Rajasthan High Court - Jaipur
O L vs Pawan Kumar Lath & Ors on 8 July, 2016
Author: Alok Sharma
Bench: Alok Sharma
IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN
AT JAIPUR BENCH
ORDER
Official Liquidator of M/s. Lath Steels Private Limited (in Liquidation)
Vs. Pawan Kumar Lath & Bimal Kumar Lath
S.B. Company Application No.52/2010
In (S.B. Company Petition No.4/1999)
Date of Order: July 8, 2016.
PRESENT
HON'BLE MR. JUSTICE ALOK SHARMA
Ms. Sonal Singh, for the petitioner.
Mr. Dinesh Bishnoi, for respondents.
BY THE COURT:
The matter has come up on an application under Section 543 of the Companies Act 1956 (hereinafter the Act of 1956).
M/s. Lath Steels Private Limited (in liquidation) incorporated on 25-6-1996 in Rajasthan (Registration certificate No.12246) with its registered office at SP-9-B Khushkhera Industrial Area Alwar was wound up by this Court vide order dated 17-10-2003 in S.B. Company Petition No.4/1999 on a petition filed by M/s. Singhal Credit Management Limited Bhiwadi. Pursuant to the winding up order, the respondents promoter directors of the company in liquidation failed to file statement of affairs of the company as required under Section 454 of the Act of 1956.
Oddly the Official Liquidator took about 5 year from the date of the winding up order to require vide letter dated 14-8-2008 Shri N.C. Jain and Associates, Chartered Accountant to undertake scrutiny of account books and records of the company in liquidation. In his report dated 20-9-2008, the Chartered Accountant found that the ex-directors of the company in liquidation had not filed any balance sheet for the years ending 31-3-1998 to 31-3-2003. Nor was any return filed after 1997 as required under Sections 210, 220 and 159 of the Act of 1956. The Chartered Accountant as per balance sheet of the company in liquidation as of 31-3-1997, found the Company in liquidation to have the fixed assets of Rs.1,90,95,699.70 and current assets of Rs.27,70,972.57. Additionally, the Chartered Accountant also found from the sale precedes with the company in liquidation an amount of Rs.33,68,471/- (cost of raw material Rs.52,18,471/- purchased after 31-3-1997 plus electricity power consumption of Rs.13,70,000/- minus amount paid for raw material Rs.32,20,000/-) for the year 1997-98. It was observed that only fixed assets had come into the possession of the Official Liquidator via the secured creditor Rajasthan Industrial and Investment Corporation Limited (RIICO) which on 25-11-2003, in exercise of its powers took over the mortgaged assets of the Company in liquidation. It was observed that the current assets of Rs.27,70,972.57 and surplus amount of Rs.33,68,471/- aggregating to Rs.61,39,443.57 belonging to company in liquidation were thus wrongly retained by the respondents. Non filing of balance sheet indicated that no books of accounts under Section 209 of the Act of 1956 were maintained. Thereby the respondents committed offence under Section 545 of the Act of 1956.
The Official Liquidator alleged that in the circumstances the respondents both promoter directors are liable for misfeasance, wrongful retention of money and property of company in liquidation, and breach of trust under Section 543 of the Act of 1956. And consequently they be held liable and a direction be issued that the amount of Rs.61,39,443.57 constituted of current assets recorded in the balance sheet as of 31-3-1997 and of surplus amounts of Rs.33,68,471/- in the hands of the directors in terms of the record of the company's turn over in 1997-98 along with interest thereon be recovered from the respondents as compensation.
A preliminary objection has been raised by the respondents in their reply that the Official Liquidator's allegations of loss, misconduct, negligence, breach of trust against the respondents are hypothetical in nature and only on the basis of the report dated 20-9-2008 prepared by the Chartered Accountant. The allegations, contentions or insinuations based on the report have been denied. No specific act of omission or commission having been alleged against the respondents the very maintainability of the application under Section 543 has been questioned. It has been submitted that the applicant Official Liquidator has failed to discharge his initial burden of proof qua the allegations of omission and commission against the respondents and hence the application at his instance is liable to be dismissed. The respondents point out that the respondent company's factory was shut down on 1-10-1998 due to reasons beyond their control. It has been submitted that the entire records relating to the company in liquidation was at the factory premises SP-9-B Khushkhera Industrial Area Alwar, possession of which was taken by RIICO without notice to the respondents. The takeover of the books of accounts was not reflected in the inventory then drawn, which merely recorded the mortgaged assets of concern to RIICO. On 28-12-2005 the respondents requested the Official Liquidator for allowing them to visit the factory premises to obtain the record, but were not allowed to do so. It was submitted that the conclusions in the report of the Chartered Accountant appointed by the Official Liquidator are deductive and merely based on the balance sheet of 31-3-1997 without any requisite enquiry of about the wrong doing or omissions by the respondents, first time entrepreneurs whose tasks of complying with the requisites of the Act of 1956 was defeated by the respondent company's chartered accountant himself being a partner of the petitioner-company in the winding up petition leading to the respondent-company being wound up.
On the basis of pleadings of the parties the following issues were framed:-
1. Whether the respondents though being aware of passing of winding up order dated 17-10-2003 are guilty of not handing over the possession of the record/ books of account to the OL on passing of the order of winding up thereby intentionally stalling the winding up proceedings and causing loss to the company's creditors?
2. Whether the respondents are guilty of removing the current assets, account books and record from the factory premises of the company ?
3. Whether the respondents are guilty of having committed offence under Sections 541 and 543 of the Companies Act, 1956 by not maintaining books of accounts evident from the acts of the respondents in not filing any balance sheet as on 31-3-1998, 31-03-1999, 31-3-2000, 31-3-2001, 31-3-2002, 31-3-2003 and further by not filing Annual returns after the year 1997 as required under Sections 210, 220 and 159 of the Act of 1956 ?
4. Whether the respondents are guilty of causing loss to the company by non submission of statement of affairs/ not providing account books and record of the company whereby no verification could be made with respect to any missing item of fixed asset and further making the recovery of loans and advances made by the company to third parties impossible ?
5. Whether the respondents are guilty of retaining the current assets amounting to Rs.27,70,972.57/- and the surplus amount of Rs.33,68,471/- aggregating to Rs.61,39,443.57/- belonging to the company thereby causing breach of trust and loss to the company.
6. Whether RIICO had taken over the possession of the fixed assets only, not the books of accounts and records of the Company ?
7. Whether the application filed under Section 543 by the O.L. is maintainable in the absence of any specific allegations against the Ex-Directors/respondents ?
The Official Liquidator in the affidavit in evidence reiterated the allegations in the application under Section 543 of the Act of 1956. He was cross examined, wherein he submitted that RIICO vide letters dated 18-2-2006 and 17-4-2006 informed that the record of the company was not at factory premises, when they were taken over on 25-11-2003. He submitted that the chartered accountant prepared the report on the basis of documents available in the office of Registrar of Companies. Mr. N.C. Jain Chartered Accountant was cross examined on his affidavit in evidence filed in support of the application. He admitted that no communication was made with the ex-directors of the company in liquidation to ascertain facts on which he reached on conclusions. He admitted that possession of the factory premises/ registered office SP-9-B Khushkhera Industrial Area Alwar was not taken by RIICO in the presence of the respondent directors. Mr. Jain admitted that neither books of accounts nor any records of company in liquidation were made available to him by the Official Liquidator and that the amounts for which the respondent directors were sought to be made liable for breach of trust and/ or misfeasance was worked out as deduction from records obtained by him from the Registrar of Companies without any positive material in his knowledge to support the allegations.
Mr. Pawan Kumar Lath in his cross examination admitted that he was the promoter managing director of the company in liquidation. He stated that he had taken a term loan from RIICO for which the respondent company's factory, land and building was mortgaged. Default on the payment of the term loan obtained from RIICO being made for reason of bad market conditions, possession of the mortgaged assets was taken by RIICO but without any notice to him or to the Official Liquidator of the company then in liquidation on 25-11-2003. Inventory was not prepared in the circumstances in his presence or in the presence of his nominee. He stated that all statutory records were available at the factory premises. He stated that the statement of affairs was filed on 5th of February, 2015. It was submitted that the dispute with the Chartered Accountant of the company, now in liquidation even prior to the filing of the winding up petition, entailed not filing of statutory returns. In fact the companys Chartered Accountant was effectively the petitioner in the winding up petition. It was stated by Mr. Pawan Kumar Lath that the Chartered Accountant, appointed by the Official Liquidator, prepared the report on the basis of figures available at the time when the company was in business, and not when it went out of business, for reason of which his conclusions as to alleged misfeasance and breach of trust are wholly speculative and based on surmises and conjectures.
Bimal Kumar Lath, the other promoter director of the respondent company has reiterated the defence in his affidavit in evidence. During his cross examination he submitted that the registered office of the company was at SP-9-B Khushkhera Industrial Area Alwar. The production at the factory started on 27-5-1997, but owing to adverse market conditions closed on 1-10-1998. It was stated that the balance sheet and annual return subsequent to 31-3-1997 could not be filed for the reason of disputes with the Chartered Accountant. It was stated that RIICO took over the factory cum registered office situate SP-9-B Khushkhera Industrial Area Alwar on 25-11-2003, where the books of accounts of the company were lodged and had to be so lodged as per law. RIICO however did not record the same in the inventory drawn in the absence of the company's representatives. It was further stated that the books of accounts of the company in liquidation were in the possession of the RIICO following its taking over possession of the factory/ registered office on 25-11-2003. This fact has also been adverted to in para 10 of the report dated 20-9-2008 submitted by the Chartered Accountant. Mr. Bimal Kumar Lath further stated that even otherwise the report dated 20-9-2008 prepared by the Chartered Accountant is on the face of it purely speculative, based on surmises and conjectures and impermissible deductions drawn from the balance sheet of 31-3-1997 without reckoning for the company's business upto 1-10-1998. It was stated that as per Chartered Accountants own admission, in his cross examination, the Official Liquidator had supplied no documents to him and the Chartered Accountant had only relied on partial and stale record obtained from the office of the Registrar of Companies. A roving enquiry has been made with regard to affairs of the company without following the mandate of Section 543 of the Act of 1956 to determine the specific liability on any of the directors of the company with regard to misfeasance, malfeasance or breach of trust. It was stated that in the circumstances, the application under section 543 of the Act of 1956 filed by the official liquidator be dismissed.
Heard. Considered.
Issues No.1 to 4:
As issues No.1 to 4 are interlinked they are being addressed jointly.
From the evidence on record it indeed transpires that subsequent to winding up order dated 27-10-2003 books of accounts of the respondent company were not handed over to the Official Liquidator. The counsel for the Official Liquidator has submitted that it was so done intentionally with the object to stall the winding up proceedings and cause loss to the creditors of the company in liquidation. Counsel for the respondent directors has submitted that the record of the company in liquidation were lodged at the registered office/ factory premises SP-9-B Khushkhera Industrial Area Alwar, which was taken over without notice by RIICO in exercise of its powers under Section 29 of the State Financial Corporation Act, 1951 on 25-11-2003. It is not in dispute that the registered office of the company in liquidation was the factory premises i.e. SP-9-B Khushkhera Industrial Area Alwar, where the books of accounts and other record of the company were to be kept as required by law. In the circumstances it is not incredible, as stated by the respondent directors that the books of accounts of the respondent company were at the registered office of the company. In the circumstances it cannot be discounted altogether that the respondent directors did not have the possession of the books of accounts and other record subsequent to possession being taken over by RIICO on 25-11-2003.
As far as the issue of non filing of statutory returns by the respondent directors qua affairs of the company is concerned, I am of the considered view that this deficiency would be covered under Section 541 of the Act of 1956 and not be a matter of enquiry under Section 543 of the Act of 1956, which is in nature tortuous liability of the directors responsible for misfeasance, malfeasance or breach of trust. Consequently issues 1 to 4 are decided against the official liquidator.
Issue No.5:
From the evidence on record it is apparent that allegation against the respondent directors with regard to retaining current assets of Rs.27,70,972.57 and surplus amount of Rs.33,68,471/- aggregating to Rs.61,39,443.57 are based on the balance sheet of 31-3-1997 without reckoning for working of the company now in liquidation upto 1-10-1998. The Official Liquidator failed to discharge the burden on this count, more particularly with regard to specific action of the two directors. Evidence on record reflects that no enquiry from the respondent directors was made either by the Official Liquidator or the Chartered Accountant appointed by him only deductive inferences from the basis of allegations insufficient for discharge of the burden of proof on the Official Liquidator with reference to this issue are sought to be made. The liability under Section 543 of the Act of 1956 is inter-alia quasi criminal and thus one charged of misfeasance, malfeasance and/ or breach of trust is entitled to all protection and safeguards/ rights as in criminal jurisprudence including the benefit of doubt. Clear cut proof of the allegations made is required and tortuous liability under Section 543 cannot be based on surmises and conjectures alone.
Consequently the issue No.5 is decided against the Official Liquidator.
Issue No.6:
A wholistic reading of the evidence on record with regard to taking over assets of the company in liquidation by RIICO indicates that assets had been taken over by RIICO in absence of the respondent directors or their nominee, and the inventory was also drawn in their absence. Further this fact is also recorded in para No.10 of the report of the Chartered Accountant dated 20-9-2008. Evidence on record indicates that the Official Liquidator has not produced any witness from RIICO to support the contention of taking over possession of the assets of the company in liquidation by RIICO on 25-11-2003 to prove the fact that nothing except the fixed assets was available or found by RIICO at the relevant time. Consequently the issue No.6 is also decided against the Official Liquidator.
Issue No.7:
Section 543 of the Act of 1956 provides that where in the course of winding up of a company, it appears that any person who has taken part in the promotion or formation of the company or any past or present director, managing agent, secretaries or officer of the company had misapplied or retained or become liable or accountable for any money or property of the company or has been guilty of any misfeasance or breach of trust in relation to the company, the Court may, on the application of the Official Liquidator compel him to repay or restore the money or property or any part thereof with interest at the rate deemed fit to the official liquidator representing, the company in winding up. It is thus evident that to fix liability for repayment of any amounts misappropriated, wasted and misapplied or retained belonging to the company it has to be proved before the Court that such misapplication misfeasance or breach of trust obtained at the instance of a director or an officer of the company.
The case of the respondent directors is that no case under Section 543 of the Act of 1956 is made out. Allegations levelled against the respondents are vague, general in nature, not specific about incidences and against individual directorswhich is contrary to the provisions of Section 543 of the Act of 1956. Reliance has been placed on the judgment of the Apex Court in case of Official Liquidator Vs. Raghava Desikachar [(1975)45 Com. Cases 136] wherein it was held in the context of Section 543 of the Act of 1956 proceedings that the application should contain a detailed narration of the specific acts of commission and omission on the part of each director quantifying the loss to the company arising out of such acts or omissions. Reliance has also been placed on the judgment in case of Official Liquidator of Gujarat Vs. Kavasaji Tehmures Modi [2003 (45) SCL 514 Guj.] to contend that the charges should be specific and not of vague and general nature, and when no specific or particular allegation was made in regard to any director/ officer so as to make him responsible for repaying or restoring the money, it would be difficult for the court to grant an appropriate relief in the matter. Reliance was then placed on the judgment in case of Security and Finance Private Limited Vs. B.K. Bedi [1991 (71) Com Cases 101 Delhi] to contend that the court is to examine the conduct of an individual director or officer and to pass an order against him, if such a person is personally found liable for misapplication etc. of the money or property of the company or otherwise guilty of any misfeasance or breach of trust in relation to the company. In the absence of specific allegations and positive evidence, it is not possible or proper for the court to indulge in a fishing or roving enquiry so as to compel the individual director to reimburse and/ or compensate the company. Reliance for the same proposition was also placed on the judgments in case of M/s. Ashoka Auto and General Industries (P) Ltd. Vs. Shri Inder Mohan Puri [2005 (124) Com Cases 422 Delhi].
Mr. Dinesh Bishnoi also relied on the judgment in the case of Official Liquidator Vs. T.J. Swamy [1996 (86) Com Cases 696 AP] wherein the Andhra Pradesh High Court held that unless individual responsibility is identified and established it would be difficult for the court to grant appropriate reliefs on a Section 543 of the Act of 1956 application. It was held that only documents such as audit reports and the balance sheet cannot establish that there was a misfeasance on the part of the respondent-directors. There should be very specific individual and personal misconducts for making out a case under Section in issue. Counsel also relied on the case of Official Liquidator Dhavalgiri Paper Mills (P) Ltd. Vs. Chinubhai Khilachand [2003 (114) Com Cases 277] wherein the Gujarat High Court held that to bring the charge of misfeasance against ex-directors it is necessary that specific acts of commission or omission and/ or negligence on the part of each director should be pointed out and proved establishing that the act of commission or omission or negligence was with the knowledge and intent to cause loss to the company simultaneously resulting in personal gain.
Mr. Dinesh Bishnoi finally referred to the case of Official Liquidator Vs. D.D. Sinha [SB Company Application No.5/1995 decided by the Rajasthan High Court] holding that if any loss is caused to the company all its directors will not automatically became liable, unless the allegation of misfeasance is made and proved against the director indicating his connection with such loss. The allegation of misfeasance and misapplication has to be specifically pleaded with material particulars against each of the directors/ erstwhile directors of the company.
The state of law having been thus detailed, the moot question is whether a case against the respondent directors is made out. The case as laid is based on the report dated 20-9-2008 prepared by the Chartered Accountant. The said report indicates that relies only on documents collected by the Chartered Accountant from the office of the Registrar of Companies. Amongst them is the balance sheet of 31-3-1997 which however does not reckon the companys functioning upto 1-10-1998 during which period its financials are likely to have been altered. Further no specific evidence obtains on record against any of the respondent directors having misappropriated or otherwise wrongly acted to cause loss to the company in liquidation to their corresponding enrichment/ benefit. In fact no allegation of the respondent-directors benefitting personally has been made at all.
The High Court of Karnataka at Bangalore in the case of Official Liquidator of M/s Zenith Power Systems (I) Ltd. Versus Sri K. Venkatachalam & Ors. (C.A. No.752/2007 In C.O.P. No.138/2000), decided on 21-1-2013, had held that an application under Section 543 of the Act of 1956 cannot be made on vague terms and cannot be used as a power to conduct a roving enquiry to ascertain as to whether there was any act of misfeasance, malfeasance or breach of trust on the part of erstwhile directors. The averments in the application should be clear, unambiguous and specific. In the absence thereof, such application would not stand to the test of scrutiny warranted in law and be liable to be dismissed. In fact, Section 543 proceedings are proceedings to quantify loss sustained by the company (in liquidation) on account of acts of misfeasance, malfeasance, breach of trust committed by its ex-directors and others. As such, alleged acts of the respondent-directors or officers of the company in winding up should be clear and specific and should emerge from the application itself duly supported by documentary evidence. Until and unless these ingredients are satisfied from evidence on record and the Court lawfully arrives at the conclusion that the deeds and acts of ex-directors/others were of a nature not expected of a prudent person engaged in business bonafide, liability cannot be laid on the door of the ex-directors or any other to hold them responsible under Section 543 of the Act of 1956.
On consideration of the pleadings and evidence on record and particularly relying on the judgments in case of OL Vs. Raghava Desikachar (supra), OL Vs. Kevasaju Tehmures Modi (supra), Security Finance Private Limited Vs. B.K.Bedi (supra), I am of the considered view that no case of misfeasance, malfeasance or breach of trust is made out against the respondents Pawan Kumar Lath and Bimal Kumar Lath Ex-Directors of the company in liquidation. Consequently issue No.7 is decided in favour of the respondent directors and against the Official Liquidator.
Resultantly, the application under Section 543 of the Companies Act, 1956 stands dismissed accordingly.
(Alok Sharma), J.
arn/ All corrections made in the order have been incorporated in the order being emailed.
Arun Kumar Sharma, Private Secretary.