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2016 (8) TMI 331 - RAJASTHAN HIGH COURT

2016 (8) TMI 331 - RAJASTHAN HIGH COURT - TMI - Winding up order - 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? - Held that:- From the evidence on record it indeed transpires that subsequent to winding up order dated 27-10-20 .....

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s taken over without notice by RIICO in exercise of its powers under Section 29 of the State Financial Corporation Act, 1951 on 25-11-2003. It is not in dispute that the registered office of the company in liquidation was the factory premises i.e. SP-9-B Khushkhera Industrial Area Alwar, where the books of accounts and other record of the company were to be kept as required by law. In the circumstances it is not incredible, as stated by the respondent directors that the books of accounts of the .....

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of the Act of 1956 and not be a matter of enquiry under Section 543 of the Act of 1956, which is in nature tortuous liability of the directors responsible for misfeasance, malfeasance or breach of trust. Consequently issues 1 to 4 are decided against the official liquidator. - Guilty of retaining the current assets and the surplus amount belonging to the company thereby causing breach of trust and loss to the company - Held that:- From the evidence on record it is apparent that allegation a .....

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nt directors was made either by the Official Liquidator or the Chartered Accountant appointed by him only deductive inferences from the basis of allegations insufficient for discharge of the burden of proof on the Official Liquidator with reference to this issue are sought to be made. The liability under Section 543 of the Act of 1956 is inter-alia quasi criminal and thus one charged of misfeasance, malfeasance and/ or breach of trust is entitled to all protection and safeguards/ rights as in cr .....

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ver 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 .....

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ue No.7 is decided in favour of the respondent directors and against the Official Liquidator. - S.B. Company Application No.52/2010 In (S.B. Company Petition No.4/1999) - Dated:- 8-7-2016 - MR. ALOK SHARMA, J. For The Petitioner : Ms. Sonal Singh, For The Respondent : Mr. Dinesh Bishnoi The matter has come up on an application under Section 543 of the Companies Act 1956 (hereinafter the Act of 1956 ). M/s. Lath Steels Private Limited (in liquidation) incorporated on 25-6-1996 in Rajasthan (Regis .....

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t 5 year from the date of the winding up order to require 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 Ac .....

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s amount paid for raw material ₹ 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 25-11-2003, in exercise of its powers took over the mortgaged assets of the Company in liquidation. It was observed that the current assets of ₹ 27,70,972.57 and surplus amount of ₹ 33,68,471/- aggregating to ₹ 61,3 .....

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ust under Section 543 of the Act of 1956. And consequently they be held liable and a direction be issued that the amount of ₹ 61,39,443.57 constituted of current assets recorded in the balance sheet as of 31-3-1997 and of surplus amounts of ₹ 33,68,471/- in the hands of the directors in terms of the record of the company's turn over in 1997-98 along with interest thereon be recovered from the respondents as compensation. A preliminary objection has been raised by the respondents .....

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ed. It has been submitted that the applicant Official Liquidator has failed to discharge his initial burden of proof qua the allegations of omission and commission against the respondents and hence the application at his instance is liable to be dismissed. The respondents point out that the respondent company's factory was shut down on 1-10-1998 due to reasons beyond their control. It has been submitted that the entire records relating to the company in liquidation was at the factory premise .....

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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 p .....

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emises of the company ? 3. Whether the respondents are guilty of having committed offence under Sections 541 and 543 of the Companies Act, 1956 by not maintaining books of accounts evident from the acts of the respondents in not filing any balance sheet as on 31-3-1998, 31-03-1999, 31-3-2000, 31-3-2001, 31-3-2002, 31-3-2003 and further by not filing Annual returns after the year 1997 as required under Sections 210, 220 and 159 of the Act of 1956 ? 4. Whether the respondents are guilty of causing .....

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longing to the company thereby causing breach of trust and loss to the company. 6. Whether RIICO had taken over the possession of the fixed assets only, not the books of accounts and records of the Company ? 7. Whether the application filed under Section 543 by the O.L. is maintainable in the absence of any specific allegations against the Ex-Directors/respondents ? The Official Liquidator in the affidavit in evidence reiterated the allegations in the application under Section 543 of the Act of .....

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ication was made with the ex-directors of the company in liquidation to ascertain facts on which he reached on conclusions. He admitted that possession of the factory premises/ registered office SP-9-B Khushkhera Industrial Area Alwar was not taken by RIICO in the presence of the respondent directors. 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 direct .....

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efault 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 on .....

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company was in business, and not when it went out of business, for reason of which his conclusions as to alleged misfeasance and breach of trust are wholly speculative and based on surmises and conjectures. Bimal Kumar Lath, the other promoter director of the respondent company has reiterated the defence in his affidavit in evidence. During his cross examination he submitted that the registered office of the company was at SP-9-B Khushkhera Industrial Area Alwar. The production at the factory s .....

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the inventory drawn in the absence of the company's representatives. It was further stated that the books of accounts of the company in liquidation were in the possession of the RIICO following its taking over possession of the factory/ registered office on 25-11-2003. This fact has also been adverted to in para 10 of the report dated 20-9-2008 submitted by the Chartered Accountant. Mr. Bimal Kumar Lath further stated that even otherwise the report dated 20-9-2008 prepared by the Chartered .....

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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 addre .....

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uidation were lodged at the registered office/ factory premises SP-9-B Khushkhera Industrial Area Alwar, which was taken over without notice by RIICO in exercise of its powers under Section 29 of the State Financial Corporation Act, 1951 on 25-11-2003. It is not in dispute that the registered office of the company in liquidation was the factory premises i.e. SP-9-B Khushkhera Industrial Area Alwar, where the books of accounts and other record of the company were to be kept as required by law. In .....

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e company is concerned, I am of the considered view that this deficiency would be covered under Section 541 of the Act of 1956 and not be a matter of enquiry under Section 543 of the Act of 1956, which is in nature tortuous liability of the directors responsible for misfeasance, malfeasance or breach of trust. Consequently issues 1 to 4 are decided against the official liquidator. Issue No.5: From the evidence on record it is apparent that allegation against the respondent directors with regard .....

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Liquidator or the Chartered Accountant appointed by him only deductive inferences from the basis of allegations insufficient for discharge of the burden of proof on the Official Liquidator with reference to this issue are sought to be made. The liability under Section 543 of the Act of 1956 is inter-alia quasi criminal and thus one charged of misfeasance, malfeasance and/ or breach of trust is entitled to all protection and safeguards/ rights as in criminal jurisprudence including the benefit o .....

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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 .....

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urt may, on the application of the Official Liquidator compel him to repay or restore the money or property or any part thereof with interest at the rate deemed fit to the official liquidator representing, the company in winding up. It is thus evident that to fix liability for repayment of any amounts misappropriated, wasted and misapplied or retained belonging to the company it has to be proved before the Court that such misapplication misfeasance or breach of trust obtained at the instance of .....

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it was held in the context of Section 543 of the Act of 1956 proceedings that the application should contain a detailed narration of the specific acts of commission and omission on the part of each director quantifying the loss to the company arising out of such acts or omissions . Reliance has also been placed on the judgment in case of Official Liquidator of Gujarat Vs. Kavasaji Tehmures Modi [2003 (45) SCL 514 Guj.] to contend that the charges should be specific and not of vague and general n .....

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im, if such a person is personally found liable for misapplication etc. of the money 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 .....

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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 Official Liquidator Dhavalgiri Paper Mills (P) Ltd. Vs. Chinubhai Khilachand [2003 (114) Com Cases 277] wherein the Gujarat High Court held that to bring the charge of misfeasance against ex-directors it is necessary that .....

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all its directors will not automatically became liable, unless the allegation of misfeasance is made and proved against the director indicating his connection with such loss. The allegation of misfeasance and misapplication has to be specifically pleaded with material particulars against each of the directors/ erstwhile directors of the company. The state of law having been thus detailed, the moot question is whether a case against the respondent directors is made out. The case as laid is based .....

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ated or otherwise wrongly acted to cause loss to the company in liquidation to their corresponding enrichment/ benefit. In fact no allegation of the respondent-directors benefitting personally has been made at all. The High Court of Karnataka at Bangalore in the case of Official Liquidator of M/s Zenith Power Systems (I) Ltd. Versus Sri K. Venkatachalam & Ors. (C.A. No.752/2007 In C.O.P. No.138/2000), decided on 21-1-2013, had held that an application under Section 543 of the Act of 1956 can .....

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