2007 (3) TMI 377 - HC - Companies Law

Summary

Issues Involved:
1. Execution of the Company Law Board (CLB) order.
2. Ownership and attachment of the property.
3. Fiduciary duties and liabilities of directors.
4. Validity of transfer of property.
5. Corporate veil and personal liability of directors.

Issue-wise Detailed Analysis:

1. Execution of the Company Law Board (CLB) Order:
The Petitioners sought to execute the CLB order dated 8-6-2004 under section 634A of the Companies Act, 1956, through the High Court of Bombay as the Executing Court. The Respondent No. 2, a life-time Director of the Respondent No. 1-Company, contested the execution, arguing that the order was against the Company and not him personally. However, the court found that Respondent No. 2, as the life-time Chairman and Director, was liable to execute the order as he was the agent of the Company and failed to carry out the CLB's directions.

2. Ownership and Attachment of the Property:
The Applicant-Company claimed ownership of the attached flat, arguing that Respondent No. 1-Company did not own the property. The court examined the history of the flat's ownership, noting that it was initially purchased by the wife of Respondent No. 2 in 1977 and later transferred to their son in 2000. The court found that the transfer documents were inadequate and the ownership claimed by the Applicant-Company was not legally substantiated. The court concluded that the flat belonged to Respondent No. 2, who attempted to show a lack of legal interest by transferring ownership to family members and other companies.

3. Fiduciary Duties and Liabilities of Directors:
The court emphasized the fiduciary duties of directors towards shareholders, referencing the case of Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad. It was held that directors owe a fiduciary duty to shareholders and must act in the interest of the Company. The court found that Respondent No. 2 acted with an oblique motive and collateral purpose, transferring properties to defeat and delay execution of the CLB order. His actions were deemed mala fide, and he was held personally liable for the satisfaction of the decree.

4. Validity of Transfer of Property:
The court scrutinized the transfer of the flat from Respondent No. 2's son to the Applicant-Company, noting discrepancies in the dates and registration of the transfer deed. The transfer was found to be a sham transaction, executed to evade liabilities. The court lifted the corporate veil, revealing the true ownership and dismissing the Applicant-Company's claim to the property.

5. Corporate Veil and Personal Liability of Directors:
The court agreed with the Petitioners' argument to lift the corporate veil, exposing the reality that Respondent No. 2 incorporated various companies to shield himself from liabilities. The court held that Respondent No. 2, as a life-time Chairman and Director, could not evade his responsibilities by resigning. His resignation was considered ineffective in law, and he remained liable for acts and liabilities incurred prior to his resignation.

Conclusion:
The court dismissed both Chamber Summons No. 1060 of 2006 and Chamber Summons No. 1061 of 2006, finding that Respondent No. 2 failed in his fiduciary duties and was personally liable for the execution of the CLB order. The court imposed costs of Rs. 5,000 on each application, reinforcing the principle that directors cannot evade their responsibilities through sham transactions and resignation.