TaxTMI 
TaxTMI 
TaxTMI 
1976 (12) TMI 116
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....Company (India) Private Ltd. and/or their representatives. The company was ordered to be wound up by an order made by this court on 15th September, 1976. In an appeal preferred against the order of winding up the company, stay of operation of the order was granted but I was informed that the stay is vacated. Therefore, at present, there is no stay of the winding-up order. This court made an order on 7th May, 1976, directing the liquidator to appoint auditors to audit the books of account of the company so as to be able to arrive at a reasonable clear picture of the state of affairs of the company. In order to satisfy the requirements of the proviso to section 391(2), it was necessary to have the latest balance-sheet and profit and loss account of the company and, therefore, the direction was given that M/s. Kantilal Patel and Company, chartered accountants, be appointed to audit the books and submit a report showing the position of the company as on 31st December, 1975. The auditors have prepared a draft report and in the course of auditing, they came across certain things for which they want the explanation of the directors who are responsible for the same and are not offering ex....
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....is Principles of Modern Company Law, 3rd edition, after referring to the articles styled "fiduciary relationship" and "the director as trustee", has observed that the correct position of a director has been settled by Romer J. when he said that the directors are agents of the company and are in fiduciary relationship to their principal, the company. The duties of good faith which this fiduciary relationship imposes are virtually identical with those imposed on trustees and, to this extent, the description "trustee" still has validity. It is this duty of a director which must be kept in view before deciding whether they can be asked to do what the liquidator wants them to do. However, at the inception, it would be necessary to refer to some of the statutory provisions with respect to the duty of the directors. Section 209 provides that every company shall keep proper books of account with respect to various things mentioned in that section. Section 209A requires the books of account, other books and papers of the company to be kept open for inspection during business hours by the Registrar of Companies or by such officer of the Government as may be authorised by the Central Governm....
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....n and which should be according to the prescribed standard and on the basis of which the balance-sheet and profit and loss account will be prepared by the board of directors. Now, section 224 imposes a duty on the company to appoint, at each annual general meeting, auditor or auditors to hold office from the conclusion of the meeting until the conclusion of the next annual general meeting. Duty to appoint auditors is thus statutory. Section 226 prescribes qualifications of auditors. Then comes section 227 which is material. It provides that every such auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company whether kept at the head office or elsewhere and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor. An auditor thus enjoys a statutory right to call for explanations from officers. Expression "officer" is defined in section 2(30) to include any director, managing agent, secretaries and treasurers.........., etc. Now, if I remove the word "officer" from section 227 and read the word "directors", ....
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....reme argument to offer in this connection. He said that if directors had committed any offence, they should be prosecuted but the liquidator cannot call them to offer explanation. I have not been able to fully grasp the meaning of this submission. I would prosecute. There would be no hesitation in doing so. But that does not put an end to the liability to give explanation. The argument is that if called upon to explain, they will be squarely bound by the explanation which may hamper their defence in the prosecution that may be launched against them. That was Mr. Mehta's passing apprehension. But the argument which in terms was posed is that the various provisions herein discussed do not confer any power on the court to call upon the directors to explain something which happened during the period they were directors because the auditors appointed by the court and not one appointed by general meeting seeks their explanation. Fact situation is slightly different though I do not propose to rest this order on that position. Auditors appointed by the general meeting disclosed their disinclination to audit accounts. Therefore, the court appointed the auditor. But the irrefutable and impo....
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.... they were minority directors since 1971 and they did not participate in the management of the office and resigned from the office of directors on 4th October, 1974. Their resignations were accepted on 30th April, 1975. Miss S.M. Madan, learned advocate on behalf of director No. 10-Sultanali Kasamali Ladiwala-urged that the director, S.K. Ladiwala, resigned from the office of the director on 9th December, 1975. All these advocates invited me to hold that they are not liable to give any explanation as sought by the auditors. In order to dispose of this summons, it is necessary to state that the relevant period for which accounts are prepared commence from 1st November, 1974, and ends on 31st December, 1975. If anyone who was a director daring this relevant period, he must give explanation. If he is a minority director and did not participate in the management, that would be his answer. Resignation of a director becomes effective from the day on which it is accepted. If any other construction is to be accepted, the result would be that all of them can walk out on the day preceding the date on which the accounting year comes to a close and on the last day they would pocket the balanc....