JUDGMENT
D.A. Desai, J.
1. This summons is taken out by the liquidator, Bhavnagar Vegetable Products Ltd. (in liquidation), representing the court to direct the directors of the company to sign and authenticate the audited balance-sheet and profit and loss account as required by section 215 of the Companies Act and to give necessary authentication of certificates of basic data and particulars entered into accounts and also the information and explanations as required in the draft report and the letter dated 29th November, 1976, of the auditors. Further direction sought was that Tungabhadra Industries Ltd. (sponsor for short) and Dena Bank, United Commercial Bank, State of Bank of Saurashtra, Indian Overseas Bank and Bank of Baroda be directed to get the stocks of the company physically verified, inspected and valued by M/s. General Superintendence Company (India) Private Ltd. and/or their representatives.
2. The company was ordered to be wound up by an order made by this court on 15th September, 1976. In an appeal preferred against the order of winding up the company, stay of operation of the order was granted but I was informed that the stay is vacated. Therefore, at present, there is no stay of the winding-up order. This court made an order on 7th may, 1976, directing the liquidator to appoint auditors to audit the books of account of the company so as to be able to arrive at a reasonable clear picture of the state of affairs of the company. In order to satisfy the requirements of the proviso to section 391(2), it was necessary to have the latest balance-sheet and profit and loss account of company and, therefore, the direction was given that M/s. Kantilal Patel and Company, chartered accountants, be appointed to audit the books and submit a report showing the position of the company as on 31st December, 1975. The auditors have prepared a draft report and in the course of auditing, they came across certain things for which they want the explanation of the directors who are responsible for the same and are not offering explanation. A letter dated 29th November, 1976, annexure “A” to the affidavit in support of the summons by which the auditors requested the liquidator that steps should be taken for authentication of the statement of account prepared by them by the directors and secretary of the company as well as authentication of the certificates of the basic date and particulars entered into the accounts. The draft also sought certain information which the auditors requested the liquidator to furnish. Thereafter, the liquidator took out the present summons. It has been served upon the directors, the petitioning-creditor, the sponsor of the scheme and various banks who claim to be the creditors of the company.
3. Mr. A. H. Mehta, learned advocate who appeared for directors No. 5 – Indrajit Jamnadas Thakkar, No. 14 – Navinchandra Gaurishankar Vyas and No. 16 – Nissarhusein Abdulhusain Merchant, led on behalf of the objecting directors and most of his arguments were adopted by other who raised objection to the summons being granted. It is, therefore, necessary to dispose of the objections raised by Mr. Mehta.
4. In respect of the first contention, Mr. Mehta contended that this court has no jurisdiction under sections 215 and 217 calling upon the directors to sign and authenticate the audited balance-sheet and profit and loss account nor even the court has power to direct the directors to appear before the auditors and submit explanation sought by the auditors. In short, the objection was that section 215 does not confer any power on the court to give such direction.
5. For the purpose of the present direction, it may be assumed that those who object to the summons were the directors of the company because it is in their capacity as directors that they are being called upon to do various things by the liquidator. The question that would then arise is whether those who are directors can be called upon by the court to do various things as prayed for by the liquidator in the summons. This would necessarily require examining the duties of the director. It is now indisputable that directors stand in fiduciary position with the company. Apart from various statutory liabilities which they undertake on becoming directors, this is the position which is beyond controversy that directors stand in fiduciary position in relation to the company. This is a position of utmost trust. Professor Gower in his Principles of Modern Company Law, 3rd edition, after referring to the articles styled “fiduciary relationship” and “the director as trustee”, has observed that the correct position of a directors has been settled by Romer, J. when he said that the directors are agents of the company and are in fiduciary relationship to their principal, the company. The duties of good faith which this fiduciary relationship imposes are virtually identical with those imposed on trustees and, to this extent, the description “trustee” still has validity. It is this duty of a director which must be kept in view before deciding whether they can be asked to do what the liquidation wants them to do.
6. However, at the inception, it would be necessary to refer to some of the statutory provisions with respect to the duty of the directors. Section 209 provides that every company shall keep proper books of account with respect to various things mentioned in that section. Section 209A requires the books of account, other books and papers of the company to be kept open for inspection during business hours by the Registrar of Companies or by such officer of the Government as may be authorised be the Central Government in this behalf. Section 210(1) imposes an obligation on the board of directors of the company to lay a balance-sheet as at the end of the period specified in this behalf and profit and loss account for that period before every general meeting of the company held in pursuance of section 166. On a combined reading of these sections, it is crystal clear that the company must maintain books of account, that the books of account are open for inspection by the Registrar without any previous intimation and that at the end of the financial year, the balance-sheet and profit and loss account is to be prepared and it is to be laid before the general meeting. That duty is cast on the board of directors. In order to discharge the last duty, viz., getting prepared the statements of account, balance-sheet and profit and loss account, it will be the duty of the directors to see that regular books of account of the company are kept. That would again be the duty of the board of directors. If they are required to maintain books of account, it would be their duty to see that correct and regular books of account are kept. They should exercise such care and skill and such degree of supervision as would enable them to see that provisions of section 209 onwards are faithfully and effectively carried out. If any director neglects to provide for maintenance of books of account for the whole year, I fail to see how at the end of the year, they would be able to carry out the obligations and duties imposed on them by section 210(1). Balance-sheet and profit and loss account can be prepared or compiled on the basis of the accounts maintained during the year. It is no argument that only if a general meeting is to be convened and at such general meeting, a statement has to be produced that accounts are required to be maintained and as there is no question of calling the general meeting because the company is ordered to be wound up, and, therefore, section 210 does not come into play. Now, can one look forward to the end situation that just before the time the general meeting is to be convened, the company would be wound up and, therefore, the directors were free from the liability of keeping accounts. It is, therefore, indisputable that the board of directors had to make necessary arrangements for maintaining the keeping regular books of account which should be available for inspection and which should be according to the prescribed standard and on the basis of which the balance-sheet and profit and loss account will be prepared by the board of directors.
7. Now, section 224 imposes a duty on the company to appoint, at each annual general meeting, auditor or auditors to hold office from the conclusion of the meeting until the conclusion of the next annual general meeting. Duty to appoint auditors is thus statutory. Section 226 prescribes qualifications of auditors. Then comes section 227 which is material. It provides that every such auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company whether kept at the head office or else whether and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor. An auditor thus enjoys a statutory right to call for explanation from officers. Expression “officer” is defined in section 2(30) to include any director, managing agent, secretaries and treasurers ………., etc. Now, if I remove the word “officer” from section 227 and read the word “directors”, then section 211 will read “……… the auditors shall be entitled to require from the directors of the company such information and explanations as the auditors may think necessary for the performance of his duties as auditor. It thus becomes a statutory duty of the directors to keep the accounts or arrange to maintain the accounts of the company, to prepare balance-sheet and profit and loss account and before it can be so done, to offer explanation and information called for by the auditors.
8. Mr. Mehta does not dispute this position but his contention was that this obligation is imposed upon the directors of a company which is functioning and if the company is ordered to be wound up and the liquidator steps in, the directors cease to enjoy the status of directors and hence could not be asked to discharge a function which they were bound to discharge if they continued to be directors. If that were to be so, it would only mean that the provisions onwards from section 433 of the Companies Act would be rendered totally nugatory. Once a winding-up order is made, the board disappears. But the obligations and liabilities incurred during the period the company functioned are not discharged on the making of a winding-up order. If accounts are kept for a financial year and they are examined either by the auditor appointed by the general meeting or appointed by the court but the accounts relate to the period when board of directors was in charge of the company, then notwithstanding the winding-up order, directors are liable to render explanation. Mr. Mehta’s argument comes to this that if the accounts are being audited by the auditors for the period for which there were some directors, the duty of the directors under section 227 came to an end as soon as a winding-up order is made. If this company was functioning and there was no winding-up order, under section 227 the auditors would have a right to call upon the directors to submit explanations. If a winding-up order intervenes, the position in law in this behalf does not undergo change. Directors may cease to enjoy power, but obligations and liabilities incurred during the period they were directors do not evaporate with the passing of the winding-up order. In fact they can be enforced at the hands of the liquidator. This is the scheme of the winding-up provisions of the Companies Act.
9. Mr. Mehta had an extreme argument to offer in this connection. He said that if directors had committed any offence, they should be prosecuted but the liquidator cannot call them to offer explanation. I have not been able to fully grasp the meaning of this submission. I would prosecute. There would be no hesitation in doing so. But that does not put an end to the liability to give explanation. The argument is that if called upon to explain, they will be squarely bound by the explanation which may hamper their defence in the prosecution that may be lunched against them. That was Mr. Mehta’s passing apprehension. But the argument which in terms was posed is that the various provisions herein discussed do not confer any power on the court to call upon the directors to explain something which happened during the period they were directors because the auditors appointed by the court and not one appointed by general meeting seeks their explanation. Fact situation is slightly different though I do not propose to rest this order on that position. Auditors appointed by the general meeting disclosed their disinclination to audit accounts. Therefore, the court appointed the auditor. But the irrefutable and important fact is that the auditor has audited accounts for the period when there was a board of directors. And directors of such board are called upon the render explanation when they were in office. Accounts are required to be maintained statutorily. The duty of explain arises under the statute. Vacation of the office of director does not ipso facto bring to an end the liability to offer explanation which was statutorily placed there under section 227. Therefore, there is no substance in the contention of Mr. Mehta that the court cannot call upon the directors to appear before the chartered accountants and auditors appointed by the court to submit explanations on the questions and queries raised by them.
10. There is one apprehension of Mr. Mehta against which I would like to guard. He said that the direction sought is a composite direction. He is right. He says that, by composite direction, the directors are called upon to appear before the auditors, give explanations, sign the accounts and authenticate the certificates. He says that after offering explanations, the auditors may prepare same accounts and/or other accounts and the directors cannot be asked to sign the same. At present, I propose to confine myself to one part of the prayer, viz., to appear before the auditors and to submit explanations. Authentication will come at a later stage. Under this guise, the directors cannot be allowed to escape. Therefore, I confine my attention in this summons to that part of the prayer by which the directors are called upon to give explanations in respect of queries and points raised by the auditors in their draft report submitted by them to the liquidator. To that, there cannot be much objection, viz., that the director is being called upon to be a party to a document to which he does not subscribe. If there is statutory liability to sign, I will examine it later on. For the present, I will grant a part of the prayer in the summons.
11. Mr. A. L. Shah, learned advocate on behalf of the director No. 3 – Ahmedhusen Abdulhusen Merchant – urged that A. A. Merchant resigned from the office of director with effect from 1st October, 1974. Mrs. K. A. Mehta on behalf of director No. 7 – Mohmedhusein Abdulhusen Merchant – stated that here signed in June, 1975. Mr. D. U. Shah, learned advocate for director No. 6 – Mohmedhusein Noormohmed Merchant – and No. 8. – Fidahusen Noormohmed Merchant, urged that they were minority directors since 1971 and they did not participate in the management of the office and resigned from the office of directors on 4th October, 1974. Their resignations were accepted on 30th April, 1975. Miss S. M. Madan, learned advocate on behalf of director No. 10 – Sultanali Kasamali Ladiwala – urged that the director, S. K. Ladiwala, resigned, from the office of the director on 9th December, 1975. All these advocates invited me to hold that they are not liable to give any explanation as sought by the auditors.
12. In order to dispose of this summons, it is necessary to state that the relevant period for which accounts are prepared commence from 1st November, 1974, and ends on 31st December, 1975. If any one who was a director during this relevant period, he must give explanation. If he is a minority director and did not participate in the management, that would be his answer. Resignation of a director becomes effective from the day on which it is accepted. If any other construction is to be accepted, the result would be that all of them can walk out on the day preceding the date on which the accounting year comes to a close and on the last day they would pocket the balance in their hands and nothing can be done to them because they cannot be asked to explain. The period for which the accounts are complied ipso facto determine the liability of the directors to explain things arising from the accounts for the period, for long or for short, for a day or for a month, were directors. Mr. D. U. Shah pointed out that directors Nos. 6 and 8 were minority directors since 1971 and they wee not participating in the management. It may be true. But it cannot dispose of the liability if till April, 1975, viz., the date of resignation, the public register of the company showed them as directors. It is true that they may give an explanation that as they were not participating in the management, they cannot offer any explanation. If this statement is correct, the answer is to be accepted. But, can it be an argument that because during a part of the period for which accounts are complied, a person walked out from the office of the director, his liability to explain statutorily cast under section 227(1) would be discharged or he would be discharged or he would be freed from the liability ? It cannot be so. Therefore, all these gentlemen who said that they have resigned but appear to have been on the public register of this company as directors for some period of time out of the period for which the accounts are compiled by the auditors and explanations are sought, they would be liable to answer. Mr. G. N. Shah, learned advocate for directors No. 2-Dhirajlal Babubhai Sanghvi, No. 4 – Kiritkumar Ratilal Gandhi and No. 9 – Nagardas Ranchhoddas Sanghvi, stated that keeping open all the contentions, they agree to appear before the chartered accountants to offer whatever explanation they can offer after taking inspection of the books if they want to take and then submit statement of concurrence in respect of statement of affairs filed by the other directors. There is no other contention on his behalf.
13. Accordingly, this summons is granted in respect of prayer (a) to the effect that the directors shown at serial Nos. 2 to 16 should appear before the chartered accountants within a period of three weeks from to-day according to the date appointed by the chartered accountants and to offer explanations in respect of queries raised by the chartered accountants in the draft report submitted by them to the liquidator in respect of the accounts of the company for the period November 1, 1974, to December 31, 1975. Summons is also granted in terms of prayer (b) that all of them are called upon to submit in writing their acceptance of the inventory of the stock and goods made by M/s. General Superintendence Company (India) Private Ltd. for and on behalf of Dena Bank and UCO Bank. M/s. General Superintendence Company is appointed to verify and finally check and prepare the inventory of the stock with the State Bank of Saurashtra and any other stock with the company, and the cost of verification of the stock with the State Bank of Saurashtra shall be borne by the State Bank of Saurashtra. The cost of verification and preparation of the inventory of the stock with the company other than those of which claim is laid by Dena Bank, UCO Bank and State Bank of Saurashtra should be borne by the sponsor of the scheme, viz., Tungabhadra Industries Ltd. and they must deposit through the petitioner, Velji Shamji and Company, Rs. 1,200 with the liquidator within ten days from to-day. If the directors so desire, they or their nominees may remain present when verification is undertaken by M/s. General Superintendence Company but if they failed to avail of this opportunity, their subsequent objections would be disregarded. No order as to costs of this summons.