TaxTMI 
TaxTMI 
2025 (9) TMI 1097
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....espondents conducted the business of the First Leasing Company of India Limited (FLCIL)/ company in liquidation (the Company) fraudulently and that they are personally liable without any limitation of liability for all the debts of the Company. In particular, a declaration has been sought that the respondents are jointly and severally liable to contribute Rs. 1,302/- crores, which is due and payable to the creditors of the Company as per the report of the Special Fraud Investigation Office (SFIO) with interest thereon at 12% per annum from the date of provisional liquidation. Various interim orders were prayed for in the said application. By order dated 09.08.2024, the respondents were restrained from mortgaging or creating a charge or lien or third party interest over or alienating movable and immovable properties owned by them until further orders. They were further restrained from operating their respective bank accounts and the Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) were directed to freeze the securities owned or held by the respondents in any companies/societies until further orders. This order was modified by order dated 3....
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....ents for the grant of an ex parte order were not satisfied in this case and that even a copy of such order was not provided to him, thereby contravening Order XXXIX CPC. After stating that his life savings have been invested in mutual funds and debt securities managed by a wealth manager, he states that the freezing of his demat account has a significant adverse impact on his corpus and hampers his access to liquidity. He also states that he was a nominee non-executive director between 19.03.1999 and early July 2020. The other averments in his affidavit are substantially similar to those in the affidavit of Srinivasan. 7. The Official Liquidator filed counter affidavits in both sets of applications. In such counters, it is stated that the applicants were admittedly directors of the Company; that fraudulent activities were carried out by the management of the Company during the said period; and that all the directors participated in board meetings wherein relevant decisions were taken. As members of the board, the Official Liquidator states that the applicants were duty bound to act in good faith and prevent the misuse of funds by the promoters. In view of the failure to discharg....
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....nd 629A were invoked in relation to this charge. Section 293 deals with restrictions on the powers of the board of directors, including in relation to contribution to charitable funds not directly related to the business of the company. As in the case of other charges, this charge cannot be foisted on a non-executive director unless such person played an active role in the relevant transaction. 10. After pointing out that the role of Srinivasan is dealt with at pages 241 to 243 of the SFIO report, learned senior counsel submitted that even the tenure of directorship is erroneously mentioned in the report. He also submitted that the report noticed letter dated 10.01.2022 from Srinivasan stating that he was not involved in the day-to-day management of the affairs of the Company and that he does not have cogent material to respond to questions put to him. Apart from recording that a nominee director cannot escape from the fiduciary responsibilities of corporate governance, learned senior counsel contended that no specific allegation has been made against Srinivasan in the said report. During his term as nominee director, learned senior counsel submitted that Srinivasan attended onl....
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....er alia Section 542 of CA 1956 cannot be sustained on the basis of vague non-specific allegations against all the directors. (vi) Official Liquidator of Shubh Laxmi Savings and Finance P. Limited (in liquidation) v. Brij Mohan Gogna and another, 2006 SCC OnLine Raj 111, particularly paragraphs 8, 9 and 11 thereof, with regard to the requirement of specific acts of commission or omission on the part of each director. (vii) National Sugar Mills Limited (In liquidation), 1975 SCC OnLine Cal 303, particularly paragraphs 15 to 17 thereof. (viii) The Official Liquidator v. Raghawa Desikachar and others, (1974) 2 SCC 741(Raghava Desikachar), particularly paragraph 7 thereof, wherein the Supreme Court held that a misfeasance action against the directors is a serious charge and that the burden of proving the same rests on the Official Liquidator. (ix) T.S. PL.S. Thinnappa Chettiar v. Official Liquidator, Oriental Investment Trust Ltd., 1944 SCC OnLine Mad 273, wherein a Division Bench of this Court dealt with the difference between a Managing Director and an ordinary director with regard to responsibility. (x) Faridabad Rubber Soles Private Limit....
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....or the proposition that it is necessary to make a distinction between directors in effective control of the management and affairs of the company and nominee directors. (xix) K.Ramakrishnan v. Income Tax Department, Crl.O.P.Nos.16082 to 16084 of 2018 and connected petitions, order dated 25.10.2019, particularly paragraphs 9 to 11 thereof, regarding the unsustainability of prosecuting a non-executive nominee director without foundation. (xx) Chanakya Bhupen Chakravarti and another v. Rajeshri Karwa, 2018 SCC OnLine Del 12968, particularly paragraphs 7 & 8 thereof, regarding the position and status of a non-executive director. (xxi) K.S.Mehta v. M/s. Morgan Securities and Credits Private Limited, 2025 INSC 315, particularly paragraphs 17 & 18 thereof, for the proposition that financial liability cannot be imposed on a director merely on the ground of such director having attended board meetings. 13. Mr. P.Giridharan, learned counsel for Sreenivasulu, who is the applicant in Comp.A.Nos.86 to 88 of 2025, contended that the power under Section 633 of CA 1956 may be exercised to relieve a nominee non-executive director from liability for misfeasance. He also....
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.... the Official Liquidator. His first contention was that Section 542 of CA 1956 is wider in ambit than Section 141 of the NI Act. Consequently, he contended that the determination that the applicants are not liable cannot be made at the pre-trial stage. After pointing out that each applicant attended about three or four board meetings, he also made reference to letter dated 25.06.2001 from M/s.Fraser & Ross, Chartered Accountants, to the board of directors of the Company with reference to financial irregularities. After further submitting that paragraphs 4.6.14 of the SFIO report draws reference to this letter, he contended that Srinivasan was inducted on the board on 25.06.2001. By referring to paragraph 19 of the SFIO report and paragraph 16 of the affidavit in support of Comp.A.No.276 of 2024, learned counsel contended that an allegation has been made against all the directors of the Company regarding the fraudulent conduct of the affairs of the Company and regarding their participation in board meetings with knowledge thereof. After further submitting that Section 542 requires fraudulent intent to be established and that such intent is capable of being established only by leadin....
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....SFIO report or in the affidavit in support of the application under Section 542, he submitted that Srinivasan is entitled to the relief claimed. He also contended that in the absence of even a prima facie case against Srinivasan, the interim orders against him are also liable to be vacated. Discussion, analysis and conclusion: 18. By order dated 05.07.2016 in Comp.A.No.238 of 2015, this Court directed the SFIO to undertake an investigation to ascertain whether the funds of the Company were diverted to the companies referred to in the schedule appended to the Judge's summons. Pursuant thereto, the SFIO submitted investigation report dated 31.01.2022 and corrigendum dated 24.05.2022. Comp.A.No.276 of 2024 under Section 542 of CA 1956 was filed upon receipt of the above mentioned report and letter dated 05.07.2022 from the Ministry of Corporate Affairs. On perusal of the affidavit in support of Comp.A.No.276 of 2024, it is noticeable that the Official Liquidator has relied heavily on the SFIO report, which appears to be the sheet anchor of the application. 19. The pleadings in Comp.A.No.276 of 2024 are not complete as on date because several respondents have not filed the....
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....C Public Charitable Trust; Unlawful declaration of dividends out of false profits leading to unauthorised money transfers for personal enrichment of promoters and group etc. 4.86.3. Being a member of the Board, in addition to protecting the interests of CDC, Mr.N.Srinivasan was expected to serve the best interest of sound public policy and bring about higher levels of corporate governance. Further, his presence on the Board also entailed a close monitoring of the affairs of FLCIL by working assiduously towards observance of good corporate governance practices in the company with due regard to the legitimate interests of the various stakeholders, attending the Board meetings regularly and actively participate in the proceedings of the Boards apart from duly safeguarding the interest of CDC and also ensure proper utilisation of investment made in FLCIL and prevent any misuse/diversion of funds by the promoters/management of the companies. However, it was observed that vide his letter 10/1/2022, Mr.N.Srinivasan stated he was not involved in the day to day management of the affairs of FLCIL as he was a Non-Executive Director and that presently, he did not have any cogent mater....
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....issue. 4.85.5 Since the entire Board of Directors is responsible for the governance of its Company, every member of the Board is expected to contribute for the wellbeing of the organisation through adoption of best practices for Corporate Governance, failing which he remains liable for prosecution. During his tenure, he failed to discharge his duties and responsibilities and therefore he is liable for penal action. " 24. As discussed while narrating the contentions, the SFIO summarised the charges against the directors and officers of the Company. As regards both Srinivasan and Sreenivasulu, they are shown as accused in relation to charge no.3.1 (falsification of financial statements of FLCIL), charge no.3.2 (falsification of board report) and charge no.5 (unauthorised contribution towards donation to the MAC Trust). A recommendation has been made to charge them with carrying on the business of FLCIL fraudulently and also with an intent to defraud creditors. They are not listed as accused persons inter alia in the charges relating to grant of loans to satellite companies under the same management and the charges of unlawful declaration of dividends or failure to make qu....
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....002 and 26.12.2001, both of which were attended by Srinivasan, the business done reports for the preceding quarters were placed before the board as per the minutes. Similarly, the minutes of meeting held on 04.05.2000, which was attended by Sreenivasulu, records that the business done in the previous quarter was disclosed in a report. In paragraph 4.6.14 of the SFIO report, the letter dated 25.06.2001 of Fraser & Ross is referred to. On perusal of the minutes of the board meeting held on 25.06.2001, it appears that Srinivasan attended the meeting and was inducted on the said date as a director. The minutes do not refer to the letter but make general reference to points raised by the auditors. In the light of even the minutes of meetings being incomplete, a definitive conclusion cannot be reached as to whether the letter from M/s Fraser & Ross was discussed at a subsequent meeting. 27. The minutes of available meetings reveal a couple of more aspects of relevance. Both minutes of meetings held on 28.03.2002 and 26.12.2001, which were attended by Srinivasan, disclose that the list of loans disbursed in the preceding quarter were placed before the board. The minutes of meeting on 2....
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....fiduciary duty to the Company, the SFIO recommended that proceedings for misfeasance be initiated against them. 30. By relying on Order VI Rule 4 of the CPC and several judgments, it was contended that non-executive nominee directors cannot be made liable especially in the absence of specific allegations against them. Order VI Rule 4 of the CPC is set out below: "4. Particulars to be given where necessary- In all cases in which the party pleading relies on any misrepresentation, fraud, breach of trust, wilful default, or undue influence, and in all other cases in which particulars may be necessary beyond such as are exemplified in the forms aforesaid, particulars (with dates and items if necessary) shall be stated in the pleading." Rule 3 of Order VI prescribes that the forms in appendix A shall be used for all pleadings, including by making requisite changes to conform as closely as possible to the forms in Appendix A. Rule 4 refers to the necessity to go beyond the forms and provide necessary particulars in cases where an assertion/allegation of misrepresentation, fraud, breach of trust, wilful default or undue influence is made. The object and purpose is not far t....
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....alogous agreement relating to the terms and conditions on which CDC/BII made investment in the Company, neither the Official Liquidator nor the respective applicant submitted the same. Given that Srinivasan is currently the Managing Director of BII Asia, he should have been in a position to file the same. Typically, such agreement would specify the quantum of investment and the corporate actions requiring the consent of the investing company. It would also more broadly indicate the extent of control exercised by the investing company in the affairs of the investee company. In other words, if such control existed in respect of key decisions, the responsibility of the investee company and, by extension, its nominee, for decisions made by the investing company would be greater. In the absence of relevant material, it is not possible to make an assessment on this issue at this juncture. 33. The allegations against the management of the Company are grave. Section 542 of CA 1956 is intended to enable the Court to declare that persons who were knowingly parties to the carrying on of the business of the company with intent to defraud the creditors of the company or any other persons or ....
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....is mentioned in sub-section (1), every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to [fifty] thousand rupees, or with both. (4) This section shall apply, notwithstanding that the person concerned may be criminally liable in respect of the matters on the ground of which the declaration is to be made." Sub-section (1) extends liability to 'any persons who were knowingly parties to the carrying on of the business'. If the intention were to confine liability only to persons who were in management of the company, the relevant phrase would have been framed as 'any persons who were knowingly carrying on the business'. Instead, the expression 'knowingly parties to the carrying on of the business' is used and this phraseology, in my view, expands the scope of subsection (1) to take within its fold all persons who were parties to the carrying on of the business of the company with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, even if such persons were....
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.... financial irregularity was committed. As directors, they would fall within the scope of persons carrying on the business of the company concerned. While it may be legitimate to exempt non-executive directors, including nominee directors, from liability after detailed assessment of the facts and circumstances, it cannot be said as a general rule that non-executive directors, including nominee directors, are not persons carrying on the business of the company while they are directors. Effectively, even if Section 542(1) were not interpreted as embracing persons who are not a part of the management, the respective applicant would fall within the scope thereof. Because a large number of judgments were cited, it is profitable to examine a few of them before drawing conclusions. 37. The two applicants relied on a large number of cases. Most of these cases were final disposals of misfeasance applications. It is sufficient to discuss a few of them. In Raghava Desikachar, the Supreme Court held that the burden of proof in a misfeasance application rests on the Official Liquidator and that such burden had not been discharged merely by relying on evidence recorded in course of public exam....
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....uld be tested on ex facie basis. In other words, if the unequivocal conclusion that flows from the material at the preliminary stage is that such person could never be knowingly a party to the carrying on of the business with intent to defraud creditors or any other persons or for any fraudulent purpose, the application for misfeasance would be liable to be rejected at the threshold. In all other cases, the respondent concerned would have to await trial. 39. Although no specific allegations were made against the respective applicant either in the SFIO report or the affidavit in support of Comp.A.No.276 of 2024, the general allegation that they participated in board meetings at which material decisions were taken and that they failed to discharge their fiduciary obligation was made. Sub-section (1) of Section 542 expressly provides that the Official Liquidator is entitled to depose personally or call upon witnesses to establish misfeasance. Upon consideration of the material on record at this juncture, including by noticing the incompleteness thereof, I conclude that it is sufficient to warrant a trial but insufficient to draw any conclusions on the role of the respective applica....