2009 (10) TMI 541 - HC - Companies Law

Whether the appellants were at fault in not producing the books of account before the sales tax authorities, the failure of which has resulted in the best judgment order passed by the said authorities, adding substantial amounts towards the deemed turnover in respect of the period in question, which in turn has attributed to the alleged loss to the Company under liquidation? Held that - Whether the Company was wilfully avoiding production of registers is not seen properly considered, particularly in view of the specific case of the appellants that they were not in a position to produce those records, which were stated as stealthily removed by the employees and for the very same reason, the Company Court had acquitted the very same Directors in the relevant proceedings filed by the Official Liquidator seeking to prosecute them for non-production of the records; the finality of which verdict is not seen disputed from the part of the Official Liquidator. That apart, the proceedings under section 543 of the Companies Act is rather quasi-criminal in nature, where degree of proof and adequacy of evidence are matters, which are to be considered with more circumspection. The way in which the Company Court appreciated the case does not appear to be correct or proper in a proceeding of this nature, so as to have fixed the liability upon the shoulders of the appellants. In the above facts and circumstances, we find that the order impugned in the appeal, fixing liability upon the appellants to pay a sum of ₹ 38,94,950, with interest at the rate of 6 per cent per annum from 7-12-1988, is not correct or sustainable under any circumstance. As such, we set aside the impugned order and the appeal is allowed.

Issues Involved:
1. Sustainability of the verdict fixing liability on the appellant in a misfeasance proceeding under Section 543 of the Companies Act.
2. Non-submission of Books of Account and records to the Official Liquidator.
3. Basis of Chartered Accountant's report and its reliance on sales tax assessment records.
4. Role and actions of the Official Liquidator in contesting sales tax assessments.
5. Determination of profit margin and fixing of liability on the appellants.

Issue-wise Detailed Analysis:

1. Sustainability of the Verdict:
The appeal challenges the verdict of the Company Court, which fixed liability on the appellant in a misfeasance proceeding under Section 543 of the Companies Act read with Rule 261 of the Company Court Rules. The Company Court found the appellants, who were directors of the company, guilty of misfeasance and breach of trust, holding them liable for a sum of Rs. 38,94,950 with interest.

2. Non-submission of Books of Account and Records:
The Official Liquidator found that relevant Books of Account and records post-1982 were not handed over, despite multiple requests. The appellants contended that they were not in possession of these documents as they were allegedly removed by the company's employees. The Company Court acquitted the appellants in a related complaint for non-submission of accounts, a fact not disputed by the respondents.

3. Basis of Chartered Accountant's Report:
The Chartered Accountant, T.N. Radhakrishnan, prepared a report (Ext. A1) based on sales tax assessment records, without notice to the appellants. The report formed the basis for fixing liability. The Company Court acknowledged that the report was based solely on sales tax records and no other documents were available to the Chartered Accountant. The Court reduced the profit margin from the report, estimating the company's income and fixing the liability on the appellants.

4. Role and Actions of the Official Liquidator:
The Official Liquidator, after the winding-up order, was responsible for contesting matters before the sales tax authorities. The appellants argued that the Official Liquidator should have handled the sales tax assessments, as they had informed the Liquidator of their inability to produce the records. The Official Liquidator's report indicated that the sales tax authorities did not issue notice to the Liquidator before finalizing the assessments. The Liquidator sought permission from the Company Court to address the sales tax claims as unsecured debts, due to insufficient funds.

5. Determination of Profit Margin and Fixing of Liability:
The Company Court fixed a profit margin of 7.5% based on the Chartered Accountant's report, despite evidence that the steel industry was running at a loss and the profit margin was less than 1%. The Court's decision to adopt an element of "guesswork" in fixing the income was questioned. The appellants' contention that the company was running at a loss and the profit margin was exaggerated was not properly considered. The proceedings under Section 543 are quasi-criminal, requiring a higher standard of proof, which the Company Court did not adequately meet.

Conclusion:
The High Court found that the Company Court's order fixing liability on the appellants was not sustainable. The Court noted the lack of proper evidence and the reliance on guesswork. The appeal was allowed, and the impugned order was set aside, relieving the appellants from the liability of Rs. 38,94,950 with interest.

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