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TMI Blog2005 (11) TMI 255X X X X Extracts X X X X X X X X Extracts X X X X ..... undry debtors as per balance sheet as on 31-12-1996 and ex-directors failed and neglected to recover that amount. Objection is also raised to payment of Rs. 2,07,302 on account of remuneration to Directors and in respect of amount of Rs. 15,446.98 shown as bank balance as per statement of affairs. Receipt for Rs. 74,914.48 was not entered in cash book and ex-management has shown payment of Rs. 10,000 towards land at MIDC. But statement of affairs mentions payment of Rs. 30,000 only. It is further contended that management could not recover advance of Rs. 6,233.95 given to medical representative and other advances of Rs. 31,908.93 as per balance sheet dated 31-12-1996 and sum of Rs. 42,867.65 towards Travelling Advance. It is further stated that actual sale price of vehicle of Rs. 5,248 only as per schedule of fixed assets as on 31-12-1986 has not been handed over to official liquidator. It is further stated that value of furniture and fixtures was shown at Rs. 4,000 only. It is contended that the ex-directors failed and neglected in performing the duties and put the company to heavy losses for sum of Rs. 10,51,714.22 only. It is contended that the directors are personally liable fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21-4-2005 and thereafter parties filed written notes of arguments in October 2005. The matter was then fixed on 28-10-2005 and came to be adjourned to 18-11-2005. 4. Official Liquidator has examined initially subsequent Chartered Accountant one Shri J.S. Dastur - employee of earlier Chartered Accountant and himself in support of claim. The respondents have not cross-examined Official Liquidator but they have cross-examined the other two witnesses. Respondent No. 1-R.B. Sangare has examined himself and has been cross-examined. Respondents have not examined anybody else. 5. The Official Liquidator has filed written notes of argument contending that respondents are ex-directors personally accountable for the amount misapplied and also for mismanagement of Company. The total claim amount is mentioned and then reliance has been placed upon the Judgment of Hon'ble Apex Court reported at between Official Liquidator, Supreme Bank Ltd. v. P.A. Tendulkar AIR 1973 SC 1104. It is stated that there is nothing in cross-examination of Chartered Accountant to disbelieve their reports. Reference is further made to cross-examination of respondent No. 1 to contend that it is admitted position that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eof. Section 542 requires showing the business of Company has been carried on with intent to defraud creditors of the Company or any other persons or for any fraudulent purpose. There is no such plea by Official Liquidator in his first application before this Court. It is only contended that the ex-directors failed and neglected in performing the duties and put the company into heavy loss. Even in subsequent points of claim it is only generally contended that the directors manipulated accounts, falsified the same for their own gain. However, again no details in this respect are given. In this respect it will be beneficial to make reference to Official Liquidator v. Ram Swarup AIR 1997 All. 72 where it has been held that the object of section 542(1) is to make the discharged debts and other liabilities of the Company consequent on 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable 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. Moreover in view of the admission made in the affidavit filed by the ex-director in High Court and also from the admissions made in the statement of affairs filed by the Ex-directors before the Official Liquidator, the onus on the Official Liquidator to prove misfeasance and breach of trust on the part of the ex-directors was held to have been adequately discharged. The Directors of a company occupy a fiduciary position. Therefore, this section provides relief by a summary procedure to assess their liability. The Court in the course of winding-up a company assesses and compels a delinquent director or officer to make payment in respect of the acts of misfeasance or malfeasance, breach of trust or wrongful retention or other misconduct. The proceedings are civil in nature and the question of establishing mens rea by the Official Liquidator does not arise. Thus the Allahabad High Court has held that provisions of sections 542 and 543 of the Act would be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that while making an application under this provision, it is necessary that the allegations or the charges against the Officer must be very specific and it should not be vague and general in nature. It should contain the narration of specific acts or commission or omissions on the part of the Director or officer of the company. In the absence of such specific pleadings, the application becomes susceptible for successful attack by the respondents. Even to examine the conduct of the particular Officer or Director to make him personally liable for misfeasance and misconduct, there should be specific evidence and pleadings as regards the Conduct of the Officer as held in Security and Finance Private Limited v. B. K. Bedi, 1991 (71) Comp. Cas. 101. It has also been further held by the Courts that even if the charge of misfeasance has been established, it should result in loss to the Company and then only the Court could compel them to compensate. Therefore, any misfeasance or misconduct, without resulting in loss to the Company cannot be successfully pressed into service under section 543 of the Act. After scanning through the evidence adduced on behalf of the parities, I find that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty of the Company, or (b)has been guilty of any misfeasance or breach of trust in relation to the Company. While trying such an application the Court can examine into the conduct of the person or Director against whom the allegation of commission or omission which resulted in mis-application or misfeasance has been made. It is invoking that provision the applicant has approached this Court with this M.C.A. The allegation in respect of the respondents 2 to 8 who are the former Managing Director or Directors or Officers of the Company is that they retained or mis-applied or misappropriated the fund of the Company and they have become liable or accountable to refund the said sum of Rs. 5,54,910 to the Company and their action in the matter or retention or misapplication or misappropriation amounts to misfeasance or breach of trust in relation to the Company. A reading of the Miscellaneous Company Application shows that there is no specific allegation against any of the former Managing Director or Directors as to the role they have played in the alleged mis-application or misappropriation and consequent misfeasance. No details have been supplied in the application so that the respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, in the instant case, the Company premises were locked by the State Bank of Patiala on July 17, 1982 and the books and the records of the Company were inside. The respondent had no access to them. It was in November 1987 that this Court directed the Bank to open the lock and hand over the books to the official liquidator. It was at that time that the statement of affairs could be filed by the respondent. During all this period the ex-Directors had no access to the books and could not, therefore, initiate action for recovery of amounts due to the Company. In these circumstances, I do not consider that any action is called for against the respondent. The petition is accordingly dismissed with no order as to costs". (p. 182) (E) The Karnataka High Court has in Chamundi Chemicals & Fertilisers Ltd. v. M.C. Cherian [1993] 77 Comp. Cas. 1 has held as under : "...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 Company, it is well laid principle of law that in order to make the directors personally liable under section 543 for misfeasance, it is necessary to show th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefitting from it, could not be avoided. 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 for fraud in the conduct of the business of a Company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially. If he does so he could be held liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the Company due to his neglect even if he is not shown to be guilty of participating in the commission of fraud. It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the Company. 46. The learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has stated that Explanation given by ex-directors was not supported by the documents and hence he has not considered it. He farther stated that as directors admitted the list of sundry debtors, he did not make any inquiry with said sundry debtors. He accepted that there were letters and correspondence of general nature for recovery. He stated that though he has seen Memorandum and Article of Association, he does not know whether there was provision for monthly remuneration of Rs. 1,000 to the directors. He further stated that he made no inquiry with directors in this respect. He further accepted that his report is based upon the report earlier submitted by earlier Chartered Accountant. He stated that recovery of Rs.79,914.48 has been mentioned by him on the basis of said report. He further stated that as his assignment was for limited period i.e., from 1-1-1987 till 29-8-1989, he did not verify far the account books for earlier years. He further accepted that amount of Rs. 79,723 represents the cost of medicine of which expiry date was over and hence could not be sold in market. B - Next witness of Official Liquidator is only an employee with earlier Chartered Accountant who ide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as denied that there is no voucher/bill of legal expenses of Rs. 13,230. He has further stated that remuneration was received by each director in spite of resolution dated 6-5-1992 without passing any other resolution to the contrary but by general consensus of all directors. He has expressed inability to point out as to why there is no correspondence on record in respect of sales returns on expiry. D - The brief survey of evidence above reveals that neither Official Liquidator has ascribed any malice or ill motive to the respondents nor any such allegation is made or suggestion is given in the respondent's cross-examination (of R.B. Sangare). It is not even suggested to him that he or any other respondent failed to discharge their duties towards Company. Report of subsequent Chartered Accountant proceeds further by treating earlier report as base. The earlier report has been exhibited in view of order dated 21-4-2005 but at the same time the question regarding truth of its contents was kept open. Cross-examination above of employee Shri Dastur of earlier Chartered Accountant reveals that he has no personal knowledge about the contents and he has not prepared said report. It furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examination of accounts for subsequent period. Thus, this claim for Rs. 26,823.01 was not forming part of earlier claim lodged within five years and a new claim for subsequent period has been made after said expiry. In earlier report, under second head recovery of Rs. 6,233.95 only has been worked out towards advance to medical representative. However it is entirely deleted in subsequent report. In old report, under third head, recovery of Rs. 31,908.93 is shown on account of other advances. These are totally deleted in subsequent report and new figure of Rs. 13,230 only for subsequent period of 1988 and 1989 is substituted. Again, this substitution of new claim is beyond period of five years. In earlier report, under fourth head recovery of Rs. 5,248 only has been shown on account of sale price of vehicle. In subsequent report this recovery is found to be factually incorrect and has been deleted. In earlier report under fifth head difference in value of furniture and fixtures of Rs. 4,000 was sought to be recovered but it has been totally deleted in subsequent report. In earlier report, under 6th head, recovery of Rs. 30,000 only was worked out on account of land at MIDC and this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recovery was shown as per its paragraph 5.1 and Schedule "B" and it was on account of cash vouchers not entered in the cash-book. Thus a totally new head and recovery has been pointed out by subsequent Chartered Accountant. 12. From the discussion above, it is apparent that the subsequent Chartered Accountant Shri Pimparkhede has partially maintained recoveries under head Nos. 9 and 10 of earlier report. Head No. 9 has been partially modified. However, while modifying this recovery the earlier Report has been used as stated by subsequent Chartered Accountant without verification of its authenticity. When truth of earlier report itself is not proved, report of subsequent Chartered Accountant treating it as base for subsequent report cannot be accepted. The recovery from sundry debtors as observed by subsequent Chartered Accountant, therefore, cannot be held against respondents. The only charge/head of recovery as included in earlier report and maintained even in subsequent report is, therefore, remuneration of Directors. For the reasons already stated above, in the facts and circumstances of the case, it has not been substantiated and cannot form part of these proceedings. Thus, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not be governed by the same principles. He further submits that even though the misfeasance summons is taken out against dead respondents, their heirs can be subsequently brought on record even beyond the period prescribed under section 543(2), because according to him, under section 543(2) only an application is required to be made within the prescribed period. Once an application is made, somebody can be subsequently joined as a party to it. Such an interpretation cannot be accepted. Section 543(2), when it refers to an application, must necessarily refer to an application against a specified person or persons. It cannot be an application in the abstract. Therefore, when the heir of a respondent who was non-existent at the time when the original misfeasance summons was taken out, is brought on record, it is equivalent to taking out a fresh misfeasance summons against the heir. There is no question here of the amendment relating back to the date of the original misfeasance summons against some other parties. Therefore, this contention must be rejected. In view of this position, we do not see how the present Company Application No. 75/88 can be granted." (p. 76) It is more ..... X X X X Extracts X X X X X X X X Extracts X X X X
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