2008 (7) TMI 587 - HC - Companies Law

Winding up - Power of Court to assess damages against delinquent directors, etc. - order deleting his name from the array of respondents in CA No. 604 of 2004 and other consequential reliefs - Held that - If by examining the facts stated in the pleading and the materials submitted in support thereof it is found that no case of misfeasance or breach of trust has been made out against any of the respondents in the proceedings, then it will be a failure of duty on the part of the Court not to drop the proceedings against all the respondents, but only against the respondent who has taken out an application. In the present case, even if everything what has been stated in the points of claim and the auditors report is taken at its face value, it cannot be concluded that any case of misfeasance or breach of trust has been made out against any of the respondents in the proceedings. Thus allow the application and drop the misfeasance proceedings initiated under section 543. CA No. 604 of 2004, the misfeasance application, is hereby rejected on the ground that the allegations made therein do not disclose any case of misfeasance or breach of trust against any of the respondents named therein.

Summary

Issues Involved:
1. Application for deletion of name from respondents.
2. Initiation of misfeasance proceedings under Section 543 of the Companies Act, 1956.
3. Maintainability of an application under Order 7, Rule 11 of the Code of Civil Procedure, 1908.
4. Requirement of detailed allegations in misfeasance proceedings.
5. Timing and stage of filing an application under Order 7, Rule 11.
6. Examination of the merits of the allegations in the misfeasance application.

Detailed Analysis:

1. Application for deletion of name from respondents:
The first respondent in CA No. 604 of 2004 applied for an order deleting his name from the array of respondents and other consequential reliefs. The application was taken out by the Judge's summons dated 8-8-2007.

2. Initiation of misfeasance proceedings under Section 543 of the Companies Act, 1956:
CA No. 604 of 2004 was initiated by the Official Liquidator under Section 543 of the Companies Act, 1956, against the erstwhile directors of Dewrance Macneill & Co. Ltd. The winding-up order was based on the recommendation of the Board for Industrial and Financial Reconstruction (BIFR) due to the company's financial condition. The auditors appointed by the company court found prima facie facts showing misfeasance, leading to the initiation of the misfeasance proceedings.

3. Maintainability of an application under Order 7, Rule 11 of the Code of Civil Procedure, 1908:
The Official Liquidator contended that the application under Order 7, Rule 11 of the Code was not maintainable in proceedings under Section 543, arguing that such proceedings are summary in nature. However, it was held that misfeasance proceedings are more akin to suits and are decided based on a trial on evidence. Therefore, an application under Order 7, Rule 11 is maintainable.

4. Requirement of detailed allegations in misfeasance proceedings:
It was emphasized that an application initiating misfeasance proceedings must contain detailed specific allegations against each respondent. The application should narrate specific acts of misfeasance or breach of trust committed by each respondent, as supported by the statutory Form No. 123. The Court referred to several precedents, including the Supreme Court's decision in Official Liquidator v. Raghawa Desikachar, which highlighted the necessity of detailed particulars in such applications.

5. Timing and stage of filing an application under Order 7, Rule 11:
The Court held that an application under Order 7, Rule 11 could be taken out at any stage before the conclusion of the trial, even after the commencement of recording evidence. The Court referred to the Supreme Court's decision in ITC Ltd. v. Debts Recovery Appellate Tribunal, which clarified that such applications could be entertained even after issues have been framed and evidence recording has started.

6. Examination of the merits of the allegations in the misfeasance application:
The Court examined the allegations made in the points of claim and the supporting auditors' report. It was found that the allegations were general and lacked specific details of acts of misfeasance or breach of trust by the respondents. The Court concluded that no case of misfeasance or breach of trust was made out against any of the respondents. Consequently, the misfeasance proceedings were dropped, and CA No. 604 of 2004 was rejected on the ground that the allegations did not disclose any case of misfeasance or breach of trust against the respondents.

Conclusion:
The application for deletion of the first respondent's name was allowed, and the misfeasance proceedings under Section 543 were dropped due to the lack of specific allegations against the respondents. The Court emphasized the necessity of detailed allegations in such proceedings and upheld the maintainability of an application under Order 7, Rule 11 at any stage before the conclusion of the trial.