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TMI Blog2007 (11) TMI 404X X X X Extracts X X X X X X X X Extracts X X X X ..... known as the ex-directors of the company in liquidation in terms of sections 542 and 543(1) of the Companies Act, 1956, and order that they are jointly and severally liable to contribute to the assets of the company in liquidation by way of compensation for the loss caused by them to the company in liquidation to the extent of Rs. 13,84,13,871.36 (rupees thirteen crores eighty four lakhs thirteen thousand eight hundred and seventy one and paise thirty six only) and the future claims from the creditors with interest at the rate of 12 per cent per annum thereon from the date of winding up, i.e., from 7-4-2000, till the date of recovery of the entire amount : ( c )declare that the respondents herein are personally liable/responsible without any limitation of liability for all the debts and other liabilities of the company in liquidation. ( d )declare the liabilities of respondent Nos. 1 to 5 for the said sum of Rs. 13,84,13,871.36 (rupees thirteen crores eighty four lakhs thirteen thousand eight hundred and seventy one and paise thirty six only) and future claims of the creditors together with interest thereon shall constitute the first charge on the property and effects in thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vables handed over by them fetched only a sum of Rs. 5,21,000; (3) The ex-directors have not furnished the details of debts nor stated whether any recovery proceedings are being taken to recover the debts, when they have shown a sum of Rs. 28,94,488 in trade debtors category and a sum of Rs. 15,69,639 in loans and advances; and (4) the amount of Rs. 2,71,06,248.36 shown in unsecured creditors category accrued due to the maladministration and mismanagement of the ex-directors. Hence, the above application has been filed by the official liquidator. 5. A counter-statement has been filed by respondent Nos. 1 to 3. 6. It is stated in the counter-statement that the application filed under sections 542 and 543 of the Companies Act, 1956, is not maintainable as the report of the official liquidator does not disclose any material particulars of the purported instances of breach of trust and misfeasance committed by respondent Nos. 1 to 3. 7. According to them, in spite of their best management, the company went into liquidation because of recession uplifting the cotton industry and the hostile attitude of the secured creditor bank. In fact, it was pointed out in the counter that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gments referred to in support of their submissions. 11. Learned senior counsel for respondent Nos. 1 to 4 submitted that the application filed under sections 542 and 543 is to be rejected as there is no specific allegations of dishonesty misappropriating the funds and thereby illegally enriching themselves by the directors. The allegations levelled are only general in nature and in such circumstances, sections 542 and 543 cannot be invoked. Learned senior counsel submitted even on the merits that the ex-directors could not be personally held liable as in spite of their best management, the company went into liquidation. 12. I have considered the rival submissions with regard to facts and citations. 13. First let me consider the decisions relied on by the learned senior counsel for the respondents to cull out the legal principles that have been enunciated with regard to sections 542 and 543 of the Companies Act. 14. In Official Liquidator v. Raghawa Desikachar [1975] 45 Comp. Cas. 136 , the hon ble Supreme Court held a misfeasance application against the directors being a serious charge of misconduct or breach of trust. The application by the official liquidator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely upon any other documents, nor did respondent No. 5, who was instrumental in initiating the misfeasance case against respondent Nos. 1 to 4, lead any evidence. In our view, there was no justification whatsoever for the District Court to reject the evidence which the respondents had intended to lead or to disallow the production of documents other than those already produced, and for that reason the High Court rightly ordered that additional evidence be recorded in this case." 15. In Security Finance (P.) Ltd. v. B.K. Bedi [1991] 71 Comp. Cas. 101 , the Delhi High Court held that in an application under sections 542 and 543 of the Act, if there are no specific allegations against any specific director, the application to be dismissed insofar as that director is concerned. The relevant passage reads as under : "Sections 542 and 543 of the Act read as under : 542. Liability for fraudulent conduct of business. (1) If in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company or any other persons, or for any fraudulent purpose, the Court, on the application of the of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against delinquent directors, etc. (1) If in the course of winding up a company, it appears that any person who has taken part in the promotion or formation of the company, or any past or present director, manager, liquidator or officer of the company ( a )has misapplied, or retained, or become liable or accountable for, any money or property of the company ; or ( b )has been guilty of any misfeasance or breach of trust in relation to the company, the Court may, on the application of the official liquidator, or the liquidator, or of any creditor or contributory, made within the time specified in that behalf in sub-section (2), examine into the conduct of the person, director, manager, liquidator or officer aforesaid, and compel him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Court thinks just or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the Court thinks just. (2) An application under sub-section (1) shall be made within five years from the date of the order for winding up, or of the first appointm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the enquiry, therefore, is to be confined to the purpose with which the business of the company had been carried on and about the persons who were knowingly parties to such carrying on of the business. Under section 543 of the Act, the Court is vested with jurisdiction to examine the conduct of the past or present director, manager, liquidator or any other officer of the company to find out whether he has misapplied or retained or become liable or accountable for any money or property of the company; or he has been guilty of any misfeasance or breach of trust in relation to the company and, where any such conduct is found attributed to any such person, then, to compel him to repay and restore the money or property, or any part thereof to the company. In other words, under this section, the Court is to examine the conduct of an individual director or officer and to pass an order against him, if such a person is personally found to be liable for misapplication, etc., of the money or property of the company or, otherwise, is guilty of any misfeasance or breach of trust in relation to the company. It is thus clear that, to enable the Court to examine the conduct of an individual di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dishonesty on the part of the directors in not recovering the amounts for the company. As per the statement of account filed by the respondent the aforesaid amounts were due to the company from different parties but the directors including the respondent took no steps to recover the same and the recovery of the amounts had become barred by time by the time the liquidator took over. The question that arises is whether the mere fact that a few debts due to the company had been allowed to become barred by time amounts to misfeasance on the part of the directors. The matter is not res integra . A similar matter arose before Falshaw J., in Kaithal Grain and Bullion Exchange Ltd. v. Lachhman Das [1954] 56 PLR 486, where the learned Judge relying on the observations of Jessel M.R., in Forest of Dean Coal Mining Co., In re [1878] 10 Ch. D 450, held that mere inaction on the part of the directors to recover the amount does not amount to misfeasance within the provisions of the Act. The learned Judge in that case was dealing with the provisions of section 235 of the Companies Act, 1913, which are similar to those of section 543 of the Act. Moreover, in the instant case, the company pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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