9911796707
TMI Blog2002 (2) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... or various other ancillary reliefs. The above-named company was ordered to be wound up as per this court's order dated October 27, 1989. The official liquidator attached to this court was appointed as its official liquidator, who has filed the present application. As per this court's directions, the official liquidator appointed M/s. Vibhakar J. Trivedi and Co., chartered accountants, for the purpose of investigating the books of account of the company. After scrutiny of the books of account and available records the chartered accountants submitted their investigation report mainly pointing out as under : (i)The directors and officers of the company had not filed annual audited accounts for the year 1986-87 and annual returns within the statutory limits and therefore the penalties, etc., which may be levied by the Registrar of Companies, courts, etc., within the purview of section 543 of the Companies Act, 1956. (ii)From the scrutiny of accounts for the years 1984-85 to 1986-87 it appears that the management had shown suppressed losses and inflated assets in the past as is evident from the remarks of the statutory auditors in their reports for the past four years. The said detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leged misconduct was wilful or amounted to misfeasance culpable negligence. (iv)The respondents were ordinary directors of the company whose duties were of intermediatory nature performed at periodical board meetings. The company was a professionally managed company and the board of directors had from time to time employed competent senior officers including general managers and other managers for various departments of textile mills of the company. None of the respondents was the managing director of the company. On the merits of the charge levelled against them the respondents have contended that the statutory auditors of the company were a well known and reputed firm of Ahmedabad with more than 60 years of professional standing and they had followed the standards of accounting of the Institute of Chartered Accountants of India while auditing the account books of the company. The said accounting standards were circulated by the company to all the members of the company along with the printed balance-sheet and profit and loss account for the years 1983-84, 1984-85 and 1985-86. The explanation given by the directors in respect of the qualification of the auditors and the notes fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Navin Pahwa, learned counsel for the official liquidator, has reiterated the averments and submissions made in the points of claim and also in the written submissions. It is submitted that by suppressing losses and inflating the assets of the company the respondents had induced the creditors to give more loans and had misled the depositors for renewing the deposits. It is submitted that depreciation was not worked out as per the guidelines issued by the Institute of Chartered Accountants and that therefore, there was a clear breach of duty. Ratification of any illegal act of the directors by the shareholders would not make the action legal and, therefore, the respondents are guilty of misfeasance and breach of trust and are liable to make good the loss. It is also submitted by Mr. Pahwa that misfeasance proceedings are not criminal in nature and that it is not necessary for the applicant to prove mensrea on the part of the ex-directors. On the other hand, Mr. G.N. Shah, learned counsel for the respondents, has vehemently opposed the application and apart from reiterating the averments and submissions made in the points of reply and written submissions, has relied on several a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the official liquidator. The official liquidator, it may be mentioned, merely relied upon the evidence recorded in public examination of the directors and on a few documents tendered in evidence. At the stage of public examination there was no charge of misfeasance against the directors and they were not in a position to know what would be the grounds that would be alleged against them for recovering any amounts, for the loss said to have been caused to the company by reason of such misfeasance." In Official Liquidator, Supreme Bank Ltd. v. P.A. Tendolkar [1973] 43 Comp. Cas. 382, 400 ; AIR 1973 SC 1104, the court laid down the following principles in para. 40 of the judgment : "It is certainly a question of fact, to be determined upon the evidence in each case, whether a director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with due diligence, so that he could not be held liable for conniving at fraud and misappropriation which takes place. A director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any's moneys or properties or in order to enable them to retain the company's moneys or properties. The only allegation made is that by suppressing losses and enhancing the assets of the company the company could get more advances from the creditors and renewal of the deposits of the depositors. The auditors, however, did not address themselves to the crucial question whether the respondents had misapplied the funds or properties of the company or that the respondents had retained or misappropriated the funds of the company. In fact, the report of the chartered accountants does not show, much less quantify, whether any actual loss was caused to the company on account of the accounting practices adopted by the company. As per the settled legal principles enunciated by the apex court and referred to hereinabove, the misfeasance proceedings are to be conducted in order to make the responsible director compensate the company for the loss suffered by the company by the acts and omissions of the director which acts or omissions should constitute breach of trust, misappropriation, misapplication or retention of the company's monies or properties by the concerned director. In the first p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... properly. Thus, the liability was fastened not just for falsification of the accounts but because by falsification of the accounts the company's distributable profits were shown larger than they were and dividends so paid to the directors in their capacity as shareholders resulted in undue gain to them. In view of the aforesaid principles, it is clear that in the facts of the instant case the official liquidator has not made out any case that on account of any act or omission on the part of the ex-directors of the company had resulted in loss to the company. In this view of the matter, no further enquiry is required to be made and the application deserves to be dismissed. Learned counsel for the official liquidator, however, submitted that even if the case does not fall under section 543 of the Act, it is certainly covered by the provisions of sections 540(a) and 542(1) of the Act, which read as under : "540. Penalty for frauds by officers.--If any person, being at the time of the commission of the alleged offence an officer of a company which is subsequently ordered to be wound up by the court or which subsequently passes a resolution for voluntary winding up,-- (a) has, by fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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