JUDGMENT
Case Note:
Companies Act, 1956 – Section 397, 398 & 543–Mismanagement–Application seeking assessment of damages against delinquent Director is not maintainable unless a prima facie view Under Section 397 & 398 is formed.
Section 541 & 543–Application of–Invocation by a person in respect of a company which stop functioning and without there being a creditor–Provision has no application.
Usha Mehra, J.
1. By the present petition S/Shri Sanjeev Kumar Bhardwaj, Raj Kumar Sharma, Anil Kumar Bhardwaj and Amit Kumar Bhardwaj have sought directions against the respondents, namely, S/Shri Ghanshyam Dass, Phool Kumar and Shiv Kumar Bhardwaj for restoring company’s tenanted premises i.e. ground floor of property bearing No. 18, Mehrauli, New Delhi. That the respondents 1 and 2 to render the accounts and handover the record of the company and also render the accounts of the sale of the bus. Further respondent No. 1 be restrained from running the tea stall in the premises of the company. In order to get relief, petitioner has invoked the provisions of Section 541, 542 and 543 (Schedule XI), read with Section 406 and 402(f) of the Companies Act,1956 (hereinafter called the Act) read with Rules 6, 9 and 11(19) of the Companies (Court) Rules,1959 (hereinafter called the Rules).
2. Before we proceed to discuss the case on merits, lets have quick glance to the relevant provisions of the Act invoked by the petitioner in this petition, namely, Section 541, 542, 543, 406 and 402(f) of the Act, which arc reproduced as under :
SECTION 541 – Liability where proper accounts not kept :
(1) Where a company is being wound up, if it is shown that proper books of account were not kept by the company throughout the period of two years immediately preceding the commencement of the winding up, or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter, every officer of the company who is in default shall, unless he shows that he acted honestly and that in the circumstances in which the business of the company was carried on, the default was excusable, be punishable with imprisonment for a term which may extend to one year.
(2) For the purpose of Sub-section (1), it shall be deemed that proper books of account have not been kept in the case of any company, if there have not been kept –
(a) such books or accounts as are necessary to exhibit and explain the transactions and financial position of the business of the company, including books containing entries made from day to day in sufficient detail of all cash received and all cash paid; and
(b) where the business of the company has involved dealings in goods, statements of the annual stock-takings and (except in the case of goods sold by way of ordinary retain trade) of all goods sold and purchased, showing the goods and the buyers and the sellers thereof in sufficient detail to enable those goods and those buyers and sellers to be identified. SECTION 542 – Liability for fraudulent conduct of business : (1) If in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company or any other persons, or for any fraudulent purpose, the Court, on the application of the Official Liquidator, or the liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct.
3. On the hearing of an application under this sub-section, the Official Liquidator or the liquidator, as the case may be, may himself give evidence or call witnesses.
SECTION 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 of formation of the company, or any past or present director, [managing agent, secretaries and treasurers], 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, of the liquidator, or of any creditor or contributory, made within the time specified in that behalf in Sub-section (2), examine into the conduct of the person, director, [managing agent, secretaries, and treasurers], 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 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 just.
SECTION 406 – Application of Sections 539 to 544 to proceedings under Sections 397 & 398 :
In relation to an application under Section 397 or 398, Sections 539 to 544, both inclusive, shall apply in the form set forth in Schedule XI.
SECTION 402 – Powers of Company Law Board on application under Section 397 or 398:
Without prejudice to the generality of the powers of the Company Law Board under Section 397 or 398, any order under either section may provide for –
(f) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of application under Section 397 or 398, which would, if made or done by or against an individual be deemed in his insolvency to be a fraudulent preference.
4. Reading of Section 541 of the Act makes it clear that it deals with the liability where proper accounts were not kept. These provisions are attracted where a company is to be wound up and it is shown that proper books of accounts were not kept by the company through out the period of two years immediately preceding the commencement of winding up, or the period between the incorporation of the company and the commencement of winding up whichever is shorter. If such an act is committed and default is found then under this provision punishment is imposed. Whereas under Section 542 liability for fraudulent in the conduct of business is stipulated. These provisions can be invoked either by the Official Liquidator or the creditor or contributory in the course of winding up of the company if it appears to the above said persons that any business of the company had been carried on, with intent to defraud creditors of the company or any other person. In that eventuality on an application by Liquidator or creditor or contributory Court can pass appropriate directions. Section 543 on the other hand empowers the Court to assess damages against delinquent directors.
5. Section 402(f) of the Act empowers the Company Law Board on an application under Section 397 or 398 to set aside any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company.
6. In order to understand whether these provisions are applicable, we may have to go through the facts of this case.
7. It is the case of the petitioner that M/s Mehrauli Dehat Transport Company Pvt.Ltd. (in short the Company), a private company limited by shares was registered. Its registered office was situated at 692, Chirag Delhi, New Delhi. Formerly, the registered office of the company was situated at 18, Mehrauli, New Delhi which subsequently became branch office consisting of three rooms, a big hall and a portico on the ground floor. The object of the company was to operate passenger bus service in the Union Territory of Delhi. Petitioner’s grand father late Shri Damodar Dass filed a petition for winding up under Section 397/398 of, the Act which was listed as CP.No. 91/80. (It is still pending). Shri Damodar Dass died on 15th December,1992. The petitioners were subsequently brought on record. The petition bearing CP.No. 91/80 was directed against the Managing Director of the company late Shri R.K.Sharma. Late Shri Damodar Dass and late Shri Ram Kumar Sharma were taken as the Board of Directors by an order of this Court ‘ dated 21st March,1974. Shri R.K.Sharma died on 11th April,1990 and his legal heirs were brought on record. In CA.No. 399/90 vide order dated 12th February,1993 this Court constituted Board of Directors so as to include one person from each sides beside a nominee of this Court. The said Board was directed to transmit the shares of late Shri Damodar Dass to the present four petitioners and shares of late Shri R.K.Sharma were transmitted to present respondents 1 and 2. Shares of Smt.Sharda Bhardwaj, as per the Resolution of the Board, were not allowed to be transferred in the Register of Members, on objection by respondent No. 1. In April, 1979 Smt.Chanderwati sold her shares to Smt.Sharda Bhardwaj and thus late Shri R.K.Sharma lost his majority. He, however, did not agree to leave the control and management of the company. He had a scheme to usurp all the assets of the company such as bus permits, buses as well as tenancy of the company. Late Shri R.K.Sharma abused his fiduciary position as trustee as well as son-in-law of late Shri Damodar Dass. The grand father of the petitioner being an old man was unable to do much business hence he left it to his son-in-law late Shri R.K.Sharma. The said Shri R.K.Sharma thereby abused his fiduciary position and thus caused loss to the company. As trustee of the company he committed criminal breach thereof. Late Shri R.K.Sharma retained the buses, two permits and company branch premises at 18, Mehrauli, New Delhi as his personal residence. He in connivance with Mr.J.N.Joshi, landlord of one portion of the ground floor of 18, Mehrauli tried to usurp the property of the company. However, on a petition to this Court, one permit and a mini bus was granted to the petitioner’s grand father while one permit and standard bus (big) to late Shri R.K.Sharma in CA.No. 527/81 in CP.No. 91/80 vide order dated 29th September,1981. Accounts were also to be filed by both the parties. The bus which was given to late Shri R.K.Sharma bearing No. 5290 (Standard Bus) had been dismantled and sold by respondents. Proceeds thereof have been mis-appropriated without rendering the accounts. In order to deprive the company of its benefit late Shri R.K.Sharma nearly lost the permit thereby not applying for its renewal. Late Shri R.K.Sharma and present respondents 1 fraudulently alleged tenancy of 18, Mehrauli, New Delhi in the name of late Shri R.K.Sharma since 1960 which is ex-facie a fraud. In the balance sheet as on 31st March,1972 filed with the Registrar of Company it had been reflected by late Shri R.K.Sharma that the rent of this premises was paid by the company. That the ground floor of premises bearing No. 18, Mehrauli, New Delhi was ‘ never under personal tenancy of late Shri R.K.Sharma. Respondent 1 is running a tea stall in the company’s tenanted premises on the ground floor of 18, Mehrauli, New Delhi without authority and also against the object of the company. Moreover, late Shri R.K.Sharma siphoned away a sum of Rs. 2,00,000/-. The respondents have mis-appropriated the proceeds of bus No. 5290. They should restore the tenancy premises of the company consisting of three rooms, big hall and portico of the ground floor of 18, Mehrauli, New Delhi and should also produce record of the company beside rendering accounts. Respondent No. 1 contested this petition on legal grounds as well as on merits. He took preliminary objections regarding the maintainability of this petition. According to him, provisions of Section 541 to 543 cannot be invoked by filing a separate petition. Moreover, only when a company is being wound up that liability of not filing the proper books of accounts could be drawn. Even otherwise since there does not exist any running concern no question of winding up would arise nor any question of punishment. Mehrauli Dehat Transport Company Pvt.Ltd. stopped functioning since 1988. It is no more in existence. Therefore, it has no creditors and in the absence of there being any creditor or any other person provisions of Section 541 or for that matter of Section 543 are not attracted.
In the absence of any business being run by the company this Court cannot regulate the affairs of the company. The petition is otherwise barred by time because it has been filed after seven years. The accounts of the company had always been maintained at the registered office of the company at Chirag Delhi under the control of late Shri Damodar Dass, predecessor-in-interest of the petitioner and not at 18, Mehrauli, New Delhi. Respondent No. 1 denied that the entire ground floor of 18, Mehrauli, New Delhi was under the tenancy of the company. It was only a portion bearing No. 18/4, Mehrauli, New Delhi which was under the tenancy of the company. According to him portion belonging to Shri J.N.Bakshi was in the personal tenancy of late Shri R.K.Sharma.
8. Respondent No. 2 in his reply supported the case of the petitioner. He has asserted that the complete ground floor of premises bearing No. 18, Mehrauli, New Delhi was under the tenancy of the company i.e. Mehrauli Dehat Transport Company Pvt.Ltd. and not in the personal tenancy of his late father Shri R.K.Sharma. The registered office though shifted to Chirag Delhi but branch office remained on the ground of 18, Mehrauli, New Delhi. It remained under the tenancy of the company. According to respondent No. 2, the respondent No. 1 has dishonestly usurped the tenancy premises of the company in connivance with Shri J.N.Bakshi the landlord. He has denied that the portion in possession of respondent No. 1 belonging to Shri J.N.Bakshi was under the personal tenancy of their late father Shri R.K.Sharma.
9. I have heard the learned counsel for the parties and perused the record.
10. So far as the objection of respondent No. 1 that this petition ought to have been filed in CP.No. 91/80 which was filed by the grand father of the petitioner under Section 397/398 of the Act, I find no merits in this objection for the reasons given by this Court in the case of Rajendra Nath Bhaskar and Anr. v. Bhaskar Stoneware Pipes Pvt.Ltd. and Ors., Vol.72 (1991) Company Cases page 641. In that case this Court was dealing with a case filed under Section 397/398 of the Act. Allegations made in the petition were that the respondent acted in such a manner which resulted in the diversion of the company’s funds. By diverting the funds he promoted and supported his various concerns at the cost and to the detriment of the company. This he did for his own benefit and benefit of his companies. The alleged circumstances were given in that petition which according to that petitioner render just and equitable that company should be wound up and in case the company was not wound up the company affairs be rectified. A prayer with regard to repurchase of shares was also made. The respondent died during the pendency of the petition. His heirs and legal representatives filed an application to be imp leaded and allowed to contest because if the allegations relating to misfeasance, misapplication of funds, breach of trust are prima facie found true, then an application under Section 543 would be moved for getting necessary relief for assessment of damages. It was in this background that the heirs of the deceased wanted to be imp leaded as parties. According to them if an order Section 402 of the Act was passed for the purchase of shares as prayed, then such an order would affect the heirs and legal representatives of the deceased. It was urged that before any such order could be passed by the Court, the heirs and legal representatives of the deceased may be heard and the question may be considered and decided in the presence of the heirs and legal representatives of the deceased. The learned Company Judge rejected the application for bringing the legal heirs on record. But on appeal the Division Bench held that if, during the winding up proceedings, prima facie it is found that any such misconduct as mentioned in Section 543 is committed, then, an application seeking relief is contemplated in the said provision can be made. Such a relief can be sought against the heirs and legal representatives of the deceased, director or other officer as mentioned in the said provision. The heirs and legal representatives can, however, be heard in the absence of an application with necessary prayer. It was further observed that “The existence of a prima facie case against the delinquent director, etc. in a proceeding under Section 397 or Section 398, is, however, a sine qua non for a proceeding under Section 543 (Schedule XI). It was also observed that joint petitions under Section 397 or Section 398 and under Section 543, cannot be combined together or made simultaneously, the petition under Section 543 must follow after a prima face case has come to light in the course of proceedings under Section 397 or Section 398. The application must ordinarily be made by an independent application and not by a sub-application under the main application under Section 397 or Section 398.”
11. From the above observation of the Division Bench of this Court, it is clear that the petitioner was not supposed to file an application under Section 543 in the petition already filed by the petitioners under Section 397 or 398 of the Act bearing CP.No. 91/80. It is only when a prima facie view is formed on their petition under Section 397 or 398 of the Act holding respondent guilty of an act of misfeasant, misconduct then of course provisions of Section 543 would be attracted. The petitioner can invoke the previsions of Section 543 by filing a separate application but this is possible after a prima facie view on their petition under Section 397 or 398 has been formed. Similarly, in the case of Life Insurance Corporation of India v. Hari Dass Mundhra and Ors., Vol. xxxvI (1966) Company Cases page 371, Allahabad High Court was called upon to decide whether in every case under Section 397 or 398 the Court is entitled to make an enquiry into the affairs of the subsidiary company or not. It was further observed that in proceedings under Section 398 and 399 it is open to the Court to order a Director to pay compensation under Section 543 read with Schedule XI, although there was no separate application by the appellant under Section 543. So it is not necessary that an application must be moved in a pending petition under Section 397/398 of the Act. Allahabad High Court opined that even without an application decision under Section 543 can be given. Whereas our own High Court in the case of Rajendra Nath Bhaskar (supra) opined that it is only after a prima facie view is formed in a petition under Section 397/398 that a separate application under Section 543 can be filed. For the reasoning given by our own High Court objection raised by the respondent in this regard is without force.
12. So far as the question qf pendency of winding up petition is concerned, that will be heard in CP.No. 91/80. But if it is pointed out that assets of the company are in possession of some one else who is not supposed to have it, then a separate petition is maintainable whereby Court can direct such a person to return the assets of the company. In this regard, reliance can be placed to the decision of the Supreme Court in the case of Akhilash Vinod kumar Jain (Smt.) v. Cox and Kings (India) Ltd. and Ors., Vol.24 (1995) Company Cases page 28. While interpreting the Statute in regard to penal provision, the Apex Court observed that “the heirs and legal representatives of a deceased employee or officer in possession of the Company’s property would restore it back to the company. The Court would not be powerless to declare the wrongful withholding of the property of the company to be an offence. It is immaterial whether wrongful withholding is done by the employee or officer or the past-employee or past officer or the heirs of deceased employee or the officer or anyone claiming their right of occupancy under such an employee or an officer. It cannot be ignored that the legal heirs or representatives in possession of the property had acquired the right of occupancy in the property of the company, by virtue of being family members of the employee of the officer during the employment of the officer or the employee and not on any independent account. They, therefore, derive their colour and content from the employee or the officer and have no independent or personal right to hold on to the property of the company”. Relying on these observations it can safely be said that the respondent No. 1 has no independent right over the property in question. He derives his right from his late father Shri R.K.Sharma. In case it is proved that late Shri R.K.Sharma lost the majority of shareholding then this company’s property will have to be restored by respondent No. 1 to the company. An extra ordinary general meeting of the company was convened because of the order passed by the learned Company Judge in CA.No. 1140/94 in CP.No. 91/80 on 27th April,1995. And on 27th May,1995 Board of Directors of the Company was constituted in which respondent No. 2 is also a member. According to petitioners, their group got the majority shareholding i.e. 79% shares and control of the company which is more than 3/4th strength. Thus, the respondent No. 1 is continuing in illegal possession of the company’s property i.e. tenanted premises on the ground floor of property bearing No. 18, Mehrauli, New Delhi in collusion with Shri J.N.Bakshi, landlord of that half portion. By a subsequent order in CA.No. 372/95 in CP.No. 91/80 dated 12th May,1995 it was clarified that it is for the newly constituted Board of Directors of the Company to take decision and appropriate steps to recover the company property. It is the case of the petitioner that new Board passed a Resolution to take back possession of company’s property from respondent No. 1. This respondent filed an application bearing CA.No. 372/95 seeking restraint order which was declined vide order dated 12th May,1995 and Court gave the clarification mentioned above. Therefore, it cannot be said that petition as such is not maintainable because the company is not running. On the contrary perusal of Company Court orders passed on 27th April,1995 in CA.No. 1140/94 in CP.No. 91/80 and on CA.No. 372/95 in CP.No. 91/80 proves the defense of respondent No. 1 to be without merits. It has, however, come on record that late Shri R.K.Sharma, father of the respondent No. 1 was permitted to stay and live only in the premises in question till the disposal of the main petition i.e. the portion of Shri J.N.Bakshi. Late Shri R.K.Sharma was, however, restrained to carry on commercial activity. It would be difficult in view of the above circumstances to hold that the company is not in existence or for that matter to hold that respondent No. 1 can withhold the assets of the company particularly when the new Board of Directors have already resolved that the tenanted premises of the company be restored to it. Therefore, I find no merits in the defense of respondent No. 1 in this regard. The other grounds taken by the respondent No. 1, namely, the petition is barred by time, nothing has been pleaded nor the counsel for respondent No. 1 could point out how the petition is barred by time. Even otherwise on this point counsel for respondent No. 1 did not address any arguments. On merits also respondent No,l has not been able to say that he has a legal right over this property i.e. one half portion of 18, Mehrauli, New Delhi belonging to Mr. J.N.Bakshi, the landlord.
13. So far as the provisions of Section 543 are concerned, these provisions in the facts of this case cannot be attracted. It is only after a prima facie view is formed on petitioner’s petition under Section 397 and 398 that action can be taken as held by Our own High Court in the case of Rajendra Nath Bhaskar (supra). Petition under Section 397 is still pending. No decision has been rendered, therefore, relief as sought in para (b) and (c) of the petition cannot be allowed at this stage.
14. So far as the relief (a) and (d), which are reproduced as under, the same can be allowed for the reasons stated.
RELIEF :
(a) Restore company tenanted premises consisting of three rooms, big hall and portico on the ground floor of 18, Mehrauli, New Delhi from respondent Nos. 1, & 2 to the company through its Chairman or his nominee; and
(d) Direct respondent Nos. 1 and 2 not to misapply company premises for commercial purpose, namely, for running a tea stall or anything else.
50% rent of the premises i.e. Rs. 7.50 paise was paid by the company. Presently for half of the tenanted portion of the entire premises is under the tenancy of the company. Respondent No. 3 Shri S.K.Bhardwaj is paying rent at the rate of Rs. 7.50 paise on behalf of the company to Shri Ram Dayal. To that effect, affidavit has been filed by Shri Ram Dayal dated 21st April,1998. This affidavit was filed as per the direction of this Court. Moreover, as per the sale deed Shri J.N.Bakshi became owner of 50% of the tenanted premises in the year 1964 and not in 1960. On 26th November,1960 an agreement to sell was entered into between Shri Ram Dayal and Shri J.N.Bakshi. Possession of the same was handed over to Shri J.N.Bakshi in 1964. Agreement was executed in 1964. Therefore, in 1960 Shri J.N.Bakshi was not landlord of the half portion. The Company Judge had already observed that Shri J.N.Bakshi had not presented correct facts in his affidavit. Even respondent No. 2 Shri Phool Kumar has admitted that both portions of 18, Mehrauli, New Delhi were under the tenancy of the company belonging to Shri Ram Dayal and Shri J.N.Bakshi. Entire premises bearing No. 18, Mehrauli, New Delhi is under the tenancy of the company.
15. For the reasons staled above, I find that the petition by the petitioner seeking restoration of the property of the company is maintainable. Accordingly order has to be passed that respondent No. 1 should restore the assets of the company but before doing so the petitioner has to get clarification from the Company Judge in CP.No. 91/80 because in that petition dispossession of late Shri R.K.Sharma was stayed till the disposal of that petition. Since the respondent No. 1 is claiming through late Shri R.K.Sharma hence, to my mind, that order will apply in his case also till vacated or clarified by the Court in CP.No. 91/80. The respondent No. 1 shall not use this premises for commercial purpose. He can use it only for residential purpose till the petitioners get the above clarification or vacation of the order granting stay of dispossession.
16. With these observations, the petition stands disposed.