Judgment:
1. This is an application by one ex director of the Company in liquidation. It is made after a misfeasance proceeding has been started against him. He is respondent No. 4 there which is numbered as C.A. No. 14 of 2008. He submits that the proceeding against him be dropped.
2. The grounds are two. The first is that the summons by which the misfeasance proceeding was started and the points of claim do not disclose any case of misfeasance against him. Therefore, following the principles that are applied by a Civil Court to take a plaint off the file and dismiss the suit when no cause of action is pleaded in the plaint, this summons should be dismissed. Secondly, the applicant, as director had resigned on 28th December 1995. The winding up order was made on 14th January 2003. Hence, he could not possibly be involved in any acts of alleged misfeasance concerning the company. Thus, on such evidence he should be relieved from the proceeding.
FACTS IN DETAIL:
Now, let me examine the facts in more detail.
3. The applicant was appointed a director of the company on 25th November 1987.
According to him, he resigned from the Board of Directors on 28th December 1995. The Board accepted such resignation. The statutory form No. 32 was filed with the Registrar of the Companies on 22nd January 1996. It was taken on record by the registrar of companies only on 30th March 2000. The company was wound up on 14th January 2003. A Summons for misfeasance under Section 543 of the Companies Act 1956 was taken out by the Official Liquidator on 19th December 2007. On 7th April 2009 this summons was taken out by the applicant for being discharged from this proceeding.
Generally, after a company is wound up an enquiry is made by the Official Liquidator as to whether any person in control of the company at the point of time of its winding up or in the past had caused any monetary loss to the company by mis appropriation or misapplication of its funds or by not properly dealing with its properties or converting them to any use other than that which was beneficial to the company. If upon enquiry such state of affairs is revealed then, proceedings are taken against such persons to restore the property or compensate the company under liquidation for such loss. That is provided in section 543 of the said Act.
4. In this particular case such summons was taken out by the Official Liquidator which was marked as C.A. No. 14 of 2008.
5. The charges in the summons have been described in this way:
The respondent Nos. 1 to 10 ( which includes the applicant) as ex directors of the company in liquidation have misapplied, mismanaged breach of trust, breach of duty, negligence and retain and have become liable and/or accountable for the money and property, assets of the said company ( in liquidation) and are jointly and severally guilty of misfeasance . . Thereafter, each and every alleged loss of the company has been attributed to the directors jointly. Thereafter, orders are prayed for, for enquiry and accounts contribution and compensation against the directors jointly.
Points of claim were filed by the official liquidator where the above charges were replicated without any additional details.
ARGUMENTS:
6. The first point raised by the applicant is that the summons and the points of claim do not disclose any cause of action against the applicant. Principles of order VII Rule 11 of the Code of Civil Procedure are invoked. It is said that as no cause of action is disclosed in the above pleadings, the proceeding against the applicant has to be dismissed. It is submitted that the allegation against the applicant had to be made separately, showing in detail, how the applicant as director had caused loss to the company. Further, even if the allegations arising out of such alleged loss were made against the directors jointly then it had to be pleaded with particulars how the directors acting jointly had caused loss to the company.
7. The learned counsel for the applicant cited Dewrance Macneill & Co. Ltd. (In liquidation) v Padam Kumar Khaitan and others, reported in [2009] 88 CLA 144 (Cal). This is a single judge bench decision of our court which says that the principles of Order VII Rule 11 of the Code of Civil Procedure apply to misfeasance proceedings. It held that misfeasance proceedings were quasi criminal in nature. While initiating such proceedings the charges against the alleged delinquents had to be specified in detail. Otherwise such proceeding could be dismissed on the principles of Order VII Rule 11 of the Code of Civil Procedure. Such proceedings on unspecific allegations were an abuse of the process of court. The court could not waste its precious time by holding a trial when the basic facts pleaded at the time of initiation of the proceedings did not disclose a cause of action.
8. On the other hand Mr. A.K. Dhandhania, learned advocate, representing the Official Liquidator cited P.K. Nedungadi v- The Malayalee Bank Ltd. (In Liquidation) and others, reported in AIR 1971 SC 829. He has also cited Official Liquidator, Supreme Bank Ltd. v- P.A. Tendolkar (dead) by L. Rs. and others, reported in AIR 1973 SC 1104. His argument based on these two decisions is that the Official Liquidator is entitled to proceed against all the directors jointly, which must necessarily include the applicant, on the existing charges. He submits that the loss caused to the company is such that it is attributable to the directors jointly. No allegation of fraud need be made. I will elaborately discuss these decisions when I proceed to give reasons for this judgment.
9. The second point of the applicant is that he tendered his resignation on 28th December 1995. Form 32 was lodged with the Register of Companies on 22nd January 1996 but the resignation was recorded in the register on 3rd March 2000. He, having resigned, years before the winding up order should not be responsible for the acts complained of.
10. The Official Liquidator seriously disputes this. He says the resignation was recorded by the registrar on 3rd March 2000. There is no record of the applicant having resigned, prior to that.
11. In paragraph 3 of the Affidavit in support of their summons the applicant has said that he ceased to be a director from 28th December 1995. He has also repeated this fact in paragraph 7 of the said affidavit. There is no proper denial of this position in the affidavit-in-opposition, apart from a bare denial.
DISCUSSION:
12. The position of the directors of the company is variously described. They are trustees of the company. They are also its agents. If they draw salary, they are its servants as well. The Board of Directors take policy decisions for the company and administer it. But, I am yet to find a proposition of law which says that if any loss is caused to the company all directors are automatically jointly and severally liable. The Supreme Court decision in P.K. Nedungadi v- The Malayalee Bank Ltd. (In Liquidation) and others, reported in AIR 1971 SC 829 states the following in paragraph 5 :
5.
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 the offence is one for which the offender may be criminally responsible. In Halsburys Laws of England, 3rd Edition, Volume 6, it has been stated at page 623 that misfeasance and breach of trust include a breach by a Promoter, Director etc. of a duty to the Company the direct consequence of which has been a misapplication or loss of its assets for which he could be made responsible in an action.
13. Allegations or proof of fraud are not essential and it is immaterial that the offence is one for which the offender may be criminally liable.
14. Again the Supreme Court decision in Official Liquidator, Supreme Bank Ltd. v- P.A. Tendolkar (dead) by L. Rs. and others, reported in AIR 1973 SC 1104 lays down the following dictum:
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 can not 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.
15. Both the decisions of the Supreme Court say that the acts of misfeasance have to be proved. It does not say that the liability of a director or the board of directors is automatic. Once fault is established fraud need not be proved and a particular director will be liable accordingly.
16. The Supreme Court was dealing with the provisions of the Indian Companies Act, 1913. Section 235 of it corresponded with Section 543 of the present Act, more or less. The part of the judgment reproduced above specifically states that misfeasance proceedings lie if money or property of the company was misappropriated or misapplied by a director or directors or an officer or officers. Therefore, the condition precedent for the court to exercise jurisdiction for misfeasance is loss of money or property of the company proved to be caused by these officers or any of them or some of them. The Supreme Court does not say that for any loss to a company in liquidation, there is a presumption of misappropriation or misapplication by the directors or officers or any director or any officer or some of them. On the contrary the said authorities say that if such case is made out it would be the duty of the court to determine whether that particular officer had acted reasonably and honestly. However, an observation in paragraph 40 of Official Liquidator, Supreme Bank Ltd. v- P.A. Tendolkar (dead) by L. Rs. and others, reported in AIR 1973 SC 1104 is of great importance and provides an exception to the above principle. When a director is so closely connected with the management of the company that his act is equivalent to the act of the company he will be presumed to be liable for any loss of the company caused by his act. The relevant passage is this :
40.
17. 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 can not 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.
18. It is also said that allegation or proof of fraud need not be made. (see P.K. Nedungadi v- The Malayalee Bank Ltd. (In Liquidation) and others, reported in AIR 1971 SC 829. (supra) paragraph 5)
19. Therefore, what is deducible from these two decisions of the Supreme Court is that an allegation of misfeasance has to be made and proved against a director or officer indicating his connection with such loss. Further, if the connection of such director or officer with the company is so inextricable that the act of a director or officer is the act of the company, then there is a presumption of such liability in case loss of the nature contemplated in misfeasance proceedings is caused to the company, subject of course to rebuttal by the person charged. Now, I come to the Calcutta case cited by the applicant Dewrance Macneill & Co. Ltd. (In Liquidation) v Padam Kumar Khaitan and others, reported in [2009] 88 CLA 144(Cal).
20. The Honble Judge had made very important observations in that judgment. He said that under rule 6 of the Company Court Rules, 1959 the Code of Civil Procedure was applicable, unless a contrary intention was shown in those rules.
21. Thus, the principles of Order VII Rule 11 of the Code were applicable. If the points of claim did not disclose a cause of action, it was a fit ground for dismissal of the proceeding. He went on to add that such a procedure could prevent abuse of the process of law. Hence frivolous claims not disclosing any cause of action should be nipped in the bud. He nipped the proceeding before him in the bud, on that ground. But I notice upon careful examination of the judgment that what were the exact pleadings in that case have not been narrated. The Honble Judge only observed that the points of claim were based on the auditors report and attributed the loss of the company to the applicants before him. I have not been shown the pleadings in that case. So I do not know whether the points of claim in that case and this are similar.
22. Now I come back to this case.
23. Now let me examine the pleadings in this case. All loss of the company is attributable to the respondents in the misfeasance proceedings jointly. Are the pleadings so defective that they do not disclose any cause of action? The Code of Civil Procedure says that if the plaint is rejected on the ground that it does not disclose a cause of action, such a decision is a decree. (see the definition of decree, in the Code.) Order VI rule 4 of the Code says that where interalia fraud and willful default are alleged particulars have to be furnished.
24. The Supreme Court in P.K. Nedungadi v- The Malayalee Bank Ltd. (In Liquidation) and others (supra) has said that fraud need not be alleged to prove misfeasance. But in this case willful default is alleged.
25. Does the application fail?
26. The Code says that a plaint should recite facts and not law. If law is pleaded is the plaint to be rejected? No such mandate is provided. Nor for absence of particulars say of willful default. But the old authorities say that the requirement to provide particulars is out of an obligation of a party alleging a case to put the adversary to proper notice.(see Sarkar on Civil Procedure Code 11th Edition Pg. 1036 relying on the judgments of Cotton LJ AND Jessel MR in Philips v P and Thorp v Holdsworth respectively). The purpose such a requirement is that the other party is not taken by surprise. (See Ladli v Karnal, reported in AIR 1963 SC 1279). If such notice is not given, the court is to take no notice of such allegation. (see the English and our decisions referred at pg. 1037 of the said commentary by Sarkar)
27. Therefore, on the above authorities, when the Code says that particulars of willful default have to provided in the plaint, it means that those detailed facts constituting such act have to be brought out. If they are not so brought on record the court might refuse to frame issues or consider evidence on those points. The trial will proceed as if the dispute or issue is absent. But the plaint, in my opinion, cannot be thrown out for want of particulars. There is one exception. If the lack or insufficiency of particulars is so great that the plaint does not disclose a cause of action or the cause of action is such that it amounts to an abuse of the process of law on a perusal of the plaint it can be rejected and the suit dismissed. (See Dewrance Macneill & Co. Ltd. (In Liquidation) v Padam Kumar Khaitan and others (Supra) ) Therefore, absence of the required particulars makes the case of the plaintiff inherently weak. The nature of relief that the court will grant will depend on the pleadings and will vary from case to case.
28. EXCEPTION TO THE ABOVE PRINCIPLE:
But I would like to graft an exception to this broad principle on the basis of the above authorities. I will formulate the exception, after narrating the relevant facts.
29. The petitioner resigned on 28th December 1995. Section 303 of the Companies Act enjoins the company to file with the Registrar of Companies a return of such resignation in a prescribed format within 30 days of such resignation. The format prescribed by the Central government is Form 32. That was filed within those thirty days on 22nd January, 1996, though it appears that it was taken on record by the Registrar of Companies on 30th March 2000. In the affidavit of the Official liquidator there is no specific denial of this. While arguing the matter, Mr. Dhandhania doubted the date of resignation of the applicant. Now, the question is that Section 303 also provides for prosecution for late filing of Form 32. Assuming Mr. Dhandhanias argument is correct and Form 32 was filed sometime just before 30th March 2000, why did the Central Government not prosecute the applicant? Moreover, when such fact of resignation is alleged by the applicant, in my opinion, the Official Liquidator who has custody of all the records of the company ought to have shown association of the applicant with the company after 28th December 1995 to rebut the allegation. Nothing has been shown to this effect. Therefore, the resignation of the applicant on 28th December 1995 is accepted by this court.
30. There is no case made out by the Official Liquidator in the Judges Summons or in the points of claim so as to raise the presumption that the applicant was so inextricably connected with the affairs of the Company or was so connected jointly with the other directors so that the act of the company was equivalent to the act of the applicant or joint acts of all directors and that loss of the company can be attributable to them jointly or to the applicant.
31. Relying on the above authorities I hold that if it is proved that a respondent former director or officer had left the Company reasonably long before the company went into liquidation, the Official liquidator making an allegation of misfeasance is fixed with the additional duty, to enquire in greater detail how this former director or officer was responsible for such loss and make more specific allegations of them with all relevant particulars. Otherwise such proceedings brought against him would be without disclosing a cause of action and an abuse of the process of law and of the court. Here the applicant having resigned more than seven years before the winding up order, the onus of the Official liquidator was to furnish such details. He has not done so. Hence the Judges Summons and the points of claim do not disclose any cause of action against the applicant. Continuance of such proceeding would be an abuse of the process of law and court.
32. Therefore, on this solitary ground I would allow this application. The above misfeasance proceedings are struck off against the applicant. Although I refrain from making any comment regarding the pleadings concerning the other respondents, save and except what is made above. I direct the Official Liquidator to get pleadings drafted in future proceedings in accordance with the observations above.
33. There is no order as to costs.
34. Urgent certified photocopy of this judgment/ order, if applied for, be supplied to the parties subject to compliance with all requisite formalities.