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TMI Blog2016 (12) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... the power granted by the company court to the OL under Section 457 of the Act of 1956 he appointed one M/s. PC Modi & Company, Chartered Accountant (CA) to examine the accounts of the company in liquidation for determining as to whether any misfeasance/ breach of trust was made out. The Chartered Accountant accordingly having inspected and perused the accounts of the company in liquidation as also the statement of affairs of the company in liquidation furnished by the ex directors, submitted his report on 27-12- 2001. According to the said report the directors failed to recover an amount Rs. 4.67 lacs from trade debtors and an amount of Rs. 9.16 lacs advanced to various suppliers even though the goods ordered were not supplied. No concrete steps were taken by the directors in the discharge of their fiduciary duties on the aforesaid account. It is also alleged that inventory of varied goods valuing about Rs. 6.34 lacs had not been accounted for. Further an amount Rs. 500/- deposited as security towards Oxygen cylinder and Rs. 3000/- deposited as security with sales tax office of which no address was given by the directors were also lost for lack of requisite recoveries. It has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the application under section 543(1) of the Act of 1956 was not sustainable as it was based merely on the CA's report dated 27-12-2001, in the preparation of which they were not required to participate nor afforded any opportunity for any clarification. Omnibus allegations against the respondent directors have been made for alleged failure to discharge their duties to recover due amounts from debtors of the company even while no dishonest intention has been attributed to them. In the circumstances no amount in issue can in law be recovered from the respondent directors under Section 543(2) of the Act of 1956. It has been further submitted that notices on the application under Section 543 of the Act of 1956 were received by the respondents only in the year 2008 i.e. eleven years subsequent to the passing of the winding up order dated 20-3-1997, by which time the respondents were prejudiced in their defence to explain with clarity the circumstances in which the outstanding amounts of the company M/s. San India Electro Chem Private limited (in liquidation) from the sundry debtors or advances made by the company in liquidation to suppliers of machinery could not be recovered. So to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a case against them being made out. This has not been done in the present case, it was submitted. And consequently the application under Section 543(1) of the Act of 1956 is mechanical, vague and lacking in material particulars and hence liable to be dismissed. With regard to the inventory of Rs. 6.34 lacs as reflected in the accounts of the company and statement of affairs submitted to the OL, it was submitted that the said inventory was lying at the factory premises k-1921, Jetpura Industrial Area, Jetpura when possession of immovable assets was taken by RIICO in the exercise of its powers under Section 29 of the Act of 1951 on 3-9-1996. The respondent directors were thereupon completely excluded from control of the said inventory and cannot be held liable therefor. On pleadings of the parties following issues were struck: 1. Whether the respondents are jointly and severally liable to compensate and or to contribute to the applicant company, the sum of Rs. 4.67 lacs along with interest @ 18% p.a. for allowing the said sum recoverable from the sundry debtors of the applicant company to become time barred under the Limitation Act, 1908? - Applicant. 2. Whether the respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interconnected and therefore are being dealt with together. The case of OL is that an amount of Rs. 4.67 lacs towards sundry debt, and Rs. 9.16 lacs being advances by the company M/s. San India Electro Chem Private limited (in liquidation) prior to its liquidation for supply of various machines, not being recovered tantamounted to breach of trust by the respondent directors. The counsel for the OL Mr. K.J. Mehta submitted that the said amounts ought to have been recovered by the respondent directors. Non recovery of the same within time and thereafter the debts becoming barred by limitation is attributable to the failure of the respondent directors to exercise their fiduciary duty to the company, submitted counsel for the OL. Mr. Ajeet Bhandari for the respondent Directors submitted that defence evidence shows that the factory premises were taken possession of by RIICO on 3-9- 1996 along with the records, books of accounts kept at factory premises. The directors were thereafter not in a position to take any action for recovery of the amounts in issue as they for one had no access to the relevant records. He further submitted that in any event the OL following the winding up order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refund of the amount advanced towards purchase of a machine ordered. Reminder was sent on 16-1-1996 (Ex.A- 16) and a legal notice dated 14-7-1997 (Ex.A-17) through Advocate R.P.Garg followed. In reply thereto the said company by its notice dated 4- 8-1997 (Ex.A-18) instead of refunding the advance amount claimed damages for breach of contract and not purchasing the machine ordered and ready for delivery. Legal consultants threw up advise that an amount of Rs. 1 lac in the aggregate towards court fee, advocate's charges and miscellaneous expenses would be required to pursue the matter in court by way of legal proceedings which in any event had little chance of success as the company was indeed not ready to purchase the machine ordered. Hence as prudent businessmen, a decision was taken by the company not to pursue the matter. On the issue of recovery of dues from the sundry debtors in the books of the company and statement of affairs submitted to the OL. Mr. Ajeet Bhandari pointed out to the evidence of Mr. Sanjay Jain (DW-1) that the Board of Directors of the Company passed a resolution on 31-8-1996 (Ex.A-1) with regard to outstanding amount due to the company in its books against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssues No.1, 2, 4 and 5 deserve to be decided in favour of the respondent directors and against the Official Liquidator. Issues No.3: As far as the allegation of non recovery of an amount of Rs. 3,500/- in the aggregate towards security deposit of an amount of Rs. 500/- security for Oxygen cylinder and Rs. 3000/- towards security pledged with the Sales Tax Department is concerned, Ex.A-8 and A-9 filed by the respondent Directors and proved by Dw.1 Mr. Sanjay Jain, indicates that the said amount along with interest aggregating to Rs. 6500/- has been deposited with the OL through receipt No.1349 dated 12-9-2002. Therefore, this issue deserves to be decided against the OL and in favour of the respondents directors. Issue No.6: This issue No.6 relates to allegations of misfeasance and/ or breach of trust by respondent directors on the basis of the report by the Chartered Accountant submitted on 27-12-2001. That report alone is the bedrock of the evidence of the Official Liquidator and the Chartered Accountant in support of the application under Section 543(1) of the Act of 1956. Nothing concrete and specific to any of the respondent directors has been brought on record. The case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 1956. In the case of Official Liquidator Dhavalgiri Paper Mills (P) Ltd. Vs. Chinubhai Khilachand [2003 (114) Com Cases 277] it was held that to bring the charge of misfeasance against ex-directors it is necessary that specific acts of commission or omission and/ or negligence on the part of each director should be pointed out and proved establishing that the act of commission or omission or negligence was with the knowledge and intent of the director named to cause loss to the company simultaneously resulting in personal gain. In the case of Official Liquidator Vs. D.D. Sinha [SB Company Application No.5/1995 decided by the Rajasthan High Court] this court held that if any loss is caused to the company all its directors will not automatically become liable, unless the allegation of misfeasance is made and proved against the director indicating his connection with such loss. The allegation of misfeasance and misapplication has to be specifically pleaded with material particulars against each of the directors/ erstwhile directors of the company. The moot question for consideration is thus whether on the evidences of the OL a case against the respondent directors under Section 54 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the test of scrutiny warranted in law and be liable to be dismissed. In fact, Section 543 proceedings are proceedings to quantify loss sustained by the company (in liquidation) on account of acts of misfeasance, malfeasance, breach of trust committed by its ex-directors and others. As such, alleged acts of the respondent-directors or officers of the company in winding up should be clear and specific and should emerge from the application itself duly supported by documentary evidence. Until and unless these ingredients are satisfied from evidence on record and the Court lawfully arrives at the conclusion that the deeds and acts/ omissions of ex- directors/others were of a nature not expected of a prudent person engaged in business bonafide, liability cannot be laid on the door of the ex- directors or any other to hold them responsible under Section 543 of the Act of 1956. On consideration of the pleadings of the parties and evidence on record, I am of the considered view that no case of misfeasance, malfeasance or breach of trust is made out against the respondents Sanjay Jain, Abhay Jain and Ajay Jain Ex-Directors of the company M/s. San India Electro Chem Private Limited (in li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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