2018 (5) TMI 1859 - HC - Companies Law

Specific acts of commission or omission on the part of director - ex-directors of the company in liquidation are guilty of having committed breach of trust in discharge of functions and duties in managing the affairs of the company in liquidation - misfeasance or breach of trust within the meaning of section 543 of the Act of 1956 - acts for alleged transfer of property in preference to the other creditors reflects fraudulent nature of acts and prove their act of mismanagement - HELD THAT - Sale deeds, which were sought to have been executed on the basis of duress and force have already been annulled by this court. Sufficient mitigating grounds, as noted above, are made out. Merely on the basis of report of N. C. Jain, chartered accountant, who has admittedly not examined the books of account, which makes it obvious that the case for initiating proceedings and punishing the respondents under section 543 of the Act of 1956 is not made out. It is also stated that the official liquidator had already sold the said properties. Taking into consideration that the company application fails to detail narration of the specific acts of commission or omission on the part of each director and further the official liquidator has not been able to prove the case of misfeasance or committing any breach of trust in discharge of functions and duties and the respondents have been able to justify their action in not making available the records and selling their properties in duress, issues as framed by this court are not found to be proved and are answered in favour of the respondent. It is noted that non-handing over the possession of current stock, books of account is on the basis of reasonable excuse and this court is satisfied that keeping in view the law laid down by the apex court in the case of Official Liquidator v. Raghawa Desikachar 1974 (8) TMI 120 - SUPREME COURT OF INDIA , no case for holding the respondents guilty of section 543 of the Act of 1956 of misfeasance or breach of trust within the meaning of section 543 of the Act of 1956 is made out.

Summary

Issues Involved:

1. Whether the respondents disposed of the properties of the company without getting valuation to the detriment of the creditors of the company.
2. Whether the respondents handed over the possession of the current stock, record, and books of account to the official liquidator upon the passing of the winding-up order.
3. Whether the respondents caused a breach of trust and loss to the company to the extent of ?14,99,111.81 by retaining properties and assets belonging to the company.
4. Whether there is any specific event on the part of respondents Nos. 3 and 4 relating to misapplication, retention, or act of misfeasance or breach of trust in relation to the company.

Detailed Analysis:

Issue 1: Disposal of Properties Without Valuation

The official liquidator alleged that the ex-directors of M/s. Ashoka Oil Products P. Ltd. disposed of the company's properties without obtaining a proper valuation, thereby harming the creditors. The ex-directors sold the plant and machinery to Kherli Vyapar Mandal, an organization formed by 32 creditors, for ?15.40 lakhs and the factory land and building to 42 other creditors for ?4.30 lakhs. These transactions were executed within six months of the winding-up petition, suggesting fraudulent intent under Section 531 and voidable against the liquidator under Section 531A of the Companies Act, 1956. The court previously annulled these sales, indicating the ex-directors' fraudulent actions and breach of trust.

Issue 2: Handing Over of Possession

The respondents failed to hand over the current stock, records, and books of account to the official liquidator. The ex-directors did not file the statement of affairs as required under Section 454 of the Act of 1956, which includes particulars about the company's assets and liabilities. They also did not maintain or hand over the books of account and other statutory records, thereby obstructing the liquidation proceedings.

Issue 3: Breach of Trust and Loss to the Company

The official liquidator claimed that the ex-directors caused a breach of trust and a loss of ?14,99,111.81 by retaining the company's properties and assets. The respondents argued that the sales were executed under coercion and duress from the creditors, who allegedly forced them at gunpoint. The court annulled the sale deeds, but the respondents maintained that they were not in possession of the company's documents and assets post-annulment.

Issue 4: Specific Events of Misfeasance or Breach of Trust

The official liquidator did not present independent evidence apart from the chartered accountant's report, which did not examine the company's bank statements and transactions. The court noted that the official liquidator failed to provide specific acts of commission or omission by each director, as required for a misfeasance action under Section 543 of the Act of 1956. The respondents' defense of coercion and duress was found to be a reasonable excuse for their actions.

Conclusion:

The court concluded that the official liquidator did not provide sufficient evidence to prove misfeasance or breach of trust by the respondents. The mitigating circumstances, such as the alleged coercion and the annulment of the sale deeds, were considered. The application lacked detailed narration of specific acts of commission or omission, and the official liquidator's reliance on the chartered accountant's report, which did not independently verify the transactions, was insufficient. Consequently, the company application was dismissed, and the respondents were not held guilty under Section 543 of the Companies Act, 1956.