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Official Liquidator of M/s Swastik House Leasing Limited (in Liquidation) Versus Shri Manik Chand Agarwal (Deceased) through his Legal Representatives, Shri Dharmendra Agarwal S/o Late Shri Manak Chand Agarwal, Shri Rajendra Agarwal S/o Late Shri Manak Chand Agarwal, Smt. Meena Agarwal D/o Sh. Manak Chand Agarwal, W/o Sh. Rajendra Bansal, Ms Meena Agarwal D/o Manik Chand Agarwal, W/o Sh. Rajendra Bansal

2017 (10) TMI 465 - RAJASTHAN HIGH COURT

Guilty of misfeasance and malfeasance in relation to the Company - committing breach of trust in discharge of the duties towards the Company - liability under the provisions of Section 543 - Held that:- Admittedly, the case has been set up on the basis of report prepared by the Chartered Accountant whose statements have been quoted herein above. The present case is a case of voluntary winding up of the Company and not at the instance of any of its creditors. It is now an admitted position that t .....

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thin the meaning of the provisions of Section 443(1) of the Act of 1956. The allegations which were originally made, have not been found to be correct by the Income Tax Authorities and the appeal thereto has also been dismissed. In the written submissions, a new case is sought to be made out which is not in any manner coming out from the report of Mr. NC Jain or his statements. The allegations are vague and bald which could not be said to be sufficient to hold the respondents guilty of causing b .....

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) against the respondents Mr. Manik Chand Agarwal and Ms. Meena Agarwal alleging misfeasance and malfeasance in relation to the Company and for committing breach of trust in discharge of the duties towards the Company. 2. M/s. Swastik House Leasing Limited (the Company in Liquidation), having its registered office at 116, Agarwal Complex, Ramganj, Jaipur (Raj.) was ordered to be wound up by this Court vide order dated 08/02/2002 passed in SB Company Petition No.15/1999 and the OL attached to thi .....

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irectors, Managers or Officer of the Company which had been ordered to be wound up. 4. The OL appointed Mr. NC Jain, Chartered Accountant to examine and submit his report. 5. Upon examination of books of accounts of the Company, the said Chartered Accountant submitted his report on 27/01/2007 holding prima-facie the Ex-Directors of causing misfeasance and breach of trust. The respondent Mr. Manik Chand Agarwal, as per the report, alongwith his family members, his relatives and friends, had promo .....

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out 200 monthly installments for purchase of properties in the name of the Company. The possession of the properties was proposed to be handed over after receipt of regular payments of remaining 120 monthly installments. The second scheme had provided grant of housing loans to specific number of Applicants from out of a group of 1000 members in each category selected by Computer on payment of subscription of EMI s. The scheme had targeted to enroll 4000 members within a time period of 40 months .....

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the said schemes could not run after the detection by the Income Tax authorities about the said schemes being false and bogus after search and investigation having been carried out by the Income Tax Authorities on 06.02.1994. The entire deposits held in the name of registration fees and subscriptions were returned by the Company through the same agent M/s. Tribhuvan Estates Bureau in March 1994. As the transactions were found to be bogus, the Income Tax Authorities had framed huge tax demands u .....

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ving no intention to carry any business in future had passed a resolution to put to an end to its business affairs and had preferred a Winding up Petition before the Hon ble High Court which passed an order on 08.02.2002 to wind up the Company and appointed the Official Liquidator to take charge of the assets of the Company and to proceed in accordance with law for winding up of the Company. 7. Thus, it was found as under:- a) The Company had received a sum of ₹ 20.68 lakhs and ₹ 19. .....

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Shri Manak Chand Agarwal, the promoter and Director of the Company M/s. Swastik House Leasing Limited but neither details nor any particulars about the depositors were available on record to prove the genuineness of the deposits. Further even the application forms of the registered applicants were found missing. The entire said deposits held by the Company were refunded in 1993-1994 to the applicants through the agent. The refund in the name of the depositors is not supported by any proof which .....

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tik House Leasing Limited was not available on record in the last balance sheet drawn by the Company on 31.03.2000, the Company has shown a liability of 18,55,606/- against accrued interest. Meaning thereby that it had paid ₹ 6,10,363 out of an aggregated sum of ₹ 24,65,969/-. The entire payments were bogus in view of the finding by the Income tax authorities and therefore the payments towards interest of ₹ 6,10,363 made by the Company in the name of the Company were liable to .....

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he agent M/s. Tribhuvan Estates Bureau for soliciting registration of members but no supportive documents and papers were on record to prove the legality of the payments. This commission has been disallowed by the assessing authorities on the gound that commission paid has been treated as an unexplained Income which leads to an inescapable conclusion that the same was a case of diversion of profit to the concern belonging to the Director of the Company Ms. Meena Agarwal. As the Company had faile .....

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ad written off Loans and advances amounting to ₹ 50,300as bad debts in the books during the financial year 1998-99. The said amount was receivable as an advance in the name of Shri N.G. Narainswamy since 1992-93. However, there was no evidence on record to establish that any recovery steps had been taken up by the Company to recover this amount which thus had become barred sometime in the year 1994-95 itself. Thus, willful gross negligence in allowing the amount to become time barred was a .....

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ad revealed that the Income tax department had treated the business run by the Company for its housing schemes and financial services as an illegal hawala/ entry business activity. This finding was based on the basis of enquiries, evidence and facts gathered by them in the course of investigations and scrutiny and search operations. Sh. M.C. Agarwal Ex-M.D. who had been looking after the business had also given the statement before the search party about having agreed for carrying on entry/ hawa .....

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ad repaid all the money to its depositors except some portion of accrued interest. In the light of the above stated facts and information it was established that the Company was engaged in an illegal hawala/ entry business which was against the objects and provisions of the Companies Act, 1956. Therefore the ex-director, the respondent no. 1 who was managing the affairs of the Company had committed a breach of trust in relation to the company within the meaning of section 543 of the Companies Ac .....

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pany. Further, from the report, it was apparent that the entire affairs of the Company were managed by the respondent No.1 alone and no specific act of negligence or misfeasance has been shown. It was pointed out that no fraudulent invent can be inferred and with reference to the allegation of wrongful payment of interest to its creditors, it is submitted that the report is contradictory while it approves the liability of interest, it doubts genuineness of deposits. It is submitted that mere ina .....

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d losses and all the Directors of the Company are liable for their action as both of them were father and daughter. They together conspired and committed act of misfeasance and were therefore, jointly and severally liable. During pendency of the company application, the respondent No.1-Manik Chand Agarwal had expired and his legal representatives 1/1, 1/2 1/3 and 1/4 were taken on record and it is the submission of OL that the respondents are liable to the extent of estate of the deceased receiv .....

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Agarwal has also filed her affidavit and has been examined as DW.2. In defence, they have pointed out that the work was being managed by his late father Mr. Manik Chand Agarwal and neither DW.1 nor DW.2 have derived any monetary benefit from the assets of the Company. As regards Mr. Dharmendra Agarwal, he submits that he had no idea that he was a Director of the Company. He had no knowledge of M/s. Tribhuvan Estates Bureau. It is stated that he has no property of the Company and it was late Mr. .....

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oted have been reiterated. 13. Heard learned counsel for the parties. 14. Learned counsel for the respondents submits that the allegation should be rejected as the allegations alleged are wholly vague. There is no individual culpability proved by the evidence which is on record. The allegations made in the report are based on surmises and conjectures. He has also taken this Court to the cross-examination of Mr. NC Jain to show that the report was unjustified and did not have basis. It is being s .....

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n the legal representatives. 16. The DB Income Tax Appeal No.610/2008 (CIT Jaipur Vs. Manak Chand Agrawal) and the other DB Income Tax Appeals, preferred against the orders of the Income Tax Appellate Tribunal, have been dismissed by Division Bench of this Court in the light of the DBDT Circular dated 10/12/2015 wherein the tax effect, if found to be less than ₹ 20 lac, were directed to be dismissed. The orders passed by the Division Bench have been taken on record. 17. The claim of the OL .....

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be dealt with strictly. A Director or for that matter Ex-Director of the Company in Liquidation can be held guilty of misconduct, misappropriation and misfeasance of breach of trust. In the case of Official Liquidator Vs. Raghava Desikachar: AIR 1974 (SC) 2069, the Supreme Court has held that the applications filed for the purpose should contain the details, directions of the misfeasance act of commission and omission on the part of each Director quantifying the loss to the Company arising ther .....

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uestion of fact, to be determined upon the evidence in each case, whether a Director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with due diligence, so that he could not be held liable for conniving at fraud and misappropriation which takes place. A Director may be shown to be so placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud i .....

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his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the Company. 20. In the case of Official Liquidator of M/s. Shield Shoe Company Private Ltd. (In Liquidation) Vs. Shri Fateh Chand Pahwa & others: 2007(5) WLC (Raj.) 522, the coordinate Bench of this Court held in Para 6 as under:- 6. In order to establish the charge of misfeasance against the ex-directors it is required that specific acts of commission or omission and/or negligence on th .....

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n, breach of trust, misappreciation or retention of monies/properties of the company who would be called upon to make goo such loss. Thus, the onus is on the person who alleges such acts of misfeasance. The onus has to be discharged by cogent, reliable and specific evidence which would prove that the alleged misconduct was willful and amounted to misfeasance with culpable negligence. 21. Similar view has been taken by another coordinate Bench of this Court in the case of Official Liquidator Vs. .....

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an allegation of this nature, onus is always on the person who alleges such acts of misfeasance and such onus shall be discharged by him by cogent, reliable and specific evidence which should prove that the alleged misconduct was willful and amounted to misfeasance with culpable negligence. But here a caveat has to be lodged that not all acts which result in loss to the company can be treated as misfeasance because while carrying business, there is every likelihood that loss may be incurred in a .....

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nd such impropriety has to be willful so as to cause loss to the company. 18. The allegation of misfeasance has to be therefore pleaded and proved against each of the Director(s) or erstwhile Directors(s) indicating thereby that such act or omission on his part has led to the loss caused to the company or that such loss resulted from his act or omission. If such connection is proved, then only it can be held that loss of the nature contemplated in the misfeasance proceedings is caused to the com .....

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