2008 (8) TMI 559 - HC - Companies Law

Liability for fraudulent conduct of business - Whether the official liquidator is entitled for the reliefs asked for ? - Whether the appellants are entitled for discharge ? Held that - As it is true that an affidavit of Mr. Sasidhar is referred to, and it is also pointed out in the report that the affidavit could not be traced and produced before the court ; but, a communication was addressed to Mr. Varghese, the original of which was placed for perusal of the court. On perusal, the same would make it abundantly clear that respondents Nos. 8 to 10 were liable for the acts committed. Under the circumstances, merely because of the non-production of the affidavit of Mr. Sasidhar, the ninth respondent, it cannot be stated that respondents Nos. 8 and 10 were out of the liability or they could plead discharge of the liability, and under the circumstances, that contention has got to be rejected. Accordingly, it is rejected. Learned single judge marshalling the entire materials available has come to the conclusion that the company has lost ₹ 18,32,39,002 on various accounts, and respondents Nos. 1 to 10 were liable to make good the loss and granted the reliefs in the application by the official liquidator and rejected the application of discharge. All these Original Side appeals are dismissed confirming the order of the learned single judge

Issues Involved:
1. Entitlement of the official liquidator to the reliefs sought.
2. Entitlement of the appellants to discharge from the proceedings.

Detailed Analysis:

Issue 1: Entitlement of the Official Liquidator to the Reliefs Sought
The official liquidator sought reliefs alleging that the company lost Rs. 18,32,39,000 due to the actions of respondents Nos. 1 to 10, who were jointly and severally liable for fraud, misfeasance, and breach of trust. The liquidator's claims were supported by the auditor's report, the statement of the seventh respondent, and various letters and circumstances.

The court found that the business of the company in liquidation was carried on with intent to defraud creditors. The eighth respondent signed fixed deposit receipts as a director, despite denying involvement. A letter from the eighth respondent as "Group President" indicated his active participation in the company's management.

The seventh respondent, Mr. P.C. Varghese, provided a letter dated October 10, 1988, warning respondents Nos. 8 to 10 about dishonest intentions and fund diversions. The ninth respondent, Mr. Sasidhar, acknowledged these actions in a reply letter, owning responsibility for the consequences.

The court noted that the eighth respondent made pencil notings in the minutes book, indicating involvement in the company's affairs. The non-production of books and records during an inspection by the Department of Company Affairs suggested fund diversion to associate concerns controlled by respondents Nos. 8 to 10.

Despite claims that the firms' assets and liabilities were taken over by the company in liquidation, there was no evidence of such transfers. The seventh respondent's statements and the absence of balance-sheets for 1986-87 further supported the liquidator's claims.

The court concluded that respondents Nos. 8 to 10 were the actual promoters and managers of the company, using it to defraud creditors. The liquidator's detailed report and supporting materials sufficiently proved fraud, misfeasance, and breach of trust.

Issue 2: Entitlement of the Appellants to Discharge from the Proceedings
Respondents Nos. 8 and 10 argued that the application by the official liquidator was filed after the limitation period under section 543(2) of the Companies Act, 1956. They claimed no involvement in the company's promotion or formation and denied the charges of misfeasance and breach of trust. They contended that the official liquidator's failure to recover amounts due to the company resulted in losses, which should reduce their liability.

The eighth and tenth respondents sought discharge, claiming they were not involved in the day-to-day management and had resigned due to misunderstandings with Mr. Sasidhar. They argued that the proceedings were vexatious and an abuse of court process.

The court rejected these contentions, noting that the eighth respondent acted as "Group President" and the ninth respondent as "Chairman," indicating their control over the company. The court found that respondents Nos. 8 to 10 promoted the company to evade obligations from their previous firms, making them liable under sections 542 and 543 of the Companies Act.

Conclusion
The court dismissed all appeals, confirming the learned single judge's order. Respondents Nos. 1 to 10 were held liable for the company's losses and ordered to make good the loss. The seventh respondent's appeal for discharge was also dismissed, as he was found to be a party to the fraudulent acts.

The court directed the official liquidator to sell the property of Priya Rubber Estates and Plantations Ltd. and use the proceeds according to the law. Respondents Nos. 8 and 10, along with the legal representatives of the ninth respondent, were instructed to provide necessary documents to facilitate the sale.

← Previous Next →