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R.C. Abrol Vs. Official Liquidator R.C. Abrol and Co. Pvt. Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCivil Appeal No. 12 of 1972
Judge
Reported inILR1975Delhi202
ActsCompanies Act, 1956 - Sections 477
AppellantR.C. Abrol
RespondentOfficial Liquidator R.C. Abrol and Co. Pvt. Ltd. and ors.
Advocates: P.C. Khanna,; I.D. Khanna and; A.K. Jain, Advs
Cases ReferredPopular Bank v. Madhave Naik
Excerpt:
companies act (1956) - sections 477 & 478--scope of--'further report'--need for, when only one composite report has been made by the official liquidator.; in an application under sections 477 & 478 of the companies act 1956, the court made an order on 10-1-72 that on persual of the report a case for public examination of the seven persons, officers of the company, had been made out. the counsel for the respondent however, contended that the court gets jurisdiction to make an order for public examination under section 478 only when a 'further report' in addition to a preliminary report is submitted by the official liquidator setting out that a fraud has been committed:;that the public examination is a roving inquiry, not confined to a predetermined issue, so long as it relates to.....s. rangarajan, j. (1) the judgment in this company application will dispose of c. as 61/72 and 80/72 also. the applicant in c.a. 61/72 (r. c. abrol) is the husband of the applicant (smt. swaran lata) in c.a. 80/72. c.a. 12 of 1972 was filed by the office liquidator (hereafter referred to in the abbreviated form as o.l.) on 23-12-1971 in the general section and made over to the company section where it was registered on 3-1-1972. the o.l. had filed the report dated 21-12-71. among other particulars which are required to be, furnished under section 455(1) of the companies act, 1956 (hereafter called the act), he had also expressed his 'clear opinion' that 'the directors and certain officers have committed fraud on a big scale in conduct of the business of the company and it is for the.....
Judgment:

S. Rangarajan, J.

(1) The judgment in this Company Application will dispose of C. As 61/72 and 80/72 also. The applicant in C.A. 61/72 (R. C. Abrol) is the husband of the applicant (Smt. Swaran Lata) in C.A. 80/72. C.A. 12 of 1972 was filed by the Office Liquidator (hereafter referred to in the abbreviated form as O.L.) on 23-12-1971 in the General Section and made over to the Company Section where it was registered on 3-1-1972. The O.L. had filed the report dated 21-12-71. Among other particulars which are required to be, furnished under section 455(1) of the Companies Act, 1956 (hereafter called the Act), he had also expressed his 'clear opinion' that 'the directors and certain officers have committed fraud on a big scale in conduct of the business of the company and it is for the aforesaid reasons that title company had failed and further a detailed enquiry is desirable'. He had also stated, inter alia, that Mrs. Swaran Lata was 'only a signing authority' and was illegally being paid Rs. 1000.00 per month since 1963. Some further allegations had been made to the effect that large amounts which were received as fixed deposits in the name of the company but were put into private accounts of Sliri R. C. Abrol and other directors who used those monies for their priva.te ends and that the price of things and items bought were deliberately inflated : so was the cost of jobs carried out on behalf of the company pocketed by the directors or the officers of the company. It is needless to notice the other portions of this report.

(2) When this application under sections 477 and 478 of the Act (C.A. 12 of 1972) came up for the examination publicly of the officers of the company (described as respondents I to 7), I made an order on 10-1-72 that on perusal of the report a case for such public examination of the seven persons mentioned above had been made out. In pursuance of the same the 5th respondent (Shri A. D. Chaudhary), one of the officers of the company, was examined pub icly on various dates commencing from 14-2-1972 that he had received a notice from the O.L. informing him about the above order passed by this Court about the public examination and that the date had been fixed for such examination on 14-2-1972. He further stated that he had filed an appeal against the said order which came up before a Division Bench of this Court comprising V. S. Deshpande and B. C. Misra, JJ. on 11-2-1972. A notice to show cause was served on the Official Liquidator as to why the appeal should not be heard on 14-2-1972. The Division Bench heard the parties but the appeal was dismissed as withdrawn.

(3) It is stated in the present application that the Division Bench pointed out that the matters raised before it could be agitated before the Company Judge once again and hence the appeal was withdrawn. But in the reply filed by the Official Liquidator it is asserted thar the Division Bench had announced the order of dismissal of the appeal after which the applicant made a prayer for withdrawl of the appeal which was allowed. It is further explained that the Division Bench had referred to section 478(7) of the Act, which reads as follows :

'(7)(a). If any such person applies to the Court to be exculpated from any charges made or suggested against him, it shall be the duty of the Official Liquidator to appear on the hearing of the application and call the attention of the Court to any matters which appear to the Official Liquidator to be relevant.

(B)If the Court, after hearing any evidence given or witnesses called by the Official Liquidator, grants the application, the Court may allow the applicant such costs as it may think fit.' It is specifically denied that the Division Bench pointed out to the applicant that the matters raised, before it could be agitated before the Company Judge. To this aspect I shall revert last because even independently of the result of the appeal and the finality arising as a result old such dismissal the present applications both by Shri R. C. Abrol and his wife (Smt. Swaraii Lata) have no merits.

Two questions arise :

(1)Whether this Court had necessary jurisdiction to make the order concerning the public examination under section 478 of the Companies Act, 1956 (hereafter referred to as to Act), and

(2)in the event of this Court having such Jurisdiction whether the diseration was properly exercised

(4) Point (1): Shri P. C. Khanna, learned counsel for the applicant, referred me to section 454 of the Act under which a statement of affairs of the Company has to be made to the O. L. containing the particulars, namely, the assets of the company; its debts and liabilities, details of creditors, debts due to the company and such further or other information as might be prescribed or required by the O. L. The respondents are those who had to submit such a statement under section 454(2). In terms of section 455(1) the O. L. is required to submit his report within six months from the date of the order or such extended period as may be allowed by the Court concerning matters covered by subclauses ( a) to (c) of clause (1) of section 455, which read :

'(A)as to the amount of capital issued, subscribed, and paid up, and the estimated amount of assets and liabilities, giving separately, under the heading of assets, particulars of (i) cash and negotiable securities (ii) debts due from contributories; (iii) debts due to the company and securities, if any, available in respect thereof: (iv) movable and immovable properties belonging to the company and (v) unpaid calls;

(B)if the company has failed, as to the causes of the failure; and

(C)whether, in his opinion, further inquiry is desirable as to any matter relating to the promotion, formation, or failure of the company, or the conduct of the business thereof.'

Under sub-section (2) of section 455 the Official Liquidator may also, if he thinks fit, make a further report, or further reports, staling the manner in which the company was promoted or formed and whether in his opinion any fraud has been committed by any person in its promotion or formation, or by any officer of the company in relation to the company since the formation thereof, and any other matters which, in his opinion, it is desirable to bring to the notice of the Court. Section 455(3) reads as follows: If the Official Liquidator states in any such further report that in his opinion a fraud has been committed as aforesaid, the Court shall have the further powers provided in section 478'. Section 478(1) itself reads as follows :

'WHENan order has been made for winding up a company by the Court, and the Official Liquidator has made a report to the Court under this Act, staling that in his opinion a fruad has been committed by any person in the promotion or formation of the company, or by any officer of the company in relation to the company since its formation, the Court may, after considering the report, direct that that person or officer shall attend before the Court on a day appointed by it for that purpose, and be publicly examined as to the promotion or formation or the conduct of the business of the company, or as to his conduct and dealings as an officer thereof.'

(5) The contention of Shri P. C. Khanna is that the Court gets jurisdiction to make an order for public examination under section 478 only when a 'further report' in addition to a preliminary report is submitted by the Official Liquidator setting out that a fraud has been committed as noticed above. When Shri Khanna's attention was drawn to the report filed in this case (dated 21-12-1971), he contended that it was only a preliminary report and was not the further report as contemplated by section 455. It has to be noticed in the first place that the report which the Official Liquidator had filed is not styled as a preliminary report.

(6) Before discussing the above contention of Shri P. C. Khanna it will be necessary to refer to the corresponding provisions of the Companies Act of 1913. Section 177-A which deals with the statement of affairs to be made to the liquidator corresponded to present section 454. Section 177-B corresponded to the present section 455(1) and (2); the present section 455 (3) has been added. It would be best, thereforee, to read section 177-B, which in addition to section 177-A, wasinserted into the Act of:' 1913 by amending Act 22 of 1936 :

'177-B.Statement of liquidator--(1) In a casc where a windtns, up order is made, the Official Liquidator shall, as soon as practicable after receipt of the statement to be submitted under section 177-A, and not later than lour, or with the leave of the Court, six months from the date of the order, or in a case where the Court orders that no statement shall be submitted, as soon as practicable after the date of the order, submit a preliminary report to the Court:-

(A)as to the amount of capital issued, subscribed, and paid up, and the estimated amount of assets and liabilites, giving separately, under the heading of assets particulars of :--

(i) Cash and negotiable securities ; (ii) debts due from contributorics ; (iii) d'ebts due to and securities, if any, available to the company ; (iv) movable and immovable properties belonging to the company ; (v) unpaid calls ; and (b) if the company has failed, as to the causes of the failure ; and (c) whether in his opinion further inquiry is desirable as to any matter relating to the promotion, formation, or failure of the company, or the conduct of the business thereof. (2) The official liquidator may also, if he thinks fit, make a further report, or further reports, staling the manner in which the company was formed and whether in his opinion any fraud has been committed by any person in its promotion or formation, or by any director or other officer of the company in relation to the company since the formation thereof, and any other matter which in his opinion it is desirable to bring to the notice of the Court.'

(7) Section 196 of the Act of 1913 corresponded to the present section 478. Section 196 (1) which alone deals with the present aspect may be read:

'196(1).When an order has been made for winding up a company by the Court, and the Official Liquidator has applied to the Court staling that in his opinion a fraud has been committed by any person in the promotion or formation of the company or by any director or other officer of the company in relation to the company since its formation, the Court may, after consideration of the application, direct that any person who has taken any part in the promotion or formation of the company, or has been a director, manager or other officer of the company shall attend before the Court on a day appointed by the Court for that purpose, and be publicly examined as to the promotion or formation or the conduct of the business of the company, or as to his conduct and (lealings as director, manager or other officer thereof'.

The corresponding provisions in the English Act of 1948 were as follows. Section 235 of the English Act corresponded to present section 455, section 456 of the Indian Act to section 236 of the English Act and section 270 of the English Act to the present section 478 of the present Companies Act. The position in England according to decided cases has been summarised in the latest edition (42nd) of Core Browne on Companies in the Following manner :

'ITmust be borne in mind that this examination is of a penal character, it is set in motion by the Official Receiver, who is a public officer, acting judicially in making his report, and bound to take the responsibility for what he alleges in his report. Upon this report the court will not 'think fit' to order a public examination unless it 'arrives at a judicial conclusion' that it is bound to do so, and it will not do so unless the further report of the Official Receiver shows that there has been fraud on the part of the persons to be examined. It is not, however, necessary that in the report there should be an express statement that there has been fraud if the facts stated are such as to show that fraud existed. On the other hand, if fraud is charge, the report must state facts showing a basis for the charge and connecting the person sought to be examined with such facts, and must express the opinion of the official Receiver that there has been fraud by that person. The persons may be publicly examined arc only those promoters and officers against whom a prima facie case of fraud is disclosed, the practice which formerly prevailed of examining the innocent as, as the guilty being wrong, but no account of fraud practiced by the company on strangers will be taken for this purpose.'

'OFFICER'is defined by section 455 to include a director, manager, or secretary, and it has been held by the Court of Appeal that auditors may be Officers.

(8) 'THE examination is approving inquiry, not confined to a predetermined issue, so long as it relates to 'the promotion or formation or the conduct of the business of the company', or as to the conduct of andealings of the person examined 'as Officer thereof. Aggrieved shareholders may seek to obtain information that will be useful in case of future litigation. But the court will not allow the defendants in an action brought by the company to seek to obtain admission from directors to be used against the company, and in a case of pending litigation would probably also protect the witness against questions prejudicing his case.

(9) The order for a public examination is made ex parte on the application of the Official Receiver. Any person summoned may move to discharge the order on the ground that he does not come within the class of persons liable to be examined (i.e. that he is not stated in the report to be an officer, or promoter), or that the Official Receiver's report does not contain the necessary suggestion of fraud against him or facts forming the basis for such a charge. He will not, however, be allowed to question the correctness of the report or to object that the Official Receiver has drawn wrong inferences. The application must be made within a reasonable time after notice to the person implicated that the order has been made' (pp 103637).

(10) The earliest decision of the Court of Appeal to which reference may be made to start with is In re Great Truger Gold Mining Company, Ex-parte Barnard 1892 (3) Ch. Div. 307 which reversed the decision of Vaughan Williams, J. The Court of Appeal pointed out that the Court had no jurisdiction to direct a person to publicly examine under section 8(3) of the Companies (Winding up) Act, 1890 unless the Official Receiver has made a report staling that, in his opinion, a fraud has been committed in the promotion or formation of the company, or by directors or other persons of the company since its formation. The expression 'such report' was held to meana ' further report' under sub-section (2) and not a preliminary report under sub-section (1). It will be apparent from a reading of the above provisions, as they also appear from the arguments of Farwell, Q.C. (on page 310) in support of the motion before Vaughan Williams, J, that 'in no Cose can on order for public examination be made on the preliminary report'. The same would be the position even according to the present section 455(1)(a) to (c) because in the preliminary report of the Official Liquidator he is not obliged to state anything concerning his view about any fraud etc. committed. It is for this reason that a provision has been made for filing of a further report or reports. Section 455(2) of the present Indian Act makes it quite clear that he can make any number of reports concerning whether fraud has been committed or not by any concerned person.

(11) The next important English case is the one decided by the House of Lords in Ex parte George Starylton Bareas 1896 App Cas 146),(2). There again reference was made to 'further report' and the above said provisions of the Companies (winding up) Act of 1800. Lord Halsbury L- C. summarised what the preliminary report was to contain in the following concise terms :

'...THEamount of capital issued, subscribed, and paid up, and the estimated amount of assets and liabilites'.

If the company had failed he was to report as to causes of failure and whether any further inquiry was desirable. Lord Halsbury then referred to what he called 'an absolutely independent and separate set of provisions' whereby he could make a specific (further) report, with reference to some persons who have committed a fraud when the court is invested with new jurisdiction. The Official Liquidator must arrive at a judicial conclusion in his own mind that such facts are before him as to warrant the making of such a report. Lord Halsbury referred to this as 'a finding of fraud'. Lord Herschell, however, thought that no form or words would be necessary but it would be the Official Receiver's duty to exercise the discretion, which has been left to him, of reporting that a case of fraud was established against any particular person or persons.

(12) A later decision of the Court of Appeal in re Civil Naval and Military Outfitters, Limited 1899 (1) Ch. Div. 215 is instructive. While insisting on a further report (in consonance with the previous decisions) stress was laid on the opinion of the Official Receiver concerning fraud and also on the report showing facts showing the basis for his opinion and warranting the judge in calling upon the person(s) implicated for an Explanationn. In that case Wright J. had refused to discharge an order which had been passed ex parte in chambers against which an appeal was unsuccessfully filed. Wright J. had said that it seemed to him that the Official Receiver was regarded by Legislature as an opinion on matters of this kind. The Official Receiver had stated in that case that fraud had been committed by the persons named in the promotion or formation of the company and in relation to the company since the formation thereof. The leading judgment of the Court of Appeal was that of Lindley M. R. : he considered the case free from any difficulty. He observed as follows :

'. . . If you find the official receiver reporting that specified persons have, in his opinion, been guilty of fraud in connection with the formation of the company, and you look back into the report and see, not whether the charge against those persons is proved (that is not the function of the report), but whether there is such a basis for that opinion as in the view of the judge warrants him in calling upon those persons to undergo a public examination that, I think, is all that the report need do. This, as it seems to me, is the fair and true result of the language of the act and the decision in Ex parte (2).

(13) The other question which Lindley M. R. posed was whether the report in that case was so flimsy, so sketchy and so unfair that Wright J, exceeded his jurisdiction, or exercised his discretion wrongly. This was answered in the negative. Chitty L. J., who extracted the last paragraph of the Official Receiver's report in the manner to be an indictment or a statement of claim to charge as above observed that the report is not meant to be a man with fraud. The object of the report is to raise a prima facie case of fraud-not a case which a man has to answer finally, but a case upon which a judge has to decide whether he is to undergo a public examination. It may be noticed that Vaughan Williams, J. (Whose judgment in Gold Mining Company, rendered prior to Ex-parte Barnes,(2) was upset by the Court of Appeal) had also written a separate judgment following Ex parte Barnes(2). Though he concurred with the others in the result he expressed a hope that that decision would not constitute a precedant for reports of the kind submitted by the Official Receiver in that case. That is, however, a different question.

(14) It seems to me on a perusal of the above English decisions that the need for a 'further report' by the O.L. was insisted upon in view of the fact that he (the Official Receiver in England) was not expected or required to state anything about what his view was whether any fraud had been committed in the formation or promotion of the Company or subsequently. When the draftsman of section 455(3) said that the court shall have the further powers provided in section 478 when the O.L. was of the opinion that fraud had been committed in the manner stated in section 455(2), in any such further report, the court shall have the further powers provided in section 478 would it mean that even if the O.L. made a composite report, as in the present case, mentioning such details as are required under section 455(1)(a) to (c) as well as what is contemplated by section 455(2), expressing as he had done, his view concerning the officers of the company having committed fraud would it amount to sufficient compliance with section 455 giving jurisdiction to the court under section 458 to order his public examination, 'the crux of the problem it seems to me, lies in whether the O.L. is obliged to submit two separte reports and always relegate his view concerning fraud etc. to the later report alone on pain of the court lacking jurisdiction to order a public examination if two physically separate reports are not before the court If this is the position, would it not result in anomalies (some of which alone are mentioned) such as the following Whether he should file a preliminary report at 10.00 A.M. when the Court starts its work and file the second report as a further report and at least one second past 10 on risk of the court not having jurisdiction if both the reports are given at the identical time Are two physically separate reports necessary and should they be incorporated in different sheets of paper Is there any impediment to the O.L. complying with the substantive requirements of section 455 by staring in his report that in his view that fraud has been committed which requires public examination even in only one report that he files? On a careful consideration of all these reports it seems to me all that section 455 requires is substantive compliance by the O.L.'s report where in he mentions his view, based of course on the facts which may incline the court to exercise the discretion in his favor, that a fraud has been committed which involves public examination of the directors or certain directors only.

(15) Looking at the terms of the report, which has been extracted above, it is clear that the O.L. had made such a report which could not be said to be either flimsy or sketchy. He was handicapped by the fact that the statement of affairs which had been filed so belatedly was practically bareft of any useful or even needed information. The' mess which had been created would be apparent from that as ordered by Prakash Narain, J. that the auditor appointed (on Rs. 5000.00 being deposited by R. C. Abrol, was unable to audit the accounts for want of needed account books and information. Further efforts in this direction proved to be utterly of no avail. None of the directors had obtained an order in his favor from the company the judge requiring them not to file a statement of affairs. It was in this background that the O.L. in the present case had made the application that he did. It seems to me that it will be a mere sir^mng nf language to contend that even though the report of the O.L. contains particulars which may be sufficient to incline the court to exercise the discretion vasted in it or ordering public examination based on the O.L.'s further view, stated on oath by him, that fraud had been committed which requires public examination of the directors still it cannot support an order for public examination unless it had been submitted in two separate reports.

(16) Though the question in the form in which it arises for decision in the present case does not appear to have been dealt with in any of the decided cases it seems useful to refer to a decision of VimadalaL J. in OSlicial Liqi.idaioi- v. Haridas Mundhi-a and others 1971 41 Comp cas 70 where several aspects bearing on the public examination of olFicer of the company in liquidation were considered: Shri P. C. Khanna, however, did not refer to any of those aspects. In the context of an earlier application for misfeasance summons, which was kept pending wherein the O. L. had applied for public examination of certain directors, the decisions of the Supreme Court in Joseph Augusthi (K) v. Narayanan A.i.R. 1964 S.C. 1952 holding a provision similar to section 478, name!y, section 45-G of the Banking Companies Act to be not vocative of Article 20 (3) of the Constitution and the further decision of the Supreme Court in Popular Bank v. Madhave Naik : AIR1965SC654 where it was contended that section 478 of the Act as well as section 45-G of the Banking Companies Act being void as vocative of Article 20 (3) of the Constitution, were referred to. It was held by Vimadalal J. that the same principle was applicable to public, as distinct from private, examination under section 478. The scope of the public examination was also indicated by Vimadalal J. following certain passages in the earlier (41st) edition of Core Browne on Joint Stock Companies, Pennington's Company Law (2nd ed.) etc:-a roving inquiry to ciscover facts in regard to the fraud alleged in the promotion or formation of the business of the company or in regard to the conduct and dealings of the officers so examined. These facts may or may not be covered by the misfeasance summons a certain amount of overlapping elicited in the course of the public examination and the facts relied upon by misfeasance summons is inevitable. An order for public examination, it was pointed out by Vimadalal J., could not be vacated unless it was shown to be made for a collateral purpose. Under sub-sections (2) to 4 of section 478 the O.L. may take part in the examination and he may for that purpose have such legal assistance as may be sanctioned by the Court, any creditor or contributory may also take part in the examination either personally or by any advocate and the court may put such questions to the person examined as it thinks fit. All these aspects have been fully discussed by Vimadalal J. who also expressed the view that the person who is thus being examined could not refuse to answer questions invoking section 132 of the Evidence Act. Though these aspects have not been argued before me reference is made to the above decision of Vimadalal J. since it contains a fairly exhaustive discussion on all several aspects bearing upon a public examination. Vimadalal J. also though that these objections could be taken even as preliminary objections to the examination of any such person. In this view of the matter it is needless to be detained by what happened before the division Bench for it seems even needless to rest my present order on any finality arising merely by reason of the dismissal of the appeal by the Division Bench against my order dated 10-1-1972. I hold, thereforee, that the ex parte order passed on 10-1-1972 directing the officers of the company to be publicly examined was not one lacking in jurisdiction.

(17) Point (2) : On the question of exercise of discretion the order itself makes a reference to the report of the O.L., which is self-contained. The quantum of facts stated in the report and quality of the report in the circumstances of this case are not such as to warrant the criticism than an order for public examination could not be properly based on them. Nor has anything been urged before me to show that the discretion was not properly exercised.

(18) The next question which was argued was that Smt. Swam Lata (applicant in C.A. 80 of 1972) should be publicly examined because all that the report says is that she had been drawing a salary of Rs. 1000.00 per month since 1963 illegally : the way in which the com' pany has been run and Smt. Swaran Lata was also paid arc m fact matters that require clarification by a public examination. In this connection my attention has been drawn to the decision of the Judicial Committee of the Privy Council in Musabhai Noormohamed Tejani and others v. Official Receiver 1963 1 Comp L. J. 191 :

'ASto the attribution of particular pieces of alleged fraud to particular individuals, this appears to their Lordships to compel the conclusion that if a company with say three directors was carrying on some business in fraudulent manner, none of the directors could be brought to book unless he or they chose to tell the official receiver which of the three directors had been the actual perpetrator or perpetrators of any of the fradulent acts in question. This would be a reductio ad ahsurdum which their Lordships find impossible of acceptance'.

In this view, which I respectfully adopt, I do not wish to be detained further by the contention of Shri P. C. Khanna that the report of 'the O.L. does not furnish a sufficient basis for ordering the public examination of Smt. Swaran Lata.

(19) A notice according to law and in the manner directed by me on the earlier occasion will issue and the publications also, as directed, will be made for public examination of Shri R. C. Abrol before this Court on 19-11-1974, to start with, in the absence of any further directions by me to the contrary. The order in which others will be examined will be fixed up later. The Registry will settle the terms of the said notice and publications.

(20) The applications 61 & 80/72 are accordingly dismissed with costs. Counsel fee Rs. 150.00 in cash.


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