Bombay High Court
Official Liquidator vs Dhirajlal V. Modi on 1 January, 1800
Equivalent citations: (1956)58BOMLR903, [1956]26COMPCAS468(BOM)
JUDGMENT Coyajee, J.
1. This is a summons taken out by the applicant the official liquidator calling upon the respondent to reimburse the company in liquidation by paying certain amounts that have come into his hands from the company. The application is made under the Indian Companies Act, section 235. The question has been argued at some length, because it is a question of some importance whether the liquidator is entitled to proceed under this section for a claim as set out in the affidavit in support.
2. The affidavit in support states that at all relevant times the respondent was a director of the company and was solely looking after the management of the company. Substantially that averment has not been denied and the respondent in his affidavit says that he was appointed the manager of the company by Chhaturam and Sons at a salary of Rs. 1,000 a month and allowances and he began to supervise under the directors of the managing agents. He was appointed a director of the company on February 12, 1951, according to his own affidavit and continued to act as the manager of the company and drew from the company certain sums for expenses incurred by him on behalf of the company for travelling and other charges. According to the liquidator's affidavit in paragraph 6 the respondents took a sum of Rs. 17,350 in 1951 and paid back Rs. 6,000 leaving in that year 1952 according to the liquidator the company is entitled to recover from the respondent a sum of Rs. 32,943. The respondent in his affidavit says that he had not at any time in his hands any moneys belonging to the company. He disputes the items as debited to his account.
3. Before considering this preliminary question I may state two points, one is that in the letters of demand addressed by the liquidator's solicitors the claim is described as loans made by the company. Much has been made of this, but it is clear on the reading of the affidavit in support and exhibit "A", namely the account of the respondent in the books of the company annexed to the affidavit that these are withdrawals made under certain heads by the respondent and certain repayments made. Therefore, there is no question of any loan being made to the respondent in his personal capacity. These moneys were drawn by him and given to him as manager or director of the company.
4. In approaching this question whether I should entertain this application it has been strenuously argued on behalf of the respondent that this application clearly does not fall within the ambit of section 235 of the Indian Companies Act. The section in question has been referred to as prescribing a summary method in which the liquidator can obtain moneys or assets in the hands of parties indicated in this section. I may say that the word "summary" is not a very apt description of the provisions of this section. It is only summary in the sense that instead of proceeding by a regular suit on the common law side or proceeding under the Indian Companies Act by issuing a summons of misfeasance the liquidator proceeds to apply to the Judge dealing with company matters for action against any of the parties set out in this section on proper affidavits. Therefore, it is a question of procedure namely whether on a proceeding of this kind section 235 is the proper proceeding or whether the liquidator should be referred to a regular suit. Section 235 does not enlarge the rights of the liquidator nor does it enlarge the liabilities of the parties indicated therein except in regard to limitation. Therefore, the question that falls to be answered is whether this section which is in a sense a mater of procedure should be adopted in cases like the one before me. The only advantage, as far as I can see, that the liquidator gets is that the proceeding is not shunted to the long cause list where it may lie for three years holding up liquidation and apart from that there is no advantage that the liquidator may gain because even on affidavits which would be treated as pleadings proper issues would be raised and evidence if necessary recorded before the Judge comes to conclusion as regards the establishment of the claim of the liquidator. The only disadvantage which has been indicated to me as far as the respondent is concerned is that if there is any counter-claim and set-off that could not be established in this proceeding. The counter-claim that should be simultaneously heard and disposed of so that instead of there being two separate litigations there will be one. That to my mind is only a device prescribed by law for the purpose of expeditious despatch of simultaneous claims and no party has the inherent right to say that he has a claim which would be described as a counter-claim, nor can an officer of the company claim a set-off against assets of the company wrongfully in his hands. Therefore, in my opinion, there is no substance in this particular point raised on behalf of the respondent.
5. It has been very strenuously argued by Mr. Mistree that the terms of the section itself are such that the claim of the liquidator does not fall thereunder. Section 235 says that where in the course of winding up a company it appears that any person who has taken part in the formation or promotion of the company or any past or present director, manager or liquidator or any officer of the company has misapplied or retained or become liable or accountable for any money or property of the company or been guilty of any misfeasance or breach of trust, the court may on the application of the liquidator examine into the conduct of the promoter, director, manager, liquidator or officer and thereafter make a proper order. Mr. Mistree has very strenuously argued that the wording is such namely that the defaulting party has retained or become liable etc. indicate that the defaulting party has retained or become liable etc. indicate that on the face of the affidavit in support the court would be in position first to come to the conclusion that there has been such a default, and if so, then only the section would apply. To my mind that construction of the section militates against first principles. First of all the court before coming to a conclusion is entitled under this section to examine into the conduct of the party and then come to a conclusion. It indicates that issues may be framed and evidence recorded. Therefore to argue that the liquidator must on the face of the affidavit conclusively prove his case is to my mind a misreading of the section as it stands. The object of the section is obvious and as indicated in Buckley the jurisdiction under this section is essentially discretionary. The section as indicated in the commentary does not create new rights and it is a correct statement to say that this section is a procedural section only and it merely provides a summary method for enforcing such liabilities as might have been enforced by the company itself or by its liquidator by means of an ordinary action including new rights created by the winding up. The only limitation that is put upon such a section is that there is no jurisdiction under this section to set aside a contract entered into between the company and a director or promoter, and if there is such jurisdiction, it is one which will not ordinarily be exercised. The object of the section clearly is to expeditiously obtain and get in and collect any assets of the company that may be in the hands of the officers of the company that may be in the hands of the officers of the company without a protracted litigation. Section 185 only refers to an interim custody of the assets of the company and that section although referred to in arguments, to my mind, has no connection or bearing on section 235 which expressly prescribes a particular mode of obtaining relief by the liquidator without resort to a regular action. Mr. Mistree has referred me to a recent decision on this question, but before I go to that I may say that Mr. Desai referred me to the case, In re Mercantile Trading Company called Stringer's case. The observations there made by Lord Justice SELWYN are of great importance. Until that judgment was delivered the line of decisions learned more towards not applying such a summary procedure than in its favour. After reviewing the decisions Lord Justice SELWYN observed as follows (at pages 584-6):
"Under these circumstances it appears to me that we should be doing something which is entirely inconsistent with the provisions of the Act of Parliament, so general as they are, if we were to introduce any such qualifications as that said to have been laid down by the Master of the Rolls in the case of the Royal Hotel Company of Great Yarmouth......Otherwise, having regard to what I have always understood to be his own opinion upon this subject, and to his own decision in the case........of Cardiff Preserved Coal and Coke Company v. Norton, I could not help thinking that there must be some error in that report......I feel bound to say that I do not think there is to be found, either in the words of the present Act of Parliament or in the conclusion which is justify to be drawn from the decisions upon this subject, any such qualification or limitation.........if we were so to hold in all these case we should be inducing the person against whom the charge is made to endeavour to make out that there was some question to be tried, or that the matter was not so plain or straightforward as it was represented to be; and there are very few case indeed in which some such attempts as that might not be made with some reasonable hope of success. The result would be to occasion the necessity for a double mode of proceeding and unnecessary expense and delay."
6. I am quoting this because this is a complete answer to the arguments advanced by Mr. Mistree, namely, that immediately a defence is shown in the form that this was a loan or any other defence than section 235 would be completely ruled out. As pointed out by Lord Justice SELWYN, there would be very few cases in which such a defence could not be foreshadowed and the effect of that would be to wipe out section 235 from the statute book. However apart from that defence Mr. Mistree referred me to a recent decision namely Etic, In re. It was held in that case that the operation of section 215 of the English Act was not applicable to all cases in which a company had a right of action against an officer of the company but was limited to cases where there had been something in the nature of a breach of duty by an officer of the company as such which had caused pecuniary loss to the company and no order was made on the application in that case. Mr. Justice MAUGHAM reviewed all the authorities and came to the conclusion that there are cases where the section in the discretion of the court should not be made applicable. He quoted LORD MACNAGHTEN as follows (page 874):
"165th section of the Act of 1862 has often come under discussion, and it has been settled, and I think rightly settled, that that section creates no new offence, and that it gives no new rights, but only provides a summary and efficient remedy in respect of rights which apart from that section might have been vindicated either at law or in equity. It has also been settled that the misfeasance spoken of in that section is not misfeasance in the abstract, but misfeasance in the nature of a breach of trust resulting in a loss to the company. Apparently it has not been judicially determined that the applicant is bound to show that he is interested in the result of the application, but I think it must be so. I cannot think that Parliament intended that a person who happens to come under the description of a creditor or a contributory may take upon himself the functions of a public prosecutor......."
7. Mr. Justice MAUGHAM proceeded to say that the language would be quite wrong and misleading if the truth were that in every case in which the company has a claim to recover damages from an officer of the company the section is application. That is the only qualification set out by Mr. Justice MAUGHAM as regards the applicability of such section. The learned Judge came to the conclusion as follows (page 875):
"The conclusion at which I have arrived is that section 215 is not applicable to all case in which the company has a right of action against an officer of the company. It is limited to cases where there has been something in the nature of a breach of duty by an officer of the company as such which has caused pecuniary loss to the company. Breach of duty of course would include a misfeasance or a breach of trust in the stricter sense and the section will apply to a true case of misapplication of money or property of the company, or a case where there has been retention of money or property which the officer was bound to have paid or returned to the company."
8. Mr. Mistree has indicated that there is no averment of breach of trust and no averment that the respondent has misapplied any moneys. I am afraid reading the affidavit as it stands there is no doubt that on the face of the accounts which were evidently written under the supervision and direction of the manager himself, moneys are found due by an officer of the company to the company and the fact that there is a breach of trust or default on the part of the officer is a matter of inference from the accounts as set out.
9. It may be noted, however, that although notices of demand were given no reply to the notices of demand was sent at any time setting out what is now set out in the affidavit in reply, the excuse given being that he was busy with inspection in another matter and also was taking simultaneously inspection of the accounts in the books of the company. Looking to the account which is annexed to the affidavit in support I think that two hours would have been sufficient to take inspection of this account. It is not as if accounts had been written for a number of years and detailed accounts had to be gone through.
Therefore, I overrule the objection set out on behalf of the respondent that section 235 is inapplicable. This proceeding to my mind is properly brought under this section. In the result I will proceed with this matter and hear evidence if produced before me. Parties will treat the affidavit in support and the affidavit in reply as pleadings in the matter. Liberty to the liquidator to file an affidavit in rejoinder, if so advised, and if that is filed within 3 weeks, liberty to the respondent to file an affidavit in sub-rejoinder. Usual order for discovery and inspection. Discovery and inspection to be given and completed within 4 weeks from today. The proceeding to be on my board on March 28, 1955. Summons to stand adjourned into court. Today's costs to be costs in the summons. Counsel certified.
10. Objection overruled.