Skip to content


Official Liquidator, Madras Oils and Fertilisers (P.) Ltd. Vs. G. Shanmugham and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai High Court
Decided On
Case NumberComp. Application No. 393 of 1977 in O.P. No. 9 of 1972
Judge
Reported in[1979]49CompCas903(Mad)
ActsCompanies Act, 1956 - Sections 543 and 543(1)
AppellantOfficial Liquidator, Madras Oils and Fertilisers (P.) Ltd.
RespondentG. Shanmugham and ors.
Appellant AdvocateParty in person
Respondent AdvocateV.S. Subramaniam, Adv. for respondent No. 1, ;T.S. Ramu, Adv. for respondent No. 2, ;S.V. Subramaniam, Adv. for ;S. Padmanabhan, Adv. for respondent No. 3 and ;None for respondent Nos. 4 and 5
Cases ReferredDovey v. Cory
Excerpt:
.....543 and 543 (1) of companies act, 1956 - matter pertaining to accountability of directors laid by official liquidator - unless there is nexus between accountability which claimed by official liquidator and any personal act on part of one or other of delinquent directors it cannot be said that they are squarely responsible within meaning of section 543 (1) (a) - official liquidator failed to establish prima facie case that directors are accountable for sums found as credit in books of company in liquidation - held, directors are not accountable for same. - - the case of the first respondent as well as the third respondent is that in the course of such supplies and adjustments, a credit has occurred, and this was in or about the year 1965.66 and having regard to the consistent.....ramaprasad rao, j. 1. this judge's summons is taken out by the official liquidator, as the official liquidator of the madras oils and fertilisers private ltd., now in liquidation, for a declaration that respondents 1 to 5 as directors or as former officers of the company had misapplied or become liable or accountable for the monies as stated by him in the schedule to his report in support of the summons, and consequent upon the directors not having accounted for the same, he is representing the body of the creditors is entitled to recover the said amounts under sections 542 and 543 of the companies act, read with section 460(4) therein. admittedly, the amounts claimed and of which he has given out the details in his report, are amounts which were payable to the componay between the years.....
Judgment:

Ramaprasad Rao, J.

1. This judge's summons is taken out by the official liquidator, as the official liquidator of the Madras Oils and Fertilisers Private Ltd., now in liquidation, for a declaration that respondents 1 to 5 as directors or as former officers of the company had misapplied or become liable or accountable for the monies as stated by him in the schedule to his report in support of the summons, and consequent upon the directors not having accounted for the same, he is representing the body of the creditors is entitled to recover the said amounts under Sections 542 and 543 of the Companies Act, read with Section 460(4) therein. Admittedly, the amounts claimed and of which he has given out the details in his report, are amounts which were payable to the componay between the years 1958 and 1966. The case of the official liquidator is that each of the respondents were directors on the date when the order of winding up was passed on July 28, 1972 and that on a scrutiny of the books of accounts and on a perusal of the statement of affairs as disclosed by the directors, coupled with the balance sheet perused by him, he found that a sum of Rs. 27,464.27 was noted in the balance-sheet as debts considered doubtful, and another sum of Rs. 5,399.39 was noted as sum total of advances considered doubtful by the officers of the company.

2. The case of the official liquidator is that once such amounts are shown in the books of account as recoverable from third parties and so long as those amounts were not recovered and there is evidence to show that genuine and sincere attempts were not made to recover such amounts in a manner known to law, the officers of the company including the respondents as directors cannot escape the statutory liability to account for such sums under Section 543(1)(a) of the Companies Act, The fifth respondent is reported to be dead even on the date when the summons was taken out. He is, therefore, taken out of consideration for all purposes.

3. Respondents 1, 2 and 3 appear by counsel- The case of the respondent, as seen from the counter-affidavits filed, generally is that they accepted the reports as placed before the Board by the actual persons in management of the affairs of the company and as they were given to understand that the debts were doubtful and bordering on irrecoverability, they were mechanically reproducing the same in the books of account though they were conscious, however, of the fact that they were doubtful debts and irrecoverable advances.

4. The first respondent's case, in so far as the amounts shown as due and payable by E.I.D. Parry Ltd, are concerned, is that he, has stated that it was a credit which had accrued for years and in the course of the dealings the company had for years with that company. He has set out the course of business thus :

The company in liquidation used to enter into contracts with the E.I.D. Party Ltd. for the supply of de-oiled cakes. Prima facie, a pro forma invoice will be prepared for supplying such de-oiled cakes to E I.D. Parry Ltd., and the fixation of price would depend upon the nitrogen content of such de-oiled cakes supplied by the company to E.I.D. Parry Ltd. As set out by the first respondent in the counter-affidavit, it appears that after purchasing the de-oiled cake, E.I.D. Parry and purchasers similar to the said firm would send the de-oiled cake to their own laboratories for test and after ascertaining the percentage of nitrogen content, they would inform the company about the result of the test. Thereafter, there would be further negotiations between the company and the purchaser. After arriving at the price, credit would be given in the books of account for such agreed price and this would be set off against the tentative or the provisional price which the company by themselves fixed on the de-oiled cake supplied to E.I.D, Parry Ltd. and other purchasers. The case of the first respondent as well as the third respondent is that in the course of such supplies and adjustments, a credit has occurred, and this was in or about the year 1965.66 and having regard to the consistent acceptance of the Board for well over three years and also by the general body at its annual meeting about the irrecoverable nature of such debts and advances, no steps were taken by the company, as by initiating further steps for recovery of such doubtful debts, it would further involve the company in unnecessary expense. The same explanation is given by the third respondent but he would also plead that he was an out-of-station director and that it was the first respondent, who was the director-in-charge of the company in liquidation and, therefore, in any event, he should be exonerated under any account.

5. The official liquidator, on the other hand, would say that in the absence of any reasonable explanation for not having taken any action for recovery of the debts, the mere assertion by the company in liquidation, though through the voice of the board that it was an irrecoverable debt, and that it was assented to by the shareholders at its general meeting, cannot bind the third party creditor after liquidation. In fact, he would go to the extent of saying that recording of such amounts in the books of accounts, as if they were amounts recoverable by the company was, to some extent, an attempt to mislead the creditors as a body. In these circumstances, the summons is pressed into service and a direction as prayed for is asked.

6. Section 543 of the Companies Act which enumerates the power of court to assess damages against the delinquent directors has set down certain norms for the exercise of such power resulting in mulcting the ex-officers, may be directors, with damages for not acting reasonably and thus committing the company to unnecessary loss. The vein that runs through the intendment of Section 543 of the Companies Act appears to be that there should be prima facie proof of such negligence bordering on misfeasance and breach of trust which alone was generally the basis for invocation of the punitive rule contained in Section 543 of the Companies Act. No doubt, Section 543(1)(a) and Section 543(1)(b) create as between themselves a dichotomy in the matter of the exercise of the power of the court in such matters. As per Clause (a) of Sub-section (1) of Section 543 of the Act, such a power to assess the damages could be invoked in case of misapplication and retention of monies or property of the company and on a fair and reasonable conclusion by the court that the officers of the company are liable or accountable for the same. The court can then exercise its jurisdiction and assess the damages against the delinquent director or officer. Clause (b) of Sub-section (1) of Section 543 of the Act, however, lays down a specific hypothesis for the invocation of the power and for the exercise of it. It contemplates that the delinquent director should be found to be guilty of misfeasance or breach of trust in relation to the company. Therefore, Clause (b) deals with a particular situation, wherein it should appear to the court, whether on the application of the liquidator or any creditor or contributory, that the company whilst it was functioning acted through a body known as the directors or the officers who are guilty of appropriation without authority of the funds of the company. It may ultimately be a case wherein there was misappropriation also resulting in the breach of that faith which the shareholders and the creditors outside the domestic chamber of activity of a company place in the body of directors or officers in charge of the affairs of the company. A farther elucidation of the purpose and objective of Clause (b) of Sub-section (1) of Section 543 is not necessary for purposes of this case. I am not, therefore, embarking on it. But as it appears on the arguments addressed before me, the official liquidator can succeed in making for the issuance of the prayer in the summons only if he proves that the respondents 1 to 4 as quondam directors of the company have become liable or accountable for the money which was due to the company. Certainly, this is not a case where monies have been misapplied or monies have been retained by the directors including the respondents 1 to 4. The question, therefore, is whether, in. the circumstances of the case, respondents 1 to 4 or any one or more cf them are accountable for the monies claimed in the judge's summons.

7. We will take up for the purpose of elucidation and illustration the amount of Rs. 21,642.93 claimed in the judge's summons said to be due from E.I.D. Parry Ltd. On an enquiry made by the official liquidator in the course of the winding-up of the company, he was informed by the E.I.D. Parry Ltd. by its letter dated 11th May, 1976, that no amount was due to the company in liquidation. This letter produced before me is marked as Ex. C-1. The further admitted facts are that all the amounts shown as doubtful debts or doubtful advances were carried in the books of account for well over three years and it is also not in dispute that on the date when the order for winding-up was passed, all the amounts claimed in the summons were barred by the common law of limitation. But the official liquidator's case is that notwithstanding the fact that they were barred by the law of limitation, the directors could have recovered the same in time and that not having taken any reasonable steps or proved to have taken such steps in time, all of them or one or more of them are responsible or accountable for such monies. The peculiar facts and circumstances of this case are that the reports that these debts and advances became doubtful and not recoverable in the usual course were assented to by the shareholders as well as by the board. Generally, it would be inequitable to expect the board of directors to scrutinise every commercial activity of the company so as to acquaint themselves in full as to what should be done or what ought not to be done. They rely upon the bona fide reports prepared by the personnel of the firm, and when they come up before the board, commend such reports for the general acceptance of the general body as well. It is in this context relevant to quote the observations in the well-known case of Dovey v. Cory [1901] AC 477 :

' I think that Mr. Cory (who was one of the alleged delinquent directors in the case) was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information, and advice of the chairman and general manager, as to whose integrity, skill, and competence he had no reason for suspicion. '

8. I am only quoting this not out of the context, but only to fortify my view that unless there is a nexus between the accountability which is claimed by the official liquidator and any personal act on the part of one or the other of the delinquent directors, it cannot be said that they are squarely responsible within the meaning of Section 543(1)(a) of the Act. It is not in dispute, as is stated before me in the course of the arguments, that for more than three years all the amounts were reflected as irrecoverable amounts in the balance-sheets. We have to assume that the shareholders who also were parties to the acceptance of the commendation made by the board and who are presumed to be always strict and stringent in their criticisms having accepted the report that such debts are irrecoverable should be deemed to have considered that it would be a further waste of the company's funds to file suits or take appropriate legal proceedings to recover such amounts. It is in this view that the circumstances of the case in question have to be viewed. I agree with the official liquidator that such ought not to be the general impression or conclusion in all matters, for it would highly prejudice the creditor. But, in a case like this where debts were outstanding from 1958 to 1966 or 1967, it cannot be said that the company as a whole, and the respondents 1 to 4 in particular, avoided their duty or responsibility in not taking steps to recover them, knowing that they could be recovered in a manner known to law. In the peculiar circumstances of the case, it should be held that the directors can-not be said to be responsible to answer a case of accountability laid by the official liquidator.

9. The Calcutta High Court in In re Central Calcutta Bank Ltd. [1959] 29 Comp Cas 437 apparently falling in line with the ratio in Dovey v. Cory [1901] AC 477 , cited above, observed that it is also settled that the directors are not bound to examine the entries in the company's books of accounts. This view, as expressed by the Calcutta High Court, also supports the conclusion of mine that the directors sitting in the board and accepting the memoranda and the explanatory statements placed before them by the officers who are actually functioning in the company, cannot be made automatically responsible for any of the debts payable to the company if the report to them is that they are not recoverable in the ordinary sense of the term. I am unable, therefore, on the meagre evidence placed, to come to the conclusion that though prima facie the directors are accountable for the sums found as credits in the books of a company in liquidation, yet on a further probe, if it is found that such credits are nominally kept over and carried forward in the books of account, probably for tax purposes, they cannot be the sole guide to infer that there was negligence on the part of the directors in not having taken steps to collect the amounts in time. They cannot of course be made liable on the ground that they have deliberately allowed such debts to become time-barred, and, therefore, commercially accountable and legally responsible for making good that amount.

10. The further special contention of the third respondent is that he was an out-of-station director and, therefore, in any event he is not responsible. This would be the best way for any director to escape from the clutches of law. So long as he is in the cobweb of administration as a director of the company, he has to take the responsibility for such involvement and the consequential accountability that flows from it. He cannot escape on the simple ground that he was outside the region of activity and that it was the first respondent alone who was nominated as the director-in-charge. The collective responsibility would have made him otherwise responsible under the Act, but for the peculiar circumstances of the case under which I exonerate all the respondents.

11. The judge's summons, therefore, fails and is dismissed. There will be no order as to costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //