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Colaba Land and Mill Co. Ltd. Vs. Vasant Investment Corporation Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtGujarat High Court
Decided On
Case NumberCompany Petn. No. 7 of 1960
Judge
Reported inAIR1964Guj107; (1963)GLR911
ActsCompanies Act, 1956 - sections 397, 398 and 543; Companies (Court) Rules, 1959 - Rule 10
AppellantColaba Land and Mill Co. Ltd.
RespondentVasant Investment Corporation Ltd. and ors.
Appellant Advocate K.H. Kaji, Adv., i/b.,; Kanga and Co.
Respondent Advocate B.J. Shelat and; B.J. Bhatt, Advs.
Excerpt:
(i) company - appointment - sections 397, 398 and 543 of companies act, 1956 and rule 10 of company (court) rules, 1959 - whether whole of petition should be dismissed without any further enquiry in case prayers under sections 397 and 398 do not survive - enquiry under sections 397 and 398 has no connection with enquiry under section 543 - enquiry under section 543 directed against promoters and past officers of company - proceedings under section 543 is emanation from proceedings under section 397 or section 398 - petition under section 398 cannot be dismissed outright. (ii) prima facie evidence - whether court is required to record a finding in petition under section 397 or section 398 that a prima facie case for examination of person concerned or payment of compensation against him.....ordern.m. miabhoy, j.1. this is a petition under sections 397 and 398 of the indian companies act, 1956 (no. 1 of 1956) (hereafter called 'the act') by the colaba land and mills company ltd., a company incorporated under the indian companies act, 1866, and having its registered office at bombay thereafter called 'the petitioner company') against the vasant investment corporation limited, a company incorporated under the indian companies act, 1866, and having its registered office at ahmedabad (hereafter called 'the respondent company') and ten other respondents. respondents nos. 2 to 9 were at the time of the presentation of the petition, the directors of the respondent company. respondents nos. 10 and 11 are the shareholders of that company. they have been joined in the petition for.....
Judgment:
ORDER

N.M. Miabhoy, J.

1. This is a petition under sections 397 and 398 of the Indian Companies Act, 1956 (No. 1 of 1956) (hereafter called 'the Act') by the Colaba Land and Mills Company Ltd., a company incorporated under the Indian Companies Act, 1866, and having Its registered office at Bombay thereafter called 'the petitioner Company') against the Vasant Investment Corporation Limited, a company Incorporated under the Indian Companies Act, 1866, and having its registered office at Ahmedabad (hereafter called 'the respondent Company') and ten other respondents. Respondents Nos. 2 to 9 were at the time of the presentation of the petition, the Directors of the respondent Company. Respondents Nos. 10 and 11 are the shareholders of that Company. They have been joined in the petition for themselves and also for and on behalf of the shareholders of the respondent Company other than respondents Nos. 2 to 9. The petitioner Company admittedly is a shareholder of the respondent Company holding therein 22000 ordinary shares of that Company and it is not disputed that the petitioner Company has a right under Section 399 of the Act to file the present petition under sections 397 and 398 of the Act. The petitioner Company prays:

(a) for the removal of respondents Nos. 2 to 7 from their office as Directors of the respondent Company;

(b) for obtaining suitable directions for appointment of new Directors for regulation of the future conduct and We affairs of the respondent Company; and,

(c) for appointment of a fit or proper person or a committee to conduct and manage the future affairs of the respondent Company.

These are the main prayers in the petition. But, for the reasons to be presently stated, these prayers no longer survive. In addition to the aforesaid prayers, the petitioner Company also prays:

(d) that respondents Nos. 2 to 4 or any one or more of them be ordered to pay or contribute such sums or sums of money to the assets of the respondent Company as and by way of compensation in respect of mal-practices, mismanagement; misappropriation, and breach of trust, committed by them or any of them such as are set out in the petition; and,

(e) for obtaining such necessary directions for making such enquiries or passing such orders, or taking such accounts as may be deemed proper by this Court.

The relief which survives for consideration is the relief (d) aforesaid and such part of the relief (e) as is connected with the relief (d). In connection with these two reliefs, a preliminary point is raised by Mr. Bhatt, the learned counsel for respondents Nos. 3 and 4, and it is Wat point which requires consideration and determination at the present stage. For the purpose of disposal of this preliminary point, it is not necessary for me to state all the allegations on the basis of which the present petition is founded. It is sufficient to mention that, originally, the name of the respondent Company was 'The International Bank of India Limited' and that it was, later on, changed into its present name 'The Vasant Investment Corporation Limited'. The authorized capital of the respondent Company originally was 1,01,000 ordinary Shares of Rs. 100/- each. The subscribed capital originally was 96,961 shares of Rs. 100/- each, of which Rs. 50/- was paid up and 1500 shares of Rs. 100/- were fully paid up. But, at present, the subscribed capita! is of 96,961 fully paid up shares of Rs. 50/- each and 1500 fully paid up shares of Rs. 1007- each. Originally, one J. C. Thakker was the Managing Director of the respondent Company. He held a controlling block of 27,000 shares in that Company. One Jwaladatt R. Pilani is the father of the second respondent Vasudev Pilani. This Jwaladatt and Vasudev purchased, on or about 13th of August 1946, the aforesaid controlling block of 27,000 shares from J. C. Thakker and, thereafter, entered into management of the respondent Company. Later on Jwaladatt Pilani and second respondent acquired a further block of 13,000 shares in the respondent Company. Having regard to the fact that a large number of shareholders of the respondent Company is residing in East Africa, the Pilani family was able to secure control over the management of the respondent Company, in spite of the fact that it held only 40 per cent of the shares of the Company. The affairs of the respondent Company are being managed by a Board of Directors. Jwaladalt Pilani became Chairman of the Board of Directors on or about 13th of August 1946 and continued to be so till 21st of November, 1950. The respondent No. 2 became an ordinary Director of the respondent Company on 13th or August 1946 and continued to be so till 1st September, 1951, when he was elected Chairman of the Board of Directors. The respondent No. 2 continued to be the Chairman of the respondent Company thereafter and was its Chairman when the present petition was filed en 26tti of November 1958. However, he ceased to be the Chairman during the pendency of this petition as and from 31st of December 1958. The respondent No. 3 was co-opted as a Director of the respondent Company on 27th of August 1953 and the respondent No. 4 was co-opted as such a Director on 14th December 1954. Both these persons continued to be the Directors of the Company at the date when the present petition was presented but they ceased to be such Directors from 30th of June 1959 during the pendency of the petition. The Central Government made an order No. 33 (1Q5)-CL/56, dated 17th October 1956, under Section 235, clause (c) of the Act appointing witness V. H. Deshpande, a Chartered Accountant, as an Inspector to investigate into the affairs of the respondent Company and to make a report thereon to the Central Government. The witness made his report on 29th June 1957. The present petition is mainly based upon the report of the witness Deshpande and that report constitutes the main evidence for the prayers made in the petition including the prayer for compensation on the ground that respondents Nos. 2 to 4 were guilty of acts of malfeasance and misapplication of funds. The acts of malfeasance alleged against respondent No. 2 are eight in number and they have been tabulated by the petitioner Company in paragraph 11 of the petition. Some of these acts of malfeasance are also attributed to respondents Nos. 3 and 4. For the purpose of deciding the preliminary point, it is not necessary to state the details of the alleged malfeasance and misapplication of funds.

2. After the present petition was presented, the petitioner Company went into liquidation and the Official liquidator, High Court of Bombay was appointed as the Provisional Liquidator. With the permission of the learned Company Judge, High Court of Bombay, the Official Liquidator appeared in support of the present petition at a later stage and the conduct of the present petition is in the hands of that Officer. The respondent No. 2 also appeared and contested the petition. However, before the hearing of the petition commenced, respondent No. 1 instructed his solicitors to withdraw and permitted them to withdraw their appearance. The consequence has been that respondent No. 2 was not represented by any counsel or attorney at the date of the heating. Respondent No. 2 also did not appear in person to contest the petition. Respondents Nos. 3 and 4 were also represented by the same solicitors and they also permitted the solicitors to withdraw their appearance on their behalf. However, at the date of the commencement of the hearing, Mr. B. J. Bhatt appeared on behalf of respondents Nos. 3 and 4.

3. Mr. Kaji, the learned counsel for the petitioner Company, in his opening address mentioned that, since the filing of the petition, there had been such a change in the management of the affairs of the Company by the retirement of the respondents Nos. 2 to 4 that it was not longer necessary to press for the prayers contained in clauses (a) to (c) aforesaid and that, therefore, this Court was no longer required to consider the allegations on the basis of which the aforesaid three prayers were made. This statement by Mr. Kaji provided Mr. Bhatt with an argument that the petition no longer survived and the same deserved to be dismissed forthwith. I propose to consider this argument just in a moment. Mr. Kaji, therefore, at the commencement of the hearing, stated, that the only prayers which the petitioner Company was now pressing were the prayer (d) and that part of the prayer (e) which was connected with that prayer (d). As already stated, prayer (d) is for an order requiring respondents Nos. 2 to 4 to pay or to contribute by way of compensation a sum or sums in respect of the malpractices, mismanagement, misappropriation and breach of trust alleged to have been committed by them. Mr. Kaji, therefore, staled that he would lead only suit evidence as was in the possession of the petitioner Company in support of the allegations which would sustain the aforesaid two prayers.' For this purpose, Mr. Kaji examined Mr. Deshpande and certain other witnesses and produced quite a good mass of documentary evidence. Mr. Shelat, the learned counsel for the respondent Company, lent support to the evidence, adduced by the petitioner Company. None of the respondents led any evidence to counter the evidence adduced by the petitioner Company.

4. Before the commencement of the hearing, Mr. Bhatt had Indicated, as already stated, his contention that the prayer in clause (d) aforesaid did not survive in view of the fact that the prayers (a) to (c) were not being pressed by the petitioner Company. That prayer (d) strictly did not come within the purview of either Section 337 or Section 398 of the Act, although it is connected with those two sections. That prayer is based upon Section 543 [Schedule XI] of the Act. That Section 543 (Schedule XI) applies to the facts of the present case by virtue of Section 406 of the Act. The latter section enacts that, in relation to an application under Section 397 or Section 398, Sections 539 to 544, both inclusive, shall apply in the form set forth in schedule XI. As already stated, Mr. Kaji did not press the petition under sections 397 and 398 of the Act. He did not press the petition under Section 397 on the ground that the petitioner Company was now advised that a winding up of the respondent Company was just and equitable and that such winding up would not unfairly prejudice the members. In order to sustain a petition under Section 397 of the Act, it is necessary for the Court to be satisfied on two points, viz. (i) that the Company's affairs are being conducted in a manner oppressive to any member or members thereof and (l) that winding up of the Company would unfairly prejudice such member or members, but that, otherwise, the facts would justify the making of a winding-up order on the ground that it was just and equitable that the Company should be wound up. The petition under Section 398 was based on a complaint that the affairs of the respondent Company were being conducted in a manner prejudicial to the interests of the Company. This is provided for in Clause (a) of Section 398 of the Act. This prayer was not pressed, as already stated, because of the change in the Constitution of the directorate of the Company during the pendency of the petition, Mr. Bhatt contended that, therefore, the object of the present petition had been exhausted and that the petition had become infructuous. He, therefore, contended that the petition deserved to be dismissed as the only prayers which could, have been granted under sections 397 and 398 were not being pressed for. On the other hand, Mr. Kaji, at that stage, contended that there was a vital connection between the prayers made under Section 397 and/or Section 398 on the one hand and the prayers made under Section 543 (Schedule XI) on the other and that, until the allegations on the basis of which the prayer (d) was founded were finally determined- the petition must survive. The submissions which Mr. Kaji made at that stage were as follows;

(1) in order to grant the prayer under Section 545 (Schedule XI), it was necessary for the Court to record a finding to the effect that a prima facie case of misapplies caution, misfeasance, and/or breach of trust in relation to the funds of the Company had been made out; and,

(2) that, after such a finding was recorded, an application might be made in the present proceedings by a creditor or a member of the respondent Company and, thereupon, the Court was bound to undertake an examination of the delinquent persons and, then, to pass a suitable order for compensation in terms of prayer (d). Without deciding the validity of the above contentions, I permitted Mr. Kaji, at the commencement of the hearing, to lead evidence for and on behalf of the petitioner Company because, in my judgment, in any case, an application for compensation on the basis of malfeasance or misapplication must be preceded by appearance of evidence on the record of a petition under Section 391 and/or Section 398 of the Act and in the course of the proceedings therein. It was necessary for me to grant such permission to Mr. Kaji also because both Mr. Kali and Mr. Bhatt were agreed that, in order that an application for compensation for misfeasance etc. may be competently made, it is necessary that, at least, some materials there for must appear in the course of proceedings under Section 397 and/or Section 398 of the Act

5. After Mr. Kaji had addressed me at length on the merits of the prayer for compensation for misapplication of funds and malfeasance etc., Mr. Kaji made his submissions on the topic of the competence of this Court to decide upon the question tentatively or finally about the grant of the prayer for compensation on the ground of malfeasance etc.

6. Before I indicate the rival contentions which were urged on the above topic by the learned counsel on both the sides, it will be convenient first to reproduce Section 543 (Schedule) XI) of the Act on the construction of which the solution of the above controversy will ultimately rest. That section is as follows:

'543. Power of Court to assess damages against delinquent directors, etc. -- (1) If, in the course, of the proceedings on an application made to the Court under Section 397 or 398, it appears that any person who has taken part in the promotion or formation of the company, or any past or present director, managing agent, secretaries and treasurers or manager or any 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 any creditor or member, examine into the conduct of such person, director, managing agent, secretaries and treasurers, manager 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.

(2) This section shall apply notwithstanding that the matter is one for which the person concerned may be criminally liable.'

The section confers powers upon the Court (I) to examine into the conduct of any person who has taken part in the promotion or formation of a Company or any director, managing agent, secretaries and treasures or manager, or any officer of the Company (hereafter for brevity's sake called 'the person concerned') and (ii) to compel the person concerned to repay or restore the money or property of the Company or to contribute any sum by way of damages. The exercise of the powers is made dependent upon an application being made to the Court by a creditor or member of the concerned Company. The persons against whom the order can be made are not merely the present director, managing agent, secretary and treasurer or manager or officer of the Company, but even against the past director, managing agent, secretary and treasurer or manager, or officer of the Company. The section further provides that misapplication, retention, misfeasance or breach of trust, for which repayment, restoration or compensation can be ordered, must appear in the course of proceedings under Section 397 or Section 398 of the Act. In other words, the section provides for an application for recovery of damages to be made if it appears, in the course of proceeding under Section 397 or Section 398 of the Act, that misfeasance etc. has taken place in relation to a Company.

7. The points which arise for determination at the present stage are as follows:

(1) Whether the whole of the petition should be dismissed without any further enquiry if the prayers under sections 397 and 398 do not survive?

(2) Whether the Court is required to record a finding in a petition under Section 397 or Section 398 thata prima facie case for examination of the person concerned or payment of compensation against him exists inthe proceeding under Section 397 or Section 398 ofthe Act?

(3) Whether an order for examination and payment of compensation can be made in the petition under Section 397 or 398 of the Act or whether a fresh application is required to be filed for institution of a proceeding under Section 543 (Schedule Xi)

(4) If so, whether the application required to be filed under Section 543 (Schedule XI) should be an independent petition or whether the application can be made in the main petition under Section 397 or Section 398 of the Act?

8. sections 397 and 398 occur in Chapter VI. The provisions contained in this Chapter are new and no. such provisions were to be found in the Indian Companies. Act, 1913, or any of its predecessors. No such provision, is to be found in the Company Law applicable at present-in England. The heading of the Chapter is 'Prevention of Oppression and Mismanagement'. A perusal of all the sections in the Chapter shows that certain important powers are conferred by the sections on the Court with a view to prevent oppression of one section of shareholders by another section and/or to put an end to mismanagement in the affairs of a Company and that, in order to achieve this object, certain rights are conferred, on the shareholders and creditors of the Company and even on the Central Government. Sections 397 and 398, of the Act appear to be the main sections in the Chapter. The applications thereunder can be made by only members who are qualified to do so under Section 399 of the Companies Act. This qualification appears to have been introduced with a view to prevent shareholders having only a very small Interest in the Company from disturbing the management thereof, of shareholders other than the qualified shareholders wish to set right the affairs of a Company alleged to be under mismanagement, then, that shareholder has got, in the first instance, to satisfy the Central Government and to obtain, authority there from before presenting a petition under sections 397 and 398 of the Act. Section 397 is designed to put an end to an oppressive management or oppressive conduct of the affairs of a Company. Section 398 has been designed to put an end to the affairs of '-. Company being conducted in a manner prejudicial to the interests of a Company or to prevent a change being made in the constitution of a Company or its control, which change is likely to lead to any such pre judicata management. From these provisions, it is crystal-deer that the sections are not intended to deal with any questions connected with the past management of a Company except in so far as such past management may indicate that it is necessary to take steps for the prevention of future oppression of one section of shareholders against another or to prevent a prejudicial management and conduct of its affairs. The dominant idea seems to be to confer powers on the Court which will enable it to put an end to the present state of affairs and to safeguard the future interests of the Company and/or its shareholders. In such a petition, the necessary or proper parties are not the persons who had something to do with the past management of the Company. The necessary or proper parties are those who are connected with the present management of the Company and the Court will enquire Into the conduct of only such persons with a view to see whether they should or should not be removed or how they should be! dealt with in order that the management of the Company may be conducted in the general interests thereof and in the interests of all the share holders without one section oppressing the other. Therefore, prima facie, the enquiry under sections 397 and 398 has no connection with the enquiry under Section 543 (Schedule XI) aforesaid, at least in so far as the enquiry under the latter section is to be directed against the promoters and past officers of the Company. But, at the same time, it cannot be said that there is a complete divorce between the objects of sections 397 and/or Section 398 on the one hand and those of Section 543 (Schedule XI) on the other. Section 543 (XI) is also a new section which was not to be found in the old Company Law. That section has also been designed with a view to provide a summary remedy to the creditors and shareholders of a Company which enables them to obtain an order for compelling the delinquent officers of the Company to contribute towards the funds and assets of the Company which they have illegally obtained during the course of their management or which have been lost as a result of such management. Under the general law of the land, a right to resort to such summary procedure is not given to any creditor or shareholder of the Company whilst the Company is in existence. Under the old law, such a right arose only after the Company was taken into liquidation. Under the latter contingency, a right was given for obtaining similar orders against delinquent officers of the Company, which right has been preserved by the Act by Section 543. But it appears that the Legislature intended to extend this right further by conferring a similar right upon the creditors and members of the Company even during the subsistence of the Company. That right is not an absolute or untrammeled right. The right is circumscribed or limited by that conditions mentioned in Section 543 (Schedule XI) of the Act and one of the conditions mentioned is that, before an application for examination of the person concerned and an order for compensation are made against him, prima facie evidence must appear against such concerned person in the course of a proceeding under sections 397 or 398 of the Act. Therefore, a proceeding under Section 543 (Schedule XI) is an emanation from a proceeding under Section 397 or Section 398 of the Act and although the objects of sections 397 and 398 are different from the object of Section 543 (Schedule XI), there is a vital connection between the two in the sense that a proceeding under the latter section emanates from a proceeding under either of the two sections 397 and 398 of the Act.

The above discussion, though it clears the ground for answering the first point for determination, does not necessarily answer that point. The controversy is whether the petition under Section 398 of the Act, (as the latter is the only section under which the present petition survives, as already stated) should or should not be retained on the file of this Court until either the proceeding under Section 543 (Schedule XI) is determined, or, in any case, until a petition under that section comes to be made. In my judgment, there is force in the argument of Mr. Bhatt that it is not necessary that a petition under Section 543 (Schedule XI) can only be made when a proceeding under Section 397 or Section 398 is subsisting. Section 543 (Schedule XI) does not say that an application under that section can be made only during the subsistence of a petition under Section 397 or Section 398. That section only states that it must appear that a misfeasance has been committed in the course of a proceeding under Section 397 or Section 398 of the Act. Therefore, all that an applicant under Section 543 (Schedule XI) has to satisfy, when presenting an application under Section 543 (Schedule XI) is that a case for misfeasance has come to light in the course of a petition under Section 397 or Section 398. Therefore, from one point of view, the moment the present petition was filed and allegations came to be made against respondents Nos. 2 to 4 that they were guilty of misfeasance, a right to present an application under Section 543 (Schedule XI) accrued to a creditor or member of the respondent Company and, therefore it is necessary that the present petition must be retained on the file, in order to enable either the petitioner Company or any other creditor or member of the respondent Company to make that application. But, in my judgment, having regard to the facts of the present case, though such is the legal position, Mr. Kaji is not wrong in seeking permission of the Court to adduce further evidence in regard to the aforesaid allegations against respondents Nos. 2 to 4 so as to enable the petitioner Company or any of the creditors or members thereof to decide for itself (this is on the assumption that such decision is not obligatory on the Court) whether a prima facie case of misfeasance does or does not exist against respondents Nos. 2 to 4. I cannot accede to the request of Mr. Bhatt unless Mr. Bhatt satisfies me that there is anything in any of the aforesaid three sections or any of the other provisions of the Act which compels the Court to dismiss the petition under Section 397 or Section 398 of the Act the moment the object with which the petition was brought is exhausted. Once a petition is brought on the file of a Court, it is entirely discretionary with the Court as to when the proceeding therein should terminate. Under the circumstances, I have regarded the initial address of Mr. Kaji as not a present and immediate prayer for dismissal of reliefs (a) to (c), but as only an expression of a desire to withdraw from those prayers as soon as either a prima facie case for misfeasance has come to light in the course of the present proceedings or, if his second submission is right, until this Court has recorded a finding to the effect that a prima facie case of misfeasance exists or does not exist or until this Court considers and decides his further submission that the petitioner Company should be permitted to apply for a Judge's Summons in relation to the acts of misfeasance alleged against respondents Nos. 2 to 4. Under the circumstances, though I agree with Mr. Bhatt's interpretation of Section 543 (Schedule XI) that, in order to make an application under Section 543 (Schedule XI), it is not necessary that a proceeding under Section 397 or Section 398 should be subsisting, 1 do not agree with him that, having regard to the facts of the case, the petition under Section 398 of the Act must be dismissed out right.

9. So far as the second point is concerned, again, I agree with the submission made by Mr. Bhatt that this Court is not required to record a finding in a petition under Section 397 or Section 398 of the Act whether a prima facie case for examination of the person concerned or for restoration of assets or for payment of compensation against him exists. The question has got to be answered primarily with reference to the first part of Sub-section (1) of Section 543 (Schedule XI). That apart, though it states that it must appear that the person concerned has been guilty of misfeasance, does not say as to the person or the authority to whom the existence of such prima facie case must appear. In my judgment, If the Legislature intended to say that such a prima facie casemust appear to the Court, it could have easily added the words 'to toe Court' after the verb 'appears' occurring in the first part of Sub-section (1) of Section 543 (Seh. XI) of the Act. I am by no means convinced that there is anything in this section or the Act which compels the Court to add those words to carry out the intention of the Legislature. On the contrary, in my opinion, having regard to the fact that the final decision on the question of examination and payment of compensation can only be made, on an application by a creditor or a member, the intention of the Legislature cannot have been that, in a petition designed under Section 397 or Section 398 of the Act, the Court should undertake the responsibility of finding out whether any such prima facie case has or has not come to light. As already pointed out by me, the person against whom the petition under Section 397 or Section 398 is filed is not necessarily the person against wham the prima facie case may come to light. Having regard to the facts of the present case, there is no doubt in my mind that, if all the allegations which the petitioner Company has made are true, then, a prima facie case exists, not only against respondents Nos. 2 to 4, but it exists also against a large number of other persons. I do not think the Legislature could have intended to import into a processing under Section 397 or Section 198 the principles under which a criminal Court Inquires into the existence of a prima facie case before proceeding to try a suspected person of a serious criminal charge. Even in such a criminal trial, the person to be proceeded against is always a party at the time of the determination of the question about the existence of a prima facie case. It could not have been the intention: of the Legislature that wherever any such prima facie case comes to light in a proceeding under Section 397 or Section 393, the further proceedings must be stayed until, the person against whom the prima facie case appears is joined as a party. If any such procedure were to be followed, the case under Section 397 or Section 398 may never come to an end. Moreover, the petitioner under Section 397 or Section 398 may be unwilling to join the person concerned being proceeded against under Section 543 (Schedule XI). In some cases, the petitioner under Section 397 or Section 398 himself may be found to be guilty of misfeasance under that particular section. In my judgment, the scheme of Section 543 (Schedule XI) read in the light of the scheme of sections falling under Chapter VI appears to be that if evidence or materials come to be brought on the record of a proceeding under Section 397 or Section 398, then, it is open to a creditor or member of a Company to start proceeding against a delinquent director etc. under Section 543 (Schedule XI). If the section is not interpreted in the aforesaid manner, then, in some cases a determination by the Court about the existence of a prima facie case of misfeasance is likely to become infructuous. The Court may record a finding and no Creditor or member of the concerned Company may be Interested at all in launching misfeasance proceedings against a delinquent director etc. Moreover, though the Court may take the trouble of determining the existence of a prima facie case, a creditor or member, who has always a better source of knowledge, may think It not worth his while to launch misfeasance proceedings at all. Under the circumstances, the second point for determination must be answered against the petitioner. In my judgment, the Court is not only net bound, but it would be Improper for the Court to record any finding about the existence of a prima facie case of misfeasance in a proceeding under Section 397 or Section 398 of the Act.

10. That brings me to a consideration of the third point for determination. Having regard to the discussion aforesaid, in my opinion, it must follow that a fresh application is necessary for starting proceedings under Section 543 (Schedule XI) of the Act. This follows from the clear language used by the Legislature itself in the latter part of Section 543, Sub-section (1) (Schedule XI). As already stated, that part contemplates an application to be made for the purpose of obtaining an order for examination of the person concerned and for obtaining an order for compensation against him. It is important to notice that this application can be made not only by the petitioner under Section 397 or Section 398 of the Act, but can be made by any member and even by a creditor of the Company. Mr. Kaji concedes this position. But, his contention is that such an application ran be made simultaneously with the petition under Section 397 or Section 398 and that the prayers under Section 397 or Section 398 and those under Section 543 (Schedule XI) can be combined together in one and the same petition. I find difficulty in accepting this contention. As already pointed out by may the existence of a prima facie case against the delinquent director etc. in a proceeding under Section 397 or Section 398 is a sine qua non for a proceeding under Section 543 (Schedule XI). If a petitioner combines the prayers under the two sets of sections in one and the same petition, then, it would mean that a petition under Section 543 (Schedule XI) had come to be made before a prima facie case of misfeasance had come to light in a proceeding under Section 397 or section 398 of the Act. I have no doubt whatsoever that a proceeding under Section 397 or Section 398 of the Act cannot be said to have started unless the petition under that section has come to be filed, numbered, and at least, some order of the Court is obtained thereon. Till that stage, it cannot be said that a proceeding under Section 397 or Section 398 of the Act has started. In this view of the matter, it appears to me to be crystal clear that petitions under sections 397 or 398 and 543 (Schedule XI) cannot be combined together or simultaneously made, but that the petition under the latter section must follow after a prima facie case has come into light in the course of the proceedings under the former sections.

11. That brings me to the final point for determination whether an application under Section 543 (Schedule XI) should be an independent petition or whether it can be made as a sub-application under the main petition under Section 397 or Section 398 of the Act. The answer to this question is also contained in the language used by Section 543 (Schedule XI) and the discussion aforesaid. If my view is right that a Court dealing with a petition under Section 397 or Section 398 of the Act has nothing to do with the launching of proceedings under Section 543 (Schedule XI), but that it is a matter which is entirely within the scope of the right of a creditor or a member, then, it must follow that the application under Section 543 (Schedule XI) must be by an independent application. When the present petition was filed, the rules under the Act No, 1 of 1956 had not come to be made. Therefore, Mr. Kaji is right in his submission that, on the date on which the present petition was filed, the petitioner Company could not have had any idea 'as to what procedure was to be adopted for the purpose of securing its prayer for the examination of the persons concerned and for payment of damages by them. But, though this is so. In my judgment, for the reasons already recorded, there cannot be any doubt that the application under Section 543 (Schedule XI) must be made after the present petition under Section 397 or Section 398 was filed. Therefore, in my judgment, the combination of the two sets of prayers (a) to (c) and (d) was not permissible under the provisions of the Act.

12. But, that does not end the matter. The Supreme Court has now framed rules under the Act thereafter called 'the Rules'). Before 1 deal with the relevant rules on the subject, I may mention that the rules make a distinction between two kinds of applications: one is an application by petition and the ether is an application by Judge's summons. An application by petition, broadly speaking, is a substantive and an independent application filed for obtaining a major relief. On the other hand, an application by Judge's summons appears to be a subsidiary application : One made within the main petition for the purpose of obtaining a subsidiary relief. Broadly speaKing, an application by petition is to be neared in open Court. An application by Judge's summons may or may not be so heard. Some of the applications for Judge's summons are directed to be heard in open Court. But, a discretion has been conferred on the Court to hear them wholly or partially in Chambers; whereas the other applications by Judge's summons are ordinarily to be heard in Chambers a discretion being vested in the judge to adjourn the same for hearing them in open Court. The rules also make a distinction in the procedure to be followed in the two kinds of applications. An application by petition is to be entered in one register and an application by Judge's summons is to be entered in another register. In the latter register, the number of the main proceeding to which the application relates has also to be entered. Therefore, so far as the rules are concerned, the rules make a distinction between a petition and an application by Judge's summons. Rules 10 and It are relevant for this purpose. Rule 10 provides that, unless otherwise provided by the rules or permitted by the Judge, all applications under the Act shall be made by a petition or by Judge's summons as thereinafter provided. Rule 11 mentions the applications which are to be made by petition. Amongst these applications is included, in Clause 19, an application under Section 543 (Schedule XI) in the course of proceedings under sections 397 and 398 of the Act. Clause (b) of Rule !1 provides that all other applications under the Act or under the rules shall be made by Judge's summons. Rule 12 provides that all petitions under the rules shall be heard in open Court and, in addition, mentions a number of other applications which can be made by Judge's summons also to be heard in open Court. Amongst these applications is included an application under Section 543, which section confers e right for a similar examination and payment of compensation for acts of misfeasance brought to light in the course of a winding up petition. Therefore, so far as rules are concorned, there cannot be any doubt whatsoever that an application under Section 543 (Schedule XI) has got necessarily to be made by a petition which petition must he entered in the Company Petition Register of this Court and must be given separate number in the same manner as the present petition has been so entered and numbered. Mr. Kaji did not deny this position a his contention that 8 proceeding under Section 543 (Schedule XI) was a proceeding under Section 397 or Section 338 of the Act was rejected. The aforesaid rules, in my judgment, is an additional ground for rejecting the contention of Mr. Kaji that a proceeding under Section 541 (Schedule XI) is subsidiary to the petition under Section 397 or Section 398 of the Act. But, Mr. Kaji contends that, even though, under the rules, an independent petition is required to be filed for a proceeding under Section 543 (Schedule XI), I must exercise the discretion vested in the Court under Rule 10 aforesaid which confers a jurisdiction upon the Court to permit a person to present an application by Judge's summons in lieu of an application by petition. I have given my careful thought to the arguments advanced by Mr. Kaji in support of this submission and I have come to the conclusion that none of them is of such a validity as to permit me to exercise the discretion in favour of an application by Judge's summons, it is quite clear that the discretion vested under Rule 10 aforesaid must be exercised on sound judicial principles and having regard to the scheme of the Act and the Rules, an application under Section 543 (Schedule XI) being an independent petition, the Court will not be justified in lightly departing from the procedure laid down by the rules unless there are very strong and cogent grounds in support of any such prayer. The first ground which Mr. Kaji urged was that I had already heard the present petition for three days and that all that time would be wasted if a separate petition were ordered to be hired, I fail to see how, even if an application by Judge's summons were to be permitted, all that has already been done in the present proceedings would be of any avail. Mr. Bhatt has all along proceeded on the basis that a separate and fresh application is required to be filed to sustain a petition under Section 543 (Schedule XI). It is because of this view that Mr. Bhatt probably has not entered into details which otherwise he would have done and has not adduced any independent evidence on behalf of his clients. It is quite clear that even if an application by Judge's summons were to be permitted, Mr. Bhatt would ask for further cross-examination of the witnesses already examined and that he would insist upon his right to lead his own evidence in rebuttal. Secondly, having regard to the evidence already adduced in the present proceedings, I have no doubt whatsoever that respondents Nos. 2 to 4 are not the only delinquents, but, there are 3 number of other persons who stand at least on the same footing as respondents Nos. 3 and 4. Thus, having regard to the evidence which has been recorded in the case, it cannot be denied that proceedings under Section 543 (Schedule XI) can be filed against those other persons too. I do not know what attitude the present petitioner would adopt in the matter. But, even assuming that the present petitioner does not wish to launch proceedings against persons other than respondents Nos. 2 to 4, then, it is crystal clear that, If another application comes to be made against any other person, there will be two sets of proceedings in which there is likelihood of a conflict of decisions being recorded. Mr. Kaji contended that an application by Judge's summons was a cheaper and a speedier remedy then an application by petition. This is so. But, this argument would apply to every application for a Judge's summons in a petition under Section 397 or Section 398 and can hardly be regarded as a good and sufficient ground for granting the prayer. Finally, Mr. Kaji contended that the present rules were not in existence at the time when the present petition was filed and that, therefore, I should exercise the discretion in favour of the petitioner Company. In this connection, he brought to my notice the fact that the rules themselves have provided the procedure by Judge's summons in the case of an application for misfeasance under Section 543 of the Act and he contended that there was no reason why the same procedure should not be followed in the case of an application under Section 543 (Schedule XI). This argument at one stage did appeal to me, but, after giving careful thought, I have come to the conclusion that, by itself, It is not a good ground for exercising the discretion in favour of the petitioner Company. My reason for this is that, in any case, an application by Judge's summons will have to be made and that will have to be separately tried. In my judgment, having regard to the stakes involved in the present case and the probability of an application being filed against the other delinquent directors etc., it will not be proper to allow two parallel sets of proceedings to proceed simultaneously. In my judgment, having regard to the materials which nave appeared on the record, the petitioner Company should review those materials and take such steps as it may think necessary or expedient in on a consolidated proceeding against such of the persons against whom the record reveals a prima facte case of misfeasance rather than that it should proceed to get the matter decided only against respondents Nos. 2 to 4. Even if ultimately it decides not to proceed against any other person, it is better that a separate and independent proceeding should be filed rather than that the petition under sections 397 and 398 should be kept indefinitely pending until the decision of the contemplated application under Section 543 (Schedule XI). Therefore, I am not disposed to grant the prayer of the petitioner Company to permit it to proceed under Section 543 (Schedule XI) by a Judge's summons. For the aforesaid reasons, in my judgment, the prayer embodied in Clause (d) and that part of prayer (c) which is connected with that prayer cannot be given to the petitioner Company in the present proceedings. The petitioner Company will have to take such steps as it may be advised for launching proceedings under Section 543 (Schedule XI) by filing a proper petition therefor.

13. Mr, Kaji finally requested me to give same suitable direction in the matter of the contemplated proceeding under Section 543 (Schedule XI). I fail to see why any such directions should be given by this Court. As already pointed out by me, the matter is not to be determined by this Court in the present petition and I fail to see how any direction given by the Court can help the petitioner Company in the matter of launching the contemplated misfeasance proceedings. On the contrary, in my opinion, any such direction is bound to cause anxiety to respondents Nos. 2 to 4 and can be made by them a legitimate ground for complaint.

14. However, in order not to create any complications for the petitioner Company in the matter of taking out of misfeasance proceedings against respondents Nos. 2 to 4 or any other persons, I order that the present petition should be adjourned for a period of three months within which period the petitioner Company or any other person interested in the matter may take such steps as it or he may be advised in regard to the acts of misfeasance alleged to have been committed by respondents Nos. 2 to 4 or arty other person. The petition shall be posted for final orders Immediately after three months from to-day. The costs of the hearing so far Incurred shall be costs in the cause.


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