9911796707
TMI Blog2002 (12) TMI 501X X X X Extracts X X X X X X X X Extracts X X X X ..... wound up by an order of this court dated 16-11-1990, in Company Petition No.88 of 1989 and the official liquidator became the liquidator of the said company. The company in liquidation was incorporated on 9-8-1985, by the Registrar of Companies, Tamil Nadu. It was declared as a Nidhi on 22-8-1986, under section 620A of the Companies Act, 1956. The main object of the company is to encourage and afford all facilities on mutual basis for cultivating thrift, saving and to render all types of financial assistance to its members only by receiving long and short-term deposits from the members and in particular recurring time deposits, term deposits, fixed deposits and other deposits and to grant loans only to members on securities. As per the memorandum of association of the company in liquidation, the authorized share capital is Rs. 2,00,000 divided into 2,00,000 equity shares of Re. 1 each. As per the records of the Registrar of Companies, Tamil Nadu at Madras, based on the annual return made up to 16-2-1987, the following are the directors of the company : (1) V.S. Sridhar; (2) T. Sudarsan; (3) V. Parameswaran; (4) P.C. Varghese. There were 48 branches of the company in liquidation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm and B. Rajagopal Nair and K.V. Sasidhar were the partners of the second above mentioned firm. According to the statement of the former director P.C. Varghese recorded by the official liquidator on 4-1-1994, and 6-1-1994, under rule 130 of the Companies (Court) Rules, 1959, B. Rajagopal is the group president of the Dhanalakshmi group of companies and K.V. Sasidhar is the group chairman of the Dhanalakshmi group of companies and they were the promoters of the company in liquidation. The registration expenses were met by K.V. Sasidhar and B. Rajagopal and they took steps for the incorporation of the company in liquidation Respondent Nos. 1 to 7 in this application are the signatories to the memorandum of association and articles of association of the company in liquidation. According to P.C. Varghese, ex-director of the company in liquidation, respondent Nos. 1 to 7 were the employees of these two firms and they have signed the memorandum of association and articles of association of the company in liquidation only at the behest of respondent Nos. 8 and 9 herein. 6. The partners of the two firms did not repay the depositors of the two firms and in order to overcome the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er either the assets and effects or the liability or the business of those two firms by the company in liquidation. The original balance-sheets for the years ended 31-12-1986, and 31-12-1987, are not available among the records taken possession by the official liquidator. In this regard, the solemn statement made by V.S. Sridhar and V. Parameswaran, directors of the company in liquidation, in their affidavit in W.P. Nos. 1948 of 1986 and 12900 of 1987 is relevant. 8. Even though the official liquidator has not called for claims from eligible persons, he has received 4,421 claims filed voluntarily claiming various amounts aggregating to Rs. 7,04,03,266.22. 9. Respondent Nos. 1 to 7 and 8 to 10 have incurred the liability in view of the fact that all the assets as and effects of the said two firms were not made over to the company in liquidation, but deposit receipts issued by those two firms in favour of the creditors of those two firms were renewed by issuing deposit receipts in the name of company in liquidation and by making payments towards interest on the deposit amounts with the two firms from and out of the funds of the company in liqui- dation. According to the state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds from the company in liquidation to its associate concerns. P.C. Varghese has submitted to the official liquidator a copy of his letter dated 10-10-1988, to K.V. Sasidhar, B. Rajagopal, B. Muralidhar and K.V. Vijaykumar to the effect that on various occasions on their advice, he had been transferring heavy amounts to their sister concerns and that they have not left sufficient assets to answer the creditors and that they are responsible for all their and his acts since the same was done at their instigations. The report further says in that letter they have clearly stated that with their full knowledge and clear mind own their responsibilities, liabilities, claims, etc., in respect of any consequences, actions, either civil, criminal or statutory that may arise on account of the acts of P.C. Varghese of commissions, omissions, non-fulfilment of certain legal formalities, etc., which have been done solely on account of their advice and on their behalf. P.C. Varghese has also produced a copy of the letter dated 27-1-1986, signed by B. Rajagopal as the corporate director of Dhanalakshmi group wherein it is stated that he takes immense pleasure in informing that with effect from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 10 are liable to make good the loss and to compensate the said loss. They are jointly and severally liable for the said amount. All of them are guilty of misfeasance and breach of trust in relation to the affairs of the company in liquidation. 12. The respondents have filed a separate counter affidavit disputing various averments made by the official liquidator. I am of the view that instead of referring to those averments in the counter affidavit, it is suffice to refer to the affidavit filed by B. Rajagopal for himself and on behalf of B. Muralidhar in Company Application No. 1321 of 2001 seeking for an order to discharge them from the proceedings under sections 542 and 543 of the Companies Act initiated by the official liquidator in C.A. No. 888 of 1995 in C.P. No. 88 of 1989. It is stated that both of them were carrying on business of accepting deposits from members of the public at interest and advancing the money on interest. The firm was regularly paying interest to the depositors and the principal amount on maturity. Section 45B of the RBI Act imposed restrictions on entities other than incorporated companies from accepting deposits from public. In the circumstances, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to realize substantial amounts and paid off the depositors. 13. The signatories to the memorandum and articles of association of the company at the time of formation did not include the signature of the applicants. Neither of the applicants were on the board of directors of the company. In the course of carrying on the business of the company certain management decisions had been proved to be unwise later on and because of that the company incurred loss. The object of the company was to carry on business as a "Nidhi" company which purpose is lawful and cannot be stated as fraudulent. To fall within the mischief of section 542 the company ought to have carried on business and incurred debt at a time when there is, to the knowledge of the directors, no reasonable prospects of creditors ever receiving payments. Taking over the business of the firms by incorporated companies is an accepted method of carrying on business. No irregularity or illegality can be attributed to it. The take over of the business of the two firms were in pursuance of the board s resolution dated 31-8-1985, confirmed by a general body resolution in extraordinary general meeting held on 1-9-1985. P.C. Var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. In the light of the above pleadings, I have heard Mr. Arvind P. Datar, learned senior counsel for applicant/official liquidator ; Mr. R. Vedantham Srinivasan, learned senior counsel and Mrs. Nalini Chidambaram, learned senior counsel for respondent Nos. 8 and 10 ; Mr. P.N. George Graham for the seventh respondent and Mr. S. Rajeswaran for the third respondent. 16. For convenience I shall refer to the parties as described in Company Application No. 888 of 1995. The material particulars, relevant dates and events are stated hereunder. Dhanalakshmi Consolidates Finance and Industrial Investments, a partnership firm in which K.V. Sasidhar, the ninth respondent herein and B. Rajagopal, the eighth respondent herein were partners. The business of the firm was to accept deposits from the public for interest and deploy the funds in various activities and pay the interest and principal from the income arising from the said business. On 2-11-1983, P.C. Varghese, the seventh respondent herein, was appointed as junior accounts officer in the firm. The Banking Laws (Amendment) Act, 1984, introduced Chapter III-C to the Reserve Bank of India Act, 1934. Section 45B of the Act provides that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by official liquidator by sale of movable assets. Rs. 64,20,286 is in deposit in the name of DFIL in Catholic Syrian Bank, Royapettah, Madras-14 remitted to the account of official liquidator in C.A. No. 1202 of 1991. On 26-11-1993, this court appointed M/s. V.T. Arasu and Company as auditors to carry out the accounts and affairs of the company. On 4-1-1994, and 6-1-1994, former director P.C. Varghese, seventh respondent herein, made a statement and the same was recorded by the official liquidator under rule 130 of the Companies (Court) Rules, 1959 (hereinafter referred to as the "Rules"). In the statement, P.C. Varghese has asserted that B. Rajagopal, eighth respondent herein is the group president of the Dhanalakshmi group of companies, K.V. Sasidhar, ninth respondent herein, is the group chairman of the Dhanalakshmi group of companies and the two were the promoters of the company. He also stated that respondent Nos. 1 to 7 were the employees of the erstwhile firms and signed the memorandum and articles of association at the behest of respondent Nos. 8 to 10. In Company Application No. 2224 of 1993 filed by the official liquidator for permission to appoint an auditor to investiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-members also. As per P.C. Varghese s statement, B. Rajagopal gave instructions to write up the minutes books of the meeting at the residence of V. Parameswaran another director. P.C. Varghese also stated that he had never attended the board meeting. Based on the obove asperts, the official liquidator concluded that it is clear that the minutes of the board meetings was not maintained properly. 18. From the statement of P.C. Varghese, it is evident, that B. Rajagopal has given an advertisement in News Today that the two firms have been taken over by the company. Respondent Nos. 8 to10 are common directors in most of the companies. I have already referred to the fact that as per the records available, B. Rajagopal is termed as group president and K.V. Sasidhar is termed as chairman of the Dhanalakshmi group of companies. It is further seen that the Department of Company Affairs has taken up inspection of books and accounts of three of the limited companies to examine the flow of funds from the company in liquidation to the said companies. As far as the company M/s. Mazda Agro Engineering and Exports Private Limited is concerned, K.V. Vijayakumar was the managing director fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments and by K.V. Sasidhar in respect of the firm M/s. Asian Integrated Finance and Industrial Corporation and the certificates of the company in liquidation were issued by renewing the deposits of the firm. P.C. Varghese has also stated that there was transfer of funds from the company in liquidation to various concerns of the group as per the instructions of B. Rajagopal and K.V. Sasidhar. He described B. Rajagopal and K.V. Sasidhar as the promoters of the company giving directions and instructions to manage the day-to-day affairs of the company and that he had been carrying out their instructions. He further stated that K.V. Sasidhar and B. Rajagopal instructed him to open bank accounts with various banks at Madras and other places wherever the company s branches were situated. He also stated that the bank accounts were opened in the name of the company in liquidation and the accounts were operated by K.V. Vijayakumar and thereafter he was instructed by K.V. Sasidhar and B. Rajagopal to sign the cheques prepared and verified by the accounts department and V.S. Sridhar has been operating the bank accounts. 22. P.C. Varghese has stated that jewel loans were given by Asian Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company or were guilty of misfeasance and breach of trust and that a total amount of Rs. 18,32,39,002 was totally lost to the company and respondent Nos. 1 to 10 are liable to contribute to the assets of the company by way of compensation. 26. Mr. R. Vedantham Srinivasan, and Mrs. Nalini Chidambaram, learned senior counsel for respondent Nos. 8 and 10, after referring to the relevant provisions from the Companies Act and Rules, would contend that since proceedings under sections 542 and 543 of the Companies Act are quasi-criminal in nature, the standard of proof is beyond reasonable doubt and not based on preponderance of probabilities. In addition to the above contentions, learned senior counsel point out that the reports state that the two firms of which B. Rajagopal and B. Muralidhar were partners, were collecting substantial sums from the public under special F.D. Scheme. The assets of the two firms were taken over by the company Dhanalakshmi Funds (India) Limited which was incorporated on 9-8-1985. The company became a nidhi company and thereafter accepted deposits from the public. The allegation is that the deposits were mobilized by B. Rajagopal and K.V. Sasidhar a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sses by registered post with acknowledgement due and the reply letter dated 11-10-1988, are concocted documents to extricate himself from any liability which may arise out of his functioning as finance manager and secretary of the company. If according to P.C. Varghese he had disowned all his responsibilities and V.S. Sasidhar and B.Rajagopal have owned the responsibility, it is curious that B. Rajagopal will be writing to the assistant manager, DFIL, to co-ordinate with P.C. Varghese to set right the accounts issue. Also it is curious that P.C. Varghese would have acted on the letter dated 15-12-1988, written by one Thirunavukkarasu, if P.C. Varghese had already downed his responsibilities from DFIL. What is relevant is whether B. Rajagopal was in charge of running the company and whether he can be held liable under section 543 of the Companies Act. The most significant documents are the two affidavits filed by K.V. Sridhar owning responsibility for the conduct of the business of the company and curiously both the affidavits are missing both from the file of the official liquidator s office and this Court Registry. 27. Pursuant to the orders of this court dated 16-11-1990, ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n even against the legal heirs and representatives of the employee or the officer concerned continuing in occupation of the property of the company after the death of the employee or the said officer. The said decision is not with reference to sections 542 and 543 of the Act ; hence the same is not helpful to the respondents. 30. It is contended on the side of respondent Nos. 8 and 10 that misfeasance is a serious charge, accordingly the application should contain specific acts of commissions and omissions on the part of the each of the directors. They also contended that the burden of proof is on the liquidator. It is also contended that the liquidator is under a misconception that proceedings relating to misfeasance are summary in nature. It is their contention that the proceedings being in the nature of quasi-criminal, the liquidator is bound to examine himself and witnesses giving a right of cross-examination to the directors and persons charged with misfeasance. They also contended that the confession of a co-accused cannot form the basis of proceedings against another accused. According to them, the statement of P.C. Varghese cannot be construed as evidence within the mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e detailed report filed by the auditors and the pleadings of the parties as well as the subsequent documentary evidence. 31. The report of the official liquidator contains specific acts of omission and commissions on the part of respondent Nos. 8 and 9. It also refers to the role of the tenth respondent as a promoter of the company. The burden of proof has been discharged by the official liquidator in placing the evidence of fraud, misfeasance etc., before this court. The details furnished by the official liquidator satisfied the requirements specified in Official Liquidator v. Raghawa Desikachar [1975] 45 Comp. Cas. 136 (SC). Sections 478 and 519 of the Act confer discretionary powers on the court and the right of cross-examination will depend on the facts and circumstances of the individual case. Admittedly, respondent Nos. 8 and 10 have not challenged the official liquidator s report by filing counter affidavit and also have not been able to controvert or dispute the averments in the official liquidator s report. In such a circumstance as rightly contended, the question of cross-examination does not arise. 32. Coming to the argument relating to "confession of co-accu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther person"; accordingly this will apply to group president, chairman and B. Muralidhar. As far as section 543 is concerned, it will apply to promoters of the company. A reading of sections 542 and 543 and the report of the official liquidator based on the auditor s report and statement of P.C. Varghese would show that the conditions stated in both these provisions will cover B. Rajagopal and B. Muralidhar, respondent Nos. 8 and 10 respectively. I have already referred to the fact that the chartered accountants M/s. N.T. Arasu and Co. had submitted their report after examination of whatever records were available. Based on the report of the chartered accountants, the official liquidator has made his report in support of the present application under sections 542 and 543 of the Act. No doubt, respondent Nos. 8 and 10 (ninth respondent is no more) filed a counter affidavit in this application as well as Company Application No. 1321 of 2001 wherein they completely denied their involvement in the company. However, the auditor in his report on examination of documents/letters/correspondences, arrived at a conclusion that B. Rajagopal was the group president and K.V. Sasidhar was the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , housing loans, teachers loan, false pronote loans, etc. (11) Total loss to the company in liquidation is Rs. 18,32,39,002. 35. Though B. Rajagopal, eighth respondent initially has stated that himself and 10th respondent have nothing to do with the company, on examination of the records, it was found that B. Rajagopal was the group president and B. Muralidhar was in charge of the M.G. Brothers Lorry Services. In view of the stand taken by him, original documents were placed before this court. A careful perusal of the same would show that he had signed various letters as group president. Several letters produced contain the signature of B. Rajagopal as group president. It was he who took decision regarding posting of persons, as branch managers. He signed in fixed deposit receipt and also informed all deposit holders about the take over of different companies. The records produced also show that Rajagopal along with K.V. Sasidhar and B. Muralidhar were de facto in charge of the affairs of the company. As rightly contended, they have not placed themselves as directors in order to avoid any statutory liability. In view of the details furnished in the official liquidator s rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical infringement of natural justice. The requirements of natural justice must depend on the facts and the circumstances of the case, the nature of the inquiry, the rules under which the Tribunal is acting, the subject matter to be dealt with and so forth. 32. ...The concept of fair play in action must depend upon the particular lis, if there be any, between the parties. If the credibility of a person who has testified or given some information is in doubt, or if the version or the statement of the person, who has testified, is, in dispute, right of cross-examination must inevitably form part of fair play in action but where there is no lis regarding the facts but certain explanation of the circumstances there is no requirement of cross-examination to be fulfilled to justify fair play in action. When on the question of facts there was no dispute, no real prejudice has been caused to a party aggrieved by an order, by absence of any formal opportunity of cross-examination per se does not invalidate or vitiate the decision arrived at fairly. This is more so when the party against whom an order has been passed does not dispute the facts and does not demand to test the veracity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of natural justice. The perusal of rules 260 and 261 leaves the entire matter to the discretion of the court and no mandatory duty has been cast upon the court to follow a particular form of procedure. In this regard it is relevant to note the judgment of the Calcutta High Court in A Stock Co. Ltd., In re [1992] 1 Comp. LJ 323, 326 wherein it is held that "rule 261 read as a whole would show that the matter is entirely discretionary and no mandatory duty has been cast upon the court to follow a particular form of procedure". I have already referred to the fact that subsequent to the order of winding up, this court appointed N.T. Arasu and Co. as auditors to go into the affairs of the company in liquidation. Pursuant to the said direction, the auditors collected the books of account from various places and after gathering information regarding the affairs of the company, submitted a report to the official liquidator. By virtue of the powers conferred on him, the official liquidator recorded a statement from P.C. Varghese, seventh respondent herein and based on all the above materials, including the documents collected, he filed the present application under sections 542 and 543 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidhar, ninth respondent, died on 13-2-1999, B. Rajagopal and B. Muralidhar, respondent Nos. 8 and 10 alone are liable for prosecution under section 545 of the Act. 40. Learned senior counsel for the official liquidator has also pressed into service a decision of the Kerala High Court in K. Joseph Augusti s case ( supra ). The following observation is relevant (page 363) : "The word misapplication by itself involves no mens rea. It imports no mental element such as dishonesty or fraud, not even negligence. It only means wrong or incorrect application, not necessarily a wrongful application, and there can be a perfectly innocent misapplication. But it is well-settled that liability under section 543 can be imposed only if there has been dishonesty, or fraud or at least negligence, not ordinary negligence but gross and culpable negligence. If under section 543 standing by itself, at least gross negligence has to be found before liability can be imposed it is difficult to see how section 633 can afford relief from such liability since, if a person has been grossly negligent, it can scarcely be said that he has acted reasonably. Yet, section 633 expressly refers to liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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