2008 (9) TMI 561 - HC - Companies Law

Winding up - Power of Court to assess damages against delinquent directors, etc.- Held that - For various acts of malfeasance, misfeasance, breach of trust, etc., the ex-directors are liable for criminal prosecution under section 542(3) as also for action under section 543(1) of the Companies Act. In the report of the learned District and Sessions Judge (Vigilance), Haryana, it has come that an amount of ₹ 11,98,724.82 was illegally and fraudulently retained and misutilised by the ex-directors. In fact, this is a public money in the hands of the company. The ex-directors have misutilised the amount and, thus, are liable to reimburse the same to the company. In view of the above, the present application is allowed and direct the ex-directors of the company to reimburse a sum of ₹ 11,98,724.82 along with interest at the rate of 6 per cent per annum with effect from the date of the report of the learned District and Sessions Judge (Vigilance), Haryana, i.e., 31-3-1995, till actual payment, within a period of two months from today. No costs.

Issues Involved:
1. Fraud committed by the directors in the promotion, formation, and conduct of the business.
2. Recovery of Rs. 11,98,724.82 from the respondents.
3. Restoration of property held by the respondents out of the company's funds.
4. Imprisonment under section 538(p) of the Companies Act, 1956.
5. Timeliness and limitation of the application under section 543(2) of the Companies Act.
6. Validity of the report submitted by the District and Sessions Judge (Vigilance), Haryana.

Issue-wise Detailed Analysis:

1. Fraud Committed by the Directors:
The District and Sessions Judge (Vigilance), Haryana, after recording evidence, submitted a report on 31-3-1995, concluding that fraud had been committed by the directors in the promotion, formation, and conduct of the business of the company. This finding was based on the investigation ordered by the Official Liquidator and the report prepared by the Chartered Accountant, which highlighted various discrepancies and fraudulent activities by the ex-directors.

2. Recovery of Rs. 11,98,724.82 from the Respondents:
The creditors claimed a sum of Rs. 11,98,724.82, which was required to be recovered from the respondents. The District and Sessions Judge (Vigilance), Haryana, confirmed that this amount was fraudulently retained and misutilised by the ex-directors. Consequently, the court directed the ex-directors to reimburse this sum along with interest at the rate of 6% per annum from the date of the report (31-3-1995) until actual payment.

3. Restoration of Property:
The Official Liquidator sought a directive for the respondents to restore the property, both movable and immovable, held by them out of the company's funds. This was part of the broader reliefs sought to address the fraudulent activities and misappropriation of the company's assets by the ex-directors.

4. Imprisonment under Section 538(p) of the Companies Act, 1956:
The application also requested that the respondents be punished with imprisonment under section 538(p) of the Companies Act, 1956. This section deals with offences by officers of the companies in liquidation, including acts of omission and commission that constitute punishable offences.

5. Timeliness and Limitation of the Application:
The respondents argued that the application was beyond the limitation period prescribed under section 543(2) of the Companies Act, which allows for action within five years from the date of the winding-up order. However, the court noted that the acts of misapplication, retainer, misfeasance, or breach of trust only came to light after the public examination and the submission of the report on 31-3-1995. Thus, the limitation period commenced from this date, making the application filed on 4-7-1995 within the prescribed period.

6. Validity of the Report Submitted by the District and Sessions Judge (Vigilance), Haryana:
The respondents contended that the District and Sessions Judge (Vigilance), Haryana, was not required to give his findings in the report, and doing so prejudiced them. However, the court clarified that the order dated 24-3-1994 explicitly directed the Judge to submit his report along with the record of the proceedings, including his conclusions. Since this order was not challenged by the respondents, the report was deemed valid.

Conclusion:
The court found the ex-directors liable for fraudulent activities and directed them to reimburse the misappropriated amount with interest. The application was deemed timely, and the report by the District and Sessions Judge (Vigilance), Haryana, was upheld. The court allowed the application and directed the ex-directors to pay the specified sum within two months.

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