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In Re: National Sugar Mills Ltd. (In Liquidation) - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKolkata High Court
Decided On
Case NumberC.A. No. 128 of 1971 in C.P. No. 74 of 1963
Judge
Reported in[1978]48CompCas339(Cal)
ActsCompanies Act, 1956 - Section 543
AppellantIn Re: National Sugar Mills Ltd. (In Liquidation)
Appellant AdvocateAshutosh Law, Adv. for Official Liquidator
Respondent AdvocateBikash Sen, Adv. for respondent No. 3
Cases ReferredSupreme Bank Ltd. v. P.A. Tendolkar
Excerpt:
- .....who is being defended by mr. bikash sen, advocate.2. mr. ashutosh law, counsel appearing for the official liquidator, submitted that his main attack in this misfeasance application is against the respondent no. 4, manindra nath mitra, residing at 6-b, keyatala road, calcutta, who was the managing director during the relevant time and was practically in sole charge of the management and affairs of this company and was all in all. according to mr. law, mr. choudhuri and also other directors are not directly responsible for the alleged act of misfeasance or breach of trust. however, on the points of claim and defence filed by r. chowdhury the following issues were raised :1. whether the respondent no. 3, ranadeb choudhuri, barrister-at-law, is liable as a director for the sum of rs......
Judgment:

Ajay K. Basu, J.

1. This is an application by the official liquidator under Section 543 of the Companies Act, 1956, against various directors who have been made respondents in this application. Of course some of the directors are Government directors and Government officials but none of the directors, though duly served, is appearing before me to contest or oppose these proceedings except one director, Mr. Ranadeb Choudhuri, Barrister-at-Law, who is being defended by Mr. Bikash Sen, advocate.

2. Mr. Ashutosh Law, counsel appearing for the official liquidator, submitted that his main attack in this misfeasance application is against the respondent No. 4, Manindra Nath Mitra, residing at 6-B, Keyatala Road, Calcutta, who was the managing director during the relevant time and was practically in sole charge of the management and affairs of this company and was all in all. According to Mr. Law, Mr. Choudhuri and also other directors are not directly responsible for the alleged act of misfeasance or breach of trust. However, on the points of claim and defence filed by R. Chowdhury the following issues were raised :

1. Whether the respondent No. 3, Ranadeb Choudhuri, barrister-at-law, is liable as a director for the sum of Rs. 83,700 or any part thereof to the company ?

2. Are the directors or any of them liable for the said sum of Rs. 83,700 or any part thereof to the company ?

3. Whether this application is barred by the law of limitation and

4. To what relief, if any, is the official liquidator entitled ?

3. I should first decide issue No. 3, i.e., whether this application is barred by the law of limitation. Mr. Bikash Sen, appearing for the respondent No. 3, says that the order for winding up of this company, National Sugar Mills Ltd., was made by this hon'ble court on 1st February, 1966, and this application for misfeasance was noted as made on 2nd February, 1971. Under Section 543(2) it says :

' An application under Sub-section (1) shall be made within 5 years from the date of the order for winding up......'

4. Now if the order for winding up was made on 1st February, 1966, as in this case, then on 1st February, 1971, 5 years will expire and, therefore, as this application was taken on 2nd February, 1971, prima facie, it appears to be made one day after the expiry of the period of limitation. Mr. Law, appearing for the petitioner-official liquidator, however, submitted that 31st January, 1971, was a Sunday and 1st February, 1971, was also aholiday declared by this hon'ble court for Goddess Saraswati Puja immersion and so according to him after 31st January, 1971, the first working day of this hon'ble court was 2nd February, 1971, and on that very day this application was noted as made. Mr. Law called Mr. A.C. Kar, solicitor, son of Mr. R.C. Kar, solicitor, as a witness for the official liquidator to prove that 1st February, 1971, was declaraed a holiday by this hon'ble court and he produced his day book and other documents. Thereafter, Mr. Bikash Sen appearing for the respondent No. 3 submitted that as he finds that 1st February, 1971, was in fact declared a holiday for this court he is not pressing this issue on limitation. However, I am satisfied on evidence and on materials before me that 1st February, 1971, was really a holiday as this hon'ble court declared some time in January, 1971, that 1st February would be a holiday after the calendar was printed and, therefore, this application is not barred by the law of limitation. Therefore, I answer issue No. 3 in the negative.

5. Now I shall come to issues Nos. 1 and 2 together. In the judge's summons by the official liquidator the following are the grounds made for the misfeasance summons :

' 1. The directors wrongfully and illegally paid and/or allowed to be paid a total sum of Rs. 29,000 as commission for sale of shares of the said company. The said sum was paid and/or allowed to be paid without any justification in utter disregard of the interests of the shareholders and the said company and not complying with the provisions of law and the articles of association of the company and thereby causing a loss to the said company to the extent of the said sum.

2. The directors wrongfully and illegally paid and/or allowed to be paid a total sum of Rs. 52,700 on account of commission and interest for procuring finance for the company. There was no reason or justification whatsoever for such payment and the said payment was made and/or allowed to be made in complete disregard of the best interests of the shareholders and the company and in violation of the provisions of law and the articles of association of the company. The directors thereby caused a loss to be suffered by the company to the extent of the said sum.

3. The directors wrongfully and illegally paid and/or allowed to be paid a sum of Rs. 3,000 on account of travelling and conveyance expenses to a member of the staff of the said company without any justification whatsoever and for certain unspecified work and thereby causing loss to the said company to the extent of the said sum.'

6. One M/s. S.K. Bhattacharyya and Co., auditors, were appointed by this court to investigate the accounts of the said company. National Sugar Mills Ltd. (In liquidation), from 1955 up to the date of the winding up. The said auditors have made a report which says it is an interim report but was ultimately treated to be the final report dated 30th December, 1970, whichwas tendered by the official liquidator and marked as exhibit A. I must say that the auditors' report is not so exhaustive as it should have been. The auditors should have taken little more pains to go into the details of accounts in mote particulars. The auditor, Mr. S.K. Bhattacharyya, was called and gave evidence before me. However, as none of the directors came to the witness box to challenge this report which has been duly proved or cross-examined the auditor, I take this report to be correct. In the said report under the heading ' Commission for selling of shares ', it is stated:

'I observe that since the inception the company is paying commissions to persons for selling shares of the company. The company appointed persons as agents for selling shares and paid them 5% commission on face value of shares. I observe that the persons were appointed as agents who applied to the company in the prescribed forms of the company. This payment of commission to the agent is authorised by the articles of association of the company under Article 18 and the managing director has been authorised.'

7. Thereafter the auditors say that one Sugar Sales & Co. (P.) Ltd. were appointed the sole selling agents for the sale of sugar for a period of 5 years and the auditors make the comment: ' I fail to understand how the board proposed to appoint a non-existent company on the date of board's meeting dated August 6, 1956, as a sole selling agent.' This company. Sugar Sales & Co. (P.) Ltd., came into existence after August 6, 1956. The auditors further stated in his report. ' In my opinion for securing a subscription of Rs. 5 lakhs the board of directors actually paid a total sum of Rs. 1,19,301.25, the impudency of which needs no elaboration.' The auditors further statedi ' It is observed that during the year 1960-61, the following commission on sale of shares was paid to one P. Mitra, from 24th August, 1961, to 25th September, 1961 (altogether a sum of Rs. 25,000 was paid). From available records it is found that the above payments were always paid in cash, the payments being passed in all cases by Mr. M.N. Mitra, the managing director of the company.....' Also norecords or documents appointing the said P. Mitra as the share-selling agent of the company were found by the auditors. The auditors further remarked : ' It is natural, under the circumstances, for grave doubt and suspicion having arisen in my mind in respect of the same identity of P. Mitra of the share application forms and Prem Ranjan Mitra in the cash vouchers. From circumstantial evidence it is quite natural to come to the conclusion that the payments have been made to a dummy person unless of course it is proved otherwise.' Of course one Mr. Rajendra Lal Dutta, chief accountant of the company, who was called to prove M.N. Mitra's signature wanted to state that there was in fact a person called P. Mitrabut I am not satisfied with his evidence as it was plain from his evidence and demeanour that be came to support his ex-employee in any event.

8. The auditor further opined regarding commission for securing unsecured loans and deposits. ' I observe that following amounts of commission were paid to different persons for securing finance, unsecured loans, etc , from various persons ' and then he gives a list of more than Rs. 52,000 having been paid up to September 30, 1963, as commission for securing unsecured loans and advances. The auditor opines : ' I have to state that such type of expenses does not appear to be permissible under the provisions of the memorandum and articles of association of the company and the said payments may, therefore, be deemed to have been made in contravention thereof.' The official liquidator has produced before me the various vouchers upon which the cash payments of more than Rs. 83,000 was made and, barring one, each and every voucher was signed by the managing director, Mr. M.N. Mitra. It is striking that though each voucher was signed by the alleged recipient, yet the same recipients have signed differently in different vouchers. For example, Dipak Kumar Nandi's signature in voucher dated 10th May, I960, and Dipak Kumar Nandi's signature in the voucher dated 9th February, 1960, are not only different, but their address is different and everything is dissimilar though the said Rajendra Lal Dutta, chief accountant, in his deposition wanted to say that both are the same and identical person. Even while attempting to tally the vouchers with the cash book it was found that they did not tally at all. As a matter of fact, advance to the company was shown in the cash book as advance for supplying sugar. From the books of the company which I inspected it seems everything was in doldrum. No satisfactory explanations could be made available as to how these huge sums of money were paid as commission for securing loans and advances which may be contrary to the articles of association and is illegal. From the vouchers it is clear that all these were passed by the managing director, M.N. Mitra, and Rajendra Lal Dutta also says that Mr. M.N. Mitra was handling the cash and was himself making personal payments and, therefore, it is not possible for anybody to know whether Mr. M.N. Mitra was really making payments or misappropriating the money himself. M.N. Mitra himself has neither appeared before me nor came to explain these transactions.

9. About the travelling expenses the auditor says that 'Miscellaneous expenses of Rs. 3,000 were incurred in connection with the visit of one Sri D. Kbanna to New Delhi for the company's work as advised by Kabiraj B.N. Tarkatirtha, a director. The said voucher was signed by the managing director, M.N. Mitra, and the accountant. The said voucher does not contain any description, address, signature or other details of the payee nor there is any supporting entries giving details of the expenditure. Thesignature of the payee is also not available in the voucher. It is, therefore, quite natural that grave suspicions have arisen in my mind in respect of the genuineness of the above payment. None of the directors came forward before me to explain this expense. It appears to be a fictitious entry and the managing director must have made a personal gain out of these transactions.'

10. Coming to the responsibility of the directors, Section 543 of the Indian Companies Act gives power to the court to assess damages in the case of delinquent directors. If in the course of winding up of a company it appears that any director has misapplied or retained or has become liable or accountable, i.e., he cannot properly account for any money or property of the company and appears to be guilty of misfeasance or breach of trust in relation to the company, the court may examine into the conduct of such a director and compel him to re-pay or restore the money or property or any part thereof with interest as the court thinks fit and to contribute such sum of money to the company by way of compensation in respect of such misapplication, retainer, misfeasance, breach of trust as the court thinks fit and proper.

11. It is clearly a question of fact to determine on evidence whether a director alleged to be liable for such misfeasance has acted reasonably as well as honestly and with due diligence so that he could not be held liable for conniving at fraud or misapplication of the fund of the company. But if a director is shown to be so placed that he has been closely and personally associated with the management of the company before funds have been misapplied then he will be deemed to be not only cognisant but liable for fraud or misappropriation of the funds of the company if there is a loss, even though no specific act of fraud or dishonesty is proved against him for such loss. Such director cannot shut his eyes and allow misappropriation of company's funds. It is his duty to look after the affairs of the company as a man of ordinary prudence. Now, coming to this test, I have no reason to doubt that the managing director of the company, M.N. Mitra, being at the helm of affairs of the company and actively participating in the management of the company is personally liable for the misfeasance of the said company and is guilty of breach of trust and misfeasance for the said sum of Rs. 83,700 which has gone out of the till of the company by his order and also perhaps by his own hand. It is also clear that where difficulties are encountered to prove the charges of misfeasance because of want of a reliable statement of accounts of the company or the books not being available, that itself is a strong evidence of breach of duty of the managing director and the board of directors because it is their duty to see that the business was honestly and efficiently conducted and statutory and otherbooks of accounts are properly maintained. Strong reliance has been placed in the case of Official Liquidator, Supreme Bank Ltd. v. Tendolkar [1973] 43 Comp Cas 382 (SC). It has also been held that the court should not summarily make an order against the directors en masse for all acts of misfeasance without any specific finding as to which director is actually responsible for a particular act of misfeasance. [In re Central Calcutta Bank Ltd. [1959] 29 Comp Cas 437 (Cal)]. This case was limited to misfeasance and breach of trust by some of the directors.

12. The directors are, however, responsible for the mismanagement of the company where under the articles of association of the company, as in this company, the business has to be conducted by the board with the assistance of the managing director, but the directors cannot avoid themselves of the responsibility by delegating the whole management to an agent and abstaining from all enquiry if the latter proves unfaithful. Directors are trustees of the funds and assets of the company.

13. In order to establish a case of misfeasance, the applicant must prove, (i) that there has been a breach of trust, and (ii) the breach has resulted in pecuniary loss to the company. An innocent director is not liable for the fraud of his co-director. The general principle of liability of joint tortfeasors cannot apply to misfeasance proceedings. In this particular case, there is no doubt that a sum of Rs. 83,000 and odd has been totally lost to the company without any benefit to the company which directly resulted in the liquidation of the said company. So, there is no reason to doubt that there was a breach of trust by director or directors in respect of this sum and this breach of trust has undoubtedly resulted in pecuniary loss to the company resulting in its liquidation to the great detriment of its share-holders. If the directors acted honestly, they would not have committed any breach of trust and consequently there would not have been any loss to the company. But from the evidence on record as adduced by the official liquidator I am satisfied that the respondent No. 3, Ranadeb Chowdhury, was an innocent director and is not liable for the fraud of his other co-director, namely, M.N. Mitra. It has also been held that it is no part of the duty of all the directors to scrutinise or examine the entries in the books of accounts of the company and when there is nothing to raise suspicion in the mind of a director no question of any abstention from any enquiry can arise. Following this principle, it was in the knowledge of M.N. Mitra and M.N. Mitra alone about the misappropriation of this huge sum of money belonging to the company and I am satisfied that Mr. Ranadeb Chowdhury had no knowledge of that and as it was no part of his duty to scrutinise or examine the books of accounts of the company, he is not liable for such breach of trust.

14. It has been held in Govind Narayan Kakade v. Rangnath Gopal Bajopadhye, AIR 1930 Bom 572, that where directors wilfully shut their eyes to the acts of the agents or managing agents and recklessly sanction payments to others thereby aiding and abetting misapplication and misappropriation of company's funds, in this state of affairs a director should be held guilty of misconduct and liable to pay compensation. It is true that the directors are appointed generally by election by the shareholders at the annual general meeting and the shareholders elect such person or persons as directors in whom they have confidence that they will manage the affairs of the company truly, honestly, diligently and look to the interest and welfare of the company. Therefore, the directors cannot avoid their responsibilities and liabilities in not doing their duties. Sleeping director is a misnomer in the present context of the Companies Act. When the managing director was conducting the day-to-day affairs of the company, he should tie held responsible for any loss incurred due to misapplication and misuse of the funds. ' Where the directors are cognizant of circumstances of such a character so plain and so manifest that no man with ordinary degree of prudence acting in that behalf would have conducted themselves in a manner as the directors of the company have done, then the conduct of the directors must be held to be irresponsible and culpable and an inference of their complicity in concealing the true state of affairs from the shareholders, presumably because they were themselves benefiting from it could not be avoided. ' [1973] 43 Comp Cas 382 (SC).

15. Now, the official liquidator restricted his attack only on M.N. Mitra. I can only say that the conduct of some of the other directors, past and present, might not be above board. But, none the less, the official liquidator has neither produced any material or specific evidence against any of them nor has pressed his case or produced any materials against any of the other directors except M.N. Mitra, So, however suspicious I may be in respect of the activities of the past and present directors of the company, I cannot make any order against them. It is alleged that the company secured crores of rupees but none the less went into liquidation because of bad management by these persons, both its past and present directors. The court is powerless unless the official liquidator furnishes materials for enquiry.

16. The official liquidator examined Mr. S.K. Bhattacharjee, the investigating auditor appointed by this court, and Jyotirmoy Ghosh, an employee of the official liquidator who took possession of the books and documents of this company, Adhip Chandra Kar, the solicitor and Nagendra Nath Dutta, the chief accountant of the said company.

17. Mr. Sudhir Kumar Bhattacharjee, the chartered accountant who made the investigation into the affairs of National Sugar Mills in liquidation, first made a preliminary report dated 30th December, 1970, and thereafter by hisletter dated 28th January, 1971, exhibit B, confirmed that the preliminary report should be treated as a final report, marked exhibit A. The report covered the period from 1955 up to the date of the winding-up, February 1, 1966. According to the auditor, he was satisfied that the day-to-day affairs of the company were conducted under the direction and control of the respondent No. 4, Manindra Nath Mitra, the managing director. The other directors, specially the respondent No. 3, Ranadeb Chowdhury, bar-at-law, according to Mr. Bhattacharjee from the books he could find that they only attended the meeting and apart from that they did not take part in any other affairs of the company and left it entirely on M.N. Mitra.

18. As I have already stated, this auditor, Bhattacharjee, has not done his work very satisfactorily but acted in a slipshod manner. I am told by Mr. Kar that the auditor has received more than Rs. 3,000 as remuneration for doing the work. In conclusion he says in his report from the statement of affairs filed by the management under Section 454 of the Companies Act, 1956:

' I am at a loss to understand how the management could compile the facts, figures and data as stated therein when the date of the statement was up to February 1, 1966, but the accounts have been made up to 30th September, 1963. But I find that the directors caused cash book to be prepared up to 11th February, 1965, and the general ledger posting up to 20th May, 1964. I was asked to prepare the statement of accounts together with the list of contributories, debtors and creditors up to the date of liquidation on February 1, 1966. I went through available books of accounts and other relevant files as far as practicable within this time. But no supporting schedule for preparation of balance-sheet and accounts as on 30th September, 1963, could be found out, whereas it is customary for every company to keep an audit file containing all the details, lists of assets and liabilities and working papers in supplement, figures in the balance-sheet stated therein in a summarised form under several specified groups and sub-heads. Without getting the details the matter was referred to the company's auditors who signified their inability to comply with the same on the plea of very old files not being traceable in the office. As far as possible I made an indirect attempt to ascertain the accuracy or otherwise of the figures contained in the said statement of affairs as made out on behalf of the directors, but has not yet been able to reconcile the variation that has come to my notice. However, I am still trying to reconcile the said figures which requires considerable time and searching out various papers and documents relating thereto so as to allay my suspicion as to the genuineness of the figures given in the said statement of affairs on behalf of the directors. My further report will follow as and when I come to a definite conclusion.'

Needless to say that he did not file any further report.

19. But this statement itself proves the utter negligence of the managing director and the directors in maintaining the proper books of the company which were not maintained or made available to the official liquidator. It is no defence that as all the books are not forthcoming before the investigator, therefore, the directors should not be held liable. If that be so, then the obvious and most profitable for every director to do is to burn or secrete all the books of the company and then snap their fingers at the official liquidator on the plea that all books could not be produced by the liquidator; so directors are not to be held liable. On the other hand, it has already been decided in several cases that non-production and nonavailability of books is itself evidence of deliberate negligence on the part of the managing director or directors. In this case, the managing director should keep proper and statutory books of account of the company but as all the books were not made available that itself shows that the managing director is guilty of deliberate and gross negligence for which he is liable [Official Liquidator, Supreme Bank Ltd. v. P.A. Tendolkar [1973] 43 Comp Cas 382 (SC)].

20. Jotirmoy Ghosh, the clerk of the official liquidator, deposed that the said Rajendra Lal Dutt, chief accountant of the company, made over the available books to the official liquidator.

21. Therefore, considering all the facts and circumstances of the case, and the argument of the learned counsel, I answer issues Nos. 1 and 2 as follows:

Mr. Manindra Nath Mitra, the managing director and respondent No. 4, is the director who is personally liable for misfeasance for bringing this company into ruination and for the sum of Rs. 83,700 which he must compensate with interest at 6% per annum from 1st February, 1971, up to, realisation to the official liquidator of this company. The respondent No. 3, Ranadeb Chowdhury, is not liable for the said sum and the claim against him is dismissed. I also further direct that the official liquidator should initiate criminal proceedings against the said M.N. Mitra and hand over the investigation of this case to the Deputy Commissioner, Detective Department, Calcutta, for enquiry and bring the delinquent director, M.N. Mitra, and other persons or person who may be liable under the, Indian Penal Code for such action as it may think just and proper.

22. The official liquidator is entitled to get costs from the said M.N. Mitra. The official liquidator to pay the costs of this application out of the assets in his hands at the first instance.


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