Karnataka High Court
Official Liquidator, High Court Of ... vs Maganlal Hirachand Shah And Ors. on 28 March, 1980
Equivalent citations: ILR1981KAR64
JUDGMENT Chandrakantaraj Urs, J.
1. In this application by the official liquidator for appropriate action against the respondents undo s. 543 of the Companies Act, respondents 10-A(i), (ii), (iii) and (iv) and 10-B(i), (ii), (iii) and (iv) have questioned the legality of the proceedings against them.
2. It is necessary to state that respondent 10 is a partnership firm represented by two of its partners, "A" and "B", who had died even before the application was filed by the official liquidator under s. 543 of the Companies Act (hereinafter referred to as "the Act"). Respondents 10-A(i), (ii), (iii) and (iv) are the widow and minor children of the decreased partner S. M. Parkhe. Similarly, respondents 10-B(i), (ii), (iii) and (iv) are the widow and minor children and mother, respectively, of the deceased partner A. V. Kavathekar.
3. The allegation by the official liquidator against respondent 10, the partnership-firm, is that the relevant time the partnership firm, M/s. Parkhe Associates were the lessee of the company in liquidation under an agreement dated, July 17, 1964; that the respondent shad managed that affairs of the company in terms of the agreement and in the course of such management the lessee firm caused loss to the extent of Rs. 4,44,534 to the company by selling by selling the product of the company to a favoured buyer at a discount over a period of five years. It is further alleged that the lessee firm favoured in the course of the management, M/s. Ganesh had Company, Poona, who had other connections with the firm by buying raw material for the business of the company in liquidation at a higher rate than what was paid to local buyers for the raw materials. In this behalf, it is claimed by the official liquidator that the company, over a period of eight years, suffered a loss of Rs. 1,85,911.43 and most of it was attributable to the lessee-firm's mismanagement.
4. The respondents-legal representatives of the deceased partners of the lessee-firm have objected to the proceedings against them mainly on two grounds :
(1) firstly, that the lessee-firm was not one of the persons named in section 543 of the Companies Act, not being a director, past or present, manager, liquidator or officer of the company, and (2) secondly, that the legal representatives cannot be proceeded against, under section 543 of the Act, particularly when the deceased partners of the firm had died even before the application under section 543 of the Act was filed in court.
5. In so far as first objection is concerned, learned counsel appearing for the official liquidator pointed out that the pleadings against the lessee firm as to their acts of misfeasance being clear, mere failure to mention that the application is one under s. 542 of the Act as well, as will not, in itself be a sufficient ground to reject the case as against the legal representatives as s. 542 of the Act is wider in its application and includes "any person" who has been responsible for causing loss to be the company in liquidation when such person had participated in the management or business of the company in liquidation.
6. There is some force in this contention. In the pleadings, the acts of misfeasance on the part of the lessee-firm are quite clear though the application is said to be made explicitly under s. 543 of the Act. It will be always open to the applicant-official liquidator to induced the court to treat the application against some the respondent as an application under s. 542 of the Act as long as the requirements of the section are satisfied, in that the participation of a person other that the one mentioned in s. 543 of the Act is not in dispute. Therefore, I have no hesitation hold that though the application so one under s. 543 of the Act, the pleadings permit the court to come to the conclusion that some the respondents were persons who had participated in the management and it is open to the court to hold that such persons were liable under s. 542 of the Act.
7. In the instant case, this is merely academic inasmuch as the legal representatives-respondents cannot be said to be persons who had participated in the management of the company in liquidation at any point of time and, therefore, while in appropriate cases the contention advanced for the official liquidator would readily be accepted by court, in the instant case it cannot be so.
8. This takes us to the next question as to whether legal representatives of a company's director or other persons named in s. 543 of the Act or the legal representatives of persons covered under s. 542 of the act can be proceeded against for misfeasance.
9. Sri B. V. Krishnaswamy Rao, learned counsel appearing for the legal representatives-respondents, has strenuously contended that both under ss. 542 and 543 of the Act, legal representatives cannot be proceeded against at all and more so, when the concerned director or person, participating in the management of the company, had died even before he had in opportunity of meeting the case of misfeasance against him. In support of his proposition he has depended on a catena of decisions of the High Courts of India before and after the partition. He has also placed reliance on certain observations and rulings for of the Supreme Court in case of Official Liquidator, Supreme Bank Ltd. v. P. A. Tendolkar [1973] 43 Comp Cas 382.
10. Normally, the question raised in this petition could have been disposed of with reference to the aforementioned decision of the Supreme Court. Unfortunately, the said decision appears to have been understood any a Divisions Bench of the High Court of Punjab and Haryana in a particular manner favouring the stand taken by the official liquidator in these proceedings while the Division Benches of the Calcutta High Court and the High court of Kerala have taken the opposite view, placing reliance on the same decision of the Supreme Court in Tendolkar's case [1973] 43 Comp Cas 382. Therefore, it has become necessary to refer to some of the decision of the High Court and also to the decision of the Supreme Court in Tendolkar's case in deciding the question.
11. It is useful to mention that Tendolkar's case was a case which went up from this court to the Supreme Court. In that case, after the application was filed under s. 543 of the Act and before any declaration was made by the court, some of the directors in the company died and, therefore, a point for determination was formulated by Narayana Pai J., as he then was, in the following terms ([1964] 34 Comp Cas 34, 54) :
"Whether the official liquidator has any right of recourse against the legal representatives of the deceased-respondents ?"
12. Placing reliance upon the decision of the English court in the case of In re East of England Bank : Feltom's Executors case [1865] Eq. Cases 219, which had been followed by Indian High Courts in a numbers of cases, the held that the proceedings under s. 543 could not be contained against the legal representatives. But, it is equally useful to bear in mind that Tendolkar's case [1973] 43 Comp Cos 382 went up to the Supreme Court on account of the fact that Tendolkar died after a declaration had been made against him by this High Court and the question of rights and liabilities of legal representatives arose before the Supreme Court because the legal representatives of Tendolkar wanted to prosecute the appeal against the judgment of this court and the official liquidator also wanted which had been declared to be the liability to be discharged by Tendolkar.
13. A Division Bench of the Madras High Court, in the case of the Peerdan Juharmal Bank Ltd., In re [1958] 28 Comp Cas 546; AIR 1958 Mad 583 has held thus :
"The proceedings taken under s. 235 against a director of a banking company, ordered to be wound up, cannot be continued after the death, and the liability, if any, of such a director cannot be enforced again his legal representatives in those proceedings. It is the language of s. 235 of the Act that decides the issue. It is a limited right that is conferred by the section. It ends when the director dies and does not survive after his death."
14. In doing so, the Bench relied upon a number of English cases as well as the decision of other High Courts, notably the decision of the Bombay High Court reported in Manilal Brijlal v. Vandravandas C. Jadav [1944] 14 Comp Cas 147; AIR 1944 Bom 193, S. B. Billimoria, Offl. Liq. v. Cecilla Mary De Souza, AIR 1926 Lah 624 and Mufassil Bank Ltd. v. Jugal Kishore [1938] 8 Comp Cas 300; AIR 1939 All 1.
15. In Tendolkar's case [1973] 43 Comp Cas 382 (SC) Beg J., as he then was, spading for the court, after reviewing all the English and Indian decisions on the question, in para. 28 (as ) observed as under :
"The decisions of our High Courts, while keeping in view the consideration that a misfeasance proceeding, contemplated by section 235 of the Act of 1913, involving an inquiry into the personal conduct of person acting in capacities menaced therein may attract the application of the maxim 'actio personalis moritur cum persona' have proceeded, very rightly, more on an interpretation of the provisions of section 235 than on the application of that maxim."
16. In other words, s. 235 of the Companies Act, 1913, which corresponds to s. 543 of the Act was interpreted not with reference to the maxim action personnels mortar can cum persona nut on the language of that section. If this is the view expressed any Beg. J., I have no doubt that the Supreme Court approved the construction put on scope of s. 235 of the old Companies Act or 1913 with reference to the legal representatives. This becomes more clear, when it is to be noticed in the following paragraph, the learned judge has stated :
"Whatever view one may take of the justice of the principle, it was clear that it would not be applicable to actions based on contract or where a tortfeasor's estate had benefited from a wrong done."
17. The above observation goes to prove that if an action against legal representatives can at all be taken, the first thing that is not to be proved is that there has been benefit to the estate of the deceased director or other person as a consequence of the misfeasance alleged against him, before the legal representatives can be held liable at all. Unfortunately, this part of the judgment has not been noticed by the Division of the High Court of Punjab and Haryana.
18. In Parthasarathi Sinha v. Official Liquidator, Ballygunge Real Property and Building Society Ltd. (In Liquidation) [1976] 46 Comp Cas 555 (Cal), the learned judges, writing separate but concurring judgment, held that in Tendolkar case [1973] 43 Comp Cas 382 (SC), where a declaration had bed made against Tendolkar it was not followed against the estate in the hands of the legal representatives and, therefore, in cases where no declaration had been made as in the case with which they were concerned, they had no hesitation to come to the conclusion that misfeasance proceedings could not be continued against the legal representatives.
19. After the Calcutta decision above mentioned was rendered, in the case of Shiwalik Transport Co. Ltd. (In liquidation) v. Thakur Ajit Singh [1978] 48 Comp Cas 465, a Division Bench of the Punjab and Haryana High Court expressly disagreed with the ruling of the Calcutta High Court. Chinnappa Reddy J., as he then was in that High Court, relying upon para. 33 of the Judgment in Tendolkar's case (as ), held that proceedings under s. 543 of the Act could be continued against the legal representatives of the deceased director against whom it was initiated.
20. A Division Bench of the Kerala High Court in the case of Smt. Joselin v. Official Liquidator, Alwaye Chit Funds (P.) Ltd. [1979] 49 Comp Cas 170, held that the three directors therein had died at an early stage of the proceedings before the company court and none were examined in the misfeasance proceedings nor had they opportunity to defend prior to their death and on that account it would not be just, fair or equitable to continue the nuisance proceedings against the appellants who were the legal representatives of the three directors. Balakrishna Eradi J., as he then was, speaking for the Bench, essentially placed reliance on paras. 28, 29 and 30 of the Supreme Court's decision in Tendolkar's case (as ) and arrived at the conclusion which the Bench did in the Kerala High Court.
21. It is unnecessary to go into the reasons why misfeasance proceedings cannot be continued against the legal representative of a deceased director particularly in cases where no declaration against the director has been made by the court in which the proceedings have been initiated, for the obvious reason that the language of S. 543 of the Act or s. 542 of the Act clearly indicates that what is impeachable under those sections is the personal conduct of the director or other person who had been responsible for causing loss to the company in the course of participating in the business and management of the company. This personal conduct can only be defended by such person with the facts and knowledge that he possesses and it cannot be defended by others who are ignorant of anything that the deceased director might or might not have done in the course of such management and business of the company. Therefore, legal representatives can never be stated to be in a position to defend, no matter how detailed or elaborate the pleadings of misfeasance on the part of a director or other person may be, in proceedings under ss. 542 or 543 of the Act. They will be placed in a very difficult position if they are exposed to defend the action of somebody about which they might not have knowledge at all.
22. As pointed out by me earlier and also as understood by the Division Bench of the Kerala High Court, the decision in Tendolkar's case [1973] 43 Comp Cas 382 (SC) clearly pointed towards the approval of the Supreme Court of the construction placed by several High Courts on s. 235 of the Indian Companies Act, 1913, corresponding to s. 543 of the Act, more on its language than by extension of principle available to cases in tort. With the utmost respect, I must point out that the reliance placed by the Division Bench of the Punjab and Haryana High Court on certain observations in Tendolkar's case, in para. 33 of the decision as was taken out of context failing to notice the preceding paragraph. This can only become clear if that portion of para. 33 which is as follows (p. 398 of 43 Comp Cas) :
"It may be possible (though we need express no final opinion on the matter) where a proceeding under section 543 is covered also by the terms of section 542 of the Companies Act of 1956, to give directions to persons other than those whose conduct is inquired into, including directions to heirs and legal representatives, for the purpose of enforcing a declaration. Bet we think that the power under section 235 of the Act of 1913, which corresponds to section 543 of the Act of 1956, would not extend beyond making a declaration against a deceased director provided he, in his lifetime or his beers after his death, have had due opportunity of putting forward the case on behalf of the allegedly delinquent director. If either a liquidator or the heirs of a delinquent director, against whom a declaration of liability has been made, can question the determination of liability of the deceased delinquent, who was alive at the time of the judgment against him, it is obvious that the appellate court could give a declaration either reducing or increasing the liability even though it may not be able to enforce it by an order under section 235 of the Act. If the declaration can be questions by an appeal, as we think that it can the liability can be not only, wiped off or reduced but also increased on an appeal heard after the death of a director held liable."
23. is analysed carefully.
24. The first sentence which is not an expression of final opinion is indicative that there my be cases where it is possible for the court to give directions to heirs and legal representatives for the purpose of enforcing a declaration. The following sentence also speaks in somewhat similar terms, but emphasis sold be on the language used regarding due opportunity of putting forward the case on account of the alleged acts of the director, either by the director himself before his death or his heirs thereafter.
25. When it is clear from the facts of the case on hand that the respondents legal representatives are widows, mother and minor children of the deceased partners of the firm, to continue them as respondents in these proceedings would not be giving them due opportunity to defend the action of their respective deceased parents. Even para. 33(AIR 1973 SC) of Tendolkar's case [1973] 43 Comp Cas 382, 397, 398 (SC) even if understood very liberally, it cannot be said that it is the final expression of the view of the Supreme Court. That is made amply clear by the Supreme Court itself. I am more persuaded by the approval of the Supreme Courts of the construction put by the High Courts in India on the language of s. 543 which renders proceedings against legal representatives not maintainable.
26. In the result, the objections on behalf of respondents Nos. 10-A(i), (ii), (iii) and (iv) and 10-B(i), (ii), (iii) and (iv) are sustained.
27. The official liquidator cannot maintain proceedings either under s. 542 or s. 543 of the Act against the said respondents-legal representatives. Therefore, those respondents will be deleted and the proceedings against others who are not already deleted will continue.
28. Respondents-legal representatives will bear their own costs.