1957 (9) TMI 29 - HC - Companies Law

Summary

Issues:
1. Applicability of section 185 of the Indian Companies Act regarding the liability of directors to refund amounts received during liquidation.
2. Interpretation of section 235 of the Act in the context of misapplication of funds by directors during winding up.

Analysis:

Issue 1: Applicability of Section 185
The case involves an appeal under section 202 of the Indian Companies Act, 1913, where the liquidator of a company made disbursements to creditors, including directors, during voluntary liquidation. The District Judge ordered the directors to refund the amounts received, invoking section 185 of the Act. The court examined whether the directors, who were also creditors, could be considered officers of the company under the Act. The court held that merely being directors does not automatically make them liable under section 185. The directors had advanced funds to the company as creditors, not in their capacity as directors. Therefore, the court concluded that section 185 did not apply to the directors in this case.

Issue 2: Interpretation of Section 235
The court also considered the application of section 235 of the Act, which deals with misapplication of funds by individuals involved in the formation or management of a company during winding up. To trigger section 235, it must be shown that the person misapplied or retained company funds or was guilty of misfeasance or breach of trust. In this case, the directors received repayment of loans advanced to the company, not company funds directly. As creditors, they were paid what was due to them by the former liquidator. Therefore, the court held that the directors could not be compelled to refund the amounts received under section 235 as they did not misapply or retain company funds. Consequently, the court set aside the District Judge's order and dismissed the liquidator's application, with costs to be borne by the liquidator in both courts.

This judgment clarifies the distinction between directors acting as creditors and their liability under sections 185 and 235 of the Indian Companies Act, providing guidance on the circumstances under which directors may be required to refund amounts received during company liquidation.