ORDER
1. The present Company Application is filed and Judge's Summons is taken out under Section 543(1) of the Companies Act, 1956 in making following prayers :
(1) For a declaration that the respondent Nos. 1 to 5 and others as Directors of the Company were guilty of misfeasance, breach of trust, breach of duty, gross negligence in discharging their duties and in managing the affairs of the Company and guilty of fraudulent conduct in relation to the Company,
(2) For a declaration that the respondents are liable and accountable for the non-recovery of loans and advances by the Company and also for interest at reasonable market rates on the loans and advances by the Company.
(3) For an order against all of them or such of them as may be held liable jointly or severally to repay various loans and advances made to themselves and/or their friends and/or relatives and others with interest at reasonable market rate and to contribute such amount to the assets of the Company by way of compensation as may be determined.
(4) For the purpose of ascertaining the liability of all or any of the respondents, necessary accounts and inquiries may be directed to be taken and made and they may be examined.
(5) For an order that the respondents do pay the costs of and incidental to this application.'
2. Before dealing with the aforesaid prayers, it is necessary to have some bare facts giving rise to the present application. The Company, namely, Gujarat Investment Trust Ltd., (in liquidation), was incorporated on 1st December 1934. The company was ordered to be wound up by this Court on 15th December 1976 and the Official Liquidator attached to this Court was appointed as the Liquidator of the said Company. The Official Liquidator vide his letter dated 28-4-1981 had retained M/s. Haribhakti & Co., Chartered Accountants to investigate the books of account of the said company for the purpose of initiating misfeasance proceedings under Section 543(1) of the Act and the said firm of Chartered Accountants had submitted its report to the Official Liquidator on 23-11-1981 and based on the said report, the Official Liquidator has filed the present application before this Court on 11th December 1981 which is filed within the time limit prescribed under Section 543(2) of the Act.
3. The above firm of the Chartered Accountants in its report submitted to the Official Liquidator had scrutinized the books of account of the said company for the years from 1971 till the date of winding up order passed by this Court in respect of the said Company. The above firm of the Chartered Accountants, after discussing the various issues in its report, had given brief summary of the entire report in para 13 thereof which is as under :
'13. Summary:
Gujarat Investment Trust Co. Ltd. was ordered to wind-up by the order dated 15-12-1976 of the Hon'ble Gujarat High Court.
13.1 The Paid-up Share Capital was Rs. 2.5 lakhs as against Authorised Capital of Rs. 5 lakhs. Even though the Company was facing financial difficulties in repaying the deposits, the Company did not call for the unpaid portion of the Authorised' Capital instead of that they have contracted further liabilities by accepting further deposits from public and Share Holders.
13.2 The books of the accounts were not properly maintained and narration of the entries in the Books were not complete.
13.3 Mr. Sudhir V. Jadav, who was the Director of this Company, became the Secretary w.e.f. 22-4-1966 and he continued to be the Secretary till his death. After his death his wife Smt. Tarunika S. Jadav has been appointed as Secretary on the same terms and remuneration though she has no experience of such work.
13.4 As discussed in para (5), the Company has contravened the provisions of Section 58A of the Companies Act, 1956 and the directives issued by the Reserve Bank of India in accepting the deposits from the share-holders and from the public under the Investment Pool A/c.
The Company has also contravened provisions of Section 205A(2) of the Companies Act in not depositing the unclaimed dividend in a separate Bank A/c.
13.5 The Investment as shown in the Statement of Affairs worth Rs. 5,99,280 are actually not realisable as discussed in para (5.7), as the Company has acquired shares of Rs. 4 lakhs of the subsidiary Company in settlement of the dues. Thus the funds of the Company have been invested in non-earning and not realisable assets as the subsidiary Company is also facing financial crisis and have incurred heavy loss.
13.6 As discussed in para (5.11), the Company has not charged interest on certain parties and have given undue advantage to the Secretary in granting remission and also not charging interest for a certain period on the advances granted to him. The Company has incurred heavy loss in not charging interest on Over-draft A/cs. from 1-7-1974 onwards.
13.7 As discussed in para (7.1), the Company has given interest-free advance of Rs. 1,24,322.70 on 23-11-1971 to the Broker M/s. Mansukhbhai Bhaidas with the intention of not recovering the said amount.
13.8 As discussed in para (8.1), the Company has not taken proper care in granting Over-draft and B.P. facilities to various parties and allowed the said debt to become doubtful of recovery by not taking any steps for recovery and thereby rendering heavy loss to the Company.
13.9 As discussed in para (9.1), the Company has utilised Suspense A/c. for giving facility of advances to certain persons including Secretary of the Company without charging any interest and without entering into any legal formalities. The Suspense a/c have also been utilised to reduce the losses as items of expenditures have been included in Suspense A/c.
13.10 As discussed in para (11), transactions entered with Gujarat Safe Deposit Co. Ltd. are not proper and the Current A/c have been utilised to accommodate certain fictitious entries.'
4. After giving the above summary, the said firm of the Chartered Accountant had come to the conclusion that after considering the overall position of advances, deposits and losses, it became apparent that the liabilities were contracted with no intention to repay, as advances given were not recoverable and that the ex-directors and Secretary of the Company, Sudhir V. Jadav was benefited in getting remission in payment, waiver of interest for certain period, getting temporary interest-free advances through suspense A/c and getting undue credit against his debit balance in current A/c. The said firm of the Chartered Accountant had thereafter concluded his report by stating that the directors of the company continued to carry on the business, contracted the liabilities and incurred losses when they saw no reasonable prospects of the creditors of the company being paid.
5. On the basis of the aforesaid report of the Chartered Accountant, the Official Liquidator, while filing the present application and making several prayers therein as indicated above, has stated that this Court should declare that the respondent Nos. 1 to 5 and others as directors of the company were guilty of misfeasance, breach of trust, breach of duty, gross negligence in discharging their duties and in managing the affairs of the company and guilty of fraudulent conduct in relation to the company, in not properly maintaining the books of account of the company, in giving loans to themselves without following proper procedure and without charging interest, in not repaying the loans taken by them from the company, in giving or allowing to give loans by the company to their friends and/or relatives in not enforcing repayment of loans, in diverting the funds of the company for their personal use and at the cost of the company, in appointing the persons in such a position although these persons had no experience of such work, in accepting the deposits in violation of the provisions contained in Section 58A of the Act, in not depositing the unclaimed dividend in a separate bank account, in contravention of the provisions of Section 205A of the Act and in entering into improper transactions with other companies etc.
6. As stated above, the present application was filed way back in 1981 and during the pendency of this application, the respondent Nos. 1 and 3 have expired. The respondent No. 2 did not appear to have been served as the office endorsement shows that direct service affidavit is not filed and at the time when this application is taken up for hearing, it is conveyed to the Court that respondent No. 5 is in the hospital. The respondent No. 4 has already filed his affidavit-in-reply in April 2001.
7. Heard Mr. Navin K. Pahwa, learned advocate appearing for the petitioner, Mrs. Sonal D. Vyas, learned advocate appearing for respondent No. 4, and Mr. Percy Kavina, learned advocate appearing for respondent No.5, Mr. Pahwa has based his arguments on the Chartered Accountant's report and he has taken me to the various pages of the said report and emphasized that the respondents had not discharged their duties in a just and proper manner and they have misused their fiduciary positions of being directors of the company while dealing with the affairs of the company and/or applying the funds of the company. He has further submitted that the books of account were not properly maintained and that the deposits were accepted from their shareholders in excess of the limits prescribed by Reserve Bank of India in its directives applicable to the non-banking financial companies and that the respondents have also contravened the provisions contained in Section 58A of the Act. He has further submitted that as per the provisions contained in Section 205A(2) of the Act, the unclaimed dividend was required to be deposited in a separate account, however as on 30th June, 1974, unclaimed dividend of Rs. 5,076 has not been deposited in the separate bank account and hence the company and its directors have contravened the provisions of Section 205A(2) of the Act. As far as the investment is concerned, he has submitted that investments were made in the Companies for which the directors were interested and there were no good chances of recovery of the amount invested or there was very little scope for returns. He has further submitted that the directors have not charged interest on loans and advances and thereby the company's funds were invested by the directors in non-earning investments which were prejudicial to the interests of the shareholders of the depositors of the company. He has further submitted that the directors have not taken any steps to recover the advances given by the company and thereby rendering loss to the company which was prejudicial to the interests of the shareholders and depositors. On the basis of these acts of commission and omission on the part of the respondents and also on the basis of other irregularities and illegalities pointed out by the Chartered Accountants in their report, Mr. Pahwa has strongly urged that this Court should grant the reliefs prayed for in the present Company Application as the provisions of Section 543(1) are squarely applicable to the facts of the present case and the respondents are held to be liable for and they be declared as guilty of misfeasance, breach of trust and breach of their respective duties and accordingly the respondents may be directed to repay the amount to the extent of loss suffered by the company and to contribute to the assets of the company by way of compensation.
8. As stated above, out of the 5 respondents, two have already expired and one does not appear to have been served. The respondent No. 4 in his affidavit-in-reply has stated that the present application filed under Section 543(1) of the Act is not maintainable in the eye of law as there is no iota of evidence with regard to the allegations made in the said application against him as well as other respondents. It was further stated in the affidavit-in-reply that the respondent No. 4 was inducted as director with effect from 1st March, 1976 and when he was inducted as a director the company was in much financial crisis and within a short time after his induction as a director, the company had gone into liquidation. It was further stated that allegations regarding transactions which had taken place prior to 1976 could not be dealt with by him in any manner. Even otherwise these allegations were not supported by any documentary evidence and hence the application deserves to be dismissed in limine. He has also raised an issue that two of the five directors have expired and the Official Liquidator has not taken any steps to bring the legal heirs and legal representatives on record and on that count also the application is required to be rejected.
9. Mr. Percy Kavina, learned advocate appearing for respondent No. 5 has submitted that the present application is filed against the ex-directors without any application of mind. No specific allegation is made against any of the directors. The allegation was made against the ex-director, namely Sudhir V. Jadav who expired and hence he was not rightly impleaded as a respondent in the present application. Except this, none of the present respondents' names is mentioned either in the Chartered Accountant's report or in the present application. The allegations made are absolutely vague and no documentary evidence or proof are produced showing the involvement of the respondents. He has further submitted that the provisions of Section 58A as well as 205A of the Act were brought under a statute book with effect from 1st February, 1975 and the alleged violation of the said provisions were prior to this date and hence the respondents cannot be held to be liable for committing any breach of these provisions which were brought under the Statute book with effect from 1st February, 1975. Neither the Chartered Accountant nor the Official Liquidator has kept this issue in mind while giving their report and/or filing the present application before this Court. He has further relied on the decisions of this Court in the case of O.L, of Aryodaya Ginning & Mfg. Mills Ltd. v. Gulabchand Chandalia in Company Application No. 261 of 1994 in Company Petition No. 157 of 1986, delivered on 7th February, 2002 and in the case of O.L. of Dhavatgiri Paper Mills Pvt. Ltd. v. Chinubhai Khilachand in Company Application No. 266 of 1989 in Company Petition No. 35 of 1982, delivered on 22nd April, 2002. Based on these two decisions as well as keeping settled legal position in mind, which is also discussed at length in these two decisions, Mr. Kavinahas submitted that there is no merits or substance in the present application and hence it is required to be rejected.
10. I have heard at length the learned advocates appearing for the respective parties and I have also gone through the report of the Chartered Accountant as well as the application and the affidavit-in-reply. I have also considered the authorities cited before me. Before dealing with the rival submissions of the parties, it would be just and proper to have a glance at the provisions contained in Section 543(1) of the Act, which reads as under:
'543. Power of Court to assess damages against delinquent directors, etc.--(1) If in the course of winding up a company, it appears that any person who has taken part in the promotion or formation of the company, or any past or present director, manager, liquidator or officer of the company-
(a) has misapplied, or retained, or become liable or accountable for, any money or property of the company; or
(b) has been guilty of any misfeasance or breach of trust in relation to the company;
the Court may, on the application of the official liquidator, or the liquidator, or of any creditor or contributory, made within the time specified in that behalf in Sub-section (2), examined into the conduct of the person, director, manager, liquidator or officer aforesaid, and compel him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Court thinks just or to contribute such sum lo the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the Court thinks just.'
11. A bare reading of the above provisions makes it amply clear that proceedings under this section are of civil nature and the liability, which is enforced therein, is a liability in the nature of a tort or a quasi-criminal responsibility. It is basically grounded on the principle that a person, who has caused loss to the Company by an act which would amount to a breach of trust, should make good the loss. The section provides a summary remedy to determine the amount payable by such director. It is also contemplated in this section that the charges levelled against the delinquent directors should be specific and not of vague and general nature. When any application is filed by invoking these provisions, such application should contain a detailed narration of the specific acts of commission and omission on the part of the delinquent director. The Courts have consistently taken the view that proceedings under this section are not maintainable when there is no specific charge with regard to misfeasance or breach of trust etc., duly coupled with concrete proof and/or documentary evidence. The Court is very slow or rather restrains itself from making an order against the directors en masse for all acts of misfeasance etc., without any specific finding as to which director is actually responsible for particular act of misfeasance. When no specific or particular allegation was made in regard to each and every officer so as to make him responsible for repaying or restoring the money or property of the company and individual responsibility was not identified and established, it would be difficult for the Court to grant an appropriate relief in the matter. The Courts have also taken the view that in order to enable the Court to examine the conduct of a particular director or officer and to make him personally liable for misfeasance or misconduct, there should be proper pleadings and specific evidence as regards the acts complained of.
12. While dealing with the provisions contained in Section 235 of the Companies Act, 1913, which is analogous to the present Section 543 of the Act, the Hon'ble Supreme Court in the case of P.K. Nadungadi v. Malayalee Bank Ltd. (In liquidation) AIR 1971 SC 829 has observed as under:--
'Under Section 235 of the Indian Companies Act, 1913 which was in force at the material time the Court has been given the power to assess damages against the delinquent Directors, etc. If the money or the property of the Company has been misapplied or there has been misfeasance or breach of trust in relation to the company by a Director, an officer or other persons mentioned in the section the Court, after examining the matter, can compel him to repay or restore the property with interest at such rate as the Court may think fit or to contribute such sums to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the Court thinks fit. It has been expressly declared that the section shall apply notwithstanding that theoffence is one for which the offender may be criminally responsible (p. 831)
The Hon'ble Supreme Court had also an occasion to deal with this issue in the case of O.L. v. Raghava Desikachar AIR 1974 SC 2069, and observed as under:--
'..It may be mentioned that misfeasance action against the Directors is a serious charge. It is a charge of misconduct or misappropriation or breach of trust. For this reason 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. The burden of proving misfeasance or nonfeasance rests on the Official Liquidator. The Official liquidator, it may be mentioned, merely relied upon the evidence recorded in public examination of the directors and on a few documents tendered in evidence. At the stage of public examination there was no charge of misfeasance against the Directors and they were not in a position to know what would be the grounds that would be alleged against them for recovering any amounts, for the loss said to have been caused to the company by reason of such misfeasance...' (p. 2073)
13. In Official Liquidator, Supreme Bank Ltd. v. P.A Tendolkar AIR 1973 SC 1104, the Hon'ble Supreme Court has, after a review of English and Indian decisions on the subject, expressed its view on the scope of the section as follows:
'40. It is certainly a question 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 in the conduct of the business of a company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially. If he does so he could be held liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the company due to his neglect even if he is not shown to be guilty of participating in the commission of fraud. It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the Company.' (p. 1115)
14. If the above principles laid down by the Hon'ble Supreme Court as well as by this Court and other Courts are applied to the facts of the present case, it is difficult to grant any of the prayers made in the present application. As already observed earlier, there was no allegation either in the Report of the Chartered Accountant or in the application or even there is no submission to that effect before this Court that the Directors have acted dishonestly, in a mala fide manner and have applied the funds of the company for their personal benefits. Not a single act or omission is attributed to any of the Directors in his individual capacity. Except the Report of the Chartered Accountant, no other document is produced before this Court. Even the Chartered Accountant has also made a grievance in his Report that they were handicapped with non-availability of document, complete set of books of account and relevant vouchers. They have, therefore, requested the Official Liquidator that the report be read subject to modification on availability of further information, document, record or explanations from the other persons in management. More than 20 years have gone and yet no further information or documents or records are made available in support of the present application. It appears that the applications are moved to the Court by the Office of the Official Liquidator only with a view to save limitation and without collecting proper details and information in the matter, and as a result thereof the Court is left with no other alternative but to reject the said applications. This Court is also of the view that only with a view to bring the case within the purview of a particular provision, the application is moved but thereafter no effective steps are taken to sustain the said application. As far as the present application is concerned, it is lying pending for the last more than 21 years during which period two of the respondents have expired and one is at present in the hospital. While filing this application and not vigorously pursuing the same, the applicant might not have thought of the mental trauma and agonies which the respondents had to suffer. Even while resorting to the provisions of Section 58A as well as 205A(2) of the Act, the applicant has not cared to see as to whether these provisions are in force at the relevant time or when the alleged act is committed. Even otherwise, the decisions of the Board of Directors to charge interest on sums advanced for installation of machinery, not from the date of advance but from a later date whenever decided to have the machinery installed, to write off certain sums due from employees and also a portion of the sum advanced for supply of the machinery, which decisions seemed to have been taken in the interest of the Company, were not held by the Courts as acts of misfeasance. Even this Court has also observed in the case of O.L. Aryodaya Gng. & Mfg. Co, Ltd. (supra), that the decisions to merely charging less interest or writing off sums due from the employees or to advance sums for supply of machinery, may be decisions which ultimately turn out to the monetary advantage of the company, but it must be shown in the misfeasance proceedings that the company had sustained a loss as a direct consequence of the breach of duty of the directors. The Court is, therefore, of the view that the Official Liquidator has not made out any case to the effect that it is only because of the act or omission on the part of the respondents that the Company has suffered loss, which ultimately led to the winding up of the Company. The applicant has failed to establish the necessary nexus or casual connection between the alleged act of misfeasance and the resultant loss suffered by the Company.
15. In this view of the matter, this Court does not think it proper to pass any order with regard to any further enquiry in the matter and hence the present application is accordingly rejected with no order as to costs.