2012 (5) TMI 14 - HC - Companies Law

Application filed by the Official Liquidator misapplication of funds belonging to the company to the extent of Rs. 1,88,60,835/-and are therefore guilty of misfeasance and breach of trust - Held that - No contrary material to indicate that the said entries were dishonestly made by the first respondent for his benefit and to cause loss to the Company-in-liquidation and has been misapplied by him since the first respondent was also a Director in the sister concern, the adjustment of amounts by Journal entries cannot be considered as a benefit derived by the first respondent for himself - as the amount which was due to the Company-in-liquidation from the sister concern as against the dues from the Company-in-liquidation to its sister concern as Indicated item wise has been wiped out by book adjustments by virtue of the journal entries but no personal benefit is evident or is proved in favour of assessee.

Issues Involved:
1. Misfeasance and breach of trust by the erstwhile Directors.
2. Allegations of misapplication of funds and fraudulent journal entries.
3. Justification and explanation provided by the respondents regarding the financial transactions and journal entries.
4. Determination of liability and personal benefit derived by the Directors.

Detailed Analysis:

1. Misfeasance and Breach of Trust by the Erstwhile Directors:
The application filed by the Official Liquidator under Section 543(1) of the Companies Act contended that the respondents, who are the erstwhile Directors, misapplied company funds amounting to Rs. 1,88,60,835/- and are guilty of misfeasance and breach of trust. The respondents disputed the claim, and the first respondent took full responsibility for the company's affairs, exonerating the other respondents.

2. Allegations of Misapplication of Funds and Fraudulent Journal Entries:
The applicant alleged that various journal entries were fraudulently made after the winding-up order dated 31.10.1996, specifically mentioning entries dated 31.03.1997. It was also alleged that vehicle maintenance expenses were claimed after the vehicles were sold, and funds were diverted to sister concerns like R.C. Exports and R.C. International. Payments were also made to Asian Electronics and other entities, which were claimed to be misapplications of the company's funds.

3. Justification and Explanation Provided by the Respondents:
The first respondent provided a detailed explanation for each financial transaction and journal entry. He contended that the journal entries were erroneously dated 31.03.1997 instead of 31.10.1996 and were made for proper accounting purposes. The vehicle maintenance expenses were justified as costs for rented vehicles used for company operations. The dues from R.C. Exports and other sister concerns were adjusted against amounts owed by the company, and no personal benefit was derived. The first respondent emphasized that all actions were taken in the business interests of the company, and the Directors did not misuse company funds for personal gain.

4. Determination of Liability and Personal Benefit Derived by the Directors:
The court examined the evidence and explanations provided by the respondents. It was found that the journal entries and financial adjustments were made in the course of business and did not indicate any personal benefit to the Directors. The court relied on precedents, including the Calcutta High Court decision in Bholanath Kundu v. Official Liquidator and the Karnataka High Court decision in Chamundi Chemicals & Fertilizers Ltd., which stated that misfeasance requires proof of personal benefit and actual loss to the company. The court concluded that the respondents' actions did not constitute misfeasance or breach of trust as contemplated in law.

Conclusion:
The court dismissed the application, holding that the act of misfeasance was not established, and the respondents could not be held liable for the claimed amount. The detailed explanations provided by the first respondent were accepted, and it was determined that the financial transactions and journal entries were made in the business interests of the company without any personal gain to the Directors. No order as to costs was made.

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