Karnataka High Court
Official Liquidator Of vs Sri. Avinash Subramanyam on 28 September, 2022
Author: S.R.Krishna Kumar
Bench: S.R.Krishna Kumar
1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 28TH DAY OF SEPTEMBER, 2022
BEFORE
THE HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR
COMPANY APPLICATION NO. 205 OF 2004
IN
COMPANY PETITION NO. 85 OF 1998
BETWEEN:
OFFICIAL LIQUIDATOR OF
M/S. SHIMBU IMPORTS & EXPORTS
PRIVATE LIMITED
HIGH COURT OF KARNATAKA
IV FLOOR, D AND F WING
KENDRIYASADAN, KORAMANGALA
BENGALURU - 34.
... APPLICANT
(BY SMT. REVATHI ADINATH MARDE., ADVOCATE)
AND
1. SRI. AVINASH SUBRAMANYAM
NO.159, 1ST CROSS, 13TH MAIN
ACICOBOONAGAR, BANK COLONY
BTM II STAGE, BENGALURU - 560 078.
2. SMT. VANI SHARMA
NO.37, 36TH CROSS, EAST END MAIN ROAD
JAYANAGAR, 9TH BLOCK EAST
BENGALURU - 560 069.
... RESPONDENTS
(BY SRI. ADHITHYA SONDHI, SENIOR ADVOCAE
SRI. NAGENDRA KUMAR.K., FOR R-1)
THIS C..A IS FILED UNDER SECTION 543 OF THE
COMPANIES ACT 1956, R/W RULE 260 OF THE COMPANIES
(COURT) RULES, 1959 PRAYING TO SUMMON THE RESPONDENTS
2
1 TO 2 FOR THE PURPOSE OF EXAMINATION WITH REGARD TO
THE MATTER SPECIFIED THEREIN AND ETC.
THIS COMPANY APPLICATION COMING ON FOR ORDERS
THIS DAY, THE COURT MADE THE FOLLOWING:
ORDER
This Company Application by the Official Liquidator (for short "OL") on behalf of the company in liquidation i.e., M/s. Shimbu Imports and Exports Private Limited is filed under Section 543 of the Companies Act, 1956 r/w. Rule 260 of the Companies (Court) Rules, 1959 seeking summoning of respondent Nos.1 and 2 for the purpose of examination and for direction to them to pay certain amounts, costs etc., to the Official Liquidator and for other reliefs.
2. In the application, it is contended that the aforesaid Company was directed to be wound up vide Order dated 19.03.1999 passed by this Court in Company Petition No.85/1998, on which date the respondents were the Directors of the Company. On 17.11.1999, the Official Liquidator filed a criminal complaint against the petitioner and an application in C.A.No.1186/1999 against the respondents 3 for non-filing of the Statement of Affairs, pursuant to which this Court the OL engaged the services of Chartered Accountants, who have been conducting investigation, which is in progress and since the prescribed period of limitation of five years to file an application under Section 543 of the Companies Act was due to expire, applicant/OL filed the instant application alleging misfeasance by the respondents and for appropriate reliefs in this regard.
3. The respondents have filed their Statement of Objections inter alia contending that apart from the fact that the application was barred by limitation and also not maintainable in law, there has not been any misfeasance committed by the respondents and that the various allegations and claims made by the applicant/OL were absolutely false and the same have been denied by the respondents. In addition to controverting and denying the allegations and claims made in the application, the various facts, circumstances and documents in support of their defence 4 have been pleaded and produced by the respondents, who sought for dismissal of the petition.
4. Heard learned counsel for the Official Liquidator and Dr. Adithya Sondhi, learned Senior counsel for the respondents and perused the material on record.
5. The material on record discloses that on behalf of the applicant-OL, one Ramamurthy N., who is working in the Office of the OL since 2004 has been examined as PW.1 and documentary evidence at Ex.P-1 has been marked and he has been cross-examined by the respondents.
6. On behalf of the respondents, respondent No.1 has been examined as RW.1 and cross-examined by the applicant-OL.
7. Before adverting to the rival contentions, it is necessary to state that it is well settled that the burden of proving misfeasance, which is a serious charge of misconduct or misappropriation or breach of trust rests heavily upon the 5 applicant-OL, who has to discharge the said burden by adducing and placing legal and acceptable pleadings and evidence in support of the said charge. In the case of the Official Liquidator Vs. Raghawa Desikachar and others - (1974) 2 SCC 741, the Apex Court held as under:
"7. The above proceedings clearly show that no opportunity was given to Respondents 1 to 4 because proceedings of January 12, 1958 show that as soon as written statement was filed on December 30, 1957 the District Judge fixed the case for argument. The proceedings of July 7, 1958 further show that Mr Amin had brought to the notice of the Official Liquidator that he should be supplied with materials on which the Official Liquidator would rely for the alleged malfeasance on the part of his clients, but no materials were furnished by the Official Liquidator. Accordingly on the second hearing after the aforesaid application, a petition for submitting fresh evidence and for cross-examining Respondent 5 was made but it was rejected. The show cause notice was given by the Official Liquidator on the basis of the public examination of Respondents 1 to 4. It is only in answer to the show cause notice that Respondents 1 to 4 could lead evidence and cross-examine Respondent 5. It may be mentioned that misfeasance 6 action against the Directors is a serious charge. It is a charge of misconduct or misappropriation or breach of trust. For this reason 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. The burden of proving misfeasance or non-feasance rests on the Official Liquidator. The Official Liquidator, it may be mentioned, merely relied upon the evidence recorded in public examination of the Directors and on a few documents tendered in evidence. At the stage of public examination there was no charge of misfeasance against the Directors and they were not in a position to know what would be the grounds that would be alleged against them for recovering any amounts, for the loss said to have been caused to the Company by reason of such misfeasance. The application made by the Official Liquidator did not give sufficient particulars which, in our view, it should have. Once a show cause notice was given to Respondents 1 to 4 the Official Liquidator did not lead any evidence nor rely upon any other documents, nor did Respondent 5 who was instrumental in initiating the misfeasance case against Respondents 1 to 4 lead any evidence. In our view, there was no justification whatsoever for the District Court to reject the evidence which the respondents had intended to lead or to disallow the production of 7 documents other than those already produced, and for that reason the High Court rightly ordered that additional evidence be recorded in this case."
8. In the case of Official Liquidator Vs. K. Venkatachalam and others - C.A.No.752/2007 dated 21.01.2013, a Co-ordinate Bench of this Court held as under:
"13. Charges made in the application are neither specific nor clear cut against each of the respondents but are vague and general and it is against all the respondents collectively in their capacity as ex- directors. Charges made should be clear and specific and not vague and general. Until and unless acts of each of the director is established, this Court would not be justified in holding the acts of misfeasance against the ex-directors. There is no specific charge against any individual director. Allegations of negligence have been made enmass against ex- directors and official liquidator cannot proceed against the ex-directors for misfeasance or breach of trust resulting in the alleged loss caused to the company. From the pleadings, it is clear that allegations made against ex-directors are enmass and on this ground alone application is liable to be dismissed. Hence, contention raised by the official liquidator in the application cannot be accepted."8
9. So also the Gujarath High Court in the case of Official Liquidator Vs. Kavasji Tehmures Modi - MANU/GJ/0469/2002 held as under:
"9. Mr. Percy Kavina, learned advocate appearing for respondent No. 5 has submitted that the present application is filed against the ex-directors without any application of mind. No specific allegation is made against any of the directors. The allegation was made against the ex-director, namely Sudhir V. Jadav who expired and hence he was not rightly impleaded as a respondent in the present application. Except this, none of the present respondents' names is mentioned either in the Chartered Accountant's report or in the present application. The allegations made are absolutely vague and no documentary evidence or proof are produced showing the involvement of the respondents. He has further submitted that the provisions of Section 58A as well as 205A of the Act were brought under a statute book with effect from 1st February, 1975 and the alleged violation of the said provisions were prior to this date and hence the respondents cannot be held to be liable for committing any breach of these provisions which were brought under the Statute book with effect from 1st February, 1975. Neither the Chartered Accountant nor the Official Liquidator has kept this issue in mind while 9 giving their report and/or filing the present application before this Court. He has further relied on the decisions of this Court in the case of O.L, of Aryodaya Ginning & Mfg. Mills Ltd. v. Gulabchand Chandalia in Company Application No. 261 of 1994 in Company Petition No. 157 of 1986, delivered on 7th February, 2002 and in the case of O.L. of Dhavatgiri Paper Mills Pvt. Ltd. v. Chinubhai Khilachand in Company Application No. 266 of 1989 in Company Petition No. 35 of 1982, delivered on 22nd April, 2002. Based on these two decisions as well as keeping settled legal position in mind, which is also discussed at length in these two decisions, Mr. Kavinahas submitted that there is no merits or substance in the present application and hence it is required to be rejected.
10. I have heard at length the learned advocates appearing for the respective parties and I have also gone through the report of the Chartered Accountant as well as the application and the affidavit-in-reply. I have also considered the authorities cited before me. Before dealing with the rival submissions of the parties, it would be just and proper to have a glance at the provisions contained in Section 543(1) of the Act, which reads as under:
"543. Power of Court to assess damages against delinquent directors, etc.--(1) If in the course of winding up a company, it appears 10 that any person who has taken part in the promotion or formation of the company, or any past or present director, manager, liquidator or officer of the company-
(a) has misapplied, or retained, or become liable or accountable for, any money or property of the company; or
(b) 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, or the liquidator, or of any creditor or contributory, made within the time specified in that behalf in Sub-section (2), examined into the conduct of the person, director, manager, liquidator or officer aforesaid, and compel him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Court thinks just or to contribute such sum lo the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the Court thinks just."
11. A bare reading of the above provisions makes it amply clear that proceedings under this section are of civil nature and the liability, which is enforced therein, is a liability in the nature of a tort or a quasi- 11 criminal responsibility. It is basically grounded on the principle that a person, who has caused loss to the Company by an act which would amount to a breach of trust, should make good the loss. The section provides a summary remedy to determine the amount payable by such director. It is also contemplated in this section that the charges levelled against the delinquent directors should be specific and not of vague and general nature. When any application is filed by invoking these provisions, such application should contain a detailed narration of the specific acts of commission and omission on the part of the delinquent director. The Courts have consistently taken the view that proceedings under this section are not maintainable when there is no specific charge with regard to misfeasance or breach of trust etc., duly coupled with concrete proof and/or documentary evidence. The Court is very slow or rather restrains itself from making an order against the directors en masse for all acts of misfeasance etc., without any specific finding as to which director is actually responsible for particular act of misfeasance. When no specific or particular allegation was made in regard to each and every officer so as to make him responsible for repaying or restoring the money or property of the company and individual responsibility was not identified and established, it would be difficult for the Court to grant an appropriate relief in the 12 matter. The Courts have also taken the view that in order to enable the Court to examine the conduct of a particular director or officer and to make him personally liable for misfeasance or misconduct, there should be proper pleadings and specific evidence as regards the acts complained of.
12. While dealing with the provisions contained in Section 235 of the Companies Act, 1913, which is analogous to the present Section 543 of the Act, the Hon'ble Supreme Court in the case of P.K. Nadungadi v. Malayalee Bank Ltd. (In liquidation) AIR 1971 SC 829 has observed as under:--
"Under Section 235 of the Indian Companies Act, 1913 which was in force at the material time the Court has been given the power to assess damages against the delinquent Directors, etc. If the money or the property of the Company has been misapplied or there has been misfeasance or breach of trust in relation to the company by a Director, an officer or other persons mentioned in the section the Court, after examining the matter, can compel him to repay or restore the property with interest at such rate as the Court may think fit or to contribute such sums to the assets of the company by way of compensation in respect of the misapplication, 13 retainer, misfeasance or breach of trust, as the Court thinks fit. It has been expressly declared that the section shall apply notwithstanding that theoffence is one for which the offender may be criminally responsible (p. 831) The Hon'ble Supreme Court had also an occasion to deal with this issue in the case of O.L. v. Raghava Desikachar AIR 1974 SC 2069, and observed as under:--
"..It may be mentioned that misfeasance action against the Directors is a serious charge. It is a charge of misconduct or misappropriation or breach of trust. For this reason 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. The burden of proving misfeasance or nonfeasance rests on the Official Liquidator. The Official liquidator, it may be mentioned, merely relied upon the evidence recorded in public examination of the directors and on a few documents tendered in evidence. At the stage of public examination there was no charge of misfeasance against the Directors and they were not in a position to know what would be the grounds that would be alleged 14 against them for recovering any amounts, for the loss said to have been caused to the company by reason of such misfeasance..." (p. 2073)
13. In Official Liquidator, Supreme Bank Ltd. v. P.A Tendolkar AIR 1973 SC 1104, the Hon'ble Supreme Court has, after a review of English and Indian decisions on the subject, expressed its view on the scope of the section as follows:
"40. It is certainly a question of fact, to be determined upon the evidence in each case, whether a Director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with due diligence, so that he could not be held liable for conniving at fraud and misappropriation which takes place. A Director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of a company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially. If he does so he could be held 15 liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the company due to his neglect even if he is not shown to be guilty of participating in the commission of fraud. It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the Company." (p. 1115)
14. If the above principles laid down by the Hon'ble Supreme Court as well as by this Court and other Courts are applied to the facts of the present case, it is difficult to grant any of the prayers made in the present application. As already observed earlier, there was no allegation either in the Report of the Chartered Accountant or in the application or even there is no submission to that effect before this Court that the Directors have acted dishonestly, in a mala fide manner and have applied the funds of the company for their personal benefits. Not a single act or omission is attributed to any of the Directors in his individual capacity. Except the Report of the Chartered Accountant, no other document is produced before this Court. Even the Chartered Accountant has also made a grievance in his Report that they were handicapped with non-availability of document, complete set of books of account and relevant vouchers. They have, therefore, requested 16 the Official Liquidator that the report be read subject to modification on availability of further information, document, record or explanations from the other persons in management. More than 20 years have gone and yet no further information or documents or records are made available in support of the present application. It appears that the applications are moved to the Court by the Office of the Official Liquidator only with a view to save limitation and without collecting proper details and information in the matter, and as a result thereof the Court is left with no other alternative but to reject the said applications. This Court is also of the view that only with a view to bring the case within the purview of a particular provision, the application is moved but thereafter no effective steps are taken to sustain the said application. As far as the present application is concerned, it is lying pending for the last more than 21 years during which period two of the respondents have expired and one is at present in the hospital. While filing this application and not vigorously pursuing the same, the applicant might not have thought of the mental trauma and agonies which the respondents had to suffer. Even while resorting to the provisions of Section 58A as well as 205A(2) of the Act, the applicant has not cared to see as to whether these provisions are in force at the relevant time or when the alleged act is committed. Even otherwise, the decisions of the 17 Board of Directors to charge interest on sums advanced for installation of machinery, not from the date of advance but from a later date whenever decided to have the machinery installed, to write off certain sums due from employees and also a portion of the sum advanced for supply of the machinery, which decisions seemed to have been taken in the interest of the Company, were not held by the Courts as acts of misfeasance. Even this Court has also observed in the case of O.L. Aryodaya Gng. & Mfg. Co, Ltd. (supra), that the decisions to merely charging less interest or writing off sums due from the employees or to advance sums for supply of machinery, may be decisions which ultimately turn out to the monetary advantage of the company, but it must be shown in the misfeasance proceedings that the company had sustained a loss as a direct consequence of the breach of duty of the directors. The Court is, therefore, of the view that the Official Liquidator has not made out any case to the effect that it is only because of the act or omission on the part of the respondents that the Company has suffered loss, which ultimately led to the winding up of the Company. The applicant has failed to establish the necessary nexus or casual connection between the alleged act of misfeasance and the resultant loss suffered by the Company."18
10. If the material on record is scrutinized bearing in mind the aforesaid principles, it is evident that except for bald and vague pleadings, which have been merely repeated in the evidence, the applicant has failed to adduce legal or acceptable evidence in support of the claim of misfeasance by the respondents charged against them. In fact, PW.1 was working in the Office of the Official Liquidator only since 14.07.2004, much subsequent to the winding up order passed by this Court on 19.03.1999. Further, the evidence of PW.1 not only discloses that he does not have personal knowledge with regard to either the affairs of the company in liquidation of which respondents were directors but his evidence also contains several discrepancies, admissions, contradictions and inconsistencies, which clearly demonstrate that the applicant/OL has failed to establish the charge of misfeasance by the respondents. It is also relevant to state that except producing an affidavit dated 06.04.2022 of one Kumar Ravi, said to be a Chartered Accountant along with an alleged investigation audit report dated 09.03.2004, no effort has been 19 made by the applicant to examine the said Chartered Accountant as a witness nor produce the said report as evidence in support of the application. It is also relevant to state that the evidence of RW.1, respondent No.1 has remained unimpeached, unchallenged and uncontroverted in the cross-examination. Under these circumstances, after having considered the entire material on record, I am of the considered opinion that the applicant/OL has failed to establish the allegation/charge of misfeasance put forth against the respondents.
In the result, I do not find any merit in C.A.No.205/2004 and the same is hereby dismissed.
Sd/-
JUDGE AN