2014 (1) TMI 1959 - HC - Companies Law

Official Liquidator's Rs. 5.86 crore claim against ex-directors under Section 543 dismissed for insufficient evidence and incomplete application

Official Liquidator of M/s. Vintek R.F. Products Limited Versus Sri. S. Krishnamurthy, Sri. S. Sathyanarayana, V.G. Padmanabhan, Sri. S.V. Shanmugavadivelu, Dr. Anil S Thavildar, Sri. N.K. Nehra, Smt. Sudharani Ravindran, R. Guruprasad, Sri. K. Chandrashekar and Sri. C.R. Venkatramu, Bangalore

Karnataka HC dismissed Official Liquidator's application against ex-directors under Section 543 of Companies Act, 1956 for Rs. 5.86 crore liability. Court ... Winding up of company - non-compliance of the provisions of Section 454 of the Companies Act, 1956 - non-submission of books of accounts and records of the company in liquidation - Liability of ex-directors under Section 543 of the Companies Act, 1956 - HELD THAT:- The evidence was tendered in the course of these proceedings. The Official Liquidator has not chosen to substantiate the claim by producing material other than the Annual Report of the year 1993-94 notwithstanding the specific contention raised in the statement of objections of the respondent no.1. The affidavit in evidence made by the company-paid-assistant attached to the office of the Official Liquidator merely reiterates that the respondents are liable to pay a sum of Rs. 5.86 crore along with interest to the Official Liquidator. As rightly pointed out by the respondents, particularly respondent no.1, the application is incomplete and inconsistent. Since the basis is on a truncated report of the year 1993-94. it does not establish the acts of misfeasance committed by each of the respondents and as to how the loss had occasioned. It is evident that apart from the partial statement of accounts and balance sheets for the year 1993-94 without reference to any subsequent statement of account and Balance Sheet, even inspite of the respondents having highlighted the same, would render the application vague and general in nature and can hardly be sustained for if the application were to be allowed, as prayed for, it would result in penal consequence visiting the respondents and therefore, it is required of the applicant to establish the allegations beyond reasonable doubt. Given the circumstance that almost all the respondents had ceased to be directors of the company, much prior to the date of the winding up and that the company was ultimately wound up, because it had stopped functioning after the fire accident in its factory premises, destroying all its assets, including its records and whatever the assets and records remained having been taken over by the KSFC and the Income-tax Department, it was incumbent on the Official Liquidator to have substantiated the application with better particulars - Application dismissed. Issues:1. Allegations of misfeasance, breach of trust, and misapplication of funds against ex-directors of a company in liquidation.2. Liability of ex-directors under Section 543 of the Companies Act, 1956.3. Contestation by respondents regarding their liability and involvement in the company's affairs.4. Substantiation of claims by the Official Liquidator based on financial records and subsequent reports.5. Dismissal of the application due to lack of concrete evidence and incomplete basis for allegations.Analysis:1. The judgment pertains to an application filed against ex-directors of a company in liquidation, alleging misfeasance, breach of trust, and misapplication of funds. The Official Liquidator accused the ex-directors of non-compliance with the Companies Act, 1956, and sought recovery of specific amounts based on the company's financial records.2. The Official Liquidator claimed that the ex-directors failed to disclose investments, allowed debts to become time-barred, and left cash and bank balances unaccounted for. The total alleged sum of Rs. 5,88,42,686 was attributed to acts of misfeasance, misapplication of funds, and breach of trust under Section 543 of the Companies Act, 1956.3. Respondents contested their liability, with some seeking deletion of their names from the application. They argued resignation from directorship before the winding-up petition, lack of involvement, or being nominal directors for a brief period. Respondent No. 1 highlighted external factors such as a fire accident causing substantial loss to the company.4. The Official Liquidator's claims were based on the company's Annual Report of 1993-94, which respondents argued was outdated and incomplete. Respondent No. 1 presented subsequent events and financial transactions, indicating that the alleged losses were not accurate due to changes in the company's status and asset management.5. The judgment emphasized the lack of substantial evidence to support the allegations of misfeasance against the ex-directors. It highlighted the incomplete and inconsistent nature of the application, relying solely on outdated financial reports. Due to the failure to establish claims beyond reasonable doubt and the ex-directors' cessation from the company before liquidation, the application was dismissed for lack of substantiation.