1965 (4) TMI 111 - HC - Companies Law

Former directors and officers ordered to repay company funds with joint liability

Official Liquidator, Palai Versus K. Joseph Augusti, Kayalackakam

The court ordered former directors and officers to repay Rs. 16,52,295 to the company for misapplication of funds, with joint and several liability. ... - Issues involved:1. Recovery of Rs. 250 lakhs from former directors and officers under Section 543 of the Companies Act and Section 45-H of the Banking Companies Act.2. Limitation period applicable to the claims.3. Falsification of balance sheets and profit and loss accounts.4. Payment of taxes and dividends on fictitious profits.5. Liability of directors and officers for misapplication of company funds.6. Determination of the extent of liability for each respondent.7. Award of interest and costs.Issue-wise detailed analysis:1. Recovery of Rs. 250 lakhs from former directors and officers:The Official Liquidator sought to recover approximately Rs. 250 lakhs from ten respondents, who were former directors and officers of the banking company, under Section 543 of the Companies Act and Section 45-H of the Banking Companies Act.2. Limitation period applicable to the claims:The respondents argued that the claims were barred by the law of limitation. The court examined three propositions of the law of limitation:- Limitation bars the remedy but not the right.- A barred remedy cannot be revived by a subsequent change in the law unless explicitly provided.- The law of limitation applicable is the one in force at the time the proceeding is instituted.The court determined that the applicable law was Section 45-O(2) of the Banking Companies Act for directors and Section 543 of the Companies Act for non-directors. The application was found to be within the limitation period as it was filed within five years from the date of the winding-up order and the first appointment of the liquidator.3. Falsification of balance sheets and profit and loss accounts:The court found that the balance sheets and profit and loss accounts were falsified to show fictitious income and profits. This was established through the books of the bank and other documents, which were not contested by the respondents.4. Payment of taxes and dividends on fictitious profits:The court held that taxes and dividends were paid on income and profits not actually earned, amounting to a misapplication of the company's funds. The total loss for the years 1936 to 1949 due to this misapplication was calculated to be Rs. 16,52,295.5. Liability of directors and officers for misapplication of company funds:The court held the directors responsible for the misapplication of funds due to their failure to ensure the proper maintenance of books and preparation of balance sheets. The directors did not take reasonable steps to fulfill their duties, amounting to gross and culpable negligence.6. Determination of the extent of liability for each respondent:The court examined the involvement of each respondent in the misapplication of funds. It was found that respondents 1 to 6 and 8 were liable for the misapplication. The extent of liability was determined based on their roles and actions.7. Award of interest and costs:The court directed that the sums misapplied would bear interest at six percent per annum from 8-8-1960 until realization. Respondents 1 to 6 and 8 were also ordered to pay the liquidator's costs in respect of Claim B.Conclusion:The court ordered respondents 1 to 6 and 8 to repay Rs. 16,52,295 to the company, with joint and several liability. The specific liabilities were:- Respondents 1, 2, and 4: Rs. 16,52,295- Respondent 3: Rs. 15,07,470- Respondent 5: Rs. 8,96,848- Respondent 6: Rs. 12,96,409- Respondent 8: Rs. 9,69,180Interest at six percent per annum from 8-8-1960 was also awarded. Respondents 1 to 6 and 8 were to pay the liquidator's costs for Claim B.