2009 (7) TMI 760 - HC - Companies Law

Winding up - application to make the respondents who are the ex-directors of the company under liquidation liable for misfeasance under sections 542 and 543(1) of the Companies Act, 1956 Held that - It is clear that when an application under sections 542 and 543 of the Companies Act is made relating to the allegation of fraud or breach of trust or misappropriation, to prove such allegation which is being criminal in nature, it is necessary that there should be mens rea aspect on the part of the ex-director either in committing fraud or causing loss to the company under liquidation. Such conduct of fraud or breach of trust must be specifically pleaded and proved and in the absence of such specific pleading and proof, on the facts of the present case, it is not possible to accept the contention of the learned Official Liquidator that there has been deliberate conduct of fraud or breach of trust on the part of the ex-directors of the company under liquidation. Thus no substance in the application filed by the Official Liquidator for taking any further action Against the respondents, viz., ex-directors of the company under liquidation for misfeasance under sections 542 and 543 of the Companies Act and, therefore, the application stands dismissed.

Issues Involved:
1. Liability of ex-directors for misfeasance under Sections 542 and 543(1) of the Companies Act, 1956.
2. Joint and several liability to pay compensation for the loss caused to the company.
3. Validity of claims regarding trade debtors, loans and advances, and unsecured creditors.
4. Requirement of specific instances or dishonest conduct to establish misfeasance.

Issue-wise Detailed Analysis:

1. Liability of ex-directors for misfeasance under Sections 542 and 543(1) of the Companies Act, 1956:
The application by the Official Liquidator sought to hold the respondents, who are ex-directors, liable for misfeasance under Sections 542 and 543(1) of the Companies Act, 1956. The court examined whether the ex-directors had misapplied company funds, committed misfeasance, or breached trust. The judgment emphasized that to constitute misfeasance, there must be an intentional act or deliberate conduct detrimental to the company's interests. The court found that there were no specific instances or dishonest acts attributed to the ex-directors, thus failing to meet the criteria under Section 543(1).

2. Joint and several liability to pay compensation for the loss caused to the company:
The Official Liquidator sought to make the ex-directors jointly and severally liable to pay Rs. 27,85,940 as compensation for the loss caused to the company. However, the court noted that the misfeasance report did not provide specific evidence or detailed instances of misconduct by the ex-directors. The court reiterated that general allegations without pinpointing specific acts of dishonesty or breach of trust are insufficient to establish liability under Sections 542 and 543.

3. Validity of claims regarding trade debtors, loans and advances, and unsecured creditors:
- Trade Debtors: The court noted that the ex-directors had taken steps to recover amounts due from trade debtors but were unsuccessful due to incorrect addresses. There was no evidence of intentional or deliberate conduct to let the debts lapse.
- Loans and Advances: The ex-directors contended that despite efforts, they could not recover the amounts due. The court found no intentional act or deliberate conduct on their part.
- Unsecured Creditors: The claim of Rs. 19,89,038 was contested by the ex-directors, who argued that these were remuneration amounts, not loans. The Official Liquidator conceded that there were no unsecured creditors, thus abandoning this claim.

4. Requirement of specific instances or dishonest conduct to establish misfeasance:
The court emphasized the necessity of specific allegations and evidence of dishonest conduct to establish misfeasance. Citing precedents, the judgment highlighted that general and vague allegations are insufficient. The court referred to the Delhi High Court's ruling in Official Liquidator, Milan Chit Fund & Finance (P.) Ltd. v. Joginder Singh Kohli and other relevant cases, which underscored the need for detailed narration of specific acts of misconduct to prove misfeasance.

Conclusion:
The court dismissed the application by the Official Liquidator, concluding that there was no substantial evidence of misfeasance or breach of trust by the ex-directors. The judgment underscored the importance of specific and detailed allegations to hold directors liable under Sections 542 and 543 of the Companies Act, 1956.

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