Director misfeasance and limitation for liquidation claims turned on unauthorised borrowings, disclosure failures, and regular liquidator appointment

Directors may be liable for misfeasance where they permit unauthorised advances and overdrafts in breach of board resolutions and accounting requirements, and where balance-sheets fail to disclose directors' indebtedness; misfeasance was proved against the managing director and one director, but not against the appellant with insufficient connection to the irregularities. In construing limitation under section 235 of the Indian Companies Act, 1913, the phrase "first appointment of a liquidator in the winding up" was held to mean the appointment of the regular liquidator after the winding-up order, not the provisional liquidator. Accordingly, the misfeasance applications against the other appellants were within time and not barred.

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Issues: (i) Whether the appellants, being directors of the company, were guilty of misfeasance for permitting unauthorised advances and overdrafts in violation of the board resolutions and accounting requirements; (ii) Whether an application for misfeasance under section 235 of the Indian Companies Act, 1913 was barred by limitation when filed more than three years after the appointment of the provisional liquidator.

Issue (i): Whether the appellants, being directors of the company, were guilty of misfeasance for permitting unauthorised advances and overdrafts in violation of the board resolutions and accounting requirements.

Analysis: The advances were made repeatedly contrary to express resolutions restricting overdrafts and unsecured loans, and the balance-sheets failed to disclose the directors' indebtedness. The managing director and the secretary directly benefited from substantial unauthorised borrowings, while the other directors failed to exercise the supervision expected of them. On the facts, the court distinguished one appellant whose connection with the affairs of the bank was limited and against whom the material did not establish knowledge of the irregularities.

Conclusion: Misfeasance was proved against the managing director and one director, but not against the appellant whose appeal was allowed.

Issue (ii): Whether an application for misfeasance under section 235 of the Indian Companies Act, 1913 was barred by limitation when filed more than three years after the appointment of the provisional liquidator.

Analysis: The phrase "first appointment of a liquidator in the winding up" was construed to mean the appointment of the regular liquidator after the winding-up order, read with the scheme of section 175 of the Indian Companies Act, 1913. The court held that provisional appointment before the winding-up order was not the starting point for limitation, and that section 168 did not alter this position. The legislative amendment of 1936 was treated as confirming that the limitation period begins when the official liquidator is appointed under the winding-up order.

Conclusion: The misfeasance applications against the other appellants were within time and not barred by limitation.

Final Conclusion: The appeal of the appellant found not to have been connected with the misfeasance was allowed, while the remaining appeals failed both on liability and on limitation.

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