2008 (3) TMI 730 - HC - Companies Law

Liquidation of company - Fraudulent Directors of the company - Non-filing of the statement of affairs by the ex-Directors and failure to produce the records and Accounts Books and assets of the company - Instituted proceedings u/s 454 of the Companies Act against the ex-directors and also to take action u/s 468 and 477 - misappropriation of the funds - Central bureau of Investigation (CBI) to enquire into the matter and submit an enquiry report as early as possible - funds of the Company in liquidation were channeled for the purpose of purchasing the property - Directors and their friends incorporated various business entities apart from the company in liquidation - Applicants alongwith hundreds of other unsuspecting investors invested their lifelong savings in the company in liquidation on the promise of handsome returns @ 36% p. a. or thereabout - investments have however gone bad and the reason for the same is stated to be the misappropriation of the funds collected by the company on the representation by its Directors particularly the Managing Director Sh. Sunil Shakt and his wife Mrs. Shilpi shakt. HELD THAT - When the fraudulent conduct is undertaken by the Directors of a company sitting in their own office with a view to defraud the creditors/investors who though the victim of the fraud are not involved in the transactions which constitute such conduct and may have no personal knowledge of the same. In K. T. Dharanendrah v. R. T. Authority 1987 (2) TMI 521 - SUPREME COURT the Supreme Court while dealing with a case under the Customs Act 1962 observed that an economic offence is committed with cool calculation and deliberate design with an eye on personal profit regardless of the consequence to the Community. A disregard for the interest of the Community can be manifested only at the cost of forfeiting the trust and faith of the Community in the system to administer justice in an even handed manner without fear of criticism from the quarters which view white collar crimes with a permissive eye unmindful of the damage done to the National Economy and National Interest. From the reports of the CBI prima facie it appears to me that this is a fit case for holding the directors of the company in liquidation personally liable without any limitation of liability. At the same time it is equally true that no one can be condemned unheard. The language of Section 542 itself shows that an opportunity has to be given to the concerned persons to lead evidence in support of their case. The Director Sh. Sunil Shakt and his wife appear to have derived the funds for the purchase of the property directly or indirectly from the business of the company in liquidation. The funds of the company appear to have been siphoned off with the intent to defraud the creditors. The Directors of the company would have known that the withdrawal of the funds from the account of the company in liquidation inter alia for the benefit of the directors will result in the creditors being denied not only the handsome returns on their investments as promised but also put in jeopardy the principal amounts invested by them. From the CBI reports it appears that the action of the Directors of the Company in liquidation cannot be said to have been undertaken for the purpose of running the business of the company to generate income for the company sufficient to meet its expenses and fulfill its undertaken obligations towards the investors/creditors. Therefore direct the official liquidator to forthwith attach the property i. e. second floor and terrace above it. I further direct the SHO of the concerned police station to render all assistance required by the official liquidator in the attachment of the property. I further direct that the evidence in relation to this application be recorded by the Registrar (Companies) and the report be sent to this Court as expeditiously as possible. The applicants may file their affidavits by way of evidence before the Registrar (Companies) within six weeks. The official liquidator shall also place the material available with it on record with an affidavit. For this purpose the official liquidator is directed to collect the documents on the basis of which the reports have been prepared by the CBI and the same be filed in this Court. Copies of the affidavit/documents be exchanged between the parties including Mr. Sunil shakt and Mrs. Shilpi Shakt Shakh through his/their counsel. The official liquidator shall file the affidavit after obtaining the copies within nine weeks. Mr. Shakt may respond to the evidence produced by the applicants and the official liquidator by filing an affidavit by way of evidence within four weeks thereafter. It shall be open to Mrs. Shilpi Shakt as well to lead her evidence in case she so desires. Considering the fact that the applicant is an investor in the company in liquidation and prima facie it appears that the ex-Directors of the company have siphoned off the funds of the company I am inclined to allow these applications. The applicant is therefore permitted to continue with the legal proceedings filed against the company as well as the ex-Directors in view of the orders passed in this case today this application does not survive. Dismissed.

Summary

Issues Involved:
1. Winding up of the respondent company and appointment of an official liquidator.
2. Non-filing of the statement of affairs by ex-directors and failure to produce records.
3. Allegations against the managing director and directors for misappropriation of funds.
4. Investigation by the CBI and findings of fraudulent activities.
5. Application under Section 542 of the Companies Act to hold directors personally liable.
6. Attachment and sale of properties purchased from misappropriated funds.
7. Continuation of legal proceedings by an investor against the ex-directors.

Issue-wise Detailed Analysis:

1. Winding up of the respondent company and appointment of an official liquidator:
On 17.01.2002, the counsel for the respondent company stated no objection to the winding up of the company and the appointment of an official liquidator. Consequently, the court appointed the official liquidator to take charge of the company's assets and records.

2. Non-filing of the statement of affairs by ex-directors and failure to produce records:
The official liquidator sought to institute proceedings under Sections 454, 468, and 477 of the Companies Act against the ex-directors for their failure to file a statement of affairs and produce the company's records. The court allowed the prayer and directed the official liquidator to file a criminal complaint and necessary applications within one week.

3. Allegations against the managing director and directors for misappropriation of funds:
The applicants alleged that the managing director and his wife misappropriated funds collected from investors by promising high returns. The court had earlier directed the CBI to investigate the matter, which revealed significant misappropriation and fraudulent activities by the directors.

4. Investigation by the CBI and findings of fraudulent activities:
The CBI's investigation revealed that the respondent company and its sister concerns collected over Rs.5 crores from investors, promising high returns. The funds were siphoned off by the directors through various fraudulent means, including the creation of multiple business entities and misappropriation of funds for personal gain.

5. Application under Section 542 of the Companies Act to hold directors personally liable:
The learned Amicus Curiae argued that the CBI reports provided sufficient basis for action under Section 542, which allows the court to hold directors personally liable for the company's debts if they conducted business with the intent to defraud creditors. The court agreed that the reports indicated fraudulent conduct by the directors and warranted further action.

6. Attachment and sale of properties purchased from misappropriated funds:
The court directed the official liquidator to attach the second floor and terrace of the property at S-185, Greater Kailash-II, New Delhi, purchased with misappropriated funds. The SHO of the concerned police station was instructed to assist in the attachment. The court also directed the Registrar (Companies) to record evidence and submit a report.

7. Continuation of legal proceedings by an investor against the ex-directors:
The court allowed an investor to continue legal proceedings against the ex-directors in various forums, including the Consumer Court, Civil Court, and under Section 138 of the Negotiable Instruments Act. The applications seeking leave to continue these proceedings were disposed of accordingly.

Conclusion:
The court's judgment addressed multiple issues, including the winding up of the company, the appointment of an official liquidator, the directors' failure to file necessary documents, and the fraudulent activities revealed by the CBI investigation. The court took significant steps to hold the directors personally liable under Section 542 of the Companies Act and directed the attachment of properties purchased with misappropriated funds. The court also permitted an investor to continue legal proceedings against the ex-directors.