2016 (8) TMI 331 - HC - Companies Law

Court Dismisses Misfeasance Allegations Due to Lack of Evidence - Official Liquidator's Application Rejected

The court dismissed the application under Section 543 of the Companies Act, 1956, as the Official Liquidator failed to provide clear evidence of ... Winding up order - Whether the respondents though being aware of passing of winding up order dated 17-10-2003 are guilty of not handing over the possession of the record/ books of account to the OL on passing of the order of winding up thereby intentionally stalling the winding up proceedings and causing loss to the company's creditors? - Held that:- From the evidence on record it indeed transpires that subsequent to winding up order dated 27-10-2003 books of accounts of the respondent company were not handed over to the Official Liquidator. The counsel for the Official Liquidator has submitted that it was so done intentionally with the object to stall the winding up proceedings and cause loss to the creditors of the company in liquidation. Counsel for the respondent directors has submitted that the record of the company in liquidation were lodged at the registered office/ factory premises SP-9-B Khushkhera Industrial Area Alwar, which was taken over without notice by RIICO in exercise of its powers under Section 29 of the State Financial Corporation Act, 1951 on 25-11-2003. It is not in dispute that the registered office of the company in liquidation was the factory premises i.e. SP-9-B Khushkhera Industrial Area Alwar, where the books of accounts and other record of the company were to be kept as required by law. In the circumstances it is not incredible, as stated by the respondent directors that the books of accounts of the respondent company were at the registered office of the company. In the circumstances it cannot be discounted altogether that the respondent directors did not have the possession of the books of accounts and other record subsequent to possession being taken over by RIICO on 25-11-2003. As far as the issue of non filing of statutory returns by the respondent directors qua affairs of the company is concerned, I am of the considered view that this deficiency would be covered under Section 541 of the Act of 1956 and not be a matter of enquiry under Section 543 of the Act of 1956, which is in nature tortuous liability of the directors responsible for misfeasance, malfeasance or breach of trust. Consequently issues 1 to 4 are decided against the official liquidator. Guilty of retaining the current assets and the surplus amount belonging to the company thereby causing breach of trust and loss to the company - Held that:- From the evidence on record it is apparent that allegation against the respondent directors with regard to retaining current assets of ₹ 27,70,972.57 and surplus amount of ₹ 33,68,471/- aggregating to ₹ 61,39,443.57 are based on the balance sheet of 31-3-1997 without reckoning for working of the company now in liquidation upto 1-10-1998. The Official Liquidator failed to discharge the burden on this count, more particularly with regard to specific action of the two directors. Evidence on record reflects that no enquiry from the respondent directors was made either by the Official Liquidator or the Chartered Accountant appointed by him only deductive inferences from the basis of allegations insufficient for discharge of the burden of proof on the Official Liquidator with reference to this issue are sought to be made. The liability under Section 543 of the Act of 1956 is inter-alia quasi criminal and thus one charged of misfeasance, malfeasance and/ or breach of trust is entitled to all protection and safeguards/ rights as in criminal jurisprudence including the benefit of doubt. Clear cut proof of the allegations made is required and tortuous liability under Section 543 cannot be based on surmises and conjectures alone.\ Whether RIICO had taken over the possession of the fixed assets only, not the books of accounts and records of the Company ? - Held that:- A wholistic reading of the evidence on record with regard to taking over assets of the company in liquidation by RIICO indicates that assets had been taken over by RIICO in absence of the respondent directors or their nominee, and the inventory was also drawn in their absence. Further this fact is also recorded in para No.10 of the report of the Chartered Accountant dated 20-9-2008. Evidence on record indicates that the Official Liquidator has not produced any witness from RIICO to support the contention of taking over possession of the assets of the company in liquidation by RIICO on 25-11-2003 to prove the fact that nothing except the fixed assets was available or found by RIICO at the relevant time. Consequently the issue No.6 is also decided against the Official Liquidator. Whether the application filed under Section 543 by the O.L. is maintainable in the absence of any specific allegations against the Ex-Directors/respondents ? - Held that:- No case of misfeasance, malfeasance or breach of trust is made out against the respondents Pawan Kumar Lath and Bimal Kumar Lath Ex-Directors of the company in liquidation. Consequently issue No.7 is decided in favour of the respondent directors and against the Official Liquidator. ISSUES PRESENTED AND CONSIDERED 1. Whether the ex-directors, aware of the winding up order, are guilty of intentionally withholding possession of company books and records from the Official Liquidator so as to stall winding up proceedings and cause loss to creditors? 2. Whether the ex-directors removed current assets, account books and records from the factory premises after the winding up order? 3. Whether failure to maintain and file balance sheets and annual returns for specified years (post 31-3-1997) constitutes an offence actionable under Sections 541 and 543 of the Companies Act, 1956 (misfeasance/malfeasance/breach of trust) or is governed by Section 541 only? 4. Whether non-submission of statement of affairs and non-provision of account books rendered verification of missing fixed assets impossible and prevented recovery of loans/advances, thereby constituting misfeasance/malfeasance/breach of trust under Section 543? 5. Whether the ex-directors retained current assets and a surplus totalling Rs. 61,39,443.57 belonging to the company, thereby committing breach of trust and causing loss recoverable under Section 543? 6. Whether the secured creditor's takeover (RIICO) of company premises on 25-11-2003 related only to fixed assets and not to books of account and records (i.e., whether RIICO, in fact, took the records)? 7. Whether the Official Liquidator's Section 543 application is maintainable in the absence of specific, particularised allegations and evidence against individual ex-directors (i.e., whether a vague/roving inquiry suffices under Section 543)? ISSUE-WISE DETAILED ANALYSIS Issues 1-4 (Group): Withholding/Removal of Records; Non-filing of Statutory Returns; Failure to Furnish Statement of Affairs Legal framework: Section 543 empowers the Court, on application of the Official Liquidator, to compel repayment/restoration where persons associated with the company have misapplied/retained money or been guilty of misfeasance or breach of trust. Separate statutory duties to maintain and file accounts and returns arise under Sections 209, 210, 220 and 159; Section 541 addresses offence/penalty for non-compliance. Precedent treatment: The Court applied authoritative principles that Section 543 proceedings require proof of misfeasance/malfeasance/breach of trust and cannot be used as a substitute for penal or regulatory proceedings under provisions like Section 541. Interpretation and reasoning: Evidence showed books and records were not handed over post-winding up, but the registered office/factory premises (where records were kept) had been taken over by a secured creditor without presence of directors. The Court found it credible that directors lacked physical possession after the secured creditor's takeover. Non-filing of statutory returns was a statutory breach but the Court held such deficiency falls within Section 541's remit and is not, without more, a tortious/quasi-criminal misfeasance claim under Section 543. The Official Liquidator failed to demonstrate intentional withholding or deliberate acts by directors to stall proceedings or cause loss; no specific acts of omission/commission were proved against individual directors. Ratio vs. Obiter: Ratio - Non-filing of statutory returns and failure to deliver books in circumstances where records were taken by a secured creditor do not automatically establish misfeasance under Section 543; such statutory defaults are addressed under Section 541. Obiter - Observations on credibility of testimony about possession of records. Conclusion: Issues 1-4 decided against the Official Liquidator; no sufficient proof of intentional withholding, removal, or misfeasance established under Section 543. Issue 5: Alleged Retention of Current Assets and Surplus (Rs. 61,39,443.57) Legal framework: Section 543 permits recovery where persons have retained or misapplied company money or property or committed misfeasance/breach of trust; burden lies on applicant to prove specific misapplication and link it to the respondent. Precedent treatment: The Court applied settled authorities requiring specific, particularised pleading and proof of individual acts causing quantifiable loss; Section 543 liability is quasi-criminal and demands clear proof beyond conjecture. Interpretation and reasoning: The alleged amounts were calculated by reference to the balance sheet as of 31-3-1997 without accounting for company operations up to 1-10-1998. The Chartered Accountant's report relied on Registrar records and lacked any enquiry of the ex-directors; no evidence showed that the directors personally misappropriated funds or benefitted. Deductive inferences from stale/partial records were held insufficient. Given the quasi-criminal nature of Section 543 claims, the benefit of doubt and requirement of clear proof weighed against the Official Liquidator. Ratio vs. Obiter: Ratio - Liability under Section 543 cannot be established by surmise from stale balance sheets or partial Registrar records; specific proof of personal misfeasance/misapplication is required. Obiter - Emphasis on evidentiary protections akin to criminal jurisprudence when Section 543 is invoked. Conclusion: Issue 5 decided against the Official Liquidator; no recoverable breach of trust established as to the contested amounts. Issue 6: Nature of RIICO's Takeover-Fixed Assets Only or Also Books/Records? Legal framework: Possession and inventory of assets following takeover by a secured creditor are factual matters bearing on whether directors retained company property/records; proof of what RIICO actually took is material to Section 543 allegations. Precedent treatment: The Court required positive evidence (witnesses/documentary proof from the secured creditor) to establish the scope of takeover; mere references in the Chartered Accountant's report or representations by parties are inadequate. Interpretation and reasoning: Evidence showed RIICO took possession in absence of company representatives and inventory was drawn without them; the Chartered Accountant's report acknowledged this. However, the Official Liquidator produced no RIICO witness or documentary evidence to prove RIICO left only fixed assets and removed or left records. Absence of direct proof meant the Official Liquidator failed to establish that records were not taken by RIICO or that directors retained records. Ratio vs. Obiter: Ratio - Allegations about what a secured creditor took on takeover must be established by direct evidence; failure to produce such proof undermines Section 543 claims dependent on retention by directors. Obiter - Notes on practical difficulties when takeovers occur without directors present. Conclusion: Issue 6 decided against the Official Liquidator; insufficient proof that RIICO took only fixed assets and not records, and thus insufficient basis to infer directors' misconduct. Issue 7: Maintainability of Section 543 Application Absent Specific Allegations Legal framework: Section 543 requires the Official Liquidator to demonstrate misapplication, retention, misfeasance, or breach of trust attributable to particular persons; relief is aimed at quantifying and compelling restoration of company property or monies with interest. Precedent treatment (followed): The Court followed established authorities holding that Section 543 applications must contain detailed narration of specific acts of commission/omission by each director, quantification of loss, and supporting material; vague or general allegations inviting a roving inquiry are impermissible. Interpretation and reasoning: The application relied principally on a Chartered Accountant's report based on partial Registrar records and stale balance sheets, without specific allegations against individual directors or evidence of personal benefit. The Court reiterated that Section 543 proceedings are not a fishing expedition; absent particularised pleading and probative evidence identifying individual responsibility, the Court cannot lawfully impose tortious/quasi-criminal liability or order restitution. Ratio vs. Obiter: Ratio - An Official Liquidator's Section 543 application that lacks specific, particularised allegations and direct evidence against named individuals is not maintainable; such applications cannot be used to conduct general or roving inquiries. Obiter - Emphasis on the need for documentary proof and targeted enquiries prior to invoking Section 543. Conclusion: Issue 7 decided in favour of the ex-directors and against the Official Liquidator; the Section 543 application was not maintainable on the evidentiary record and was therefore dismissed.