P. Jyothimani, J.@mdashThis application is taken out by the official liquidator to take action for misfeasance against the ex-directors of the
company under liquidation and for further reliefs.
2. Based on the orders of the Board for Industrial and Financial Reconstruction and the subsequent order passed by this Court dated 9
September, 2004, in Company Petition No. 215 of 2003, Lakshmi Synthetics Machineries Manufacturers Ltd., came to be wound up and the
official liquidator, as liquidator of the company, has taken charge of the available assets and effects of the company, which is having its registered
office and factory premises at Nallattipalayam, Thamarai Kulam (P.O.), Pollachi Taluk, Coimbatore District, consisting of land and building, plant
and machinery and other assets and vehicles, etc.
3. The said company was incorporated in the year 1988 with a nominal capital of Rs. 4,65,75,000 having registered office at No. 1100, Avanashi
Road, Coimbatore-37 and the factory premises is situated at Nallatti palayam, Thamarai Kulam (P.O.), Pollachi Taluk, Coimbatore District. The
registered office of the company was later shifted to the factory premises on 7 May, 2003. The main object of the company was to develop
cheaper version of draw text rising machine.
4. As per the records, the Respondents in these applications were directors of the company and the statement of affairs filed by the ex-directors
shows that the following are the secured creditors of the company:
(i) Union Bank of India, Coimbatore.
(ii) State Bank of India, Coimbatore.
(iii) Corporation Bank, Coimbatore.
(iv) Industrial Development Bank of India, Bombay.
(v) Industrial Finance Corporation of India, New Delhi.
(vi) The Industrial Credit and Investment Corporation of India Ltd. (subsequently assigned to Standard Chartered Bank).
5. In the meeting of the secured creditors conducted on 12 October, 2009, by the official liquidator, the State Bank of India, Coimbatore had
given a letter dated 11 October, 2004, stating that they propose to stand outside the liquidation proceedings.
6. The official liquidator on 12 October, 2004, took possession of the assets, books of account and records, after giving notice to the secured
creditors and ex-directors. The company''s land to the extent of 21.77 acres with several buildings/ sheds, etc., was valued by the valuer and the
assets were sold for a total consideration of Rs. 14 crores.
7. The ex-directors have also filed the statement of affairs showing the assets and liabilities as on the date of winding up, viz., on 19 October,
2004. On going through the statement of affairs, the official liquidator has found the bank balance at Rs. 26,551.16; fixed deposit in the form of
sales-tax deposit at bank Rs. 10,111.89; cash in hand of Rs. 6,593.73; realisable trade debtors of Rs. 4,07,867.52; realisable loans and advances
of Rs. 17,75,943.62; investments other than marketable securities of Rs. 15,00,000; realisable vehicle value of Rs. 6,16,500; realisable assets
specifically charged, viz., land and buildings, plant and machinery, raw materials, components, etc., with liabilities to the secured creditors shown as
Rs. 31,89,33,610.98; and the liabilities to the workmen creditors shown as Rs. 72,42,434 and the amount payable to unsecured creditors was
shown as Rs. 43,43,567 and the final deficiency was shown as Rs. 23,85,70,100.
8. As per the latest balance-sheet filed by the ex-directors for the period ending 31 March, 2003, the accumulated loss has been shown at Rs.
28,63,38,609.
9. On the official liquidator calling for the claims from the creditors of the company in liquidation, 139 claims were received and the claims of 111
workers have been adjudicated u/s 529A of the Companies Act, 1956, by admitting a sum of Rs. 66,83,214. The claim received from the secured
creditors and the amount paid to them as per the report of the official liquidator is as follows:
S. Name of the bank Amount claimedAmount Amount paid Rs.
No. Rs. admitted Rs.
1. IFCI Ltd. (joint mortgage 2,55,71,725 2,55,60,863 2,35,25,987
deed by IFCI & ICICI)
2. Corporation Bank 2,40,85,652 2,40,85,652 9,00,000
3. Union Bank of India 3,86,70,755 3,86,70,755 15,00,000
4. Standard Chartered Bank 3,27,77,206 3,27,77,206 3,01,55,030
Ltd.
5. IDBI 8,07,31,748 8,07,31,748 7,42,73,208
6. State Bank of India 5,53,37,558 10,00,000 1,00,000
10. This Court, by order dated 2 July, 2008, made in Company Application No. 1940 of 2008, has permitted the official liquidator to pay
dividend at 92 paise in a rupee to the workmen creditors and an amount of Rs. 48,36,278 has been paid to the workmen creditors shown in the
first list of creditors and to 80 work men in the second list. According to the official liquidator, 31 workmen shown in the second list remain to be
paid.
11. It is stated that the official liquidator has realised a sum of Rs. 57,501.50 from the sundry debtors out of the due of Rs. 40,78,671. The fund
position of the company in liquidation is as follows:
(i) Cash Rs. 429.00
(ii) Bank Rs. Nil
(iii) Investment Rs. 85,00,000
and the official liquidator has to pay Rs. 61,532 towards the Government Commission and Rs. 51,998 towards audit fee, apart from paying the
work men creditors as per List II, who have not been paid 92 paise in a rupee as per the order passed by this Court and the claims are pending
for adjudication for want of sufficient documentary proof.
12. While the ex-directors have stated that the realisable value of the movable and immovable assets as Rs. 26.67 crores in the year 2004, the
official liquidator was able to realise only Rs. 14 crores in the year 2007 and, therefore, according to the official liquidator, the ex-directors have
inflated the value of the assets more than 100 per cent to show a different picture about the affairs of the company and with the amount realised,
the official liquidator could settle only 92 per cent of the liabilities of the secured creditors and workmen creditors, who stand first in the queue. It is
also stated that the official liquidator could settle the three other secured creditors, viz., the State Bank of India, Corporation Bank and Union
Bank of India only Rs. 25 lakhs out of the total liability of Rs. 6.76 crores, as the banks have lent money/loan on current assets valued at Rs. 29.10
lakhs only and against the meagre allocation and payment, the State Bank of India has also filed an appeal.
13. The Commercial Tax Department has filed a claim for Rs. 7,96,10,577 and the ordinary creditors like suppliers and service providers have
filed claims for Rs. 91,55,963 and as there is no scope for payment to the preferential and other creditors, these creditors have been deprived of
their dues. It is stated that the Commissioner of Customs has claimed a sum of Rs. 62,687 and, therefore, according to the official liquidator, the
ex-directors are liable to pay an amount of Rs. 8,88,29,227 in the following manner:
Rs.
Payment to ordinary creditors 91,55,963
Payment to the Commercial Tax Department 7,96,10,577
Commissioner of Customs (Section 530) 62,687
8,88,29,227
14. It is stated that the funds available to the extent of Rs. 85 lakhs would be utilised for payment of 92 paise in a rupee to the workmen creditors
as per the second list and if any amount still remains, it would be utilised to pay the secured creditors and workmen creditors.
15. According to the official liquidator, Respondents Nos. 1 to 6 are, therefore, liable and accountable for money and the property of the company
in liquidation; guilty of misfeasance; and liable to pay a total sum of Rs. 8,88,29,227 along with interest at the rate of 12 per cent per annum.
16. Therefore, this application has been filed to examine the conduct of the Respondents u/s 543(1) of the Companies Act and to direct them to
jointly and severally contribute such sum to the assets of the company in liquidation by way of compensation for the loss caused by them to the
extent of Rs. 8,88,29,227 with interest at the rate of 12 per cent per annum from the date of winding up till the date of recovery of the entire
amount; to declare that the Respondents are personally liable for all the debts or liabilities; to declare the liability of the Respondents for the said
sum of Rs. 8,88,29,227 and for other future claims of the creditors together with interest thereon which shall constitute the first charge on the
property and effects; and for costs.
17. Respondents Nos. 2, 3 and 4 having received the notice, as it is seen in the acknowledgment filed in the proof of service, have failed to
appear. The sixth Respondent has filed a counter affidavit, wherein it is stated that the first Respondent, L.G. Varadarajulu has passed away on 19
May, 2010, as it is also reflected in the newspaper report filed by the sixth Respondent.
18. It is stated in the counter affidavit filed by the sixth Respondent that the second Respondent is a German national resident in Germany. While
the third Respondent is a leading industrialist of Coimbatore city, the fourth Respondent is an industrialist based in Mumbai, the fifth Respondent is
a lawyer practising in the Mumbai High Court and a senior partner of the leading firm of solicitors, Crawford Bayley & Co., and the sixth
Respondent himself is a senior executive of a reputed company in Coimbatore.
19. It is the case of the sixth Respondent that the application filed by the official liquidator is vague, without explaining any circumstance to show
any intentional act on the part of the Respondents or deliberate conduct of the ex-directors. It is stated that the realisable value of movable and
immovable assets given as at 2004 to the extent of Rs. 26.67 crores in the statement of affairs covers not only the land, but also buildings,
machinery, computer equipment, furniture and office equipment, library, material handling equipment, jigs and fixtures, dies and patterns, lab and
testing equipment, capital work in progress, machinery in transit, stock in trade work in progress, material in transit customs duty, etc. It is stated
that the estimated realisable value of the land amounted to only Rs. 65 lakhs, while the remaining amount relates to the above said items.
20. It is the case of the sixth Respondent that even though the realisable estimate was given by the directors in the year 2004, the sale was effected
by the official liquidator only in the year 2007 and, therefore, in the course of these three years'' time, since the above materials were kept idle, the
value would have definitely deteriorated and that cannot be imputed on the directors. It is also stated that the value was given by the directors
based on the valuation report of Karthikeyan Ashok Engineering Consultants, Coimbatore, who are approved valuers and, therefore, the former
directors have only believed bona fide the estimate and in the absence of any proof on the side of the official liquidator that the estimated realisable
value was incorrect as on 2004, no motive can be attributed on the Respondents. If the assets realise lesser value, the directors cannot be
penalised and for the realisation of lesser value, many factors would have contributed, including want of maintenance, deterioration, reduction in
value, etc., and the sale would have been a distress sale.
21. It is stated that the value was not inflated. The book value of the assets is generally less than the realisable value and therefore, the correct
estimate was made at Rs. 26.67 crores in 2004 and the actual realisation of Rs. 14 crores in 2007 was due to the market conditions and
deterioration in the assets in the three years period.
22. It is stated that there is no fraudulent conduct of business, misfeasance, breach of trust, misappropriation of property of the company as alleged
by the official liquidator and therefore, this application does not fall within the ambit of Sections 542 and 543 of the Companies Act, 1956.
23. It is also stated by the sixth Respondent that he is not having any personal knowledge about the present state of affairs of the company and
according to the sixth Respondent, there is no misfeasance.
24. I have heard learned Counsel for the applicant and the Respondents and given my anxious thought to the issue involved in this case.
25. Section 543(1) of the Companies Act, 1956, makes it clear that the liability is attributable to the ex-directors only if it is found that the moneys
of the company under liquidation have been misapplied or there has been misfeasance or breach of trust. The term misfeasance or breach of trust is
certainly relatable not only to intentional act of the directors, but also to the deliberate conduct of the ex-directors which has resulted in the loss to
the company under liquidation. Therefore, to constitute misfeasance under the said provision, intentional act or deliberate conduct which is
detrimental to the interest of the company under liquidation on the part of the ex-directors is a sine qua non.
26. It is trite that when an application under Sections 542 and 543 of the Companies Act, 1956, is made relating to allegations of fraud or breach
of trust or misapplication, to prove such allegation, which is criminal in nature, it is necessary that there should be mens rea on the part of the
erstwhile directors either in committing fraud or causing loss to the company in liquidation. The charges in these sort of cases have to be specific
and it must be brought to the notice of this Court that the term misfeasance or breach of trust is certainly relatable not only to intentional act of the
directors, but also to the deliberate conduct of the ex-directors which has resulted in the loss to the company under liquidation, for the rule actus
non facit reum nisi mens sit rea is applicable in these cases of misfeasance.
27. This Court in Official Liquidator, High Court Vs. V. Selvaraj and Others, , while construing Sections 542 and 543 of the Companies Act,
1956, has held as follows:
...it is clear that when an application under Sections 542 and 543 of the Companies Act is made relating to the allegation of fraud or breach of trust
or misappropriation, to prove such allegation which is being criminal in nature, it is necessary that there should be mens rea aspect on the part of
the ex-director either in committing fraud or causing loss to the company under liquidation. Such conduct of fraud or breach of trust must be
specifically pleaded and proved and in the absence of such specific pleading and proof, on the facts of the present case, it is not possible to accept
the contention of the learned official liquidator that there has been deliberate conduct of fraud or breach of trust on the part of the ex-directors of
the company under liquidation.
28. On a reference to the factual aspect, which has been stated above, it is clear that there is no specific instance of misfeasance which has been
pointed out. There is nothing on record to show that the loss is only on account of misfeasance. It must be noted that for the purpose of proceeding
u/s 542 of the Act, the essential ingredient is that the directors must have taken the company on a route which they are consciously aware of as
leading to a case of total mismanagement, thereby bringing down the company''s existence. In the absence of any material to substantiate the
allegation, one cannot go in a mechanical manner to sustain the contention put forth in the application.
29. Even though it is the case of the official liquidator that the ex-directors have given the realisable value of the movable and immovable assets as
Rs. 26.67 crores in the year 2004, while the same were sold only for Rs. 14 crores in the year 2007 and there is an inflation of value by the ex-
directors, admittedly, the assets were sold only in the year 2007, viz., after three years from the valuation, and the reason for lesser realisation of
value cannot be imputed on the Respondents, especially when the official liquidator with the existing value of the assets could settle 92 per cent. of
the liabilities of the secured creditors and workmen creditors, which is of utmost importance.
30. Having regard to the seriousness of the provisions and there being no material against the ex-directors, the allegations stand unproved. This
application does not merit acceptance and therefore, the same stands dismissed.
