1978 (2) TMI 160 - HC - Companies Law

Summary

Issues Involved:

1. Liability of directors for misapplication or accountability for company funds.
2. Applicability of Section 543 of the Companies Act.
3. Accountability for debts considered doubtful.
4. Responsibility of directors for not recovering debts.
5. Specific responsibility of out-of-station directors.

Detailed Analysis:

1. Liability of Directors for Misapplication or Accountability for Company Funds:

The official liquidator sought a declaration that the directors of the company were liable for misapplication or accountable for monies detailed in his report. The amounts in question were noted as debts and advances considered doubtful in the company's balance-sheet. The liquidator argued that the directors failed to recover these amounts and should be held accountable under Sections 542 and 543 of the Companies Act, read with Section 460(4).

2. Applicability of Section 543 of the Companies Act:

Section 543 of the Companies Act provides the court with the power to assess damages against delinquent directors. The court emphasized that there must be prima facie proof of negligence bordering on misfeasance and breach of trust. Section 543(1)(a) deals with misapplication and retention of company funds, while Section 543(1)(b) addresses misfeasance or breach of trust. The court noted that the official liquidator must prove that the directors were liable or accountable for the monies due to the company.

3. Accountability for Debts Considered Doubtful:

The official liquidator argued that the directors did not take reasonable steps to recover the debts and advances noted as doubtful, thereby misleading creditors. The respondents countered that they relied on the reports presented by management and believed the debts were irrecoverable. The court found that the amounts were carried in the books for over three years and were barred by the law of limitation at the time of the winding-up order. The court cited the case of Dovey v. Cory, emphasizing that directors are entitled to rely on the judgment and advice of competent officers unless there is a reason for suspicion.

4. Responsibility of Directors for Not Recovering Debts:

The court held that it would be inequitable to expect directors to scrutinize every commercial activity and that they could rely on bona fide reports from management. The shareholders had accepted the reports that the debts were irrecoverable, and it would have been a waste of company funds to pursue recovery. The court concluded that the directors could not be held accountable for failing to recover the debts in the peculiar circumstances of the case.

5. Specific Responsibility of Out-of-Station Directors:

The third respondent argued that he was an out-of-station director and should not be held responsible. The court rejected this argument, stating that being an out-of-station director does not absolve one of responsibility. However, given the peculiar circumstances of the case, the court exonerated all the respondents from accountability.

Conclusion:

The judge's summons was dismissed, with no order as to costs. The court found that the directors could not be held accountable for the debts and advances considered doubtful, given the reliance on management reports and the acceptance of these reports by shareholders. The court emphasized that directors are entitled to rely on the judgment and advice of competent officers and cannot be automatically held responsible for irrecoverable debts.