TaxTMI 
TaxTMI 
TaxTMI 
1961 (9) TMI 100
X X X X Extracts X X X X
X X X X Extracts X X X X
....ness of sugar manufacture in the name of Vijai Sugar Corporation Ltd. at Doiwala in the district of Dehradun. After being incorporated the company purchased and took over all the assets of the Vijai Sugar Corporation Ltd. for a consideration of ₹ 11,15,000/- and started the business of manufacturing sugar at Doiwala. As provided in the Memorandum of Association of the company one of the directors, Seth Radhey Lal, was the director-in-charge. The company got involved in financial difficulties and by two resolutions passed by its members and creditors on the 4th and 5th August 1949, respectively it was decided that it should be voluntarily wound up. Two persons, Sri J. B. Saxena Advocate and Seth Radhey Lal who was formerly the director in-charge of the company, were appointed joint liquidators for the purpose of the voluntary winding up. They took over charge at the affairs of the company. Subsequently on the 19th August 1949, one of the creditors of the company, viz. The Doiwala Corporation Development Union, filed an application in this Court for the compulsory winding up of the company. Later on, on the 23rd August 1949 the application for compulsory winding up was conver....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d had presumably been misappropriated by the former directors. It was further alleged that according to the stores purchase account the closing balance of the value of stores in hand on the 21st July 1947 was ₹ 4,20,807/2/- but in the balance-sheet dated the 31st July 1949 the stores in hand were shown as worth ₹ 1, 48,340/3/9. That showed, the liquidators alleged, that the value of the stores was reduced by ₹ 2,72,466/14/3 during the period of ten days on the eve of the winding up of the company. There was no explanation, they contended, as to what happened to the stores worth that amount. Thus so far as the general stores were concerned, the liquidators alleged that the former directors were liable to pay and restore to the company the three sums of ₹ 2,02,082/3/-, Rs. l,75,508/-/3-and ₹ 2,72,466/14/3. It was suggested on their behalf that during the three years prior to the order of winding up the former directors purchased all the stores through two firms Mathura Prasad and Sons and Mathura Prasad and Co., both of which were owned by the directors themselves and it was alleged that the directors had mismanaged the affairs of the company by abuse o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ance carried forward in the next year was therefore, correctly shown as ₹ 1,77,209/14/3. Their 'explanation in respect of the third item of ₹ 2,72,466/14/3 was similar. They denied that stores worth that amount had been consumed within ten days or had been misappropriated. They said that ₹ 2,72,466/14/3 was really the value of the stores consumed curing the whole year. They said that the sum of ₹ 15,000/- had in fact, been paid in connection with the purchase of the sugar mills from the Vijai Sugar Corporation Ltd. ₹ 11,000/- out of that amount had been paid to Sri Ratten Chand, the Secretary of the Vijai Sugar Corporation Ltd. and ₹ 4,000/- to one Sri Lajja Ram, a broker, for obtaining a loan of ₹ 8,00,000/- from the Lakshmi Insurance Company Ltd. In respect of the other spent sum of ₹ 15,000/-, they said that the amount had been paid to Messrs. Vijai Sugar Corporation Ltd. on account of the price of the stores. They thus denied that these items had been misappropriated. They also denied that all stores were purchased through the two firms which belonged to them though they conceded that some of the stores were purchased through ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssrs. Mathura Prasad and Sons and Messrs. Mathura Prasad and Company? ) Whether the aforesaid two firms were owned by the ex-directors themselves? If so, have the ex-directors incurred any pecuniary liability towards the Company? ) Whether the ex-directors' conduct in not issuing share-capital and in providing funds to the Company by advancing loans to it was mala fide? ) Whether the liquidators failed to make out an inventory of stores and to value them properly when they took over charge of the Mill? If so, how does that affect the ex-directors' liability? ) Whether the petition is time-barred? ) Whether the petition is bad for non-joinder of necessary parties? ) Whether the petition is mala fide? ) What amount, if any, are the ex-directors liable to pay? 5. During the pendency of the petition the accounts of the company for the years 1946 to 1949 were examined by a firm of chartered accountants Messrs, Basant Ram and Sons. They submitted their report on the 31st March 1954. In support of the Sri Kishan Lal Nayyar and Sri Chela Ram kohli application the liquidators examined two witnesses on commission. They also examined Sri Satyavant Pandya of Messrs. Basa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f were committed more than three years before the date of the application, the application could not be entertained in respect of them. The plea of limitation must, therefore, be overruled. -9. Two items of ₹ 15,000/- each formed the subject-matter of issues Nos. 4 and 5. The former amount is entered in the account books of the company as having been paid on account of commission in connection with the purchase of the sugar mills from the Vijai Sugar Corporation Ltd. The liquidator alleges that this sum was not paid at all and had, in fact, been misappropriated by the former directors. Seth Radhey Lal has, however, stated that the amount was, in fact, paid and his statement receives corroboration from the evidence of Sri Chela Ram Kohli who was the sales accountant of the Vijai Lakshmi Sugar Mills Ltd. at Doiwala. (His Lordship considered the evidence and held that there was no material on record on the basis of which it could be held that these items were misappropriated, retained or misapplied by any of the directors). 10. The other three items in dispute are the subject-matter of issues Nos. 1 to 3. The case of the liquidator in respect of these items is stated in detai....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... this case will have to be decided. They have probably been concentrating on the general liability to account of on the fact that the accounts have not been kept properly. Even if that is conceded that will not enable this Court to decide the present case in the proper manner. The main question which has to be decided in this case is for what amount the opposite parties can be made liable. For this purpose the Liquidator must decide in respect of which items in a particular year of accounting he wants to press the claim against the opposite parties. If that item has not been valued in the Issue Register it can be valued on the basis of the entries in the General Ledger or the Receipt Register or in the Issue Register itself. In this connection learned counsel for the opposite parties conceded that the entries in the General Ledger and the manufacturing accounts and the balance-sheets may be accepted as correct. It is, therefore, not difficult on the basis of the entries in these registers to find out the approximate value of the items in question which have not been valued in the Issue Registers. After the valuation has been entered in the manner indicated it will become easy to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the value of the stores received and consumed during the years in question. As an objection had been raised on behalf of the respondents in respect of the inclusion of fuel wood, lime and lime-stone in the liquidator's charts the commissioner was directed to give separate figures in respect of fuel, wood, lime and lime-stone and other stores. The commissioner held prolonged sittings, considered the cases of the parties in respect of each item of stores in detail and submitted his final report (paper No. A 115). At the end of his report he summarised the figures he had found in the following manner and attached a chart to his report showing how these figures had been arrived at: "My findings, therefore, on both the issues referred to me are as follows: 13. Objections were filed against this report only on behalf of the respondents. One of the objections taken was that the commissioner's figures contained some arithmetical mistakes. The commissioner was, therefore, required to reconsider the matter in the light of the objections and after doing that he submitted a supplementary report (paper No. A 119). He conceded that in some respects his calculations were incorre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....kes. The three points that were pressed in connection with the other objections were: (1) That the commissioner ought not to have allowed the liquidator to alter his own valuation of some of the items; (2) that if the liquidator was to be allowed to alter his valuation of some items the same facility should have been given to the respondents; and (3) that in respect of some items the commissioner has given arbitrary valuations without there being any evidence to support his view. 15. The amount involved in the items of the last mentioned kind cannot, it is conceded by both the parties, be more than ten or twelve thousands. The final figures arrived at by the commissioner are only approximate and there will be no material difference if the amount finally arrived at by him as the value of the balance of stores is reduced by ten or twelve thousand. The other two objections do not appear to have much force. The liquidator has been allowed to alter his valuation only in respect of those items whose value could be determined on the basis of the entries in the account books of the company and that material was, as has already been observed, the best material to find out the valua....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of P. W. 2 Sri K. L. Mehta and of two witnesses Indra Daman and Shiv Lal (P. Ws. 3 and 4). (His Lordship considered their evidence and proceeded). The allegation of the liquidator that the respondents removed any stores to their own house has, therefore, not been substantiated in any way. 18. The contention on behalf of the liquidator, however, is that even if he has failed to prove that any stores were actually removed by the respondents, if during the period when the respondents were in charge of the company accounts in respect of the stores were not properly kept, the value of each item issued or purchased was not entered in the account books and the balance of the stores which ought to have been shown at the end of each year in the account books was shown incorrectly the respondents must be held accountable for the actual balance, which, according to the commissioner's finding ought to have been there when the company went into liquidation. The respondents have not accounted for those stores and must, therefore, be compelled to restore the same to the company or to pay to the company their value. 19. The respondents' reply to this is three-fold. 20. It is urged in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. The-respondents Nos. 1 and 2 were only directors. The respondent Seth Radhey Lal was the director in-charge. Keeping in view the nature of the business carried on by the company the directors could not be expected to personally scrutinise the accounts or to see that the entries in the various account books and the registers kept by the company were properly made. They had to rely o& the officers employed by the company whom they had no reason to suspect. They cannot, therefore, be held liable simply because the store-keeper did not enter the valuation of the various items of stores received or issued for consumption. As soon as the Managing Director came to know that the account books were not being kept properly he dismissed the Store-keeper and the Accountant. They, however, went up to the Conciliation Officer and on their tendering apology they had to be re-employed. Steps were then taken to have the entries-in the Stores Register completed. Entries were completed in respect of about a year and then the company went into liquidation. In these circumstances it cannot be held that the respondents committed any act of negligence or misfeasance. 23. The validity of the first con....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the acts mentioned in the section it can compel him to repay or restore the money or property or any part thereof or to contribute such sum to the assets of the company by way of compensation as it may consider just. Action can therefore, be taken by the Court under the section even in respect of matters not mentioned in the application provided that they come to light during the investigation into the conduct of the respondent and the Court is satisfied that the respondent is liable to compensate the company or to make good the loss he had caused to it. No advantage, it is contended, can on this interpretation of the section be taken by the respondents of the omission of the liquidator in the present case to mention in the application the amounts relating to fuel-wood, lime or lime-stone also. If as has now been found, misfeasance or breach of trust was committed in respect of these items of stores also there is no reason why the respondents should not be held liable to pay the compensation to the company in respect of those items. 25. It is pointed out that in Reference under Section 28 of Act 7 of ILR 1870 All 238 an order under the corresponding Section 214 of the Companies A....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be made before the Court can start investigation into the conduct of the respondent. Enough particulars must be furnished so that the respondent may meet the charges levelled against him. If something is discovered during the course of the investigation it may in appropriate case be open to the Court to allow an amendment of the application and then to give the respondent an opportunity of meeting the additional allegations. It will be grossly unfair to him if he is ultimately made liable for something discovered during investigation which he had never been called upon to meet. That the proceedings under the section do not amount to a suit or that a plaint is not required to be filed cannot justify dispensing with the requirement of making definite allegations about the acts complained of in respect of which the respondent has to explain his conduct The observations of Burkitt, J. in ILR All 238 have to be understood keeping in view the context in which they were made, The question with which the learned Judge was dealing was only whether an order under Section 214 of the Companies Act of 1882 amounted to a decree or an order having the force of a decree. What he said cannot, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the time of arguments after the evidence had been closed to include in the lists which he filed items of fuel wood, lime and lime-stone also . The inclusion of these items at that stage deprived the respondents of the opportunity to give an explanation in respect of the items or to lead evidence to show that the claim made on the basis of those items was not well founded. For instance, if those items had been mentioned in the application evidence may have been led by the respondents to prove that weight of fuel-wood is reduced by dryage or that fuel-wood was also used in preparing lime or lime-stone. As the items of fuel-wood and lime had not been made the subject-matter of the application no defence had been put in in respect of the items, no issues were framed about them. The items were really discovered after the evidence was closed. The respondents appear to be correct in their contention that these items must be left entirely out of consideration so far as the present case is concerned. No attempt was made by the liquidator at any stage to have the application amended in respect of those items. He cannot, therefore, get them included in the subject-matter of investigation &q....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of duty by an officer of the company as such which has caused pecuniary loss to the company". 34. The same view was taken more recently in Karnataka Films v. Official Receiver, Madras AIR1952Mad481 , Krishnaswami Nayudu, J. observed: "In order to make the directors personally liable under Section 235 for misfeasance, it is necessary to show that the directors have dishonestly acted, or abstained from acting in conflict with their plain duty and that by reason of the act of the directors, the company has incurred a loss." 35. Before the present application can, therefore, succeed it is necessary for the liquidator to establish either the respondents accountable for some goods or money of the company or that they are guilty of misapplication, retainer or breach of trust. If they are guilty of misfeasance it must also be proved that their misfeasance has resulted in loss to the company which they can be compelled to compensate. 36. The only facts established in the present case so far as the general stores are concerned are: (i) That Seth Mathura Prasad and Seth Ladli Prasad were only directors of the company while Seth Radhey Lal was not only a director but the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Conciliation Officer, they had to be re-employed. Seth Radhey Lal then directed the Store-keeper to enter the valuation of each item in the Issue Register. He too complied with the directions and began to value each item but the task could not be completed. The company then went into liquidation. (vii) That there is no material available about the stores that were actually in hand on the date when the company went into liquidation or on the date on which the joint liquidators Sri J. B. Saxena and Seth Radhey Lal were appointed as liquidators. No inventory of stores was prepared at the time and no valuation of stores was made. It cannot therefore, be said that the stores which ought to have been there in hand according to the report of the commissioner were not there. There is also no material to show how the stores were dealt with subsequently. (viii) The allegation that the directors got the stores removed to their house is not correct. Some stores were admittedly sold to Sri Haveliwala by the liquidators. There was a dispute about the price of the stores sold to Sri Haveliwala. Ultimately there was a compromise between the liquidator and Sri Haveliwala and the latter paid ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the company for his own use or allowed it to be used in any manner in which it ought not to have been used. 42. It is, however, urged that all the respondents were directors and Seth Radhey Lal was the director in-charge. All of them and in any case Seth Radhey Lal must be held to be guilty of misfeasance because they did not perform their duty as directors in a proper manner. The question whether the acts or omissions of the respondents could amount to misfeasance shall be discussed presently. Let us for the present assume that they were guilty of misfeasance in the sense that they neglected their duties and did not take the necessary steps to have the stores properly valued. But mere neglect of duty even if it amounts to misfeasance cannot be enough for making the respondents liable in these proceedings. It must be shown in addition that on account of that misfeasance the company actually suffered loss. This could have been proved only if it was established that the stores which ought to have been there according to the finding of the commissioner were not actually there at the time when the company went into liquidation and that the joint liquidators did not get charge of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....scretion as a director as to suing or not suing a debtor to the company, even where the debt was not disputed, and a fortiori where it is a demand of this kind". 46. In re Denham and Co.(1883) 25 Ch D 752, dividend had been paid out of capital and accounts had fraudulently been manipulated by the book-keeper. The directors were, therefore, sought to be made liable. It was laid down by Chitty, J. that the directors were not bound to examine entries in the company's books, that constructive notice could not be attributed to them and that a director could not be held liable for the acts and omissions of another director of which he had no knowledge. 47. In In re Faure Electric Accumulator Co., (1888) 40 Ch D 141 it was contended that the directors were liable for having approved certain transfers made on behalf of the company. They were not charged with fraudulent dealings. It was held that the approval of the transfers not being an ultra vires act could not amount to a misfeasance or breach of trust within Section 165 of the Companies Act of 1882 so as to render the directors liable in the winding up. 48. In In re National Bank of Wales, Ltd. (1899) 2 Ch 629 it was held t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r officers of the bank or verifying the calculations of the auditors himself. The business of life could not go on if people could not trust those who are put into a position of trust for the express purpose of attending to details of management". 50. In Prefontaine v. Grenior (1907) AC 101 a director was charged with negligence and it was held that the charge of negligence could not be established simply by reason of the director having in good faith failed to detect the cashier's concealment of overdrafts. 51. In In re City Equitable Fire Insurance Co., Ltd. (1925) 1 Ch 407 dividend had been paid out of capital and losses had been occasioned by unjustified investments and loans. The liquidator sought to make the directors responsible for the loss on the ground that they had been guilty of breach of duty and their act on that account' amounted to misfeasance. The five principles which Romer, J. laid down in connection with the duty of directors were: (1) A director is only liable for gross or culpable negligence, this means that he does not owe a duty to his company, to take all possible care. It is some degree of care less than that. The care that he is bound to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts of these officers. From the very nature of things Seth Radhey Lal could not be expected to look into the accounts and registers of the company himself. He could proceed on the assumption that all the entries were being properly made. He could not be imputed with any knowledge of the fact that the valuations had not been entered against a large number of items in the registers for the receipt and issue of stores. At the end of each year the accounts were audited and the auditors never raised any question about the valuation of the stores consumed during the year. The final figures of the valuation of the stores consumed were arrived at after a joint consultation between the chief officers of the company. When the fad that the Chief Storekeeper and the Chief Accountant were not doing their duties properly was brought to the notice of Seth Radhey Lal he took immediate action and dismissed the two employees. They were, however, re-employed as they promised to make up their deficiencies. The deficiencies were also made up to a certain extent. In these circumstances it cannot be said that any of the respondents was guilty of such gross and willful negligence and breach of duty as cou....