1966 (5) TMI 38 - HC - Companies Law

Winding up Fraudulent preference, Winding up Power of court to assess damages against delinquent directors, etc.

Issues Involved:
1. Whether the debt owed by the defendant to the company was effectively released.
2. Whether the defendant committed misfeasance by entering into the agreement with Myer and Joseph.
3. Whether the release of the debt constituted a breach of Section 54 of the Companies Act, 1948.
4. Whether the liquidator should have been a co-plaintiff in the action.

Issue-wise Detailed Analysis:

1. Effective Release of Debt:
The company contended that although no formal release had been executed, the debt owed by the defendant could not be enforced in the ordinary way. The defendant argued that the debt had been effectively released. The court noted that the company could not contend that the debt was still a liability enforceable against the defendant, even though the company was now in liquidation. The court recorded that this concession was rightly made.

2. Misfeasance by the Defendant:
The company argued that the defendant committed misfeasance by bargaining with Myer and Joseph that, in consideration of selling his shares, they would use their powers as directors to cause the company to release his debt without consideration. The court found that the defendant did not commit misfeasance because the company had not received any consideration for the release of the debt from Myer and Joseph or the creditors. The creditors were only interested in being satisfied that the debt had no present value to them. The court concluded that the fresh lease of life gained by the company was not the outcome of any agreement to which the company was a party and could not be treated as consideration for the release of the debt.

3. Breach of Section 54 of the Companies Act, 1948:
The company alleged that the defendant breached Section 54 by providing financial assistance to Myer and Joseph in their purchase of shares. The court noted that the infringement occurred when the company, under the control of Myer and Joseph, released the debt. The court referenced the decision in Victor Battery Co. Ltd. v. Curry's Ltd., which showed that although the section makes the company guilty of a criminal offense, it does not invalidate the disposition. The court also referenced Steen v. Law, which showed that directors causing a company to enter a transaction infringing Section 54 are guilty of misfeasance. The court concluded that the defendant, who was no longer a director when the debt was released, could not be held responsible for the misfeasance committed by Myer and Joseph.

4. Liquidator as Co-Plaintiff:
The defendant argued that the liquidator should have been a co-plaintiff based on the decision in Independent Automatic Sales Ltd. v. Knowles & Foster. The court rejected this argument, stating that the company was not claiming the release was void by reason of Section 54 but was claiming against a director for misfeasance. The court saw no reason why the company could not bring such an action in its own name or why the liquidator could not bring it in the name of the company without suing personally.

Conclusion:
The court held that the action failed because the defendant was not guilty of misfeasance. The court noted that the defendant was entitled to stipulate an effective release of his debt as a term of transferring his shares. The court concluded that the release of the debt did not necessarily involve any misfeasance or infringement of Section 54. The court found that if Myer and Joseph carried out the release in a way that amounted to misfeasance, they were responsible, not the defendant. Consequently, the action was dismissed.

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