2007 (11) TMI 404 - HC - Companies Law

Winding up - Liability for fraudulent conduct of business - Held that - In the light of the settled legal principles, if the report of the official liquidator dated 5-4-2005, filed in support of the application is considered, it will reveal that the alleged misfeasance and non-feasance are general in nature without pinpointing a specific act of dishonesty and misappropriation on the part of the individual ex-directors. Therefore, on the basis of such general and sweeping allegations, this Court cannot proceed against the respondents under sections 542 and 543 of the Companies Act. As the report of the official liquidator is found wanting with regard to material particulars and specific acts of commissions and omissions, which are a must to proceed against the ex-directors under sections 542 and 543 of the Act, have no hesitation in rejecting this application.

Issues Involved:
1. Conduct of ex-directors under sections 542 and 543(1) of the Companies Act, 1956.
2. Joint and several liability of ex-directors for compensation.
3. Personal liability for debts and liabilities.
4. First charge on property and effects of ex-directors.
5. Costs and incidental expenses.
6. Engagement of senior counsel by the Official Liquidator.
7. Acceptance of further facts during the hearing.
8. Meeting costs from company funds or Common Establishment Charges Account.

Detailed Analysis:

1. Conduct of Ex-directors under Sections 542 and 543(1) of the Companies Act, 1956:
The application was filed by the Official Liquidator to examine the conduct of the ex-directors of the company in liquidation under sections 542 and 543(1) of the Companies Act, 1956. The Official Liquidator alleged that the ex-directors acted against the interest of the company, conducted business contrary to the provisions of the Companies Act, and failed to account for their actions. Four specific charges were framed against the ex-directors, including failure to hand over assets, undervaluation of movable assets, non-furnishing of debt details, and maladministration leading to unsecured creditors.

2. Joint and Several Liability of Ex-directors for Compensation:
The Official Liquidator sought an order declaring that the ex-directors were jointly and severally liable to contribute to the assets of the company in liquidation by way of compensation for the loss caused, amounting to Rs. 13,84,13,871.36, with interest at 12% per annum from the date of winding up until recovery.

3. Personal Liability for Debts and Liabilities:
The application also sought a declaration that the respondents (ex-directors) were personally liable for all the debts and other liabilities of the company in liquidation without any limitation of liability.

4. First Charge on Property and Effects of Ex-directors:
It was requested that the liabilities of the respondents for the specified sum and future claims of creditors, together with interest, should constitute the first charge on the property and effects in their possession.

5. Costs and Incidental Expenses:
The Official Liquidator requested that the respondents be directed to pay the costs and incidental expenses of the proceedings.

6. Engagement of Senior Counsel by the Official Liquidator:
Permission was sought for the Official Liquidator to engage the services of a senior counsel from the Madras Bar to conduct the case on behalf of the Official Liquidator.

7. Acceptance of Further Facts During the Hearing:
The Official Liquidator sought permission to place or accept further facts at the time of hearing the case.

8. Meeting Costs from Company Funds or Common Establishment Charges Account:
The Official Liquidator requested permission to meet the costs of the application and the cost of engaging senior counsel from the funds of the company or, if insufficient, from the Common Establishment Charges Account.

Judgment Analysis:

Conduct of Ex-directors:
The court examined the conduct of the ex-directors based on the report filed by the Official Liquidator. The ex-directors contended that the application was not maintainable as it lacked material particulars of the purported breach of trust and misfeasance. They argued that the company's liquidation was due to external factors like recession and the hostile attitude of the secured creditor bank, not due to their mismanagement.

Joint and Several Liability:
The court considered the lack of specific allegations of dishonesty or misappropriation against the ex-directors. The allegations were general in nature, which is insufficient to invoke sections 542 and 543. The court noted that the burden of proving misfeasance or non-feasance rests on the Official Liquidator, who failed to provide detailed narration of specific acts of commission and omission.

Personal Liability:
The court referred to precedents, emphasizing that for a misfeasance application to succeed, there must be specific allegations and proof of misconduct or breach of trust. Mere inaction or failure to recover debts does not amount to misfeasance.

First Charge on Property:
The court found that the Official Liquidator's report lacked material particulars and specific acts of misfeasance, making it inappropriate to declare a first charge on the property and effects of the ex-directors.

Costs and Incidental Expenses:
Given the dismissal of the application, the court did not grant the request for the respondents to pay costs and incidental expenses.

Engagement of Senior Counsel:
The court did not address this issue directly, as the primary application was dismissed.

Acceptance of Further Facts:
The court did not find it necessary to permit the acceptance of further facts, given the dismissal of the application.

Meeting Costs:
The court did not grant permission for meeting costs from company funds or the Common Establishment Charges Account, as the application was dismissed.

Conclusion:
The application filed by the Official Liquidator was dismissed due to the lack of specific allegations and material particulars required to establish misfeasance or breach of trust under sections 542 and 543 of the Companies Act, 1956. The court emphasized the need for detailed and specific allegations to hold ex-directors personally liable for the company's losses and debts.

← Previous Next →