2010 (11) TMI 843 - HC - Companies Law

Application is taken out by the official liquidator to take action for misfeasance against the ex-directors of the company under liquidation and for further reliefs Held that - There is nothing on record to show that the loss is only on account of misfeasance. It must be noted that for the purpose of proceeding under section 542 of the Act, the essential ingredient is that the directors must have taken the company on a route which they are consciously aware of as leading to a case of total mismanagement, thereby bringing down the company s existence. In the absence of any material to substantiate the allegation, one cannot go in a mechanical manner to sustain the contention put forth in the application. Even though it is the case of the official liquidator that the ex-directors have given the realisable value of the movable and immovable assets as ₹ 26.67 crores in the year 2004, while the same were sold only for ₹ 14 crores in the year 2007 and there is an inflation of value by the ex-directors, admittedly, the assets were sold only in the year 2007, viz., after three years from the valuation, and the reason for lesser realisation of value cannot be imputed on the respondents, especially when the official liquidator with the existing value of the assets could settle 92 per cent. of the liabilities of the secured creditors and workmen creditors, which is of utmost importance. Having regard to the seriousness of the provisions and there being no material against the ex-directors, the allegations stand unproved. This application does not merit acceptance and therefore, the same stands dismissed.

Issues Involved:
1. Misfeasance by ex-directors.
2. Realization and valuation of company assets.
3. Liability and compensation for losses.
4. Claims and payments to creditors and workmen.

Issue-wise Detailed Analysis:

1. Misfeasance by Ex-Directors:
The official liquidator filed an application to take action against the ex-directors for misfeasance under Section 543(1) of the Companies Act, 1956. The court stated that liability under this section is attributable only if it is found that the company's funds were misapplied or there was misfeasance or breach of trust by the ex-directors. The court emphasized that intentional acts or deliberate conduct detrimental to the company must be proven to constitute misfeasance. The court held that allegations of fraud or misfeasance require specific pleading and proof of mens rea (criminal intent). The court found no specific instance of misfeasance or evidence that the loss resulted from such actions by the ex-directors.

2. Realization and Valuation of Company Assets:
The ex-directors provided a statement of affairs showing the realisable value of the company's assets as Rs. 26.67 crores in 2004. The official liquidator realized only Rs. 14 crores from the sale of assets in 2007. The court noted that the valuation was based on an approved valuer's report and that the assets' value could have deteriorated over three years due to various factors, including market conditions and lack of maintenance. The court concluded that the lower realization could not be imputed to the ex-directors and that the directors' estimate was made in good faith.

3. Liability and Compensation for Losses:
The official liquidator claimed that the ex-directors were liable to pay Rs. 8,88,29,227 with interest at 12% per annum for the loss caused to the company. The court found no evidence of intentional or deliberate conduct by the ex-directors that resulted in the company's loss. The court held that the essential ingredient for proceeding under Section 542 of the Act is that the directors must have consciously mismanaged the company, leading to its downfall. In the absence of material evidence to substantiate the allegations, the court dismissed the application.

4. Claims and Payments to Creditors and Workmen:
The official liquidator received 139 claims from creditors, adjudicated 111 workers' claims under Section 529A of the Companies Act, and admitted a sum of Rs. 66,83,214. The court permitted the official liquidator to pay a dividend of 92 paise in a rupee to workmen creditors, amounting to Rs. 48,36,278. The official liquidator could settle 92% of the liabilities of the secured creditors and workmen creditors with the realized amount. The court noted that the remaining funds would be used to pay the second list of workmen creditors and, if any amount remains, to the secured creditors.

Conclusion:
The court concluded that there was no material evidence against the ex-directors to prove misfeasance or breach of trust. The application filed by the official liquidator was dismissed, and the allegations against the ex-directors were deemed unproven.

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