2017 (9) TMI 129 - HC - Companies Law

Defalcation and fraud by the appellant - appellant s motivation in infusing his personal funds to the company s liability towards the creditors - winding up proceedings - Held that - The appellant, admittedly, even according to the learned Single Judge, enabled the settlement of dues, of more than ten thousand depositors. To achieve this end, concededly, the appellant brought in his personal funds. Clearly, by providing funds, the appellant has become a creditor of KOFL. That apart, the appellant is also a contributory of KOFL. The fact that the appellant enabled a settlement with the depositors by delving into his personal funds would not deprive him of the protection of limited liability. The KOFL liability towards the creditors cannot enable the creditors to latch on to the appellant s personal assets unless they are able to establish malfeasance, defalcation and fraud by the appellant. Though, in the Administrator s report, there is a reference to the factum of appointment of M/s.Rangan and Krishnan as auditors of KOFL, nothing has been placed before us to suggest that the appellant had defalcated KOFL s funds. Therefore, the appellant s motivation in infusing his personal funds cannot, to our minds, be the basis for coming to the conclusion that keeping the winding up petition in play works to his benefit. Whatever may have been the reasons for the appellant to infuse funds, the fact of the matter is that, claims of a vast majority of depositors were settled with help of funds brought in by him and therefore, if criminal proceedings initiated against the appellant were closed on account of settlement of dues of depositors is any issue on which, we cannot comment as that aspect of the matter is not within the scope of the present proceedings. What is clear though the motivation of the appellant to keep the company petition ongoing cannot impinge upon construction of the Rules adverted to above by us. Having said so we make it abundantly clear that nothing that we said above will come in the way of prosecution of the appellant in civil and criminal proceedings, if, otherwise they are tenable in law. Therefore, for the foregoing reasons, we are of the view that the impugned judgement and decree cannot be sustained. It is ordered, accordingly. The appeal is allowed. C.P.No.179 of 2001, is put back on board. The OL, who is, presently, acting as PL, will continue to prosecute the winding up proceedings under the supervision and as per the orders of the learned Company Judge. Resultantly, the consequential directions issued via the impugned judgement and decree shall also stand set aside.

Issues Involved:
1. Validity of the dismissal of Company Petition No. 179 of 2001.
2. Substitution of the original petitioner under Rule 101 of the Companies (Court) Rules, 1959.
3. Requirement and consequences of advertisement of the Company Petition.
4. Role and discharge of the Official Liquidator (OL) as Provisional Liquidator (PL).
5. Impact of the impugned judgment on other creditors and contributories.
6. Continuation of winding-up proceedings.

Detailed Analysis:

1. Validity of the Dismissal of Company Petition No. 179 of 2001:
The appellant challenged the dismissal of C.P. No. 179 of 2001, arguing that the learned Company Judge dismissed the petition without adequately considering the procedural requirements and the interests of other creditors and contributories. The Court observed that the dismissal was premature and not in line with the statutory requirements, particularly since the petition was admitted on the grounds of KOFL's insolvency and loss of substratum.

2. Substitution of the Original Petitioner Under Rule 101:
The appellant contended that he, as a creditor and contributory, could have been substituted as a petitioner under Rule 101 of the 1959 Rules. The Court noted that Rule 101 allows substitution if the original petitioner fails to advertise the petition. However, the learned Company Judge did not provide adequate opportunity for such substitution, which was necessary to ensure that the winding-up process could continue.

3. Requirement and Consequences of Advertisement of the Company Petition:
The Court emphasized the mandatory nature of advertising the Company Petition under Rule 99 read with Rule 24 of the 1959 Rules. The advertisement is crucial as winding-up proceedings are in rem and should be widely publicized. The failure to advertise by the original petitioner does not automatically lead to dismissal. The Court can direct the OL to publish the advertisement to ensure the proceedings continue, thus protecting the interests of all stakeholders.

4. Role and Discharge of the Official Liquidator (OL) as Provisional Liquidator (PL):
The appellant argued that the OL should not have been discharged as PL without ensuring the interests of all creditors were protected. The Court agreed, noting that the OL's role is pivotal in managing the affairs of the insolvent company and ensuring equitable distribution of its assets. The learned Company Judge's order to discharge the OL was premature and did not consider the broader implications for other creditors.

5. Impact of the Impugned Judgment on Other Creditors and Contributories:
The Court observed that the impugned judgment adversely affected other creditors and contributories who had not been given an opportunity to step into the shoes of the original petitioner. The interests of these parties were not adequately protected, and the dismissal of the petition without their input was unjust.

6. Continuation of Winding-Up Proceedings:
The Court concluded that the winding-up proceedings should continue under the supervision of the Company Judge. The OL, acting as PL, should be directed to advertise the petition, ensuring compliance with the procedural requirements and protecting the interests of all stakeholders. The dismissal of C.P. No. 179 of 2001 was set aside, and the petition was put back on the board for further proceedings.

Conclusion:
The appeal was allowed, and the impugned judgment and decree were set aside. The OL was directed to continue prosecuting the winding-up proceedings, ensuring that the advertisement of the petition is carried out as required by the rules. The interests of all creditors and contributories were to be protected, and the procedural requirements strictly followed to ensure a fair and just resolution of the insolvency proceedings.

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