2022 (12) TMI 1246 - HC - Companies Law

Directors accused of misusing company funds face legal action for prolonged delays and negligence

O.L. OF ESSKAY PHARMACEUTICALS LTD. Versus KIRTI JAIN & 2 OTHER (S)

The case involved allegations of misapplication, retention, and misuse of company funds by directors, as well as misfeasance, breach of trust, and ... Misuse of own personal purpose and benefit funds of the company and became liable and accountable for money or property of the Company - guilty of misfeasance - breach of the trust - breach of duties - gross negligence - contribution to the assets of the company in liquidation by way of compensation - contribution to the assets of the company in liquidation and to pay official liquidator of the company in liquidation - section 478 read with section 543 of the Companies Act, 1956 - HELD THAT:- Considering the progress of the matter since 2007 till date, it appears that the Official Liquidator is not keen to proceed with the matter and the matter is being adjourned from time to time on one pretext or another. The Income Tax department has already instituted the prosecution which is pending as stated in the aforesaid affidavit filed on 28.11.2022. The Official Liquidator has also not pursued the matter after filing further report dated 15.09.2011 pursuant to the order dated 20.07.2011 passed by this Court - the application is disposed of due to sheer negligence on part of the Official Liquidator to pursue the same in accordance with law and keeping it pending for more than 15 years on one pretext or another and permitting the respondent to take advantage of delay tactics to see that entire cause of action is frustrated, this Court has no other option but to dispose of this matter because keeping such stale matters pending in the Court would not result into any fruitful action on part of the Official Liquidator. Application disposed off. Issues Involved:1. Misapplication, retention, or misuse of company funds by directors.2. Misfeasance, breach of trust, breach of duties, and gross negligence by directors.3. Inquiry and accounting for ascertainment of liability.4. Contribution to company assets by directors for misfeasance and breach of trust.5. Payment of costs, charges, and expenses incurred by the Liquidator.Detailed Analysis:Issue 1: Misapplication, Retention, or Misuse of Company Funds by DirectorsThe Official Liquidator filed an application under section 478 read with section 543 of the Companies Act, 1956, seeking a declaration that the respondents, who were directors of M/s Esskay Pharmaceutical Ltd, misapplied, retained, or misused company funds for personal purposes. The application was supported by a misfeasance report prepared by M/s. K.A. Shah & Company, Chartered Accountants, detailing the alleged misfeasance by the respondent Managing Director.Issue 2: Misfeasance, Breach of Trust, Breach of Duties, and Gross Negligence by DirectorsThe Liquidator sought a declaration that the respondents were guilty of misfeasance, breach of trust, breach of duties, and gross negligence in managing the company's affairs. The court issued notices and directed the respondents to be present at hearings. Despite multiple adjournments and directions, including the issuance of a bailable warrant, the respondents failed to comply consistently.Issue 3: Inquiry and Accounting for Ascertainment of LiabilityThe court directed the respondents to provide details of personal and family assets and comply with various orders to facilitate the inquiry. Despite these directions, the respondents delayed compliance, leading to repeated adjournments and imposition of costs on the Liquidator for non-compliance with court orders.Issue 4: Contribution to Company Assets by Directors for Misfeasance and Breach of TrustThe Liquidator sought an order for the respondents to contribute jointly and severally to the company's assets in liquidation. The court noted that the Income Tax Department had already initiated prosecution against the company and its Managing Director for related offenses, and the criminal complaint was pending.Issue 5: Payment of Costs, Charges, and Expenses Incurred by the LiquidatorThe Liquidator also sought an order for the respondents to pay the costs, charges, and expenses incurred, including fees for Chartered Accountants and Legal Advisors. However, due to the prolonged delays and lack of progress in the case, the court observed that the Liquidator had not effectively pursued the matter.Conclusion:The application was ultimately disposed of due to the Official Liquidator's negligence in pursuing the matter, which had been pending for over 15 years. The court emphasized that keeping such stale matters pending would not result in any fruitful action and noted the lackadaisical approach of the parties involved. The voluminous report by M/s. K.A. Shah & Company, detailing various misfeasance and fraud, was not brought to any logical conclusion due to these delays. No order as to costs was made.