1977 (4) TMI 123 - HC - Companies Law

Winding up Statement of affairs to be made to official liquidator, Liability for fraudulent conduct of business

Summary

Issues Involved:
1. Maintainability of a composite application under sections 538, 539, 542, and 543 of the Companies Act.
2. Bar of limitation.
3. Application of the principle of res judicata.
4. Prematurity of proceedings under sections 542 and 543.
5. Specific allegations against individual respondents.

Detailed Analysis:

1. Maintainability of a Composite Application:
The court addressed the preliminary objection regarding the maintainability of a composite application under sections 538, 539, 542, and 543 of the Companies Act. The objection was based on the grounds that proceedings under sections 538 and 539, being criminal in nature, could not be tried alongside civil proceedings under sections 542 and 543. The applicant did not contest this objection and sought permission to withdraw the application insofar as it invoked sections 538 and 539. Consequently, the application was treated as one under sections 542 and 543, with liberty granted to the applicant to amend the application accordingly.

2. Bar of Limitation:
The court examined whether the application was barred by limitation. Under section 543(2) of the Act, an application could be made within five years from the date of the winding-up order or the first appointment of the liquidator or the misapplication, retainer, misfeasance, or breach of trust, whichever is longer. The application was filed within five years of the winding-up order, making it timely. Additionally, the court noted that prior to the Limitation Act of 1963, there was no limitation for an application under section 542, and such applications would now be governed by article 137 of the Limitation Act of 1963, which provides a three-year limitation period from when the right to apply accrues. The right to apply under section 542 accrues when disclosures are made in the course of winding up, such as when the statement of affairs is filed. Therefore, the application was within the limitation period.

3. Application of the Principle of Res Judicata:
The respondents argued that the proceedings were barred by res judicata due to earlier criminal proceedings in Cr. O. No. 26 of 1969, where some respondents were exonerated. The court rejected this objection, stating that the earlier proceedings were criminal in nature, while the present proceedings were civil. A judgment in criminal proceedings is neither admissible nor relevant in civil proceedings, and thus, the principle of res judicata did not apply.

4. Prematurity of Proceedings under Sections 542 and 543:
The respondents contended that the proceedings were premature as the liabilities of the company had not yet been determined. The court held that sections 542 and 543 could be invoked if it appeared during the winding up that the ex-directors and others were guilty of negligence, fraud, or misfeasance. The provisions use the expression "it appears," indicating that proceedings could be initiated based on disclosures made during the winding up without awaiting definite proof. The court emphasized that the civil liability under these sections is not dependent on the existence of a shortfall in the company's assets. Therefore, the objection of prematurity was overruled.

5. Specific Allegations Against Individual Respondents:
- Respondent No. 1: The court found sufficient allegations against this respondent, who was a director until April 2, 1965, and allegedly received loans that were never recovered. The objection was overruled.
- Respondent No. 3: The court noted the absence of specific allegations against this respondent and dismissed the application against him.
- Respondents Nos. 4 and 5: The court found no specific allegations against these respondents and noted that their liability for unpaid share value did not attract sections 542 and 543. The application was dismissed against them.
- Respondent No. 6: The court found no specific allegations and noted that the liability for unpaid share value did not attract sections 542 and 543. The application was dismissed against this respondent.

Conclusion:
The application was dismissed against respondents Nos. 3 to 6 but was deemed proper and competent against the other respondents. The applicant was directed to amend the application to delete references to sections 538 and 539 and irrelevant averments. No costs were awarded due to the peculiar circumstances of the case.