HIGH COURT OF KARNATAKA
Official Liquidator of BPL Net Com Ltd. (In Liqn.)
Co. Application No. 1876 of 2007
Co. Petition No. 205 of 2001
JANUARY 24, 2013
1. This application is filed by Official Liquidator under Section 543(1) of the Companies Act, 1956 read with Rule 260 of the Company (Court) Rules, 1959, contending inter alia that the Directors (respondents herein) of the Company (in liquidation) did not handover the Investments’ namely the Share Certificates as noted in the Audited Balance Sheet duly signed by the Ex-Directors in Schedule `4′ worth Rs.3,66,04,620/- and as such they are liable to make good the loss to the said extent since they have failed to discharge their fiduciary position and they have acted against the interest of the shareholders and have thus committed ‘Breach of Trust’. It is further contended that Certificates worth Rs. 12,500/- namely National Savings Certificate, which was shown as “Investments other than Marketable Securities” was also not handed over to the Official Liquidator as required by them and as such they should make good the said loss together with interest at 18% p.a.
2. Heard Sri. V. Jayaram, learned counsel appearing for the Official Liquidator and Smt. Nalina Mayegowda, learned counsel appearing on behalf of M/s. Poovayya & Company. Perused the records.
3. The Company (in liquidation) was ordered to be wound-up by this Court in Company Petition No.205/2001 by order dated 19.12.2002. Pursuant to the said order passed, Official Liquidator became the Liquidator as per the provisions of Section 449 of the Companies Act, 1956. On intimation given by the Official Liquidator during February 2003 to file the Statement of Affairs and to handover the books and records of the company in liquidation, the 1st respondent herein is said to have filed the Statement of Affairs of the Company (in liquidation) on 03.03.2003, which was scrutinized and it was found by the Official Liquidator that there were certain discrepancies, which was required to be rectified and accordingly, a communication was issued by the Official Liquidator to the Ex-Directors by communication dated 07.04.2003. On receipt of the same, the 2nd respondent herein by communication dated 02.05.2003 is said to have complied with the discrepancies pointed out by the Official Liquidator in respect of the Statement of Affairs filed. The office copy of this communication from the 2nd respondent herein is appended to the Statement of objections filed by the 1st respondent herein as Document No.2. A perusal of the same would indicate that it has been duly acknowledged by the office of the Official Liquidator on 02.05.2003 itself. It would be appropriate to extract the relevant paragraph of the said communication which reads as under since same has a direct bearing on the defence raised:
“The original National Savings Certificates are available with the respective Sales Tax Department as Security Deposit and hence, we are unable to produce the originals. The details of such certificates have been provided by us in the `Statement of Affairs’ filed with you. Request you to instruct the concerned department for production of the same.
Investments other than the marketable securities has been shown as ‘nil’ in the Statement of Affairs because as per the audited accounts for the year ended 31.03.2003 the management has decided to provide for the diminution in value of the investment. However, the company still carries the equity shares in the company and the original of the same are available with the Company which can be handed over to yourselves on your instructions. “
4. The grievance of the Official Liquidator in this application is that the value of the shares reflected in the balance sheet of the company (in liquidation) at Schedule ‘4’ under the heading of “INVESTMENTS” was a sum of Rs. 2,98,85,000/- had been shown as having been invested in ‘Oyeindia Internet Works Pvt. Ltd’., and further a sum of Rs. 67,19,620/- had been invested in BPL AFX Information’s Services Pvt. Ltd. As per the Statement of particulars filed by ex-directors and when called upon by Official Liquidator ex-directors ought to have deposited original Share Certificates of these two companies with the Official Liquidator to enable him to recover the value of the said Share Certificates and on account of non-handing over of these original Share Certificates, the Official Liquidator has not been able to recover the said amount and thereby it has resulted in causing loss to the shareholders and respondents being Ex- Directors were discharging their duty as Directors in fiduciary position and having acted against the shareholders, thereby they have committed ‘Breach of Trust’ and as such the respondents would be liable to pay the said amount to the Official Liquidator. Said contention requires to be examined with utmost circumspection for the following reasons:
Breach of Trust refers to something, which the Officer or a Director of a Company has done wrongly by misapplying or retaining in his own hand any monies of the Company or by which the Company’s property has been wasted or the Company’s credit is improperly pledged or otherwise. It must be some act resulting in actual loss to the Company. Whether the Directors of the Company (in liquidation) closed their eyes wantonly or consciously to the acts of mismanagement or if they abstain from taking any steps as being expected of a prudent person or approves such acts of mismanagement, then in such eventualities, their conduct will amount to misfeasance.
5. The liability enforced under Section 543 of the Companies Act is a liability in the nature of a tort or quasi-criminal and of serious nature. Since the proceedings under this Section are of Civil nature, it is no doubt true that Official Liquidator need not establish mens rea. However, this does not empower the Official Liquidator to claim or lodge a claim against Ex-Directors of the Company without putting forth proper plea and proving before this Court as to the manner in which the loss has been occasioned on account of the willful acts of the Directors. In other words, Official Liquidator is also required to establish that all steps were taken by him to mitigate such loss, which otherwise would not have occurred. The initial burden of proof lies on the Official Liquidator. It may in some cases be only formal and he may rely upon the books and papers, then the burden shifts on the respondent Ex-Director or Directors as the case may be. Any proceedings under this Section i.e., against the Ex-Directors cannot be proceeded against as Joint tort-feasors unless it is proved to be as such. There cannot be any order against the Director’s enmass for all the acts of misfeasance without specific finding against each individual for his responsibility and for particular act of misfeasance. If it is proved by the Official Liquidator that Directors had taken no steps to recover the monies due to the Company, then burden shifts on the Directors to produce evidence and to establish contrary and further establish that they are not liable to pay the said amount. Misfeasance proceedings may also be taken against the Ex-Director in relation to a ‘breach of trust’ of the creditors when the company becomes insolvent.
6. Keeping these principles in mind, when the facts on hand are examined, the records would indicate that Company, on being ordered to be wound-up by this Court in Company Petition No.205/2001 on 19.12.2002, Official Liquidator had called upon the Ex-Directors on 03.02.2003 to file the Statement of Affairs and handover the books and records. In response to the said notice/letter, first respondent herein has filed the Statement of Affairs of the Company (in liquidation) on 03.03.2003. This was undisputedly scrutinized and discrepancies were noticed and it was informed to ex-directors by the Official Liquidator by communication dated 07.04.2003. These facts are not in dispute. Thereafter, while rectifying the defects pointed out by the Official Liquidator and in reply to the communication dated 07.04.2003, 2nd respondent herein has intimated the Official Liquidator by communication dated 02.05.2003 about compliance of the defects. In the said letter, it has been specifically stated that Original National Savings Certificates are in the custody of the Sales Tax Department, which was furnished as Security Deposit and Company (in liquidation) or its Ex-Directors are unable to produce the original. It is also specifically mentioned that the details of such Certificates have been mentioned in the `Statement of Affairs’. It is also stated in the said letter that Investments other than the Marketable Securities’ has been shown as `Nil’ in the Statement of Affairs on account of the diminution in the value of the investment even as on date of filing of statement of particulars. The Official Liquidator also have been notified that the company still carries the equity shares in the Company and the original of the same are available with the Company, which would be handed over on instructions from the Official Liquidator. At this juncture itself, it would be appropriate to know the very plea put forward by the Official Liquidator in the application in question particularly at paragraph 6 which reads as under:
“……..Ex-Directors have rectified the defects in statement of affairs except non-delivery of investments other than marketable securities.”
The pleadings and the records would not indicate about Official Liquidator either rejecting the explanation given by the Ex-Directors or the Ex-Directors having been called upon to handover the original Share Certificates. As such, the plea now put forward by the Official Liquidator that on account of non-handing over of the Certificates, the Ex-Directors have committed `Breach of Trust’ and said amounts covered under Share Certificates could not be recovered would be too farfetched plea, which cannot be accepted.
7. Be that as it may, in the instant case, the Official Liquidator has never raised any objection with regard to non-handing over of the Share Certificates by the Ex-Directors. Admittedly, in the communication dated 02.05.2003 referred to supra, the second respondent herein had in unequivocal terms intimated the Official Liquidator about the retention of the Share Certificate since the value of the said shares having been diminished to ‘Nil’ and also awaiting for further instructions to handover the original share certificates. This defence being valid defence and there being no willful withholding of Share Certificates so as to cause financial loss to the principals namely the shareholders, I am of the considered view that it cannot be construed that the Ex-Directors have committed `Breach of Trust’.
8. The Official Liquidator is expected to satisfy himself after a prior investigation on his own that charges, in respect of which punitive action is to be taken that a case is made out against the Ex-Directors. Accusations against the Ex-Directors for the decisions taken in the normal conduct of the business of a Company would not come within the four corners of misappropriation or retention of the Companies property or any act amounting to misfeasance and breach of trust in relation to the Company or its property. Even in the present application Official Liquidator does not state what was the value of these shares as on the date of winding up order was passed or even as on the date of filing of statement of particulars by ex-directors so as to arrive at a conclusion that on account of such non-handing over of shares certificates it has resulted in financial loss to the company (in liquidation) which otherwise would not have occurred.
9. For the reasons aforesaid, I am of the considered view that none of these ingredients being present in this application to proceed against the Ex-Directors and to direct them to pay the amounts as prayed for application is liable to be rejected. Hence, application stands rejected.