2015 (6) TMI 813 - HC - Companies Law

Court dismisses application seeking examination of ex-directors' conduct under Companies Act; burden of proof not met.

Official Liquidator Versus D.D. Sinha

The court dismissed the application seeking examination of the conduct of ex-directors under Section 543 of the Companies Act, 1956. The official ... Voluntarily winding up - Application by official liquidator u/s 543(1) of the Companies Act, 1956 - Prayer for examination in the conduct of ex-directors of the company - Direction to handover the movable & immovable properties along with books of account - Held that:- Reference in this connection may be made to the judgment of the Supreme Court in Official Liquidator v. Raghawa Desikachar [1974 (8) TMI 73 - SUPREME COURT OF INDIA]. The Supreme Court in this case held that the application filed for the purpose should contain the detailed narration of the specific acts of commission and omission on the part of each director quantifying the loss to the company arising therefrom. The burden of proving misfeasance or non-misfeasance rests on the official liquidator. In P.K. Nedungadi v. Malayalee Bank Ltd. (in liquidation) [1971 (2) TMI 74 - SUPREME COURT OF INDIA][AIR 1971 SC 829 also it was held by the Supreme Court that if the money or the property of the company has been misapplied or there has been misfeasance or breach of trust in relation to the company by a director, the court after examining the matter, can compel an officer or other persons mentioned in section 543 to repay or restore the property with interest at such rate as the court may think fit or to contribute such sums to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as it thinks fit. The allegation of misfeasance and misapplication has to be specifically pleaded with material particulars against each of the directors/erstwhile directors of the company. It is necessary that specific acts of commission or omission and/or negligence on the part of each director are pointed out and it is shown that the loss suffered by the company was result of such omission, commission or negligence. It is only then that the loss can possibly be quantified as the order of recovery of such loss shall have to be directed against such or any of the directors. In the circumstances, therefore, the petitioner cannot be said to have proved the ingredients of section 543 of the Companies Act, necessary for holding the respondents-erstwhile directors of the company guilty of misfeasance, misapplication, breach of trust or retention of the money of the company. - Application dismissed. Issues Involved:1. Examination of the conduct of ex-directors.2. Non-availability of records and books of account.3. Allegations of misfeasance, breach of trust, and compensation.4. Resignation and liability of directors.5. Legal precedents and interpretation of Section 543 of the Companies Act, 1956.6. Burden of proof and evidentiary requirements.Detailed Analysis:1. Examination of the conduct of ex-directors:The official liquidator filed the application under Section 543(1) of the Companies Act, 1956, seeking an examination of the conduct of the ex-directors of the company in liquidation. The liquidator requested the court to direct the ex-directors to hand over the movable and immovable properties, records, and books of account of the company and to make payments as compensation for retention, misfeasance, and breach of trust.2. Non-availability of records and books of account:The company, Rajasthan Commercial and Industrial Finance Ltd., was ordered to be wound up voluntarily on November 3, 1999. The official liquidator appointed chartered accountants who reported that complete records and books of account, especially for the period from January 1, 1988, to November 3, 1989, were not available. This non-availability hindered the investigation into the misfeasance and misapplication of funds.3. Allegations of misfeasance, breach of trust, and compensation:The applicant argued that due to the absence of records, it was impossible to ascertain the exact instances of misfeasance. The ex-directors were accused of retaining the records and assets of the company. The liquidator highlighted that the cash balance as of December 31, 1987, was Rs. 3,62,530.82, which was unaccounted for by the respondents. The ex-directors failed to make the books of account and other properties of the branches available, violating the statutory requirements of Section 454 of the Companies Act.4. Resignation and liability of directors:One of the respondents, Respondent No. 3, claimed to have resigned on September 28, 1988. However, the official liquidator disputed this, stating that Respondent No. 3 continued as a director according to the records maintained by the Registrar of Companies. The other respondents refuted the resignation claim, maintaining that Respondent No. 3 was still a director and thus liable. The court noted that the official liquidator did not implead all relevant parties, such as Shri Raisuddin Qureshi, who was also a director at the time of the winding-up petition.5. Legal precedents and interpretation of Section 543 of the Companies Act, 1956:The court referred to various judgments to clarify the circumstances under which directors can be held liable for misfeasance, misappropriation, or breach of trust. The Supreme Court in Official Liquidator v. Raghawa Desikachar emphasized that the application should detail specific acts of commission and omission by each director. The burden of proof lies on the official liquidator. The court also cited judgments that highlighted the necessity of proving that the directors acted negligently or with wilful misconduct, resulting in a loss to the company.6. Burden of proof and evidentiary requirements:The court emphasized that the liability under Section 543 is quasi-criminal in nature, requiring specific, cogent, and reliable evidence to prove misconduct. The allegations must be specific to each director, showing that their acts or omissions led to the company's loss. In this case, the official liquidator failed to provide sufficient evidence to prove the directors' liability for misfeasance or breach of trust. The absence of books of account alone was not enough to establish the allegations.Conclusion:The court concluded that the official liquidator did not meet the burden of proof required under Section 543 of the Companies Act. The evidence presented was insufficient to hold the ex-directors liable for misfeasance, misapplication, or breach of trust. Consequently, the application was dismissed.