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Official Liquidator, Milan Chit Fund and Finance P. Ltd. Vs. Joginder Singh Kohli and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberC.A. No. 77 of 1974 in C.P. No. 17-D of 1965
Judge
Reported in[1978]48CompCas357(Delhi)
ActsCompanies Act, 1956 - Sections 454(5), 454(5A), 542 and 543
AppellantOfficial Liquidator, Milan Chit Fund and Finance P. Ltd.
RespondentJoginder Singh Kohli and ors.
Appellant Advocate A.L. Joshi, Adv
Respondent Advocatefor the Registrar of Companies: H.S. Bhatia, Adv.
Cases Referred(Kerala State Electricity Board v. T.P. Kunhaliumma
Excerpt:
company - liability - sections 454 (5), 454 (5 a), 542 and 543 of companies act, 1956 - primary object of winding up of company is to realise assets and to discharge liabilities - liability of directors and others does not end with payment of all liabilities out of realisations made from assets - in case of surplus members of company would be entitled to amount by way of return of their capital - mere obligation to quantify liability or loss does not necessarily imply that petition can be made only after final accounts made, assets realised and liabilities discharged - basis of quantification neither laid down in rules nor relevant. - - 157 of 1975, the other respondents have filed replies on the merits as well in which preliminary objections have been raised. 8. it was then urged..........the provisions of sections 542 and 543 of the act, even if he happened to be a director of the company. the liability to pay such an amount can neither be considered a fraudulent act nor tantamount to misapplication or retention of money or property of the company or be described as an act of misfeasance or breach of trust in relation to the company. it amounts to a failure to discharge legal obligation as a member which can be enforced in accordance with law. the petition must, thereforee, fail as against this respondent as well.18. in the result the application is dismissed as against respondents nos. 3 to 6. c.a. no. 157/75 is disposed of in these terms. the application is, however, proper and competent against the other respondents.19. the applicant would take steps to file an.....
Judgment:

H.L. Anand, J.

1. This judgment would dispose of certain preliminary objections with regard to the maintainability of a composite application under Sections 538, 539, 542 and 543 of the Companies Act (for short, ' the Act') and as to the bar of limitation.

2. Messrs. Milan Chit Fund & Finance Pvt. Ltd. (in liquidation) was incorporated on October 20, 1961. The company carried on business until the year 1965. In 1965 a petition for winding-up of the company was filed and a winding-up order was made on February 11, 1969. It appears that the records of the company had been in the custody of the police since before the date of the winding-up order. The records were recovered by the official liquidator from the police custody on March 17, 1971. According to the applicant, respondent No. 1 was the director of the company from its incorporation and continued to be so until it was ordered to be wound up. Respondent No. 2 was director-in-charge ofaccounts from August, 1962, till the date of the winding-tip order. Respondent No. 3 was its director from May 22, 1964, to February 17, 1965, Respondents Nos. 4, 5 and 6 were also the directors of the company for limited periods. The statement of affairs of the company was not filed within the time allowed by law as a sequel to which a complaint of an offence under Section 454(4) and (5A) of the Act was filed against respondents Nos. 1, 2, 3 and 5 on April 26, 1969, being Cr. O. No. 26 of 1969. During the hearing of the complaint a direction was made requiring respondent No. 2 to file a statement of affairs within the time allowed by the court , which was extended from time to time. The statement of affairs was eventually filed some time in September, 1972. By an order made by Kapur J. in the complaint on March 27, 1974, the four respondents were acquitted on the ground that three of them were not directors on the date when the company was ordered to be wound up and the fourth, respondent No. 2, had reasonable excuse for not filing the statement of affairs within time because the books of account were in the custody of the police until they were recovered from it by the official liquidator in March, 1971, and that the said accused had since filed the statement of affairs within the time allowed by this court. The present application under Sections 538, 539, 542 and 543 of the Act was filed on February 8, 1974.

3. The application is grounded on allegations that the business of the company was carried on with intent to defraud the creditors; that the respondents had misapplied the monies and retained the property of the company and are liable and accountable for the money and the properties belonging to the company and have been guilty of misfeasance and breach of trust. It is, thereforee, prayed that it be declared that the business of the company was carried on with intent to defraud the creditors; that the respondents are guilty of misfeasance and breach of trust; that the respondents are liable for debts and other liabilities of the company amounting to Rs. 2,37,132.29 and that the respondents be punished for criminal action according to law and other directions and orders be made as may be considered just and proper in the circumstances of the case.

4. The respondents deny the material allegations and dispute their liability. A number of preliminary objections are raised with regard to maintainability of the application and as to the bar of limitation. While respondent No. 4 has raised a number of preliminary objections in an application under Rule 9, being C.A. No. 157 of 1975, the other respondents have filed replies on the merits as well in which preliminary objections have been raised. Most of the preliminary objections are common to all the respondents.

5. In a rejoinder filed on behalf of the applicant the various contentions are repelled and the allegations made in the application are reiterated.

6. The first preliminary objection relates to the maintainability of a composite application under Sections 538, 539, 542 and 543 of the Act on the ground that the proceedings under Sections 538 and 539 of the Act, being of criminal nature, could not be tried along with proceedings under Sections 542 and 543 of the Act which are in the nature of civil remedies. Even otherwise this court would have no jurisdiction to entertain a complaint under Sections 538 and 539 of the Act. On behalf of the applicant the objection is not contested. Learned counsellor the applicant sought permission to withdraw the application in so far as it invokes Sections 538 and 539 and the application being proceeded with under Sections 542 and 543 of the Act. In the alternative, leave was sought to suitably amend the application so as to confine the application to permissible provisions. It was also pointed out that a notice under Sections 542 and 543 of the Act alone was issued impliedly rejecting the claim under Sections 538 and 539 of the Act. In the circumstances, the application would be treated as being one under Sections 542 and 543 of the Act with liberty to the applicant to suitably amend the application so as to eliminate references to the other provisions and to delete the allegations which are not relevant for the purpose of Sections 542 and 543 of the Act. It was, however, not disputed that the application under Sections 542 and 543 of the Act could proceed subject to the aforesaid direction.

7. It was next urged that the present proceedings would be barred on the principle of rest judicata in view of the earlier proceedings in Cr. O. No. 26 of 1969 in which some of the respondents had been exonerated from criminal liability from Section 454(5) and (5A) of the Act. There is no substance in this objection. The earlier proceedings were criminal in nature while the present proceedings are in the nature of civil proceedings. A judgment in criminal proceeding is neither admissible nor relevant in civil proceedings. The decision in criminal proceedings cannot, thereforee, operate as rest judicata in relation to subsequent civil proceedings. Even otherwise, the question in controversy in the present application were neither raised nor considered or decided in the earlier proceedings. This objection is, thereforee, overruled.

8. It was then urged that the proceedings under Sections 542 and 543 of the Act are premature in that it had not yet been determined if the liabilities of the company exceeds its assets and there is, thereforee, a shortfall which the respondents may be liable to make good. It is stated that, until the realisations have been made and the extent of the liability has been ascertained and payment has been made to the creditors of the company out of the realisations it could not be said that there is any uncovered liability to the extent of which the ex-directors and others may be liable to the company.

9. On behalf of the applicant the proceedings were sought to be justified on the ground that such proceedings were competent if it appeared in the course of winding up of the company that the ex-directors and others responsible for the affairs of the company had been guilty of negligence, fraud or any acts of misfeasance in the conduct of the affairs of the company and that such proceedings need not be held over until a realisation had been made and the disbursements left a shortfall. It was, thereforee, urged that the proceedings could not be said to be premature as they were based on disclosures made in the course of the winding-up of the company and that the unlimited liability of the ex-directors of the company was not necessarily limited to any shortfall even though it was coterminous with the extent to which the company had suffered as a result of the impeached conduct.

10. Section 542 of the Act, which is based on the corresponding provisions of Section 332 of the English Act of 1948, makes provision to determine and enforce the civil liability of persons who were parties to the carrying on of business of the company with intent to defraud the creditors or any other persons or for any fraudulent purposes and for certain matters connected therewith, except Sub-section (3) of this section which deals with criminal liability of such persons. It has been held that the provision seems to postulate some nexus between fraudulent trading or purpose and the extent of liability of directors or other persons (K. Nagendra Prabhu v. Popular Bank Ltd. : AIR1970Ker120 . Rule 269 of the Companies (Court) Rules, 1959 (for short, ' the Rules '), inter alia, lays down the procedure to be followed in proceedings under Section 542 of the Act. Form 120 envisages that the declaration under Section 542 must have relation to specified acts of fraud or fraudulent purpose and the liability of the person sought to be proceeded against must be quantified.

11. Section 543 of the Act, which is based on Section 333 of the English Act of 1948, confers powers on the court to assess damages against delinquent directors and others and provides that where in the course of winding up it appears that any person who has taken part in the formation and promotion of the company or any past or present director, liquidator or officer of the company has 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 examine into the conduct of such person and compel him to repay or restore the money or property or any part thereof respectively 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 may think fit. The civil liability envisagedby the provision is independently of any criminal liability for the impeached actions. Rules 260 and 261 of the rules lay down the procedure for proceedings under this section. The summons in such proceedings has to be in Form 121 which also envisages that particulars of the specified money or property must be set out. It has been held that misfeasance was a serious charge and detailed narration of specific acts of omission and detailed commission must be set out in the application and the liability to restore must be quantified. [Official Liquidator v. Raghawa Desikachar [1975] 45 C C 136 .

12. It is no doubt true that, ordinarily, the proceedings under Sections 542 and 543 of the Act would be initiated only after it is possible to determine the value of the assets of the company and the precise extent of its liabilities either on the basis of statement of affairs submitted in accordance with the provisions of the Act or otherwise after the accounts of the company have been completed and list of creditors have been drawn up. But there is nothing in the language of these two provisions which may suggest that these could not be invoked at any earlier stage if in the course of winding up of a company it appears that the business of the company was carried on with intent to defraud or that there has been misapplication and retention of any money or property of the company or certain persons have been guilty of misfeasance or breach of trust in relation to the company. It is significant in this context to remember that both the provisions use the expression ' it appears ' indicating clearly thereby that if some disclosure is made in the course of winding up from which it appears that the requirement of the two sections are satisfied the proceedings could be initiated without awaiting definite proof of the allegations or admission in respect of the commission or omission of acts which can be impeached under these provisions. It is also not possible to accept the contention that these proceedings could be initiated only if there is a shortfall. The civil liability under the two provisions has not been made dependent on the existence of a shortfall. While the liability under Section 542 arises out of fraudulent acts, the power of the court under Section 543 to assess damages against delinquent directors and others is based on the impeached acts of misfeasance, breach of trust, wrongful application and retention in respect of the money or property of the company. It is true that the primary object of the winding up of the company is to realise the assets and to discharge its liabilities but the liability of the directors and others does not end with the payment of all the liabilities out of the realisations made from the assets because if there is a surplus the members of the company would be entitled to the amount by way of return of their capital. It cannot, thereforee, be said that the application is premature and is liable to be dismissed on that ground. At the hearing counsel forsome of the respondents referred to certain judgments of the Supreme Court and certain High Courts in support of their contention but I am unable to find any principle or decision in these cases which may support the contention raised on behalf of the respondents. Mere obligation to quantify the liability or the loss does not necessarily imply that the petition could be made only after the final accounts have been made, the assets have been realised and the liabilities have been discharged. All that the provisions of the sections, the rules and the Forms require is that the amount should be quantified. The basis of quantification is neither laid down in the Rules nor is, thereforee, relevant. This preliminary objection must, thereforee, be overruled.

13. There is no force in the preliminary objection with regard to the bar of limitation either. The winding-up order was made on February 11, 1969. The statement of affairs was filed on or about September 4, 1972. The present petition was filed on February 8, 1974. Under Section 543(2) of the Act, an application under that section could be made within five years from the date of the order for winding up or of the first appointment of the liquidator in the winding up or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, ' whichever is longer'. The application was filed within five years of the order for winding up and, in so far as it invokes Section 543, it was clearly within time. Until the Limitation Act of 1963, there was no limitation for an application under Section 542 inasmuch as the residuary Article 181 in the Limitation Act of 1908 did not regulate proceedings under the Act, a position which is very well settled [Sha Mulchand & Co. v. Jawahar Mills [1953] 23 CC 1 . It is also equally settled that the proceedings under the Act, for which the Act does not prescribe any period of limitation would now be governed by Article 137 of the Limitation Act of 1963 (Kerala State Electricity Board v. T.P. Kunhaliumma : [1977]1SCR996 . The article provides for applications for which no period of limitation is provided elsewhere in the division relating to the applications. It is not in dispute that the division relating to applications under the Act makes no provision for applications under the Act. Article 137 provides a limitation of 3 years for such applications and the time for such applications begins to run ' when the right to apply accrues '. It is a well-known common law principle that for the purpose of any proceeding time is to run from the moment the party first gets the right to initiate it. Ordinarily, thereforee, the right would accrue when the cause of action for the proceeding first arises. It is equally well known that by the words ' the right to apply ' is intended the right to apply on a particular cause of action. And where there are different causes of action there would accrue the right to apply as and when the subsequent cause of action arises. On an application of these principles, ordinarily, the right to apply under Section 542 of the Act would accrue when the persons sought to be liable committed the fraudulent acts or conduct in relation to which relief is sought. The scheme of the section is, however, such that the conduct of business complained of would not confer the right to apply because the right to apply is also dependent on two other conditions. One is that it must 'appear' that any business of the company has been carried on with intent to defraud the creditors, etc., and, secondly, that it should so appear in the course of the winding up of a company. It follows, thereforee, that the conduct complained of does not by itself give a cause of action to apply unless the other two conditions are satisfied. It is, thereforee, not possible to hold on the language of Section 542 of the Act that the right to apply accrues when the person concerned commits the fraudulent act or is guilty of the impugned conduct. Such a right accrues only if a certain state of affairs is disclosed in the course of winding up of a company. Au indication as to when the right to apply would accrue may also be gathered from the provision of Sub-section (2) of Section 543 of the Act where the legislature made a specific provision with regard to limitation. According to this provision the application could be made within five years of the date of the order of winding up or of the conduct complained of, whichever is 'longer'. It would be safe to infer from this provision that the right to apply under Section 542 of the Act would be accrued when the order for winding up is made. But the further right to apply would accrue as and when disclosures are made in the course of winding up which may enable the official liquidator or any creditor or contributory to seek relief under Section 542 of the Act. Such a right would accrue, inter alia, when the statement of affairs is filed because that is how disclosures are made with regard to the affairs of the company. The statement of affairs was tiled in this case on September 4, 1972, and the application, which was filed on February 8, 1974, was, thereforee, within time.

14. On behalf of respondent No. 1 it is urged by way of preliminary objection that the application does not contain any specific allegations against the respondent which may attract the provisions of either of the two sections. There is no substance in this contention. The respondent admittedly continued to be a director until April 2, 1965. According to paragraph 8 of the application numerous amounts were advanced to directors and others by way of loans and advances but these amounts were never recovered. One of these amounts is shown as having been advanced to this respondent. I am unable to see how these allegations are not sufficient to attract the provisions of Sections 542 and 543 of the Act. This objection is, thereforee, overruled.

15. On behalf of respondent No. 3 it is urged that this respondent remained a director only for a period of 7 months during which no business was transacted by the company and that, in any event, the respondent having no control over the affairs of the company or of its accounts or records could not be held liable under the aforesaid provisions. It is further urged that the application could not proceed against this respondent in view of the provisions of Section 426 of the Act. The question whether any business was conducted by the company during the period this respondent was a director and the extent to which the respondent was concerned with the conduct of the business of the company involves a controversy of fact which would require evidence for decision. This matter cannot, thereforee, be decided on a preliminary objection. There is no substance in the contention that the present proceedings are in any manner barred by the provisions of Section 426 of the Act. It, however, appears on a perusal of the application that apart from the vague allegations made against all the directors in relation to the conduct of the business of the company there is no specific allegation made against this respondent in the application. In the circumstances, it would be an abuse of the process of this court to proceed against this respondent in the absence of any specific allegations. The application must, thereforee, be dismissed in so far as this respondent is concerned.

16. On behalf of respondents Nos. 4 and 5, who happen to be husband and wife, respectively, a preliminary objection is raised that the application could not proceed in the absence of specific allegations against these respondents and that the allegations made in the application is relation to respondent No. 5 do not attract the provisions of the aforesaid sections, In paragraph 2 of the application the factum of these respondents being directors of the company is mentioned. In paragraph 8, it is stated that the amounts were advanced to the directors and others by way of loans and advances but the amounts were never recovered. Details of the loans and advances are then set out. The names of these respondents do not appear in the list of persons who were recipients of these loans and advances. No specific conduct is attributed to any of these respondents. However, in paragraph 11, it is alleged that a number of members of the company, including respondent No. 4 had made default in payment of the final call of Rs. 40 per share which was payable by March 31, 1965, The liability of a member of a joint stock company to contribute to the assets of the company is provided under Section 426 of the Act. The failure to make the requisite contribution does not appear to attract any of the provisions of Sections 542 and 543 of the Act. The official liquidator is entitled to take appropriate proceedings to enforce this liability. Counsel for the applicantwas unable to show how such a liability could be enforced under any of the provisions which had been invoked in the present application. The application must, thereforee, be dismissed in relation to these two respondents as well.

17. On behalf of respondent No. 6 it is urged that there are no specific allegations made against this respondent which may attract the provisions of Sections 542 and 543 of the Act and that the claim made against this respondent is beyond the scope of these provisions. It was not disputed that no specific act or conduct is alleged against this respondent. It is further urged that this respondent was one of the shareholders of the company who had failed to pay the 50% of the value of the shares which was payable on March 31, 1965. A sum of Rs. 3,000 is thus shown as payable by this respondent. As has been pointed out above the liability of a member to pay for the unpaid value of a share could be enforced under Section 426 of the Act and the failure of a member to make such a payment would not attract the provisions of Sections 542 and 543 of the Act, even if he happened to be a director of the company. The liability to pay such an amount can neither be considered a fraudulent act nor tantamount to misapplication or retention of money or property of the company or be described as an act of misfeasance or breach of trust in relation to the company. It amounts to a failure to discharge legal obligation as a member which can be enforced in accordance with law. The petition must, thereforee, fail as against this respondent as well.

18. In the result the application is dismissed as against respondents Nos. 3 to 6. C.A. No. 157/75 is disposed of in these terms. The application is, however, proper and competent against the other respondents.

19. The applicant would take steps to file an amended application so as to delete reference to Sections 538 and 539 of the Act and averments which are not relevant for the purpose of the provisions of Sections 542 and 543 of the Act.

20. In the peculiar circumstances, there would be no costs.


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