2007 (12) TMI 291 - HC - Companies Law

Winding up Custody of company s property Power of Court to assess damages against delinquent directors etc.

Issues Involved:
1. Credibility and conduct of the official liquidator in misfeasance proceedings.
2. Specific charges against the erstwhile directors regarding financial misappropriations and asset mismanagement.

Issue-wise Detailed Analysis:

1. Credibility and Conduct of the Official Liquidator:
The judgment highlights the general helplessness and lackadaisical approach of the official liquidator in conducting liquidation proceedings, which questions the credibility of the entire process. The official liquidator, as the custodian under Section 456 of the Companies Act, 1956, is mandated to be vigilant and ensure that all assets and business details of the wound-up company are promptly reported and managed. The court criticizes the routine and half-hearted manner in which misfeasance proceedings are initiated, often based on inadequate and delayed statements of affairs and insufficient investigation.

2. Specific Charges Against the Erstwhile Directors:
The official liquidator brought ten charges against the erstwhile directors, primarily focusing on financial misappropriations and mismanagement of assets. The court's analysis of these charges is as follows:

- First Charge: Inventory Write-off
The charge of writing off inventory worth Rs. 2,08,83,446 without corresponding adjustments in the stock register was not conclusively proven. The expert witness suggested it might have been a revaluation rather than a write-off. The court gave the first respondent the benefit of the doubt due to insufficient evidence from the official liquidator.

- Second and Third Charges: Diversion of Funds to ILPL
The company made payments of Rs. 59,70,423 and Rs. 60,16,012 to ILPL, where the first respondent was also a director, without any written agreement for adjustment against rents. The court found the first respondent liable for these amounts as the official liquidator established that the funds were diverted and not recovered, indicating a motive for personal gain.

- Fourth and Sixth Charges: Acquisition of Immovable Properties
These charges related to the acquisition of properties without the company being shown as the owner. The official liquidator failed to demonstrate the movement of funds for these acquisitions. The court found these charges vague and inconclusive due to a lack of additional material evidence.

- Fifth Charge: Prior Period Adjustment
The company claimed an adjustment of Rs. 2,99,30,589 in its accounts without proper explanation. The court found this charge established as the first respondent failed to provide any explanation or rebuttal, indicating possible defalcation by the company's directors.

- Seventh Charge: Advance to Loyalka Properties
The company advanced Rs. 40 lakhs to Loyalka Properties, of which Rs. 35 lakhs were repaid. The court noted that the remaining Rs. 5 lakhs might have been refunded, thus reducing the severity of this charge.

- Eighth and Ninth Charges: Advances to Sri Satya Sai Properties and Bhuwalka Trading
Advances of Rs. 15 lakhs and Rs. 10 lakhs were made without actual money returning to the company. The court did not find these charges conclusively proven as the first respondent suggested these were debited to ILPL.

- Tenth Charge: Advance to Padmawati Mercantile
An advance of Rs. 37 lakhs was made to a non-existent company, Padmawati Mercantile. The court found this charge established as the first respondent could not show any adjustment or return of the money.

Conclusion:
The first respondent was held liable for the established charges, resulting in a total recovery of Rs. 59,70,423, Rs. 60,16,012, Rs. 2,99,30,589, and Rs. 37 lakhs with 10% interest per annum from the date of the winding-up order. The first respondent was also ordered to pay the costs of the proceedings assessed at 3000 GMs. The charges against the second respondent and other directors remained unproven due to a lack of specific evidence.

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