2018 (3) TMI 718 - HC - Companies Law

Court allows delay in filing reply, directs Ex-Director to remit funds.

The court allowed condonation of a 114-day delay in filing a reply and directed the Ex-Director to remit a specific amount to the Official Liquidator ... Winding up petition - Held that:- In the course of winding up of a company, it appears that any person who has misapplied, or retained, or become liable or accountable for, any money or property of the company, the court can direct the said person to repay or restore the money. May only note that under section 446 of the Companies Act where winding up order has been made, the OL takes into custody and control all the property of the company of which the company is entitled to. It is apparent from the facts as stated above that Mr. Vinod Vij, the Ex-Director of the Company after passing of the winding up order taken money from the Batra Hospital which he was not entitled to receive in terms of the provisions of the Companies Act. He further claims to have disbursed the amount for the bonafide payment of debts of the respondent Company which he could not have done. This fact itself of having disbursed the funds to discharge the bonafide debts of the respondent Company is a doubtful contention. Further there is no merit in the plea of Mr. Vij that he was not aware that he cannot operate the accounts of the company to make bonafide payments for and on behalf of the company. Allow the present application and pass a direction to Mr. Vinod Vij to deposit with the OL the said amount of ₹ 16,31,174/- within four weeks from today. In the interest of justice, the period for depositing the said sum is extended by eight weeks. ISSUES PRESENTED AND CONSIDERED 1. Whether delay of 114 days in filing the reply should be condoned. 2. Whether, under sections 446 and 543 of the Companies Act, 1956, an ex-director who received company funds after a winding up order may be compelled to repay amounts misapplied, retained or for which he is accountable. 3. Whether receipt and onward transfer of company monies after a winding up order can be justified as bona fide payments for discharge of company debts, and whether such a defence absolves the ex-director of liability under section 543(1). 4. Whether, on the material placed before the Court (bank statements, account entries and absence of corroborating evidence), the Official Liquidator is entitled to a direction for restitution without imposition of interest, costs or penalty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay Legal framework: Civil practice permitting condonation of delay where sufficient cause is shown; exercise of Court's discretion to permit late filings so matters can be adjudicated on merits. Precedent Treatment: No precedents cited or relied upon in the judgment. Interpretation and reasoning: The Court accepted the reasons advanced in the application for delay and exercised its discretion to condone the 114-day delay, taking the reply on record to enable adjudication of substantive issues. Ratio vs. Obiter: Ratio - Court's order condoning delay was integral to adjudication on merits. Conclusion: Delay in filing the reply of 114 days is condoned and the reply is taken on record. Issue 2 - Power to Compel Repayment under Sections 446 and 543 Legal framework: Section 543(1) of the Companies Act, 1956 empowers the Court, in the course of winding up, to examine persons who have misapplied, retained or become liable/accountable for company money and to compel repayment or contribution with interest as considered just. Section 446 vests the Official Liquidator with custody and control of all property of the company upon a winding up order. Precedent Treatment: No earlier decisions were invoked or distinguished in the text; the Court relied on statutory language and facts. Interpretation and reasoning: The Court treated the statutory scheme as permitting inquiry and compulsion of restitution where a person has taken part in company administration and thereafter dealt with company funds contrary to the statutory control vested in the Official Liquidator post-winding up. The Court found that monies credited into the company account after the winding up order were monies the ex-director was not entitled to receive or to disburse, and that section 543 empowers the Court to order repayment to the Official Liquidator. Ratio vs. Obiter: Ratio - where funds of a company are received and dealt with by an ex-director after a winding up order, the Court may direct restitution under section 543, with supervision by the Official Liquidator under section 446. Conclusion: The Court directed repayment of the sum received after the winding up order to the Official Liquidator, observing the statutory power to compel such restitution. Issue 3 - Bona Fide Payment Defence and Evidentiary Burden Legal framework: Section 543(1) addresses misapplication/retention/misfeasance; defenses of bona fide payments to discharge company debts engage factual and evidentiary scrutiny and do not, ipso facto, absolve persons if statutory custody/control is breached or misapplication is shown. Precedent Treatment: None cited or discussed; Court applied statutory tests to the evidence. Interpretation and reasoning: The ex-director asserted that (a) the sums were received during a period when company accounts were de-frozen and (b) payments were bona fide disbursements for company debts through an employee's account. The Court examined the bank statements showing credits on dates after the winding up order and transfers to a third-party account. The Court found absence of corroborative evidence that the third-party was an employee, absence of invoices or particulars tying payments to legitimate suppliers/contractors, and transactions showing payments to various named individuals/entities without documentary proof of purpose or authorization. The Court noted that a limited company making bona fide project payments would follow normal accounting procedures (payments from company account based on supplier/contractor invoices), and that the ad hoc transfers and use of another person's account were inconsistent with such procedure. Ratio vs. Obiter: Ratio - a plea of bona fide payment is insufficient to avoid liability under section 543 where (i) funds were received after a winding up order, (ii) custody/control by the Official Liquidator was thereby breached, and (iii) supporting documentary evidence establishing legitimate company disbursements is absent or inadequate. Conclusion: The Court rejected the bona fide payment defence on the present material and concluded the contention of bona fide discharge of debts was doubtful and unsupported; the ex-director was held accountable to refund the funds. Issue 4 - Relief Granted, Discretion on Interest/Costs and Ancillary Directions Legal framework: Section 543 permits the Court to order repayment with interest 'at such rate as the Court thinks just' and to compel contribution by way of compensation for misapplication or breach of trust; Court retains discretion on imposition of interest, costs or penalties. Precedent Treatment: None cited. Interpretation and reasoning: Having found statutory liability, the Court exercised discretion to order immediate restitution within specified time (initially four weeks, extended by eight weeks on application). However, the Court took a lenient view and did not impose interest or any cost/penalty on the ex-director despite concluding statutory authority supported repayment. Ancillary directions were given to complete recording of statement under procedural rules and to facilitate Official Liquidator's inspection and custody/transfer of company records. Ratio vs. Obiter: Mixed - Ratio in ordering restitution under section 543 without interest/costs is a discretionary outcome; the lack of interest/costs is a factual exercise of leniency in this case (not a broad rule). Ancillary procedural directions are dispositive for case management and enforcement. Conclusion: The ex-director was ordered to deposit the specified amount with the Official Liquidator within the extended timeline; no interest, cost or penalty was imposed. Further procedural directions were issued for completion of statement recording and inspection/transfer of company records. Cross-references and Practical Observations 1. Issues 2 and 3 are interrelated: statutory power to compel restitution under section 543(1) (Issue 2) is engaged where factual predicates of misapplication/retention exist, and the viability of a bona fide payment defence (Issue 3) depends on documentary proof and timing relative to a winding up order. 2. The Court emphasized normal accounting procedure as a factual benchmark against which atypical transactions (post-winding up receipts and transfers to third-party accounts) are assessed for bona fides. 3. The exercise of discretion as to interest and costs reflects case-specific considerations and does not amount to a general limitation on the statutory remedy available under section 543(1).