1976 (1) TMI 90 - HC - Companies Law

Directors vacation of office by, Winding up Power to summon persons suspected of having property of company, etc. and Power of court to assess damages against delinquent directors, etc.

Issues Involved:
1. Misfeasance or misconduct in the purchase, pledge, or sale of shares of M/s. Ryam Sugar Company Limited.
2. Loss suffered by Gaya Sugar Mills Limited in their deal with Messrs. Mirrless Watson Company Limited.
3. Loss of rupees five lakhs for the crushing season 1949-50.
4. Purchase of shares of Messrs. Hindusthan Coal Company Limited.
5. Loss in the Warsaliganj scheme of the company.
6. Loss due to advances made to Bhadani Brothers Limited and J.R. Commercial Corporation Ltd.
7. Failure to account for the cash balance of Gaya Sugar Mills Limited.
8. Failure to account for the sum of Rs. 3,99,680 being the realization of the sale proceeds of the Warsaliganj Factory.
9. Joint or several liability of the directors for the sum of Rs. 67,68,724 or any part thereof.

Detailed Analysis:

Issue 1: Misfeasance or Misconduct in Purchase, Pledge, or Sale of Shares of Ryam Sugar Company Limited
The court found that the purchase of Ryam Sugar Company shares could not be held to be an act of misfeasance or breach of trust. The decision to purchase the shares was taken before the current directors assumed their roles, and the transaction was considered reasonable given the circumstances of 1946. The company had sufficient cash balance and the shares were purchased with the intent to acquire a controlling interest in a prosperous company. The court held that none of the directors, except Jogeshwar Prasad, were involved in the decision to purchase the shares, and therefore, they could not be held liable.

Issue 2: Loss Suffered in Deal with Messrs. Mirrless Watson Company Limited
The court noted that the company had entered into a contract with Messrs. Mirrless Watson Company Limited for the supply of machinery, which was delayed due to the second world war. The company had to pay higher prices for the delayed shipments, and the manufacturers forfeited a sum of Rs. 8 lakhs. The court found that the liquidator had failed to establish a direct connection between the directors' actions and the loss suffered. The court also noted that the company had filed a suit against the manufacturers for breach of contract, which was later compromised.

Issue 3: Loss of Rupees Five Lakhs for the Crushing Season 1949-50
The court found no specific allegations or evidence to support the claim that the company suffered a loss of rupees five lakhs due to any act of misfeasance or misconduct by the directors. The issue was not substantiated by any materials on the record.

Issue 4: Purchase of Shares of Messrs. Hindusthan Coal Company Limited
The court found that the purchase of 1,200 shares of Hindusthan Coal Company Limited for Rs. 12,000 was not an act of misfeasance or misconduct. The shares were purchased in 1944, and the decision was made by the managing director and his associates. The court held that the current directors could not be held liable for this transaction.

Issue 5: Loss in the Warsaliganj Scheme
The court noted that the company had raised capital for the Warsaliganj scheme, which could not be completed due to various reasons, including the delay in the supply of machinery and the inability to raise additional funds. The court found that the directors had acted in good faith and had made efforts to complete the project. The court held that the directors could not be held liable for the loss suffered in the Warsaliganj scheme.

Issue 6: Loss Due to Advances Made to Bhadani Brothers Limited and J.R. Commercial Corporation Ltd.
The court found that the advances made to Bhadani Brothers Limited and J.R. Commercial Corporation Ltd. were authorized by a resolution of the board of directors and were made in good faith. The court noted that the accounts of these companies were in the nature of mutual, open, and running accounts, and the transactions were approved by the shareholders. The court held that the directors could not be held liable for the losses suffered due to these advances.

Issue 7: Failure to Account for the Cash Balance of Gaya Sugar Mills Limited
The court found that the liquidator failed to establish that the directors were responsible for the cash balance of Rs. 4,40,465. The court noted that the actual management of the company was conducted by the managing director and his staff, and the directors had no control over the cash balance. The court held that the directors could not be held liable for the failure to account for the cash balance.

Issue 8: Failure to Account for the Sum of Rs. 3,99,680 Being the Realization of the Sale Proceeds of the Warsaliganj Factory
The court found that the liquidator failed to establish that the directors were responsible for the sum of Rs. 3,99,680. The court noted that the payments made through the committee of directors were adjusted in the company's journal, and the auditors did not accept these adjustments due to the lack of supporting documents. The court held that the directors could not be held liable for the failure to account for the sale proceeds of the Warsaliganj factory.

Issue 9: Joint or Several Liability of the Directors for the Sum of Rs. 67,68,724 or Any Part Thereof
The court found that the liquidator failed to substantiate his case against any of the directors. The court noted that the allegations of misfeasance, non-feasance, malfeasance, and breach of trust were serious in nature and required specific and detailed evidence, which was not provided. The court held that the directors could not be held jointly or severally liable for the sum of Rs. 67,68,724.

Conclusion
The court dismissed the application of the official liquidator, holding that the liquidator failed to substantiate his case against any of the directors. The court directed the parties to bear their own costs.

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