TaxTMI 
TaxTMI 
2008 (7) TMI 587
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....basis of an order of the Board for Industrial and Financial Reconstruction ('BIFR') constituted under provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. The BIFR recommended that the company should be wound up. 3. In the pending winding up proceedings administrative order dated 25-4-2003 was made by the company court appointing K.S. Bothra & Co. auditors to find out the acts of misfeasance, if any, on the part of the erstwhile directors of the company-in-liquidation. Accordingly, the auditors submitted their report dated 29-3-2003 (sic) concluding that there were enough prima facie facts showing misfeasance. Thereupon the Official Liquidator sought administrative directions from the company court and by order dated 25-6-2004, Mr. Ranajit Chowdhury, advocate, was engaged to take appropriate steps for initiating misfeasance proceedings. Under the circumstances, the Judge's summons initiating the proceedings was taken out. 4. It is to be noted that the summons was taken out in terms of the provisions of the Companies (Court) Rules, 1959 rule 260, which is :- "260. Applications under section 542 or 543.-An application under sub-section (1) of section 542 or ....
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....ngs commenced a few days ago. 8. The Official Liquidator is contending that in view of the administrative order of the company court dated 25-6-2004 engaging advocate for taking appropriate steps for initiating the misfeasance proceedings, the present application, in the nature of one under order 7, rule 11, of the Code of Civil Procedure, 1908 ('the Code'), is simply not maintainable. Mr. Chowdhury, counsel for the Official Liquidator, has contended that once, after considering the auditors' report suggesting initiation of misfeasance proceedings against the erstwhile directors of the company-in-liquidation, the company court made an administrative order directing the Official Liquidator to initiate misfeasance proceedings, and the misfeasance proceedings have been initiated in compliance with such order, there is no scope for any respondent therein to contend that the proceedings as against him should be dropped on the ground that the facts stated in the.pleading read with the supporting materials do not make out any case against him for proceeding under section 543. Mr. Sen, counsel for the first respondent, has submitted that the administrative order was made only for the purp....
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....e provisions of rule 6 of the Companies (Court) Rules provide :- "Practice and procedure of the Court and provisions of the Court to apply.-Save as provided by the Act or by these rules the practice and procedure of the Court and the provisions of the Code so far as applicable, shall apply to all proceedings under the Act and these rules. The Registrar may decline to accept any document which is presented otherwise then in accordance with these rules or the practice and procedure of the Court." 12. There is no dispute that misfeasance proceedings initiated under section 543 are decided on the basis of a trial on evidence. The procedure followed in case of a suit is followed in misfeasance proceedings; and this is apparent from the provisions of rule 261, quoted hereinbefore. Therefore, Mr. Sen is right in saying that misfeasance proceedings initiated under section 543 are more akin to suits initiated before ordinary civil courts. There is no reason to say that the proceedings are summary in nature. Hence, I do not see any reason to accept the contention that in the proceedings an application in the nature of one under order 7, rule 11 of the Code cannot be taken out by a responde....
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....r AIR 1973 SC 1104. 15. Mr. Sen has said that it is not correct to say that once an application under section 543 is filed initiating misfeasance proceedings, the Court has to decide it by holding a trial on evidence, even if absolutely no allegation against any of the respondents in the application is made. As to the observations made by their Lordships of the Apex Court in P.K. Nedungadi's case (supra) :- ". . . Allegations or proof of fraud are not essential and it is immaterial that the offence is one for which the offender may be criminally liable." (p. 832) Mr. Chowdhury has heavily relied on these observations, Mr. Sen has said that as will appear from the subsequent Apex Court decision in Official Liquidator v. Raghawa Desikachar [1975] 45 Comp. Cas. 136 and also from the statutory Form No. 123 appended to the Rules, a mandatory requirement of an application initiating misfeasance proceedings is that it must contain detailed particulars of specific allegation showing misfeasance by each of the respondents named in it. His further submission is that there is no reason to say that in proceedings under section 543 only damages are assessed, and nothing else is adjudicated a....
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.... Kaumadi Exporters (P.) Ltd. [1999] 96 Comp. Cas. 544 (Ker.); and Ashoka Auto & General Industries (P.) Ltd. v. Inder Mohan Puri [2005] 124 Comp. Cas. 422 1 (Delhi) - these all cited to me by Mr. Sen. 18. I am, therefore, unable to accept Mr. Chowdhury's contention that once an application is filed initiating misfeasance proceedings under section 543, and even if it contains no allegation against the respondent named in it, the Court must proceed to decide it by holding a trial on evidence, and not otherwise. By just making a formal application without any vestige of any act constituting an allegation of misfeasance or breach of trust against the respondent named in it, the Official Liquidator cannot set the proceedings into an unstoppable motion even to the extent of fettering the Court from examining, on application by the respondent, the question whether there is any specific allegation in the section 543 application, against him, disclosing a case of misfeasance or breach of trust. Such an approach as suggested by Mr. Chowdhury is bound to encourage the abuse of the process of Court, and the Court cannot afford to waste its precious time by holding a trial on evidence when the....
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....e under order 7, rule 11 of the Code, such as the present one taken out by the first respondent, even when recording of evidence in the proceedings concerned has commenced. It can be taken out at any time before conclusion of the trial; and it is the duty of the Court to decide such an application on merits, so that totally unmeritious proceedings, in the sense that the facts stated in the pleading, i.e., the application initiating the proceedings, taken at their face value, do not disclose a cause of action, or a case of misfeasance or breach of trust, a more appropriate expression in the present context, may be dropped for preventing an abuse of the process of Court. It is, therefore, to be seen what are the allegations made by the Official Liquidator in his application initiating the proceedings, and whether they disclose any case of misfeasance or breach of trust within the meaning of section 543 against the respondents named therein. 22. Before narrating the case stated in the application, I think it will be profitable to see what the provisions of section 543 are, they are as follows:- "543. Power of Court to assess damages against delinquent director, etc.-(1) If in the co....
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.... based on the unaudited accounts, as on 13-10-1999, and the profit and loss account for the period from 1-4-1999 to 13-10-1999. The assets and liabilities, as on 31-3-1999, remained the same on 13-10-1999. The company had incurred huge loss prior to the financial year ending 31-3-1999. The total sales tax liability of the company till the date of order of winding up, excluding interest, was Rs. 2,59,48,000. Because of mismanagement by the former directors and other officers of the company, as will be evident from the unaudited balance sheet submitted by one of the former directors, the company suffered the following losses and liabilities : secured loan from Canara Bank and United Bank of India Rs. 4,90,61,000 + unsecured loans Rs. 6,51,07,000 + sundry creditors goods Rs. 2,13,98,000 + sundry creditors for expenses Rs. 49,67,000 + preferential creditors Rs. 80,29,000 + advances from parties Rs. 10,08,000 + sundry creditor others Rs. 10,91,99,000 + sundry debtors over six months Rs. 26,64,000 + sales tax assessment dues Rs. 2,59,48,000 + accumulated loss till the date of winding up Rs. 26,11,16,000 = Rs. 54,48,97,000. The total dues in respect of income-tax and central excise tax co....
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.... by Mr. Sen are consistent in one thing that the application initiating proceedings under section 543 must contain particulars of specific allegation against each of the respondents who are to be specifically identified and named to the extent of their respective acts of misfeasance or breach of trust making them liable to compensate the company-in-liquidation. As the Apex Court has said the proceedings, quasi-criminal in nature, are very serious, and, hence, the application must contain a detailed narration of the specific acts of misfeasance or breach of trust, so that the specifically named respondent may deal with the allegations made against him. This means that for going into a trial on evidence a case based on sufficiently disclosed particulars must be made out in the application. It is not that an application based on speculative allegation is to be entertained and decided of course following the process of trial on evidence. In the absence of a case made out by the facts stated in the application, read with supporting materials, e.g., the auditors' investigation report, as in the present case, there is absolutely no scope to undertake the process of a trial on evidence for....
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....idator, unable to specify the acts of misfeasance and breach of trust indulged in by the respondents, was only to proceed on the basis of the report of the auditors who opined that there were sufficient materials for initiating misfeasance proceedings. As I have already noticed the opinion of the auditors is not based on any information or material other than the unaudited balance sheet prepared by the company-in-liquidation. One will wonder why all concerned did not think it appropriate to make a more effective investigation before deciding to set the law into motion initiating the quasi-criminal proceedings, now finding themselves difficult to survive. I have no hesitation in saying that absolutely no case of misfeasance or breach of trust has been made out against any of the respondents in the proceedings. 29. Mr. Chowdhury has said that if I conclude that the case against the first respondent should be dropped on the ground that allegations made in the application do not disclose any case against him, I should keep the proceedings alive for proceeding against the other respondents. As Mr. Sen has rightly said, that, if I do, will amount to the Court encouraging an abuse of the....