2010 (12) TMI 1059 - HC - Companies Law

Whether any person in control of the company at the point of time of its winding up or in the past had caused any monetary loss to the company by misappropriation or misapplication of its funds or by not properly dealing with its properties or converting them to any use other than that which was beneficial to the company? Held that - If it is proved that a respondent former director or officer had left the company reasonably long before the company went into liquidation, the official liquidator making an allegation of misfeasance is fixed with the additional duty, to enquire in greater detail how this former director or officer was responsible for such loss and make more specific allegations of them with all relevant particulars. Otherwise such proceedings brought against him would be without disclosing a cause of action and an abuse of the process of law and of the court. Here the applicant having resigned more than seven years before the winding up order, the onus of the official liquidator was to furnish such details. He has not done so. Hence the judge s summons and the points of claim do not disclose any cause of action against the applicant. Continuance of such proceeding would be an abuse of the process of law and court. Therefore, on this solitary ground would allow this application. The above misfeasance proceedings are struck off against the applicant. Although refrain from making any comment regarding the pleadings concerning the other respondents, save and except what is made above direct the official liquidator to get the pleadings drafted in future proceedings in accordance with the observations above.

Summary

Issues Involved:
1. Whether the summons and points of claim disclose any cause of action against the applicant.
2. Whether the applicant, having resigned as director before the company's winding up, can be held liable for misfeasance.

Issue-Wise Detailed Analysis:

1. Cause of Action in Summons and Points of Claim:
The applicant contends that the summons and points of claim do not disclose any case of misfeasance against him. He invokes principles of Order 7, Rule 11 of the Code of Civil Procedure, 1908, arguing that the proceedings should be dismissed as no cause of action is disclosed. The applicant asserts that specific allegations detailing how he caused loss to the company are absent, and even if allegations are made jointly against directors, particulars of their joint actions causing loss must be provided.

The official liquidator's argument, citing P.K. Nedungadi v. Malayalee Bank Ltd. and Official Liquidator, Supreme Bank Ltd. v. P.A. Tendolkar, is that he is entitled to proceed against all directors jointly based on existing charges without alleging fraud. The Supreme Court decisions indicate that misfeasance proceedings require proving acts of misfeasance, not automatic liability. The court must determine if a director acted reasonably, honestly, and with due diligence.

The judgment emphasizes that misfeasance allegations must be specific and proven, not presumed. The Calcutta case cited by the applicant, Dewrance Macneil & Co. Ltd. (in liquidation), supports the application of Order 7, Rule 11 principles to misfeasance proceedings, necessitating detailed charges.

2. Applicant's Resignation and Liability:
The applicant resigned on December 28, 1995, and his resignation was recorded by the Registrar of Companies on March 30, 2000. The official liquidator disputes this, but there is no proper denial of the applicant's resignation date. The court accepts the applicant's resignation date due to the lack of evidence to the contrary from the official liquidator.

The judgment discusses that directors are not automatically liable for company losses. It references Supreme Court decisions stating that directors must be proven to have caused loss through misfeasance. The official liquidator must show specific acts of misfeasance by the applicant, especially since he resigned seven years before the winding up order.

The court concludes that the official liquidator failed to provide detailed allegations against the applicant, making the proceedings an abuse of process. The applicant's early resignation imposes an additional duty on the official liquidator to furnish specific details of the applicant's involvement in the alleged misfeasance, which was not done.

Conclusion:
The court allows the application, striking off the misfeasance proceedings against the applicant on the ground that the summons and points of claim do not disclose any cause of action. The official liquidator is directed to draft future pleadings in accordance with the court's observations. There is no order as to costs.