1966 (2) TMI 43 - HC - Companies Law

Summary

Issues Involved:
1. Fraud in the conduct of the company's business.
2. Negligence in executing contracts and supplying sub-standard materials.
3. Borrowing large sums of money without justification.
4. Forged documents and fraudulent financial transactions.
5. Liability of directors and officers for the company's misconduct.
6. Applicability of Sections 455(2) and 478 of the Companies Act, 1956.
7. Public examination of directors and officers.
8. Protection under Article 20(3) of the Constitution of India.

Detailed Analysis:

1. Fraud in the Conduct of the Company's Business:
The official liquidator's report under Section 455(2) of the Companies Act, 1956, stated that fraud had been committed in the conduct of the business of Manasuba and Company (Private) Limited. The court noted that the company indulged in several transactions that were not permissible by law, including borrowing large sums of money and producing spurious bills to obtain loans.

2. Negligence in Executing Contracts and Supplying Sub-standard Materials:
The company was found to be grossly negligent in fulfilling its contracts. It supplied sub-standard materials, leading to counter-claims from institutions like Neyveli Lignite Corporation, the Integral Coach Factory, and the Madras Port Trust. The court acknowledged that the company's negligence contributed to its financial troubles.

3. Borrowing Large Sums of Money Without Justification:
The company borrowed large amounts from various banks and financiers, often pledging the same vehicle multiple times without the knowledge of prior encumbrancers. The court found that the borrowings were effected on the basis of forged documents, indicating fraudulent intent.

4. Forged Documents and Fraudulent Financial Transactions:
Several documents related to the borrowings from banks appeared to be forged, containing signatures of directors that were not genuine. The court found that these fraudulent activities were primarily orchestrated by the managing director, C.V. Raman.

5. Liability of Directors and Officers for the Company's Misconduct:
The official liquidator's report did not specifically allege fraud against respondents Nos. 2, 3, and 4 (other directors and the secretary). The court noted that while the managing director was mainly responsible for the fraudulent activities, there was no material evidence to conclude that the other directors were parties to the fraud. The report suggested that the other directors were grossly negligent but did not directly participate in the fraudulent acts.

6. Applicability of Sections 455(2) and 478 of the Companies Act, 1956:
Sections 455(2) and 478 together prescribe the circumstances under which a public examination can be conducted. The court emphasized that the official liquidator must state in his report that fraud has been committed by any person in the promotion or formation of the company or by any officer in relation to the company since its formation. The court found that the report justified a public examination for the managing director but not for the other directors.

7. Public Examination of Directors and Officers:
The court ordered a public examination of the managing director, C.V. Raman, under Section 478 of the Companies Act, 1956. However, it dismissed the application for public examination against the other directors and the secretary, as there was no sufficient evidence to implicate them in the fraud.

8. Protection Under Article 20(3) of the Constitution of India:
The court addressed the contention that the public examination of the managing director would violate Article 20(3) of the Constitution of India, which prohibits compelling a person accused of any offense to be a witness against himself. The court referred to Supreme Court judgments, concluding that public examination under the Companies Act does not amount to an accusation and is not prohibited under Article 20(3). Therefore, the managing director's public examination was not barred by the Constitution.

Conclusion:
The court allowed the application of the official liquidator for the public examination of the managing director, C.V. Raman, and dismissed the application concerning the other directors and the secretary. The official liquidator was authorized to engage counsel and conduct the public examination within six months. The order was suspended for three weeks to enable the first respondent to file an appeal.