S. Rajeswaran, J.@mdashThis application has been filed to examine the conduct of the respondents 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 April 7, 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 respondents 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 their possession.
(e) direct the respondents to pay the applicant the cost and incidental expenses of these proceedings.
(f) permit the official liquidator to engage the services of a senior Counsel of the Madras Bar to conduct this case on behalf of the official liquidator.
(g) allow the official liquidator to place/accept further facts at the time of hearing this case.
(h) permit the official liquidator to meet the cost of this application and the cost of engaging a senior Counsel and other costs from the funds of the
company and if it is insufficient may be borne from the Common Establishment Charges Account.
2. This application has been filed by the official liquidator under Sections 460(4), 542 and 543 of the Companies Act, 1956. In the report dated
April 5, 2005, filed in support of the above application, the official liquidator has stated that by an order dated April 7, 2000, made in C. P. No.
365 of 1997, this Court ordered the company in liquidation to be wound up. Respondents Nos. 1 to 5 herein are the ex-directors of the company.
Pursuant to taking possession of the available assets of the company in liquidation the moveables were sold on the basis of the order dated
September 26, 2003, in C.A. No. 1319 of 2002 for a sum of Rs. 5,21,000. When the immovable assets were brought for sale by the official
liquidator, no offer was made and this Court directed the secured creditor bank to bring prospective buyers.
3. As the ex-directors failed to file the statement of affairs within the time stipulated, the official liquidator filed C. A. No. 2559 of 2000 and this
Court while disposing of the application permitted the ex-directors to peruse the books of account and to file the statement of affairs. Accordingly,
the ex-directors filed the statement of affairs on January 8, 2003.
4. After going through the statement of affairs, the official liquidator found that the ex-directors acted against the interest of the company,
conducted the business contrary to the provisions of the Companies Act and failed to account for to the liquidator. Accordingly, the official
liquidator framed four charges in his report namely: (1) a sum of Rs. 13,35,512 shown as assets not specifically pledged were not handed over nor
relevant documents were produced before the official liquidator; (2) even though the ex-directors have shown the value of moveable assets at Rs.
10,59,01,777, the moveables 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 respondents Nos. 1 to 3. 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 respondents Nos. 1 to 3.
6. 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 the first respondent was awarded the Udyog Patra
Award and Shri Rajiv Gandhi Memorial Award in 1995 in recognition of his entrepreneurial abilities. Only after realising that it would not be
feasible to run this company without incurring loss, they took the decision to effect a closure in 1998.
7. In so far as the four charges framed by the official liquidator are concerned, it is stated that the entire assets and the books of account were
handed over to the official liquidator and the sums representing the assets not specifically pledged were not recoverable as the major portion was
appropriated by the banks towards interest, TDS and other deposits. The respondents assert that the value of the plant and machinery and other
assets are correctly valued and they refer to the certificate of the operating agency certifying the value of net block of assets at Rs. 1046.25 lakhs
before the BIFR. In so far as the trade debtors and loans and advances are concerned, the diligent efforts in pursuing the various creditors for the
return of the sums due to the company proved futile. They further contend that the failure of the directors to ensure recovery of sums due to the
company will not amount to an act of misfeasance. Hence, they prayed for dismissal of the application.
8. A separate counter-affidavit has been filed by the fourth respondent, wherein also the maintainability of the application under Sections 542 and
543 of the Companies Act is questioned as according to him he was a nonfunctional director of the company for a brief period only. In fact he
joined the I.A.S. in 1968 and worked in West Bengal cadre. He took voluntary retirement in 1989 and set up a consultancy organisation in
Chennai to help exporters and importers in their trade activity. He had never participated actively in the functioning of the company on a daily
basis. Due to his pre-occupation with other assignments, he had absented himself for more than three consecutive meetings of the board and had
ceased to hold office u/s 283(1)(g) of the Companies Act. He prayed for the dismissal of the application as the application is lacking in material
particulars and it does not disclose any purported misfeasance against him.
9. Heard the learned assistant official liquidator and the learned senior Counsel for respondents Nos. 1 to 4. I have also gone through the
documents and judgments referred to in support of their submissions.
10. Learned senior Counsel for respondents 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.
I have considered the rival submissions with regard to facts and citations.
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.
11. In The Official Liquidator Vs. Raghawa Desikachar and Others, , 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 should contain a detailed narration of the
specific acts of commissions and omissions and the burden of proving misfeasance or non-feasance rests on the official liquidator. The relevant
paragraph of the judgment read as under (page 142):
7. The above proceedings clearly show that no opportunity was given to respondents Nos. 1 to 4 because proceedings of January 12, 1958, show
that as soon as written statement was filed on December 30, 1957, the district judge fixed the case for argument. The proceedings of July 7, 1958,
further show that Mr. Amin had brought to the notice of the official liquidator that he should be supplied with materials on which the official
liquidator would rely for the alleged malfeasance on the part of his clients, but no materials were furnished by the official liquidator. Accordingly, on
the second hearing after the aforesaid application, a petition for submitting fresh evidence and for cross-examining respondent No. 5 was made but
it was rejected. The show-cause notice was given by the official liquidator on the basis of the public examination of respondents Nos. 1 to 4. It is
only in answer to the show-cause notice that respondents Nos. 1 to 4 could lead evidence ancUxoss-examine respondent No. 5. It may be
mentioned that misfeasance action against the directors is a serious charge. It is a charge of misconduct or misappropriation or breach of trust. For
this reason the application should contain a detailed narration of the specific acts of commission and omission on the part of each director
quantifying the loss to the company arising out of such acts or omissions. The burden of proving misfeasance or non-feasance rests on 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''s 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. The application made by the official liquidator did not give sufficient particulars which, in
our view, it should have. Once a show-cause notice was given to respondents Nos. 1 to 4 the official liquidator did not lead any evidence nor rely
upon any other documents, nor did respondent No. 5, who was instrumental in initiating the misfeasance case against respondents 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.
12. In Security and 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 in so far as that director is
concerned. The relevant passage reads as under (pages 119 to 123):
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 official liquidator, or the liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that
any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any
limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.
On the hearing of an application under this sub-section, the official liquidator or the liquidator, as the case may be, may himself give evidence or call
witnesses.
(2)(a) Where the court makes any such declaration, it may give such further directions as it thinks proper for the purpose of giving effect to that
declaration.
(b) In particular, the court may make provision for making the liability of any such person under the declaration a charge on any debt or obligation
due from the company to him, or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or
vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on his behalf.
(c) The court may, from time to time, make such further order as may be necessary for the purpose of enforcing any charge imposed under this
sub-section.
(d) For the purpose of this sub-section, the expression ""assignee"" includes any person to whom or in whose favour, by the directions of the person
liable, the debt, obligation, mortgage or charge was created, issued or transferred or the interest was created, but does not include an assignee for
valuable consideration (not including consideration by way of marriage) given in good faith and without notice of any of the matters on the ground
of which the declaration is made.
(3) Where any business of a company is carried on with such intent or for such purpose as is mentioned in Sub-section (1), every person who was
knowingly a party to the carrying on of the business in the manner aforesaid, shall be punishable with imprisonment for a term which may extend to
two years, or with fine which may extend to five thousand rupees, or with both.
(4) This Section shall apply, notwithstanding that the person concerned may be criminally liable in respect of the matters on the ground of which the
declaration is to be made.
543. Power of court to assess damages 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 of 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 appointment of
the liquidator in the winding up or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer.
(3) This Section shall apply notwithstanding that the matter is one for which the person concerned may be criminally liable.
In my view, there is no need to treat the present application as one u/s 633 of the Act. Depending upon the facts and circumstances of a case and
to meet the ends of justice and/or to prevent the abuse of the process of court, the court can drop proceedings under Sections 542 and 543 of the
Act or dismiss such an application against any party to the proceedings at any stage....
Under Section 542 of the Act, the courts may declare that any person, who was knowingly a party to the carrying on of the business of the
company, which was carried on with an intent to defraud its creditors or other persons, or was for fraudulent purpose, is personally responsible,
without any limitation of liability, for all or any of the debts or other liabilities of the company. It must be shown that the business of the company
has been carried on with an intent to defraud creditors of the company or any other person or for any fraudulent purpose. Further, that the person
who is being made liable was knowingly a party to the carrying on of the business for fraudulent purpose. Under law, the particulars of fraud must
be given in the application so as to afford an opportunity to that person to meet the allegation. Dishonesty is an essential ingredient of fraudulent
conduct of business. Hence, the pleadings must be specific with regard to the alleged delinquency of a director. The words ''any person who was
knowingly a party to the carrying on of the business in the manner aforesaid'' are very significant and the intention of the Legislature is very clear in
inserting these words. Mere vague and general allegations are not sufficient to meet the requirement of this section, because the court has come to
the conclusion that the business of the company was carried on with an intention to defraud the creditors and/or for any fraudulent purpose.
Further, that the person against whom the allegations are made was knowingly a party to the carrying on of such business. If the allegations are not
specific and details of fraud are not given, then, the court cannot indulge in a fishing or roving enquiry. Thus, 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 director or officer and to
pass an effective order to make him personally liable for misapplication, etc., of the money or the property of the company, there has to be positive
and specific evidence and pleadings in respect of the individual director of an act of the nature contemplated by the section. In the absence of such
specific allegations and positive evidence, it is not possible or proper for the court to indulge in a fishing or roving enquiry so as to compel the
individual director to reimburse and/or compensate the company. The principles with regard to the pleadings and proof are well-settled. There
cannot be a general and roving enquiry into the conduct of a person sought to be made liable.
As held in In Re: Central Calcutta Bank Ltd., , the general principle of liability of joint tort-feasors cannot apply to misfeasance proceedings and, in
order that a person may be a joint tort-feasor, there must be a common design and a concerted action.
I am in respectful agreement with Official Liquidator, Milan Chit Fund and Finance P. Ltd. Vs. Joginder Singh Kohli and Others, , that where, in an
application under Sections 542 and 543 of the Act, there are no specific allegations made against any specific director, the application can be
dismissed in so far as that director is concerned.
13. In Faridabad Rubber Soles P. Ltd. (in liquidation) v. S.L. Chopra [2001] 103 Comp Cas 975, the Punjab and Haryana High Court held that
mere inaction on the part of the directors of the company to recover dues to the company does not amount to misfeasance within the meaning of
Section 543 of the Companies Act, 1956. The relevant paragraph reads as under (page 977):
The contention that has been advanced before me on behalf of the official liquidator is that since the respondent who was the managing director of
the company did not take any steps on behalf of the company to recover the amounts of Rs. 10,97,872.21 and Rs. 57,146.18 which were due
from different parties and allowed the same to become barred by time, his negligence and inaction amounts to misfeasance on his part within the
meaning of Section 543 of the Act and he is, therefore, liable to compensate the company for these amounts. I find no merit in this contention. The
official liquidator has not alleged any fraud or 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 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.
14. In the light of the above settled legal principles, if the report of the official liquidator dated April 5, 2005, filed in support of the application is
considered, it will reveal that the alleged misfeasance and non-feasance are general in nature without pinpointing a specific act of dishonesty and
misappropriation on the part of the individual ex-directors. Therefore, on the basis of such general and sweeping allegations, this Court cannot
proceed against the respondents under Sections 542 and 543 of the Companies Act. As the report of the official liquidator is found wanting with
regard to material particulars and specific acts of commissions and omissions, which are a must to proceed against the ex-directors under Sections
542 and 543 of the Act, I have no hesitation in rejecting this application. In the result, this application is dismissed. No costs.
