De facto control can attract misfeasance liability when company funds are misapplied and documentary evidence is sufficient.

Persons exercising de facto control over a company's affairs may be proceeded against for misfeasance, breach of trust and misapplication of funds even without formal appointment as directors, where the material shows actual direction, diversion of assets and loss to the company. Documentary material such as the official liquidator's report, auditors' report and statements recorded under the Companies (Court) Rules may be sufficient to establish liability when the facts are not seriously controverted, and oral evidence or cross-examination is not invariably required. On those findings, a request for discharge by the ex-directors or controlling persons cannot be sustained.

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Issues: (i) Whether the persons controlling and managing the affairs of the company, though not formally appointed as directors, were liable under sections 542, 543 and 545 of the Companies Act, 1956 for misfeasance, breach of trust and misapplication of the company's funds; (ii) Whether the official liquidator's report, auditors' report and the statement recorded under the Companies (Court) Rules were sufficient to sustain liability without further oral evidence or cross-examination; (iii) Whether the application by the ex-directors seeking discharge could be accepted.

Issue (i): Whether the persons controlling and managing the affairs of the company, though not formally appointed as directors, were liable under sections 542, 543 and 545 of the Companies Act, 1956 for misfeasance, breach of trust and misapplication of the company's funds.

Analysis: The relevant provisions were applied to persons who were shown, on the materials placed before the Court, to have exercised de facto control over the company's affairs, acted as the guiding force behind its business, and caused diversion of funds, renewal of deposits without corresponding assets, and other irregularities. The Court treated such persons as within the sweep of the expression covering those in accordance with whose directions or instructions the board acted, and held that the absence of a formal directorship did not protect them from liability where the evidence showed actual control and involvement. The conduct disclosed misapplication of funds, loss to the company, and conduct amounting to misfeasance and breach of trust.

Conclusion: The persons at the helm of affairs were held liable under sections 542, 543 and 545 of the Companies Act, 1956, and the finding was against them.

Issue (ii): Whether the official liquidator's report, auditors' report and the statement recorded under the Companies (Court) Rules were sufficient to sustain liability without further oral evidence or cross-examination.

Analysis: The Court held that the need for cross-examination depended on the facts and the existence of a real dispute. Where the respondents did not effectively controvert the report on material facts, and the record contained detailed documentary support from the auditors and the liquidator's investigation, the absence of oral examination did not vitiate the proceedings. The procedural safeguards under the Companies (Court) Rules were treated as discretionary in the circumstances, and the Court found that the materials on record were adequate to establish the factual foundation for liability.

Conclusion: The evidentiary foundation was held sufficient, and the objection based on lack of cross-examination was rejected.

Issue (iii): Whether the application by the ex-directors seeking discharge could be accepted.

Analysis: In view of the findings that the affairs of the company were conducted with misapplication of funds and that the material on record established liability of the persons concerned, the plea for discharge could not be sustained. The Court found no merit in the defence of mere denial or in the attempt to distance themselves from the company's actual management.

Conclusion: The discharge application was rejected.

Final Conclusion: The company application filed by the official liquidator succeeded, the delinquent persons were held liable to compensate the company for the quantified loss, and the application seeking discharge from misfeasance proceedings failed.

Ratio Decidendi: Persons who, though not formally appointed as directors, in fact control and direct the affairs of a company can be proceeded against for misfeasance and breach of trust when the materials show misapplication of funds and diversion of assets; procedural cross-examination is not mandatory where the factual foundation is adequately established and not seriously controverted.

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