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TMI Blog2016 (8) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... quire vide letter dated 14-8-2008 Shri N.C. Jain and Associates, Chartered Accountant to undertake scrutiny of account books and records of the company in liquidation. In his report dated 20-9-2008, the Chartered Accountant found that the ex-directors of the company in liquidation had not filed any balance sheet for the years ending 31-3-1998 to 31-3-2003. Nor was any return filed after 1997 as required under Sections 210, 220 and 159 of the Act of 1956. The Chartered Accountant as per balance sheet of the company in liquidation as of 31-3-1997, found the Company in liquidation to have the fixed assets of Rs. 1,90,95,699.70 and current assets of Rs. 27,70,972.57. Additionally, the Chartered Accountant also found from the sale precedes with the company in liquidation an amount of Rs. 33,68,471/- (cost of raw material Rs. 52,18,471/- purchased after 31-3-1997 plus electricity power consumption of Rs. 13,70,000/- minus amount paid for raw material Rs. 32,20,000/-) for the year 1997-98. It was observed that only fixed assets had come into the possession of the Official Liquidator via the secured creditor Rajasthan Industrial and Investment Corporation Limited (RIICO) which on 25-11-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn, which merely recorded the mortgaged assets of concern to RIICO. On 28-12-2005 the respondents requested the Official Liquidator for allowing them to visit the factory premises to obtain the record, but were not allowed to do so. It was submitted that the conclusions in the report of the Chartered Accountant appointed by the Official Liquidator are deductive and merely based on the balance sheet of 31-3-1997 without any requisite enquiry of about the wrong doing or omissions by the respondents, first time entrepreneurs whose tasks of complying with the requisites of the Act of 1956 was defeated by the respondent company's chartered accountant himself being a partner of the petitioner-company in the winding up petition leading to the respondent-company being wound up. On the basis of pleadings of the parties the following issues were framed:- 1. Whether the respondents though being aware of passing of winding up order dated 17-10-2003 are guilty of not handing over the possession of the record/ books of account to the OL on passing of the order of winding up thereby intentionally stalling the winding up proceedings and causing loss to the company's creditors? 2. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors. Mr. Jain admitted that neither books of accounts nor any records of company in liquidation were made available to him by the Official Liquidator and that the amounts for which the respondent directors were sought to be made liable for breach of trust and/ or misfeasance was worked out as deduction from records obtained by him from the Registrar of Companies without any positive material in his knowledge to support the allegations. Mr. Pawan Kumar Lath in his cross examination admitted that he was the promoter managing director of the company in liquidation. He stated that he had taken a term loan from RIICO for which the respondent company's factory, land and building was mortgaged. Default on the payment of the term loan obtained from RIICO being made for reason of bad market conditions, possession of the mortgaged assets was taken by RIICO but without any notice to him or to the Official Liquidator of the company then in liquidation on 25-11-2003. Inventory was not prepared in the circumstances in his presence or in the presence of his nominee. He stated that all statutory records were available at the factory premises. He stated that the statement of affairs was filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had only relied on partial and stale record obtained from the office of the Registrar of Companies. A roving enquiry has been made with regard to affairs of the company without following the mandate of Section 543 of the Act of 1956 to determine the specific liability on any of the directors of the company with regard to misfeasance, malfeasance or breach of trust. It was stated that in the circumstances, the application under section 543 of the Act of 1956 filed by the official liquidator be dismissed. Heard. Considered. Issues No.1 to 4: As issues No.1 to 4 are interlinked they are being addressed jointly. From the evidence on record it indeed transpires that subsequent to winding up order dated 27-10-2003 books of accounts of the respondent company were not handed over to the Official Liquidator. The counsel for the Official Liquidator has submitted that it was so done intentionally with the object to stall the winding up proceedings and cause loss to the creditors of the company in liquidation. Counsel for the respondent directors has submitted that the record of the company in liquidation were lodged at the registered office/ factory premises SP-9-B Khushkhera Industria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f doubt. Clear cut proof of the allegations made is required and tortuous liability under Section 543 cannot be based on surmises and conjectures alone. Consequently the issue No.5 is decided against the Official Liquidator. Issue No.6: A wholistic reading of the evidence on record with regard to taking over assets of the company in liquidation by RIICO indicates that assets had been taken over by RIICO in absence of the respondent directors or their nominee, and the inventory was also drawn in their absence. Further this fact is also recorded in para No.10 of the report of the Chartered Accountant dated 20-9-2008. Evidence on record indicates that the Official Liquidator has not produced any witness from RIICO to support the contention of taking over possession of the assets of the company in liquidation by RIICO on 25-11-2003 to prove the fact that nothing except the fixed assets was available or found by RIICO at the relevant time. Consequently the issue No.6 is also decided against the Official Liquidator. Issue No.7: Section 543 of the Act of 1956 provides that where in the course of winding up of a company, it appears that any person who has taken part in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or property of the company or otherwise guilty of any misfeasance or breach of trust in relation to the company. In the absence of specific allegations and positive evidence, it is not possible or proper for the court to indulge in a fishing or roving enquiry so as to compel the individual director to reimburse and/ or compensate the company. Reliance for the same proposition was also placed on the judgments in case of M/s. Ashoka Auto and General Industries (P) Ltd. Vs. Shri Inder Mohan Puri [2005 (124) Com Cases 422 Delhi]. Mr. Dinesh Bishnoi also relied on the judgment in the case of Official Liquidator Vs. T.J. Swamy [1996 (86) Com Cases 696 AP] wherein the Andhra Pradesh High Court held that unless individual responsibility is identified and established it would be difficult for the court to grant appropriate reliefs on a Section 543 of the Act of 1956 application. It was held that only documents such as audit reports and the balance sheet cannot establish that there was a misfeasance on the part of the respondent-directors. There should be very specific individual and personal misconducts for making out a case under Section in issue. Counsel also relied on the case of Offici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of erstwhile directors. The averments in the application should be clear, unambiguous and specific. In the absence thereof, such application would not stand to the test of scrutiny warranted in law and be liable to be dismissed. In fact, Section 543 proceedings are proceedings to quantify loss sustained by the company (in liquidation) on account of acts of misfeasance, malfeasance, breach of trust committed by its ex-directors and others. As such, alleged acts of the respondent-directors or officers of the company in winding up should be clear and specific and should emerge from the application itself duly supported by documentary evidence. Until and unless these ingredients are satisfied from evidence on record and the Court lawfully arrives at the conclusion that the deeds and acts of ex-directors/others were of a nature not expected of a prudent person engaged in business bonafide, liability cannot be laid on the door of the ex-directors or any other to hold them responsible under Section 543 of the Act of 1956. On consideration of the pleadings and evidence on record and particularly relying on the judgments in case of OL Vs. Raghava Desikachar (supra), OL Vs. Kevasaju Teh ..... 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