1976 (12) TMI 116 - HC - Companies Law

Issues Involved:
1. Jurisdiction of the court under sections 215 and 217 of the Companies Act.
2. Directors' duty to sign and authenticate the audited balance-sheet and profit and loss account.
3. Directors' obligation to provide explanations to auditors.
4. Resignation of directors and their liability to provide explanations.
5. Verification and valuation of company stocks.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Court under Sections 215 and 217 of the Companies Act:
Mr. Mehta contended that the court has no jurisdiction under sections 215 and 217 to direct the directors to sign and authenticate the audited balance-sheet and profit and loss account or to direct them to appear before the auditors and submit explanations. The court examined the duties of directors, emphasizing their fiduciary position with the company. It was concluded that directors, being in a fiduciary relationship, have statutory liabilities, including maintaining books of account and preparing financial statements. The court held that directors could be called upon to perform these duties even after a winding-up order, as their obligations do not cease with the winding-up order.

2. Directors' Duty to Sign and Authenticate the Audited Balance-Sheet and Profit and Loss Account:
The court referred to sections 209, 209A, 210(1), and 224 of the Companies Act, which outline the obligations of directors to maintain proper books of account, prepare financial statements, and appoint auditors. It was concluded that directors have a statutory duty to ensure the maintenance of accounts and preparation of financial statements. This duty extends to providing explanations and information required by auditors, as stipulated in section 227. The court emphasized that the winding-up order does not absolve directors of these responsibilities.

3. Directors' Obligation to Provide Explanations to Auditors:
The court addressed Mr. Mehta's argument that directors' obligations to provide explanations to auditors end with the winding-up order. The court clarified that the statutory duty to provide explanations under section 227 continues even after the winding-up order. The auditors appointed by the court have the right to require information and explanations from directors for the period they were in office. The court rejected the argument that the directors' liability to explain ceases with the winding-up order, emphasizing that their obligations persist.

4. Resignation of Directors and Their Liability to Provide Explanations:
Several advocates argued that their clients, who had resigned as directors before the relevant period, should not be liable to provide explanations. The court held that the relevant period for which accounts are prepared determines the liability of directors to explain. If a person was a director during the relevant period, they must provide explanations, regardless of their resignation. The court stated that resignation becomes effective from the date of acceptance, and directors on the public register during the relevant period are liable to explain. The court allowed directors to offer explanations based on their involvement or lack thereof in the management.

5. Verification and Valuation of Company Stocks:
The court granted the liquidator's request to direct the directors to submit their acceptance of the inventory of stock and goods made by M/s. General Superintendence Company (India) Private Ltd. for Dena Bank and UCO Bank. The court appointed M/s. General Superintendence Company to verify, check, and prepare the inventory of stock with the State Bank of Saurashtra and other stocks of the company. The cost of verification was to be borne by the respective banks and the sponsor of the scheme, Thungabhadra Industries Ltd. Directors or their nominees were allowed to be present during the verification process, with the condition that subsequent objections would be disregarded if they failed to avail of this opportunity.

Conclusion:
The court directed the directors to appear before the auditors within three weeks to provide explanations for the queries raised in the draft report. The court also directed the directors to submit their acceptance of the inventory of stock and goods and appointed M/s. General Superintendence Company for verification. The costs of verification were allocated to the respective banks and the sponsor of the scheme. The court made no order as to the costs of the summons.

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