2016 (12) TMI 690 - HC - Companies Law

Court Rules in Favor of Respondents in Companies Act Application, Dismissing Allegations of Misfeasance

The court ruled in favor of the respondents and against the Official Liquidator (OL) in various issues. The application under Section 543 of the Companies ... Maintainability of application U/s. 543 of the Companies Act, 1956 - misfeasance, malfeasance or breach of trust - application barred by limitation - Held that:- The application under Section 543 of the Act of 1956 was admittedly filed on 6-3-2002 following the winding up order dated 20-3-1997-i.e. within five years of the winding up order. Section 543(2) of the Act of 1956, provides for a limitation of five years to file an application under Section 543(1) of the Act of 1956. And Section 458A of the Act of 1956 further excludes a period of one year from the date of winding up order in computing limitation under Section 543(2) thereof. The application under Section 543(1) of the Act of 1956 could have therefore been filed in fact within six years of the winding up order. It was in the instant case thus filed within limitation Winding up - respondents directors Jointly and severally liable to compensate and or to contribute to the applicant company - Held that:- Evidence on record establish that the respondent directors thus cannot be held responsible for unaccounted inventory. It was further pointed out that as against the specific case and evidence in support thereof by the respondents, it is not the OL’s case that the inventories of the company in liquidation were not available at site when possession of land, building, plant, machinery and raw materials was taken by RIICO on 3-9-1996. Mr. Ajeet Bhandari submitted that none from RIICO has been produced by the OL to prove the said fact to controvert the evidence of Shri Sanjay Jain in regard thereto. The evidence of Dw.1 Mr. Sanjay Jain remained unshaken. And the evidence of the OL’s witnesses which included himself and the Chartered Accountant remained confined to accounts reflected in the company's books of account and the Statement of Affairs submitted by the Directors of the Company in liquidation on 28-9-2001. Based thereon inference of liability of the respondent directors was sought to be drawn.In the evidence on record, issues deserve to be decided in favour of the respondent directors and against the Official Liquidator. Allegation of non recovery of an amount towards security deposit, security for Oxygen cylinder and security pledged with the Sales Tax Department - Held that:- Ex.A-8 and A-9 filed by the respondent Directors and proved by Dw.1 Mr. Sanjay Jain, indicates that the said amount along with interest aggregating to ₹ 6500/- has been deposited with the OL through receipt No.1349 dated 12-9-2002. Therefore, this issue deserves to be decided against the OL and in favour of the respondents directors. Allegations of misfeasance and/ or breach of trust by respondent directors on the basis of the report by the Chartered Accountant - whether on the evidences of the OL a case against the respondent directors under Section 543(1) of the Act of 1956 is made out - Held that:- no specific evidence obtains on record against any of the respondent directors having misappropriated or otherwise having wrongly acted or omitted to act to cause loss to the company in liquidation to their corresponding enrichment/ benefit or otherwise. In fact no allegation of the respondent- directors benefitting personally from the assets of the company has been at all made by the OL. In fact, the Chartered Accountant in his report dated 27-12-2001 which is the basis of this application under Section 543 of the Act of 1956 has stated that no dishonesty in the affairs of the company can be attributed to the directors of the company. Only because the respondents were the Directors of the company as on date of passing of winding up order, it is presumed that they were in possession of the properties and records of the company in liquidation. Non accounting of which to the OL’s satisfaction tantamounts to their being fastened with damages/ liability under Section 543(1) of the Act of 1956. That is impermissible. No liability on the rebound is contemplated under Section 543 of the Act of 1956. Concrete positive evidence at the instance of OL and his witnesses is mandatory. Unless that burden has been discharged no liability on the directors can accrue. This has not been done in the instant case. Thus no case of misfeasance, malfeasance or breach of trust is made out against the respondents Sanjay Jain, Abhay Jain and Ajay Jain Ex-Directors of the company M/s. San India Electro Chem Private Limited (in liquidation). ISSUES PRESENTED AND CONSIDERED 1. Whether the application under Section 543 of the Companies Act, 1956 is barred by limitation. 2. Whether respondent ex-directors are jointly and severally liable to compensate the company in liquidation for failure to recover sundry debts that became time-barred (sum claimed). 3. Whether respondent ex-directors are jointly and severally liable to compensate the company in liquidation for failure to recover advances to suppliers that became time-barred (sum claimed). 4. Whether respondent ex-directors are jointly and severally liable in respect of alleged unaccounted inventories and whether they must restore possession or pay equivalent value. 5. Whether respondent ex-directors are jointly and severally liable to restore or account for specified security deposits. 6. Whether the acts or omissions identified in the Chartered Accountant's report constitute misfeasance and/or breach of trust by the respondent ex-directors and, if so, to what extent. ISSUE-WISE DETAILED ANALYSIS - ISSUE 1: LIMITATION Legal framework: Section 543(2) prescribes a five year limitation for proceedings under Section 543(1); Section 458A extends the period by excluding one year from computation. Precedent treatment: The Court applies statutory limitation rules as stated; no external authority distinguished. Interpretation and reasoning: Application filed within five years of the winding up order and, when read with Section 458A, falls within the permissible period (effectively six years). The Court finds the filing timely. Ratio vs. Obiter: Ratio - limitation computed in light of Section 458A permits the application; dismissal on limitation ground is inappropriate. Conclusion: Application is not barred by limitation; Issue decided for the applicant Official Liquidator. ISSUE-WISE DETAILED ANALYSIS - ISSUES 2 & 3: RECOVERY OF SUNDRY DEBTS AND ADVANCES Legal framework: Section 543(1) permits recovery from directors for misfeasance, breach of trust or misapplication of company property; liability requires proof of specific acts/omissions causing loss. Precedent treatment: Court relies on established authorities holding that allegations under Section 543 must be specific and particularized as to acts/omissions and quantification of loss; vague or omnibus allegations insufficient. Interpretation and reasoning: Evidence shows that (a) a statutory creditor (a state industrial corporation) had taken possession of immovable assets, stock and records prior to the winding up order; (b) directors were excluded from possession and had no access to records; (c) insolvency and paucity of funds affected the feasibility of litigation and recovery; (d) correspondences and board resolution indicate commercial decisions to forgo litigation or accept waiver/forfeiture in light of weak prospects; and (e) the Chartered Accountant's report furnished aggregate accounting entries but did not link specific wrongful acts or intentional dereliction to individual directors. The Official Liquidator relied primarily on the CA report and accounts without adducing concrete evidence of personal misconduct, intent to cause loss, or personal benefit to directors. Ratio vs. Obiter: Ratio - where loss is alleged, the Official Liquidator must plead and prove specific acts/omissions attributable to named directors and quantify resulting loss; mere account discrepancies or time-barred debts are not per se misfeasance. Obiter - considerations relating to business prudence of decisions not to litigate where recovery unlikely and litigation costs prohibitive. Conclusion: Issues of liability for sundry debts and advances (including contention that amounts became time-barred) resolved in favour of the respondent ex-directors; no personal liability is imposed on the record before the Court. ISSUE-WISE DETAILED ANALYSIS - ISSUES 4 & 5: INVENTORY POSSESSION AND RESTORATION Legal framework: Liability under Section 543 requires showing of wrongful withholding or misapplication of company property by directors; restitution or accounting may follow proven misfeasance. Precedent treatment: Court applies the same requirement of specificity; possession of assets by a third party pursuant to valid exercise of statutory powers interrupts directors' control. Interpretation and reasoning: Evidence, including auditor's report and witness testimony, establishes that the state industrial corporation took possession of land, plant, machinery, records and stocks prior to winding up. Directors were deprived of control and could not hand over inventories to the Official Liquidator. No evidence contradicting this possession was produced by the applicant. The Official Liquidator did not show wrongful retention by directors or intentional conversion. Ratio vs. Obiter: Ratio - mere absence of inventory accounting in company books does not establish directors' liability where possession was lost to a statutory chargee before winding up and no specific wrongful act by directors is proved. Obiter - necessity for Official Liquidator to take timely possession of records and assets after winding up is noted but does not impose liability on directors absent misconduct. Conclusion: Issues of inventory value and restoration resolved in favour of the respondent ex-directors; no order for restoration or payment of inventory value is made against them. ISSUE-WISE DETAILED ANALYSIS - ISSUE 5 (SECURITY DEPOSITS) Legal framework: Directors may be required to account for specific deposits or sums if misapplied or not restored. Precedent treatment: Application of ordinary proof principles - documentary proof of payments or deposits defeats an allegation of non-recovery. Interpretation and reasoning: Documentary receipts demonstrate deposit of the specified security sums and interest with the Official Liquidator. The applicant did not rebut this evidence. Ratio vs. Obiter: Ratio - documentary proof of payment to the Official Liquidator discharges any allegation of non-recovery against directors. Conclusion: Issue decided for the respondent ex-directors; security deposit claim denied against them. ISSUE-WISE DETAILED ANALYSIS - ISSUE 6: MISFEASANCE / BREACH OF TRUST Legal framework: Section 543 requires proof of misfeasance, malfeasance or breach of trust by specific directors; courts have repeatedly required detailed narration of acts/omissions, quantification of loss and evidence of knowledge/intent or personal benefit. Precedent treatment: Court follows authorities holding that allegations must be specific and supported by positive evidence; audit reports and balance sheets alone are insufficient to establish individual culpability. Interpretation and reasoning: The application relied almost exclusively on a Chartered Accountant's report summarizing account deficits and non-recoveries, without attributing specific acts of commission/omission to any director or showing dishonesty, intent to cause loss or personal gain. Witness evidence for the Official Liquidator was limited to reiteration of account figures. Respondent directors produced unchallenged evidence explaining non-recovery (possession by statutory chargee, commercial decisions, forfeiture by suppliers, legal advice discouraging litigation). The Court observes that Section 543 is not a vehicle for a roving or fishing inquiry and that liability cannot be fastened merely because persons were directors when winding up occurred. Ratio vs. Obiter: Ratio - where the Official Liquidator fails to plead and prove specific individual misconduct, misfeasance or breach of trust cannot be established and relief under Section 543 must be refused. Obiter - emphasis that Official Liquidator must take timely steps to secure records and assets, but failure of OL to do so does not automatically shift liability to directors absent proof of their wrongful conduct. Conclusion: No case of misfeasance, malfeasance or breach of trust is established against the respondent ex-directors on the record; the Section 543 application is dismissed insofar as it seeks recovery from them. OVERALL CONCLUSION On the legal framework and evidence presented, limitation is satisfied but substantive relief under Section 543 is not available to the Official Liquidator due to absence of specific, particularized allegations and proof of individual directors' misfeasance, breach of trust, intent to cause loss or personal benefit; accordingly the application under Section 543 is dismissed.