross-examination is not an absolute requirement and depends on the facts of the case. The court cited the Supreme Court's decision in K.L. Tripathi v. State Bank of India, which states that cross-examination is necessary only when there is a dispute regarding the facts or the credibility of the evidence. Since the respondents did not challenge the contents of the official liquidator's report on the merits, the court found no need for cross-examination.

5. Applicability of Section 545 of the Companies Act for Prosecution:
The court considered whether a criminal case was made out under section 545 of the Companies Act. It found that respondent Nos. 8 and 10, who were in charge of the company's affairs, were liable for prosecution under this section. The court noted that section 2(30) of the Act defines an officer to include persons who direct or instruct the board of directors, and thus, respondent Nos. 8 and 10 fell within this definition. The court held that the evidence clearly showed their involvement in the fraudulent activities, and they were liable to be prosecuted under section 545.

Conclusion:
The court allowed the official liquidator's application, holding that respondent Nos. 1 to 10 were jointly and severally liable to pay Rs. 18,32,39,002 as compensation for the misapplication of funds and breach of trust. The court also directed that respondent Nos. 8 and 10 be prosecuted under section 545 of the Companies Act. Consequently, the application filed by B. Rajagopal and B. Muralidhar to discharge them from the proceedings was dismissed.

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