Case Law Details

Case Name : Official Liquidator of Zenith Power Systems (I) Ltd. (In Liqn.) Vs K. Venkatachalam (Karnataka High Court)
Appeal Number : C. O. P. No. 138 of 2000
Date of Judgement/Order : 21/01/2013
Related Assessment Year :
Courts : All High Courts (4526) Karnataka High Court (219)


Official Liquidator of Zenith Power Systems (I) Ltd. (In Liqn.)


K. Venkatachalam

Aravind Kumar, J.

C. O. P. No. 138 of 2000
C.A. No. 752 of 2007

JANUARY  21, 2013


1. This application by the Official Liquidator is filed under Section 543 of Companies Act, 1956 alleging that respondents being Directors of the company M/s. Zenith Power Constructions (I) Limited (company in liquidation) have abused their fiduciary position, committed breach of trust by non-furnishing the books of account for completing winding up proceedings and on account of such omissions and commissions committed by respondents-1 to 3, it has resulted in loss being caused to the company (in liquidation) under the following heads:


non-recovery of Sundry Debtors

-Rs. 32,28,542/-


towards cash at Bank

– Rs. 14,583/-;


non-recovery of loans and advances

– Rs. 12,88,742/-


– Rs. 45,31,865/-

2. I have heard the arguments of Sri Jayaram, learned Advocate appearing for official liquidator and Sri Rajeshwar, learned counsel appearing for respondent Nos.1 and 3 and Sri Rajendra, learned counsel appearing for respondent No.2. Perused the pleadings, records, depositions of the witnesses and exhibits marked thereto.

3. Company in liquidation came to be ordered to be wound up in Co. P. 138/2000 by order dated 25.07.2002. It is alleged in the application that respondent Nos. 1 to 3 were Directors of the company in liquidation and they are jointly and severally responsible for the assets, properties and effects of the company which has been ordered to be wound up and after collecting details from Registrar of Companies, Bangalore, letters to the Ex-Directors came to be issued to submit the statement of affairs and handover books and accounts including statutory records of the erstwhile company and in response to the said letter, respondents filed statement of affairs belatedly. It is further contended that balance sheet of the company as on 25.07.2002 which was filed along with statement of particulars reflected that sundry debtors owed a sum of Rs. 37,22,034/- to the company (in liquidation) and official liquidator could recover only a sum of Rs. 4,93,492/- and non-recovery of debts was due to non-availability of details of whereabouts of the debtors and it ought to have been furnished by the respondents-Directors and on account of non-furnishing of these details and particulars which they ought to have, official liquidator has been unable to recover the said amount of Rs. 32,28,542/-.

4. Sri Jayaram, learned counsel appearing for official liquidator would fairly concede that insofar as claim made in part 8(b) is not pressed since P.W.1 has admitted in his cross examination receipt of the said amount. His submission is placed on record.

5. It is also contended that as per the balance sheet of even date, it has been reflected that loans and advances made by the company in liquidation was to the tune of Rs. 12,88,742/- and on account of non-furnishing of the details of the persons to whom said amounts had been advanced and their whereabouts being not known to the official liquidator which is attributable solely to the Ex-Directors of the company, respondents-directors have to make good the said loss occasioned to the erstwhile company to the extent of Rs. 12,88,742/- with interest thereon at 18% p.a. He would also draw attention of the Court to the evidence of R.W. 1 wherein it has been admitted in his cross-examination dated 14.12.2010 that official liquidator had issued several notices seeking particulars of the sundry debtors and in view of the same, adverse inference has to be drawn that they have not produced the said details and as such, respondents holding the post of Directors of the erstwhile company in fiduciary capacity and as trustees of the company in liquidation, they have to be made answerable to the claimants and render themselves liable to make good the loss sustained by the company and body of contributories. It is also contended that they have not discharged their obligation in protecting interest of the company as well as its contributories and thus committed acts of misfeasance namely, committed breach of trust in relation to the company.

6. Per contra, Sri Rajeshwar, learned Advocate appearing for respondent Nos.1 and 3 would reiterate the contentions raised in the statement of objections as well as evidence tendered before this Court and also drawing attention of the Court to the cross examination of the applicant’s witness to contend that there is no wilful withholding of any information to the official liquidator and at all points of time, they have co-operated with the official liquidator and question of these two respondents committing any breach would not arise. He would also elaborate his submission by contending that discrepancy that has occasioned in the statement of particulars filed by respondents-1 and 3 is with reference to the revised amount which relates to the margin money paid by the erstwhile company while obtaining bank guarantee and this has also been reflected in the statement as per Ex.R-22 which came to be certified by the State Bank of India vide their communication dated 09.10.2007 and as such there is neither misrepresentation nor wilful withholding of any documents from production before official liquidator and as such, there is no act of misfeasance committed by respondent Nos.1 and 3. On these grounds he seeks for dismissal of the application.

7. Sri Rajendra, learned Advocate for respondent No.2 would also support the arguments of Sri Rajeshwar and he would further contend that application against respondent No.2 itself was not maintainable inasmuch as, respondent No.2 he had tendered resignation on 17.12.2001 as per Ex.R-2 which came to be forwarded to the Registrar of Companies, Bangalore on 03.01.2002 and same is evidenced from the minutes of the meeting held on 29.10.2002 as per Ex.R-2 and submits that since company in liquidation was ordered to be wound up subsequent to said resignation letter namely on 25.07.2002, second respondent is not answerable to any claim since he discontinued to be the Director of erstwhile company as on date of winding up order came to be passed. He would also bring to the notice of the Court cross examination of P.W.1 wherein it is admitted that official liquidator had signed Ex.R-1 and R-2 which would clearly go to show that as on the date of preparation of said Minutes on 29.10.2012 itself official liquidator was aware of the resignation having been tendered by respondent No.2 way back on 17.12.2001 and as such, there are no acts of misfeasance and respondent No.2 cannot be held responsible. He would also submit that respondent No.1 has filed statement of particulars and he has also filed the said particulars based on the records and there is no suppression of facts from the official liquidator and there is no act of misfeasance and any amount due to the erstwhile company cannot be recovered from respondent Nos. 1 to 3 particularly as there is no wilful act attributable to any of the Directors of the erstwhile company.

8. Having heard the learned Advocates appearing for the parties and on perusal of the depositions, exhibits and after considering arguments advanced by respective learned Advocates, I am of the considered view that following points would arise for consideration:


“Whether Official Liquidator has been able to establish that there is any wilful suppression of materials which has resulted in non-recovery of amounts due to the company in liquidation?


If so, whether such acts amounts to misfeasance and amount so not recovered by the Official Liquidator is required to be recovered from the respondent-Directors?


What order?”

9. Company in question undisputedly came to be wound up by an order of this Court on 25.07.2002. Statement of particulars came to be filed by first respondent herein on 24.10.2002. On account of there being delay in filing statement of particulars, official liquidator initiated proceedings against Ex-Directors by filing an application under Section 454 (5) & (5A) of the Companies Act, 1956 with a prayer to take cognizance of the alleged offence committed by erstwhile Directors. Said application came to be registered as C.A.No.939/2002. In the meanwhile, Ex-Directors -respondents also filed application seeking for condonation of delay of 75 days in filing statement of affairs by filing C.A.288/2003. After considering the cause shown, delay was condoned and consequently C.A.No.939/2002 filed by Official liquidator seeking for initiating action against Ex-Directors came to be disposed of by order dated 03.04.2003. There is no dispute with regard to these factual matrix. Subsequent to filing of statement of particulars, on account of non-furnishing of correct particulars, official liquidator has contended that certain amounts due from sundry debtors, loans and advances said to have been made by the erstwhile company to certain persons could not be recovered which was on account of non-furnishing exact particulars, and details and as such, on account of non-recovery of these amounts, he contended that it is to be recovered from the present directors.

10. Provisions of Section 543 of Companies Act prescribes two conditions namely, (a) has misapplied or retained or become liable or accountable for any money or property; or (b) has been guilty of any misfeasance or breach of trust in relation to the company by its directors for said section being attracted. Breach of trust refers to something which an officer of the company has wasted the company’s properties or company’s credit was improperly used. In other words, it must result in some actual loss occurring to the company. It is also to be noticed that where directors did not take any steps as is expected of a prudent director, it would amount to acts of mis-management by the directors and in such cases, it would amount to acts of misfeasance alone which is to be enforced in the nature of tort or quasi-criminal proceedings which are serious in nature. It is no doubt true that essential mens rea is not required to be established, since it is quasi-civil proceedings for recovery of amounts due to the company. Keeping the provisions of the Act in mind in the above referred background, when facts on hand are required to be examined.

11. At the outset, claim of respondent No.2 is required to be examined namely as to whether respondent No.2 can be construed as to have committed wilful breach of trust which as a director he was holding in a fiduciary benefit of assets of the company. As already noticed herein, second respondent claims to have tendered his resignation to the directorship of the company on 17.12.2001. On submission of such letter of resignation, Board of Directors admittedly and undisputedly took up the same for consideration in its Board meeting held on 29.10.2002. However, a copy of the said letter was also forwarded to the creditor namely bankers who in turn did not approve or accept resignation letter tendered by respondent No.2 on the ground that guarantee to the loan borrowed was not in the capacity of being a co-director of the company. Assigning this reason, resignation letter was not accepted by Board of Directors of the company in liquidation. In fact, letter also came to be submitted by respondent No.2 to ROC which is duly acknowledged as is found from the minutes drawn on 29.10.2002. In fact, in the communication dated 28.12.2001 addressed by the company in liquidation to the second respondent, a reference to the resignation letter dated 17.12.2001 finds a place. Subsequent letters written by second respondent to the official-liquidator as per Ex.R-3 to R-8 would also indicate that official liquidator had been intimated of the resignation letter submitted by second respondent to the Board of directors of the company under liquidation. The witness who has been examined on behalf of official liquidator namely, P.W. 1 does not dispute these documents. On the other hand, she pleads her ignorance about these documents. Thus, having not disputed this factual matrix and there being no other material available on record to arrive at a conclusion that second respondent was in fact a director of the erstwhile company as on the date of order of winding up came to be passed, no proceedings can be’ initiated and continued against second respondent. In fact, P.W.1 in the cross examination dated 08.07.2010 has also admitted about signature of the official liquidator found in Ex.R-1 and R-2. In view of the fact that O.L was also aware of the resignation having been tendered by respondent No.2 not only on 17.12.2001 but also on 06.09.2002 and 29.10.2002, non-filing of Form No.32 by the company (in liquidation) would not empower the official liquidator to initiate proceedings against second respondent, unless contrary facts are established. Hence, application as against respondent No.2 is liable to be dismissed.

12. Insofar as claim against respondent Nos.1 and 3 is concerned, it is of two fold – (i) non-furnishing of details of sundry debtors; (ii) amounts shown in the statement of particulars as loans and advances made by erstwhile company is not being recovered on account of details not being furnished. Plea with regard to details of creditors is as vague as vagueness could be. As found in the pleadings particularly at paragraph 8 in the statement of objections filed by respondent Nos. 1 and 3 in reply to paragraph 8(a) of the application namely, amounts which could not be recovered from sundry debtors, it has been, specifically contended that majority of the sundry debtors are Government Bodies, Semi-Government Bodies, Institutions and reputed companies and official liquidator could have initiated recovery proceedings for recovery from them. It is specifically contended that all the requisite information sought for by Official liquidator was furnished. Admittedly, official liquidator has recovered a sum of Rs. 4,93,492/- from the sundry debtors. The said recovery is based on the very same list furnished along with the statement of particulars by respondents-1 and 3 apart from furnishing other details as sought for. When the O.L was able to recover this amount, no answer is forthcoming from the pleadings for not initiating proceedings against other sundry debtors. Contention raised in the application that it was on account of details not being furnished by the respondents-1 and 3 is too far fetched and cannot be accepted. In fact, major debtors of the erstwhile company are:


Andhra Pradesh Technological Services Limited (APTS)

– Rs. 16,55,530/-


National Informatics Centre New Delhi

-Rs. 9,62,500/-


A.P. Pollution Control Board, Hyderabad

-Rs. 1,33,452/-


Rs. 27,51,482/-

Total amount claimed to be due from the sundry debtors is Rs. 37,22,034/-, sum total of three sundry debtors above referred to is Rs. 27,51,482/-. Thus, difference is Rs. 9,70,552/-. Out of this, a sum of Rs. 4,93,492/- has admittedly been recovered. Short fall is Rs. 4,77,060/- (Rs. 9,70,552/- (-) Rs. 4,93,492) . This amount of Rs. 4,77,060/- was due from different sundry debtors. As to what steps official liquidator took to recover the said amount, whether notice was issued, what were the steps taken by official liquidator and why said amount could not be recovered, plea in this regard is silent. Neither in the examination-in-chief nor in the cross examination R.W. 1 it has been brought on record as to what reasonable steps official liquidator took to recover the amount and/or otherwise why such steps could not be taken to recover the said amount. In the absence of any such material available on record, it is not possible for this Court to examine the conduct of any of the ex-directors in the affairs of the company. In fact, in the cross examination dated 08.07.2010 of P.W.1 has admitted to the following effect:

“We have made the list of sundry debtors. It is true that we asked for details and particulars of sundry debtors from the company. The company has furnished incomplete information. We have issued notices for further information but I cannot say the date.”

As to what was the information which was sought from the erstwhile directors and information or details which had been withheld by these directors is not forthcoming either from the pleadings or the evidence available on record. The alleged notices said to have been issued by the official liquidator have also not seen the light of the day. It is remained as a mystery unravelled till date as to how official liquidator was able to recover from the very same information furnished by the directors to an extent of Rs. 4,93,492/- and as to how he was unable to recover balance amount. These sequential of events would clearly establish that there is neither pleading nor material evidence available on record to establish that respondents have failed to furnish details of creditors sought for by the official liquidator.

13. Charges made in the application are neither specific nor clear cut against each of the respondents but are vague and general and it is against all the respondents collectively in their capacity as ex-directors. Charges made should be clear and specific and not vague and general. Until and unless acts of each of the director is established, this Court would not be justified in holding the acts of misfeasance against the ex-directors. There is no specific charge against any individual director. Allegations of negligence have been made enmass against ex-directors and official liquidator cannot proceed against the ex-directors for misfeasance or breach of trust resulting in the alleged loss caused to the company. From the pleadings, it is clear that allegations made against ex-directors are enmass and on this ground alone application is liable to be dismissed. Hence, contention raised by the official liquidator in the application cannot be accepted.

14. Now turning to the second issue namely, as to whether ex-directors of the company in liquidation have not furnished information with regard to the loans and advances said to have been made by the erstwhile company in a sum of Rs. 12,88,742/- by examining said contention with reference to pleading and evidence available on record, it would emerge that as per the statements of particulars furnished by the first respondent after company was ordered to be wound up, it has been stated in Schedule III to the loans and advances as being Rs. 9,84,729/- as against figures found in the balance sheet on Rs. 12,88,742/-. Details of Rs. 9,84,729/-has been specifically mentioned in Schedule III to the statement of particulars Ex.P-1. Statement of affairs by the erstwhile company as reflected in Ex.P-1 was as on 24.10.2002 subsequent to the audit conducted. Thereafter it has been found that bank guarantee margin money is reflected in the statement of particulars was Rs. 1,31,230/- as against revised sum of Rs. 6,03,275/-. This difference in amount was on account of retention of margin money by the bankers of the company in liquidation namely, State Bank of India and to evidence the fact that margin money has been retained by the said Bank was to the tune of Rs. 6,03,275/-, confirmation letter issued by the said bank on 09.10.2007 came to be produced and marked as Ex.R-22. This document would fortify the contention raised by respondents-1 & 3 in their statement of objections as well as in their evidence. It is also to be noticed that amount of Rs. 54,587/- said to have been received by the company from the income tax department has been handed over to official liquidator on 08.11.2002 as per Ex.R-19. Even the Certificate of tax deducted at source for the assessment year 2002-03 received from different customers has also been handed over to official liquidator on 28.01.2003 as per communication dated 25.12.2003. The rental deposit towards a building located at New Delhi, an advance of Rs. 37,000/- has been received by the first respondent from its lessors who deducted Rs. 8,000/- towards electricity charges and other maintenance costs and said amount of Rs. 37,000/- has also been handed over by respondent No. 1 to the official liquidator on 07.02.2003 as per Ex.R-20. These acts of respondents would clearly go to show that neither there is wilful withholding of any information from them which resulted in the official liquidator being unable to recover amounts due from the respondents.

15. An application under Section 543 of the Companies Act, 1956 cannot be made in vague terms and it cannot be used as a power to conduct a roving enquiry in these proceedings and to ascertain as to whether there is any act of misfeasance on the part of erstwhile directors. The plea in the application should be clear and unambiguous and specific and in the absence thereof, such application would not stand the test of scrutiny so as to grant such prayer made in the application. In fact, Section 543 proceedings is only proceedings to quantify loss sustained by the company (in liquidation) on account of acts of misfeasance committed by its ex-directors. As such, such alleged acts should to be clear and should emerge from the application itself. Until and unless these ingredients are satisfied and official liquidator arrives at the conclusion that the deeds and acts of ex-directors was of such nature which was not expected of a prudent person and thereby it has resulted in non-recovery of the said amount, fault cannot be laid on the door steps of the ex-directors.

16. For the reasons aforesaid, point Nos.(1) and (2) hereinabove is to be answered against the applicant-official liquidator and in favour of respondents – ex-directors of the company. Hence, application fails and it is hereby dismissed.

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