9911796707
TMI Blog1993 (1) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent No. 4 : From March 14, 1962, to October 11, 1968. (as a nominee of the Industrial Finance Corporation, Delhi.) Respondent No. 5 : From September 1, 1968, till the date of winding up order. Respondent No. 6 : From March 30, 1970, till the date of winding up order. Respondent No. 7 : From April 21, 1975, till the date of winding up order. Respondent No. 8 : From July 13, 1976, to the date of winding up order. Respondent No. 9 was the managing agent of the company and they ceased to be the managing agents consequent on the abolition of the managing agency system. The first respondent, who was a, former director, died on March 23, 1987. Respondents Nos. 5 and 7 are his sons, but no legal representative application was filed to bring them on record as legal representatives of the deceased respondent No. 1. But they were the directors of the company during the period mentioned in the note above. The allegations of the official liquidator against the respondents during the relevant time in which the respondent-company was functioning are: The company advanced Rs. 1,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,000 was transferred from the account of C. Appu Rao, an employee of the company, to the account of respondent No. 9. But, as on December 31, 1968, the debit balance of Rs. 8,588.33 in the employee's account was written off as a bad debt. This has apparently been done with the intention of wiping off his balance in the books of the company. Respondents Nos. 1 to 5 being the directors and respondent No. 9 being the managing agent of the company during the relevant period are liable to make good the loss. It is alleged that D. Kamesh, a staff member of the company at Bangalore, was entrusted with the work of purchasing raw materials. Huge sums were accordingly transferred to him. A sum of Rs. 25,380.49 was outstanding in his account which was written off as a bad debt in 1970, which is not the actual amount due from him, but from the management. Respondents Nos. 1 to 6 being the directors and respondent No. 9 being the managing agent of the company during the relevant period are liable to make good the loss of Rs. 25,380.49 suffered by the company by writting off the said sum. It is further stated that a sum of Rs. 19,000 was advanced to C. P. Dhawan on March 28, 1966, by lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the company purchased 15,763.156 M. tons of sulphur during the period from 1964 to 1968. But the actual quantity of sulphur received in the factory of the company was only 15,057.124 M. tons. It is found that the quantity of 706.32 M. tons of sulphur was short-received by the factory causing financial loss to the company. Further, it is submitted by the official liquidator that the respondents are jointly and severally liable to pay the several amounts referred to in paragraphs 8( i ) to 8( ix ) above, in all aggregating to Rs. 11,58,936.97. In the application, the official liquidator has stated that it appears, the chartered accountant has finalised his report without taking into consideration the clarifications given by the ex-director. It is further stated in the application by the official liquidator that in short, the ex-directors stated that the transactions reflected in the respective balance-sheet had been duly approved by the board as well as by the general body, and the statutory auditors had given unqualified reports for all the years and that the management had always acted for the betterment and improvement of the company. Respondents Nos. 1, 5, 7, 8 and 9 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gest that advances were made by the company to M. M. M. Ltd. as a loan, free of interest. It is stated that since production in the company was stopped in July, 1968, due to heavy accumulation of stocks and slump in the market and for want of funds, the idea of installing the proposed plant was dropped and a decision was taken to give up the idea of installing the plant and to recover the advances and to charge 10 per cent. interest on the advances from January 1, 1970, to avoid the risk of forfeiture of the advances by M. M. M. Ltd. for cancellation of the orders. It is further stated that the advances to M. M. M. Ltd. have been treated as an asset of the company in the balance-sheet for the years ending December 31, 1968, to 1973. The accounts of the company have been unanimously approved and passed by the shareholders of the company in general meetings. The entire allegations of the official liquidator in this behalf are baseless. The issue cannot, therefore, be reopened and questioned under section 543 of the Companies Act, 1956. In so far as the advances to A. J. George are concerned, it is stated that the company had engaged A. J. George for liaison work at Delhi at a nomin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... travelling expenses incurred by him for the work of the company, amounting to Rs. 8,588.33. It is incorrect to say that a sum of Rs. 8,588.33 due from C. Appu Rao was written off. It is false to contend that there is any diversion of funds of the company through the account of Mr. C. Appu Rao. The apprehension of the official liquidator in this behalf is baseless. Hence, respondents Nos. 1, 5 and 9 are not liable to pay this amount. It is further stated that respondent No. 5, Mr. Chandy, became a director of the company on September 1, 1968. As such, he is not responsible for the transaction of the company earlier to that date. D. Kamesh was in charge of the office at Bangalore and was making purchases in addition to doing liaison work for the company at Bangalore. A sum of Rs. 61,000 was given by the company to D. Kamesh for making payment to Mysore Machinery Manufacturers Limited towards fabrication of a plant for the company. There were five directors in the company in 1967 whereas there were six directors in M. M. M. Ltd. Out of the above, only one respondent, i.e., M. C. Cherian, was a common director in both the company and M. M. M. Ltd. D. Kamesh died on May 30, 1968, wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondents Nos. 1, 5 and 9 are not liable to make good the alleged loss and they are in no way personally interested in the transaction. Respondents Nos. 1 and 9 submit that the land bearing S. No. 93 is adjacent to the factory at Munirabad, which has a residential building over it, and has all along been used as residence by the staff and officers of the company from the date of purchase, i.e., 1965. It belonged to K. T. Cherian, assistant manager, who was paid Rs. 16,030 for purchasing the premises. The company has acquired title to the property in question by adverse possession. The advance for the purchase of the property is shown in the books of the company under the heading "land account". The property was not shown in the statement of affairs of the company, but the advance made to K. T. Cherian for the purchase of land is included in the " land account" in the statement of affairs. This position was clarified by respondent No. 5 by his letter dated September 20, 1980, to the official liquidator. The land in question has been included in the value of total land held by the company at the time of filing the statement of affairs. The value of the property in question has ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equently the production had to be stopped in 1968. It is pertinent to mention that most of the factories manufacturing superphosphate stopped production at the relevant time. The directors of the company, viz ., M. C. Cherian, M. C. Chandy and M. C. George, were mainly responsible for bringing in monies to an extent of about Rs. 4 lakhs from their personal sources and relatives for maintaining the staff and machinery of the company, in the hope of re-starting the factory. If the details which are given in the account, had been properly checked, the official liquidator would not have come to the conclusion that there was a shortage of 706.032 tonnes of sulphur. It is further denied that these respondents have committed acts of misfeasance, breach of trust, diverted the funds of the company (under liquidation), no efforts were made to recover the amounts due to the company, misappropriated the funds of the company (under liquidation), amounts were written off to satisfy the queries raised by auditors, and the action taken by the directors lack bona fides and that they are liable to account for the loss suffered by the company (under liquidation), etc., as contended by the official ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny event whether the court has jurisdiction to continue the proceedings against the legal representatives of the deceased director? (2)Whether the court has inherent power to reject the application under section 543 of the Act in limine or it is bound to hold a regular enquiry on the application filed under section 543 of the Act ? (3)Whether the official liquidator has made out a case to foist liability on respondents Nos. 1 to 9 for the alleged loss that may have been caused by the company in liquidation ? Point No. 1 : It is not disputed that respondent No. 1, the former director of the company (in liquidation), died on March 23, 1987. The company was wound up by the order of this court on February 18, 1987. The company application under section 543 was filed on July 31, 1981, and till October 9, 1987, steps were being taken to serve notice to the respondents. Though respondent No. 1 died during the interregnum period of taking steps to service notice on other respondents and subsequently the case was fixed for hearing on November 20, 1987, no step was taken to bring the legal representatives of the deceased respondent No. 1, but it was stated that respondent No. 5 and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the part of a director or other person may be, in proceedings under section 542 or 543 of the Act. They will be placed in a very difficult position if they are exposed to defend the action of somebody about which they might not have knowledge at all." The Division Bench of the Kerala High Court in the second case held that (headnote); "The three directors had died at an early stage of the proceedings before the company court. They had not been examined in the misfeasance proceedings nor had they an opportunity to place before the company court any evidence in support of their contentions prior to their death. Therefore, it would not be just, fair or equitable to continue the misfeasance proceedings against the appellants, who were the legal representatives of the three directors." The misfeasance charged against a director is a serious charge in a proceeding contemplated under section 543 of the Act and it involves an inquiry into the personal conduct of persons acting in capacities mentioned therein. It was contended by the respondent's counsel that the maxim actio personalis moritur cum persona is applicable in respect of the proceedings initiated against a delinquent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e just, fair and equitable to continue the misfeasance proceedings against the legal representatives of the deceased director. Further, it is to be noted that the legal representatives of respondent No. 1 have not been brought on record representing the deceased respondent No. 1. Point No. 2. The misfeasance proceeding is no doubt a proceeding of civil nature but it gives rise to the liability of a director for his misconduct which is of a quasi-criminal nature and a serious one. Section 543 provides relief by a summary procedure to assess the delinquent directors liability. Thus, misfeasance proceedings in the course of winding up of a company are independent, whether or not the person proceeded against may be criminally liable for any offence disclosed by the facts of the case and for assessing the civil liability under section 543 of the Act. Counsel for the official liquidator has referred to rules 260 to 262 and contended that the court should conduct an enquiry by taking evidence, and it cannot reject the judges summons on a prima facie finding that there was no case made out to proceed with the enquiry. Learned counsel for the respondents submitted that the court has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach of trust is constituted. In other words, the test is that taking the allegations in the complaint/application as they are, if no misconduct is made out then the company court will be justified in quashing the proceedings in exercise of its inherent power. Point No. 3. It is relevant to analyse section 543 of the Act. It enumerates the powers of the court to assess damages against the delinquent directors mulcting them with the damages for not acting reasonably and thus committing the company to unnecessary loss. The proceedings, however, do not extend to any and every kind of claims which the company may have against the delinquent directors. It is confined to claims relating to misfeasance or breach of trust in respect of their duties in relation to the company. Thus, it is only misfeasance which includes breach of duty, breach of trust resulting in loss to the company which will come within the purview of section 543 of the Act. Mere negligence or neglect of duty will not by itself create liability unless there was gross negligence amounting to misfeasance or breach of duty resulting in loss to the company. In the decision of the Madras High Court in Official Liquid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r contributory to examine the conduct of the delinquent directors or officers of the company. The court examines the conduct to see if they were guilty of any misfeasance or other breach of duty to the company. If the court so finds, it can order the delinquent directors or officers to repay or restore the assets of the company or such sum as the court thinks just. It is contended by the respondents' counsel that as per the statement contained in the application by the official liquidator all the transactions reflected in the respective balance-sheet had been duly approved by the board as well as the general body, and the auditors had given unqualified reports. That being so, the shareholders in the company had no objection to or even authorised the conduct which the liquidator is now complaining of as a breach of duty. As such, when the shareholders have unanimously approved of the acts of directors, it cannot be complained by the liquidator that their acts constituted negligence and are liable to make good the loss. In the decision in Multinational Gas and Petrochemical Co. v. Multinational Gas and Petrochemical Services Ltd. [1983] 1 Ch 258, it was held thus (at page 586 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors were all at the relevant periods prior to the winding up of the company. The chartered accountants' report, annexure A, relied upon by the liquidator alleging the misfeasance against the directors, does not indicate that the company was not solvent at the time of the alleged breach of duty by the directors. I am of the view that since the shareholders have no objection to, and even authorised the conduct of the directors during the relevant periods, when the company was not insolvent, the liquidator cannot now complain that the conduct of the directors constituted negligence amounting to misfeasance including breach of trust. However, the official liquidator relying on the report of the chartered accountant, annexure A, has strenuously argued that the directors are liable to account for the loss caused to the company. In the application he has enumerated the various acts of ex-directors of the company, respondents Nos. 1 to 9 at para 8( i ) to 8( viii ) and 8( ix ), claiming that the directors are liable to repay the sum of Rs. 11,58,936.97. The respondents have delivered their defence and submitted that no case much less a prima facie case is made out by the liquidat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eculiar facts of the case that since the company did not want the machinery to be installed by the M. M. M. Ltd., and there is likelihood of forfeiture of the advance money for breach of contract, a decision was taken to treat it as a loan and charge interest at 10 per cent. which is a commercial decision by the board of directors which later came to be approved by the shareholders in the general body meeting. As already pointed out when once the conduct of the directors is authorised and approved by the shareholders, it cannot be complained of by the official liquidator or any contributory under section 543 of the Act. That apart, there is no nexus between the accountability which is claimed by the official liquidator and any personal act on the part of the respondents-directors. In para 8( ii ) of the application, the claim is made to the effect that an employee A. J. George was advanced a sum of Rs. 97,500 for the purchase of a motor car during the year 1965. He gave an account only for Rs. 57,321. Subsequently there were some more advances to him and later, he gave an account for Rs. 22,499.85 which included the value of the car at Rs. 17,000. In the year, it seems the said G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fence, to the effect that a bald allegation has been made " that it is apprehended that the management was diverting the funds of the company", and there is no specific allegation against any of the directors as to diverting of funds for his own benefit or to misappropriation of the fund. It is stated that the personal account of C. Appu Rao, the sales officer was credited in a sum of Rs. 10,000 by debiting the account of respondent No. 9 (the Associated Planters Private Ltd.), who were the managing agents. The corresponding entry exists in the accounts of respondent No. 9, and as such, the official liquidator cannot question the credit given to an employee for which there is an entry in the books of the company. It is further pointed out that the personal account of C. Appu Rao was credited by a sum of Rs. 10,000 towards ex gratia payment and a sum of Rs. 8,588.33 towards travelling allowance incurred by him for the work of the company. It is, therefore, submitted that it was incorrect to state that a sum of Rs. 8,588.33 due from C. Appu Rao was written off. It is argued by the respondents' counsel that the official liquidator has not alleged that there was any fraudulent transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment as a bad debt. No efforts were made to recover the amounts, and as such, the directors respondent No. 1 to respondent No. 6 are liable. In the defence, it is stated that the amount was paid to Dhawan as advance for the supply of a pulveriser The company stopped production, and as such it did not require the machinery and the directors decided in the year 1974 to write off the said amount advanced to Dhawan as taking delivery of the machinery required further investment. It is further submitted by the respondents' counsel that the decision to write off the amount was taken by the board and the same was approved by the shareholders. Here, the charge is that a wrong decision is taken in writing off the advance amount given to the supplier of the machine. But there is no charge that the directors misapplied the funds for their personal benefit. It is a sound commercial judgment taken by the director in the interest of the company. It is relevant to note that there is no specific charge against any individual director ; moreover the allegations are vague and lack particulars of the alleged wrongful acts and omissions. In para 8( vi ) it is alleged that a sum of Rs. 8,000 was paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents to certain questions, which in fact even the chartered accountant did not, there would not have been those allegations referred in para 8( viii ). It is obvious, and to my mind it appears that the allegations are devoid of any charge of misfeasance or breach of trust against the directors. In para 8( viii ) it is alleged that a sum of Rs. 8,500 outstanding in the books of Messrs. Chamundi Curing Works in 1968 against Rajaratnam, an ex-employee of the company was transferred to the company. After setting off the amount due to him as bonus for the year 1966-67 the balance amount of Rs. 7,360 was written off as ex gratia and travelling expenses. It is stated that it was done to satisfy the queries raised by the auditors and there is lack of bona fides on the part of the directors. In reply, it is controverted by the respondents stating that Rajaratnam was working as a Fertiliser Sales Officer in Coorg Mysore Coffee Company Ltd., for about 10 years before he was employed by the company. There was a debit balance of Rs. 7,360 in the books of the company consequent to the transfer from Coorg Mysore Coffee Company Ltd., on January 31, 1968. The services of Rajaratnam were terminate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is further stated that to the liquidator's queries the clarification has been issued by respondent No. 5 through letter, dated September 20, 1983, stating that there is no shortage of sulphur. It is also stated that the special auditor appointed by the court has not taken into account the purchases and receipts of sulphur during 1963, sale of sulphur of 1,104 tonnes at Bombay in 1965 by the company and sale of 451 tonnes of sulphur in 1974 by Punjab National Bank at Bombay. If this was taken into account, the special auditor as well as the liquidator would not have made the allegation. In fact, there was an excess of 606.088 tonnes of sulphur. The allegation in the claim statement is that a quantity of 706.32 tonnes of sulphur was short-received by the company in the years 1964 to 1968 causing financial loss to the company. It is pointed out by the respondents that in response to clarification sought for by the liquidator in this regard, it was clarified by respondent No. 5, director, that there was no shortage of sulphur. It was pointed out that the sale of sulphur effected during 1963 and in 1965, had it been taken into account would reveal that there is excess of 606.088 tonnes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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