2017 (10) TMI 465 - HC - Companies Law

Guilty of misfeasance and malfeasance in relation to the Company - committing breach of trust in discharge of the duties towards the Company - liability under the provisions of Section 543 - Held that - Admittedly, the case has been set up on the basis of report prepared by the Chartered Accountant whose statements have been quoted herein above. The present case is a case of voluntary winding up of the Company and not at the instance of any of its creditors. It is now an admitted position that the entire affairs of the Company were in the hands of one and single person namely Mr. Manik Chand Agarwal who has expired. Even as against Mr. Manik Chand Agarwal, as per the statement of the OL, who has stated that the application is being filed in view of report of Mr. NC Jain, Chartered Accountant and the record as available with him, there does not appear to be any single particular specific act which can be said to have been committed by any of the particular Director as required within the meaning of the provisions of Section 443(1) of the Act of 1956. The allegations which were originally made, have not been found to be correct by the Income Tax Authorities and the appeal thereto has also been dismissed. In the written submissions, a new case is sought to be made out which is not in any manner coming out from the report of Mr. NC Jain or his statements. The allegations are vague and bald which could not be said to be sufficient to hold the respondents guilty of causing breach of trust or misfeasance within meaning of Section 543 of the Act.

Issues Involved:
1. Allegations of misfeasance and malfeasance against the respondents.
2. Examination of the company's financial activities and schemes.
3. Investigation and findings of the Chartered Accountant.
4. Legal responsibilities and liabilities of the directors.
5. Defense and rebuttal by the respondents.
6. Legal standards and burden of proof for misfeasance.

Detailed Analysis:

1. Allegations of Misfeasance and Malfeasance Against the Respondents:
The Official Liquidator (OL) filed an application against the respondents, alleging misfeasance and malfeasance in relation to M/s. Swastik House Leasing Limited (Company in Liquidation). The allegations included breach of trust in the discharge of their duties towards the Company.

2. Examination of the Company's Financial Activities and Schemes:
The Company, which started its activities in 1985-86, launched "Interest Free House Loan Scheme" and other housing loan schemes, collecting substantial registration fees and installments from members. However, these schemes were deemed false and bogus by the Income Tax authorities after an investigation in 1994. The Company returned all deposits through its agent, M/s. Tribhuvan Estates Bureau, in March 1994. The Company faced huge tax demands for the assessment years 1991-1995, which were under appeal.

3. Investigation and Findings of the Chartered Accountant:
The Chartered Accountant, Mr. NC Jain, appointed by the OL, submitted a report on 27/01/2007. The report found:
- Misfeasance and breach of trust by Ex-Directors, including misappropriation of ?6,10,363.
- Payment of ?1,30,638 as commission to M/s. Tribhuvan Estates Bureau without supportive documents.
- Writing off ?50,300 as bad debts without evidence of recovery efforts.
- Engagement in illegal hawala/entry business, leading to a tax demand of ?2,24,55,422.

4. Legal Responsibilities and Liabilities of the Directors:
The OL argued that the directors, particularly Mr. Manik Chand Agarwal and Ms. Meena Agarwal, were jointly and severally liable for the losses and misfeasance. The death of Mr. Manik Chand Agarwal led to his legal representatives being held liable to the extent of the estate received by them.

5. Defense and Rebuttal by the Respondents:
The respondents denied the charges, arguing that the report was vague and lacked specific allegations. They contended that no monetary benefit was shown to have occurred to the Company, and mere inaction on the part of the Directors was insufficient to attract the provisions of Section 540 or 543 of the Companies Act, 1956. They also pointed out that the tax liability had not attained finality and was under appeal.

6. Legal Standards and Burden of Proof for Misfeasance:
The Court emphasized that misfeasance cases must be dealt with strictly, requiring specific acts of commission or omission and quantification of the loss to the Company. The burden of proof rests on the OL to establish misconduct, misappropriation, and breach of trust by the directors. The Court referred to precedents, including Supreme Court judgments, which held that directors could be held liable for negligence that enabled frauds and losses to the Company.

Conclusion:
The Court found that the allegations were vague and lacked specific evidence of individual culpability. The entire affairs of the Company were managed by Mr. Manik Chand Agarwal, who had expired. The Income Tax Authorities' findings and subsequent dismissal of appeals did not support the OL's claims. Consequently, the application was dismissed, and the notices were discharged.

← Previous Next →