Himachal Pradesh High Court
Hypine Carbons Limited vs J.C. Bhatia And Ors. on 13 November, 1998
Equivalent citations: [2001]103COMPCAS422(HP)
Author: R.L. Khurana
Bench: R.L. Khurana
JUDGMENT R.L. Khurana, J.
1. This order will dispose of the petition preferred under Sections 542 and 543 read with Section 541 of the Companies Act, 1956, by the official liquidator of the petitioner-company, Hypine Carbons Limited, claiming the following reliefs :
(a) declaration to the effect that the respondents have been guilty of fraud, misfeasance and/or breach of trust in relation to the company as aforesaid and are jointly and severally liable without any limitation of liability for all the debts of the company amounting to Rs. 12,05,521.85 paise ;
(b) direction to the respondents to contribute jointly and severally to the assets of the company and to pay to the official liquidator of the company the aforesaid amount or all such sums as they may be found liable to contribute to such assets as the court may deem fit together with interest on such sums at the rate of 12 per cent. per annum from December 6, 1973, till the date of payment ;
(c) costs of the present proceedings ; and
(d) such other and further orders as may be deemed just and proper in the facts and in the circumstances of the case.
2. Brief facts.--The petitioner-company was incorporated under the Companies Act, 1956 (hereinafter referred to as "the Act"), as a public limited company in the year 1969 having its registered office at Nalagarh. Ever since its incorporation, the petitioner-company has been incurring losses. As per the balance-sheet for the financial year ending March, 1976, the accumulated losses of the petitioner-company amounted to Rs. 68,59,652. The petitioner-company raised loans from various financial institutions, such as, banks and hire purchase financial corporation for the smooth running of its business. The unsecured loans owed by the company as on April 30, 1976, was to the tune of Rs. 50,18,544, This was in addition to the secured loans raised by the company.
3. The petitioner-company, vide orders dated May 16, 1978, passed in Company Petition No. 1 of 1977 was ordered to be wound up and the official liquidator was appointed who was authorised to take charge of the assets of the company.
4. Respondents Nos. 1 to 18 were the directors of the company. While respondents Nos. 19 and 20, respectively, were the secretary and the chief executive. Respondent No. 1 Shri J.C. Bhatia was the managing director of the company till December 6, 1973. Thereafter, respondent No. 12, Shri Ram Gopal Saraf functioned as director-in-charge-cum-chairman. Respondent No. 16, Shri Kuldip Prakash functioned as managing director of the company till the date of winding up.
5. During the course of proceedings the books of account of the company for the period May 1, 1974, to May 16, 1978, were got audited. Such audit was carried out by K.N. Chandla and Company, chartered accountants, Chandigarh. It was then revealed that the respondents had committed certain acts of misfeasance and breach of trust in relation to the petitioner-company and its creditors.
6. Allegations against respondent No. 1, Shri J.C. Bhatia :
(a) Respondent No. 1, Shri J.C. Bhatia had resigned from the post of managing director of the company on December 6, 1973. He had in his possession the movable properties of the company worth Rs. 15,014 that is, air-conditioner and various other items of fixtures and furniture. He has failed either to hand over those properties or to account therefor in spite of having been repeatedly called upon to do so by the official liquidator ;
(b) As per the books of account, semi-finished stock of activated carbon worth Rs. 3,21,900 stands debited to the account of respondent No. 1, Shri J. C. Bhatia, since May 1, 1973. Such stock has not been accounted for by him ;
(c) A sum of Rs. 7,776 has been debited to the account of respondent No. 1, Shri J.C. Bhatia, towards expenses of foreign tour under the head "loans and advances". This amount also has not been accounted for by him.
7. Allegations against respondents Nos. 2 to 13.--The abovesaid respondents were the directors during the period Shri J.C. Bhatia (respondent No. 1) was the managing director. They allowed the commission of irregularities, acts of misfeasance and misappropriation by respondent No. 1, Shri J.C. Bhatia.
8. Allegations against respondents Nos. 2, 11, 12 and 14 to 20.--Respondents Nos. 2, 11 and 12 continued to be directors of the company even after the resignation by respondent No. 1, Shri J.C. Bhatia. They as well as respondents Nos. 14 to 20, who functioned as directors and officials of the company, did not take any legal steps against respondent No. 1, Shri J.C. Bhatia for the recovery of the amounts found due from him.
9. Allegations against respondent No. 16, Shri Kuldip Prakash.--This respondent became the managing director of the company after the resignation of respondent No. 1, Shri J.C. Bhatia, and he continued to be so till the date of order of winding up of the company. He failed to hand over complete charge of the company to the official liquidator. He on May 1, 1977, had sold "pine-tar naked" worth Rs. 11,657 to Dinesh Carbons Pvt. Ltd., Chandigarh, without prior permission of the official liquidator.
10. Allegations against respondent No. 19, Shri V.K. Gupta.--The branch office of the company at Delhi was being looked after by this respondent. Some furniture belonging to the company was in his possession. He was asked by the official liquidator to hand over such items of furniture. This respondent on April 25, 1977, intimated that the items of furniture belonging to the company and in his possession had been handed over by him to respondent No. 17, Shri Pradeep Gupta. When approached in this behalf by the official liquidator, no reply was given by the said respondent No. 17, Shri Pradeep Gupta.
11. Allegations against respondent No. 18, Shri S.K. Tulshan.--The keys of the branch office at Delhi, as per respondent No. 16, Shri Kuldip Prakash, had been handed over to respondent No. 18, Shri S.K. Tulshan. He was informed by the official liquidator about his visit to Delhi for taking over the goods of the company. This respondent gave in writing to the official liquidator that he was not in possession of any property belonging to the company. The value of the furniture in the branch office at Delhi has been estimated as Rs. 10,000.
12. Allegations against respondent No. 20, Shri B.P. Sinha.--This respondent was the chief executive of the company. He was found to be in possession of one revolving chair and a water cooler worth Rs. 10,000 belonging to the company, which he has failed to account for.
13. In addition to the above, at the time of taking over charge of furniture, etc., from this respondent by the official liquidator, certain items of furniture worth about Rs, 10,000 were found short which have not been accounted for.
14. Allegations against respondents Nos. 16, 17, 19 and 20.--As per the books of account, the following sums were found outstanding from these respondents as under :
Respondent No. Name Amount (Rs. P.) 16 Kuldip Prakash 2,591.41 17 Pradeep Gupta 5,000.00 19 V. K. Gupta 7,328.00 20 B. P. Sinha 10,231.70
15. Such amounts have not been paid back by these respondents in spite of repeated demands by the official liquidator.
16. General allegations against all the respondents.--As per the books of account, various sums as detailed in paragraphs 20 to 23 were outstanding against various officials and debtors of the company. The respondents being the managing directors), directors and officials of the company failed to take necessary legal steps to effect the recoveries of the said amounts.
17. Respondents Nos. 6, 10 and 14 have died. The legal representatives were not brought on record. Therefore, the proceedings against them stand abated.
18. Respondent No. 2, Shri Bhagwati Prasad also has died. His sons, namely, S/Shri Deepak Singhka and Rakesh Singhka were impleaded as respondents Nos. 2(a) and 2(b).
19. The present petition is being resisted and contested only by respond ents Nos. 2{a), 2(b), 8, 9, 12, 15 and 20. They have denied their liability. It has been pleaded that no acts of fraud, misfeasance and/or breach of trust have been committed by them.
20. The official liquidator apart from himself having appeared as his own witness as P.W.-2, has examined P.W.-1, Shri J. P. Bhasin, chartered accountant of K.N. Chandla and Company, Chandigarh.
21. Respondents Nos. 12, 15 and 20 tendered into evidence only documents exhibit D-1 to D-5. No evidence has been led by the other contesting respondents.
22. I have heard learned counsel for the parties and have also gone through the record of the case.
23. Section 541(1) of the Act, which is material for the purpose of the present case, reads :
"Where a company is being wound up, if it is shown that proper books of account were not kept by the company throughout the period of two years immediately preceding the commencement of the winding up, or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter, every officer of the company who is in default shall, unless he shows that he acted honestly and that in the circumstances in which the business of the company was carried on, the default was excusable, be punishable with imprisonment for a term which may extend to one year."
24. Under the aforesaid provisions, before any officer of the company, being wound up, can be held guilty, it has to be shown that such officer(s) had failed to keep proper books of account throughout the period of two years immediately preceding the commencement of the winding up or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter.
25. In the present case, the period of two years immediately preceding the commencement of the winding up, being the shorter period, has to be looked into.
26. The auditor who had audited the accounts of the company, has appeared as P.W.-1. He has merely stated that at the time the books of account were made available to him, the accounts were not complete. There is nothing in his statement to show that such books of account were incomplete throughout for a period of two years immediately preceding the commencement of winding up.
27. The auditor's report dated February 25, 1982 (exhibit P.W.-l/A), also does not state that the books of account were not complete throughout for a period of two years immediately preceding the commencement of winding up. Paragraph 6(ii) of such report is in the following terms :
"Proper books of account as required by law had been kept by the company but they have not been properly maintained to the extent referred to in para 1 above."
28. Paragraph 1 of the report records :
"The company was ordered to be wound up by the order of the High Court of Himachal Pradesh on May 16, 1978. The books of the account of the company were incomplete when charge of the company was taken over by the official liquidator, and we were appointed to complete the books of account up to April 30, 1978, and up to the date of winding up. We have completed the books of account on the basis of the record made available to us and when the information supplied to us by the official liquidator and the various banks and institutions."
29. Apart from the fact that the petitioner has failed to show that the books of account have not been properly maintained during the stipulated period of two years, there are neither averments nor evidence to show as to which of the respondent(s) was responsible for the maintenance of such books of account.
30. Under the circumstances no case under Section 541 of the Act is made out.
31. Section 542(1) of the Act provides :
"If in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud the creditors of the company or any other persons, or for any fraudulent purpose, the court, on the application of the official liquidator, or the liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.
On the hearing of an application under this sub-section, the official liquidator or the liquidator, as the case may be, may himself give evidence or call witnesses."
32. A bare reading of the above provision shows that before a person can be held liable thereunder it must be shown that such person had carried on the business of the company, with intent to defraud the creditors of the company, or any other persons, or for any other fraudulent purpose. For the purpose of this section dishonesty is an essential ingredient of fraudulent trading.
33. In the present case, what to talk of evidence, there are no averments as to carrying on the business of the company by the respondents with any fraudulent intention. The only averments are that the respondents failed to take necessary legal steps against the various debtors for the recovery of the amounts due from them.
34. Mere failure on the part of the respondents to initiate legal steps against the debtors would not bring the case within the ambit of Section 542 of the Act unless it is shown that the respondents had failed to do so with fraudulent intentions to defraud the creditors, or any other person(s), or for any other fraudulent purpose.
35. Therefore, no case even under Section 542 of the Act has been made out against the respondents.
36. Section 543(1) of the Act lays down :
"If in the course of winding up 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, 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), examine 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 to 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."
37. Though it is averred that respondents No. 1, Shri J.C. Bhatia, No. 16, Shri Kuldip Prakash, No. 18, Shri S.K. Tulshan, No. 19, Shri V.K. Gupta and No. 20 Shri B.P. Sinha have misapplied and retained the movable properties consisting of items of furniture, etc., to their own use and had failed to pay the amounts due from them to the company, no evidence in this regard is forthcoming. Neither the relevant record, nor the books of account nor the necessary vouchers in regard thereto has been produced.
38. The entire case of the petitioner rests on the report, exhibit P.W.-1/A of the auditor. Such report does not make out a case against the respondents under Section 543 of the Act.
39. Even if it be assumed that certain items of furniture were found short by the official liquidator at the time he took charge of the affairs of the company, in the absence of specific evidence to show that a particular item was in the possession and control of a particular respondent, he cannot be fastened with the liability. The best available evidence has not been produced. As such a case even under Section 543 of the Act has not been made out.
40. Resultantly, there being no merit in the present petition, the same is dismissed. No order as to costs.