9911796707
TMI Blog1996 (3) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... Panna Lal and Roshan Lal were two brothers. In the year 1932, a registered partnership firm was started of which Roshan Lal and his son Ram Swarup and his two nephews, namely, Purshottam Dass and Jugal Kishore (sons of Panna Lal), were the partners. In the year 1951, the partnership firm was converted into a private limited company of which the four partners mentioned above were the first directors. Purshottam Dass died on October 31, 1960, and by a resolution of the board of directors, his widow, namely, Smt. Padmavati, was inducted as a director. On April 28, 1963, Roshan Lal also died and his grandson, Raj Rajeshwar Swarup, was inducted as a director. The company which was carrying on the business of manufacturing sugar at Barabanki in the State of Uttar Pradesh suffered heavy loss and proceedings for winding up were initiated against the company in the year 1968 by filing Company Petition No. 9 of 1968. By an order dated August 22, 1972, passed in Company Petition No. 9 of 1968, the company was ordered to be wound up and the official liquidator, High Court, Allahabad, was appointed as the liquidator. On the date of the winding up order the four directors of the company were ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rup, and Company Application No. 16 of 1977 was filed against Raj Rajeshwar Swarup and other heirs of the late ex-director, Roshan Lal. Company Applications Nos. 31, 32, 33 and 34 of 1976 were contested by the said opposite parties by filing counter affidavits. Vide the order dated December 11, 1978, the company judge dismissed Company Application No. 31 of 1976 by relying upon the Supreme Court decision in the case of Official Liquidator, Supreme Bank Ltd. v. P.A. Tendolkar [1973] 43 Comp. Cas. 382; AIR 1973 SC 1104, on the ground that no order under the aforesaid sections could be passed against the heirs of a deceased director. A similar order was passed by the company judge while dismissing Company Application No. 33 of 1976 filed against Tirath Raj. However, vide other orders of the same date, Company Applications Nos. 32 and 34 of 1976, filed against Smt. Padmavati and Jugal Kishore (ex-directors) were decreed and the same directors were ordered to refund the amount withdrawn by them to the official liquidator along with interest at 12 per cent, per annum. Against the said orders four special appeals were filed before this court. Special Appeal No. 7 of 1979 was filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons before the Supreme Court which were allowed subject to the condition that the said opposite parties shall deposit a sum of Rs. 11,00,000 with the official liquidator. On the said amount being deposited this court, vide the orders dated July 8, 1992, recalled the two ex parte decrees dated February 6, 1978, and April 19, 1978, and directed that Company Applications Nos. 15 and 16 of 1977, be listed for hearing afresh. Thereafter, the opposite parties filed their counter-affidavit to the said company applications. The main stand of the opposite parties was that the amounts were not withdrawn by the said parties but the dues shown against them were actually the dues of the partners in the erstwhile partnership firm which after the incorporation of the company were carried over in the account books of the company. Consequently, the provisions of sections 542 and 543 of the Act were not attracted in the present case. Besides, a receiver was appointed over the properties of the company in proceedings taken under section 182A of the Land Revenue Act in the year 1969, and, subsequently, on July 3, 1991, by virtue of the notification issued under section 3 of the U.P. Sugar Undertakings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director and his family members and was being illegally retained. On account of the said act on the part of the ex-director and his heirs by not refunding the amount to the company when needed, the said company had to face its ruin. Had the ex-directors not misapplied the funds of the company by holding them over for their benefit and the benefit of their heirs without paying any interest thereon the company probably would not have had to face liquidation and, at any rate, the ex-directors and their heirs are personally responsible and accountable for retaining these amounts and for applying the same for their personal gains. Learned counsel, therefore, submitted that the charge of misfeasance and fraudulent trading has been made out against the ex-directors and their heirs attracting the provisions of sections 542 and 543 of the Act. It has been further contended that the points taken in the counter affidavit and the arguments sought to be raised were taken by other directors which were repelled by the company judge and the said contentions were also rejected by the Division Bench, vide its judgment dated September 24, 1982, in Special Appeals Nos. 7 and 8 of 1979, and the said ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly and categorically admitted that a sum of Rs. 9,78,711.20 is outstanding against the said director in the books of account of the company. In the revised statement of affairs filed by Jugal Kishore jointly on behalf of the other directors, a copy of which is also on record, Schedule VI at List "A" clearly depicts that the total dues from the contributors was to the extent of Rs. 39,81,760.37. These amounts were found to be due at the time when the winding up order was passed and are based upon the entries made in the books of account of the company which have been duly audited by the chartered accountant of the said company. In fact, from the record of the case it is apparent that the withdrawals were made by the directors between the period 1952 and 1959 after the incorporation of the company. The submission made by learned counsel that the amounts shown as dues against the ex-directors were the dues against the partners of the erstwhile partnership firm and were carried over in the account books of the company is, therefore, contrary to the records and without any basis. That apart, there are neither specific pleadings to this effect nor is there any evidence on record to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies and even closely held public companies are recognised exceptions as, in the present stage of the development of corporate management in this country, they are no better than glorified partnerships, where the holding does not represent mere investment for gain but has for its motivation the desire to be directly associated with the course of management ". As already stated above, this case arose out of a petition under sections 397 and 398 of the Act and the observations made by the court were in the facts of the said case. In the case at hand the question involved is totally different. That apart, it is well-settled that a company is an independent and legal personality distinct from the individuals who are its members and it is not a partnership where there is nothing to show that the rights and obligations of the parties while they were partners in a firm remain the same after the firm was converted into a limited liability company, and the articles of association of the company which govern the rights and obligations of the parties do not provide that the rights of the partners of the pre-existing partnership firm as regards the management of the affairs, share of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fraudulent conduct of the business of the company the personal liability of those who have knowingly participated in such fraudulent activity. The expression "personal liability" is used to contra-distinguish it from the liability of the company. While section 542(1) provides for the declaration of the personal liability of the persons concerned with fraudulent conduct of business, section 542(2) provides for giving of appropriate directions for the purpose of giving effect to that declaration. Therefore, the inquiry which has to be made under section 542 is with regard to the purpose with which the business of the company had been carried on by the persons who were knowingly parties to the same. In the facts of the present case it will be noticed that the directors of the company had unjustifiably withdrawn huge amounts out of the capital of the company and continued to carry on the business of the company even thereafter knowing fully well that the company is running at a loss and was unable to pay its dues to the Government or to the workmen. It has already been found that the losses did not pertain to the period in which the receiver was appointed in the year 1969 but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company. It is well-settled that before section 543 of the Act can be applied it has to be shown that monetary loss has accrued to the company and the said loss has not been made good by the concerned persons. A director is an agent of the company and owes twin duties to the company, first, the duty of loyalty and second the duty of care. Breach of these duties amounts to breach of trust and misfeasance. In other words misfeasance arises when there is breach of trust qua the company resulting in loss to the said company. Applying these tests to the facts of the present case we find that the ex-directors of the company having withdrawn the major part of the share capital of the company even while the company was functioning and thus having caused loss to the company, have committed breach of trust and, consequently, can be held to be liable for misfeasance. Further, where the conduct of the directors is clearly in breach of their duty of loyalty to the company, the directors are liable to compensate the company for the loss caused by their conduct to the company. I am further of the view that from the admission made in the affidavit filed by the ex-director, Ram Swarup, befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e debentures under section 266 of the English Companies Act, 1929. On the facts of the said case, it was held that "intent to defraud" and "fraudulent purpose" in section 275 of the English Companies Act connote actual dishonesty involving, according to the current notion of fair trading among commercial men, real moral blame. On the facts of the said case applying the interpretation of the section it was held that the business of the company had not been carried on by the opposite parties for a fraudulent purpose or to defraud the creditors and, therefore, the court would not make a declaration to the said effect. The observations made by the Chancery Division in the case of Patrick and Lyon Ltd., In re [1933] All ER 590, were on the facts of the said case. In the present case at hand, I am of the view that the observations made in the decision cited by learned counsel will not be applicable. Learned counsel for the opposite parties then contended, though halfheartedly, that the statement of affairs was filed by Jugal Kishore, one of the ex-directors, and the affidavit filed by Ram Swarup was signed in good faith without going through the records which were with the receiver. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to entertain the applications filed by the official liquidator. Similarly, regarding limitation the Division Bench has in the decision referred to above held that the application filed by the official liquidator was well within limitation. That apart, the submission made by learned counsel has no substance as the limitation provided under section 543 of the Act is five years. The application was filed by the official liquidator on November 14, 1977. Excluding one year as provided under section 458A of the Act, the application was well within time. I, therefore, do not find any substance in this argument of learned counsel for the opposite parties either. With regard to Company Application No. 16 of 1977 filed by the official liquidator against Raj Rajeshwar Swarup and three others who were the heirs of the deceased ex-director, Lala Roshan Lal, learned counsel for the opposite parties has submitted that the heirs of the deceased director cannot be held liable for misfeasance committed by the deceased ex-director. In support of his submission, learned counsel has placed strong reliance upon the decision of the Supreme Court in the case of Official Liquidator, Supreme Bank Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that the legal heirs of Lala Roshan Lal would be liable for refunding to the official liquidator the sum to the extent of the value of the estate of the deceased which has come in the hands of the said heirs. It has also been contended by learned counsel for the opposite parties that Raj Rajeshwar Swarup, one of the heirs of the late Lala Roshan Lal and also an ex-director of the company who had been inducted after the death of Lala Roshan Lal in the year 1991 died during the pendency of the proceedings before the Supreme Court and as his heirs have not been brought on record Company Application No. 16 of 1977 against the heirs of Lala Roshan Lal has abated. I am unable to agree. The other heirs of Lala Roshan Lal are on record and the estate is represented through them. There is, therefore, no question of abatement of Company Application No. 16 of 1977. As a result, Company Applications Nos. 15 and 16 of 1977 are allowed. It is hereby declared that the ex-director of the company (in liquidation), namely, Ram Swarup, shall pay a sum of Rs. 9,78,711.20 along with interest at the rate of 12 per cent, per annum from the date of the winding up order to the official liquidator. Si ..... X X X X Extracts X X X X X X X X Extracts X X X X
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