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1990 SCC OnLine Del 102 : (1991) 71 Comp Cas 101

[In the Delhi High Court]

(BEFORE S.N. SAPRA, J.)

Security and Finance Pvt. Ltd.

Versus
B.K. Bedi and others.
C.A. No. 1122 of 1986 in C.A. No. 311 of 1974 in C.P. No. 22 of 1968
Decided on March 30, 1990

Page: 102

Page: 103

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The Judgment of the Court was delivered by

SAFRA, J.:— Shri P.S. Bedi, respondent No. 4 herein, has filed the present
application under rule 9 of the Companies (Court) Rules, 1959, read with section 151
of the Civil Procedure Code, 1908, thereby praying that the proceedings initiated
against him under sections 542 and 543 of the Companies Act, 1956, hereinafter
called “the Act”, be quashed and/or for any other order or direction for dropping the
proceedings.
2. Briefly, the facts of the case are as under:

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Shri B.K. Bedi, Shri G.S., Puri (now deceased), Shri Hira Lal and Shri Lorinda Mal
Sethi (now deceased), as promoters formed a finance company under the name and
style of “Security and Finance Private Limited”, hereinafter called “the company”, on
November 15, 1959, under the Indian Companies Act, 1913. Under the articles of
association of the company, the promoters who were the first subscribers to the
memorandum of association were the permanent directors. The company carried on
a business in motor and general finance. One of the creditors of the company filed a
petition, being Company Petition No. 22 of 1968, on February 19, 1968, against the
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company for its winding up, on the ground that it was unable to pay its debts. Vide
order dated July 17, 1969, the company was wound up and the official liquidator
attached to this court was appointed the liquidator of the company.
3. The official liquidator moved an application, being Company Application No. 311
of 1974, for summons under sections 542, 543 read with sections 538 and 541 of the
Companies Act, thereby seeking various reliefs, including a declaration and orders that
the business of the company had been carried on from November 15, 1949, to the
date of the commencement of the winding up petition and also up to the order of
winding up, with intent to defraud the creditors by respondents Nos. 1 to 12 who were
the managing director/directors of the company; that respondents Nos. 1 to 12 had
misapplied and retained money of the company and, as such, they became liable to
the company and are guilty of misfeasance and breach of trust in relation to the
company for various reasons as mentioned therein and an order punishing the
respondents for not keeping such books of account as are necessary under law to
explain the position of the company, including the books containing entries made from
day-to-day in sufficient details, etc. In the application, the official liquidator impleaded
12 persons as the respondents, who were the directors of the company. During the
course of proceedings, respondents Nos. 2, 5, 9 and 12 have since expired. After the
filing of points of defence by the respondents, the court directed the parties to file
affidavits by way of evidence. Affidavits have been filed.
4. In the present application, the applicant who is respondent No. 4 in Company
Application No. 311 of 1974 has alleged that, right from the beginning, the company
was entirely being controlled by Shri B.K. Bedi and Shri G.S. Puri who were managing
the affairs including the finance and administration of the company. The company was

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being run and manipulated by these two persons at their fancy and whims. Besides
the promoters, the directors or the two directors, i.e., who were controlling the
company, through the managing agency, namely, Bedi and Puri, had the complete
control over the affairs of the company. But, with a view to give wider publicity, the
aforesaid two promoters invited a few other prominent and eminent persons to join the
company as directors.

5. In this manner, the board of directors of the company was extended from time to
time with a view to attract more finances from the market.
6. The proceedings under sections 542 and 543 of the Act, though primarily
directed against Shri B.K. Bedi and Shri G.S. Puri (now deceased), yet other directors
including the applicant have been made parties, in spite of the fact that no prima facie
case has been made out against them. This also finds support from the various
affidavits filed by way of evidence. The proceedings were instituted in the year 1974
and the same have put respondent No. 4 to great hardship and harassment and he
has been made to defend these proceedings, which are an abuse of the process of
court. By no stretch of imagination and under no circumstances, can the proceedings
succeed against respondent No. 4.
7. It is further alleged by the applicant that, as far as respondent No. 4 is
concerned, no case has been made out. In fact, he resigned from the directorship of
the company by a letter dated October 14, 1967, and his resignation was accepted by
the company, vide resolution passed at the meeting held on March 6, 1968. According
to the applicant, the proceedings under sections 542 and 543 of the Act have been
filed by the official liquidator thereby impleading all the directors of the company who,
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at one time or the other, happened to be directors, without any application of mind.
The further case of respondent No. 4 is that there is nothing on record to show that he
was guilty of misfeasance, or at any stage, misapplied or misused the funds or
property of the company or defrauded the creditors.
8. The applicant was just an employee of another associate company when he was
made director of the company for administrative purposes though he never exercised
nor was he allowed to exercise any power. He was just designated director, without
any power. The entire control was under the tight grip of Shri B.K. Bedi and Shri G.S.
Puri, who were the joint managing directors.
9. With regard to the allegation in respect of car No. RSD-800, it is alleged that the
same is baseless as he never sold the car nor had

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he anything to do with the car. The company sold the car and received the sale
proceeds for which there is an entry in the books of the company. As a matter of fact,
Shri B.K. Bedi, the joint managing director of the company, sent a letter dated
November 11, 1967, thereby requesting respondent No. 4 to hand over the car to Shri
M.S. Ahluwalia, The car was, accordingly, handed over.

10. Mr. N.S. Sistani, learned counsel for respondent No. 4, has urged that no case
has been made out against the applicant within the meaning of the provisions as
contained in sections 542 and 543 of the Act. There is no specific allegation against
the applicant with regard to an act of misfeasance or malfeasance. The applicant was
just an employee before he was made a director of the company for administrative
purposes. He was neither a promoter nor a founder director. All the powers were
vested in the managing director or the joint managing director, namely, Shri G.S. Puri
and Shri B.K. Bedi, who were controlling all the affairs including the accounts of the
company. No such power was ever exercised independently by the applicant.
11. Mr. Sistani has further contended that the applicant resigned as a director of
the company by a letter dated October 14, 1967, which was accepted by the company,
vide resolution No. 4 passed at the meeting of the board of directors held On March 6,
1968.
12. With regard to one specific allegation relating to car No. RSL 800 which was
allegedly in the possession of the applicant, Mr. Sistani contended that this car was,
admittedly, handed over to Shri M.S. Ahluwalia, an employee of the company, in
pursuance of the letter dated November 11, 1967, issued by Shri B.K. Bedi.
13. In the next place, Mr. Sistani has submitted that the applicant has filed two
affidavits dated September 13, 1989, and September 18, 1989. The official liquidator
has not filed any reply. It is clear that there are no allegations of dishonesty, fraud or
mala fides made against the applicant in the application filed by the official liquidator.
On the other hand, it is proved that the applicant, so long as he was a director, had
acted in a bona fide and honest manner in the discharge of his duties and there was
no act of omission or commission, directly or indirectly, which can be attributed to him
and which may amount to misfeasance or malfeasance. The applicant always acted
bona fide, reasonably, diligently and earnestly, with a view to promote the interest of
the company during the period he was associated with the company. All the
allegations made by the official liquidator do not concern the applicant.

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14. With regard to the objection that the present application is not maintainable
under rule 9 of the Companies (Court) Rules, 1959, Mr. Sistani submits that the same
is maintainable as the allegations made by the official liquidator in his application are
very vague and no specific allegation has been made against the applicant. If this
court finds that the application is not maintainable under rule 9 then the same can be
treated as an application under section 633 of the Act.
15. Mr. B.N. Nayyar, appearing for the official liquidator, contended that the
liabilities of all the directors are joint and several under the Act. A director is, in fact, a
trustee and he is in a fiduciary capacity. A director is required to use diligence and act
honestly and reasonably in the discharge of his duties as a director. A director cannot
sleep over the affairs of the company. He has invited the attention of this court to the
definition of “director”. A director is under an obligation to act for the benefit of the
company.
16. Mr. Nayyar has further urged that the question whether the applicant is liable or
not for misfeasance and acts of fraud can be decided only in the main application in
which various allegations have been made against the directors of the company.
According to Mr. Nayyar, the applicant has failed to show that he acted honestly, bona
fide and reasonably, as a director.
17. Reference may be made to the judgments relied upon by learned counsel for
the parties.
18. In Shamji Kheta v. A.V. Patwardhan, [1958] 28 Comp Cas 195; AIR 1959 Bom
474, while dealing with the scope of section 235 of the Indian Companies Act, 1913
(which is nearly similar to section 543 of the Companies Act, 1956), Mr. Justice
Mudholkar of the Bombay High Court held (at page 197 of 28 Comp Cas):
“Then comes another provision on which reliance has been placed. That provision
is section 235 of the Act which reads thus:
Where, in the course of winding up a company, it appears that any person
who has taken part in the formation or promotion of the company, or any past or
present director, manager or liquidator, or any officer of the company has
misapplied or retained or become liable or accountable for any money or property
of the company or been guilty of any misfeasance or breach of trust in relation to
the company, the court may, on the application of the liquidator, or of any
creditor or contributory made within three years from the date of the first
appointment of a liquidator in the winding up or of the

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mis-application, retainer, misfeasance or breach of trust, as the case may be,

whichever is longer, examine into the conduct of the promoter, director, manager,
liquidator or officer 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.’

19. For this provision to apply, two conditions must be satisfied. The first is that the
person against whom an order is made must belong to one of the categories specified
and the second condition is that he must have either misapplied or retained any fund
or become liable or accountable for any money or property of the company or been
guilty of any misfeasance or breach of trust in relation to the company. Now, as
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already stated, the appellants did not come by the money which is now sought to be
recovered from them in their capacity as directors. Being creditors, they were paid,
though perhaps wrongly, what was due to them by the former liquidator and could
not, therefore, be said to be in possession of any funds as such of the company. They
only received repayment of the loans advanced by them. Therefore, there could be no
question of their having misapplied or retained or become liable or accountable in any
way for any money or property of the company or being guilty of any misfeasance or
breach of trust. In these circumstances, it is difficult to see how they can be asked
under section 235 to refund what they have received.”
20. In Central Calcutta Bank Ltd., In re, [1959] 29 Comp Cas 437; AIR 1959 Cal
625, while interpreting the scope of section 235 of the Indian Companies Act, 1913,
the Calcutta High Court held (at pages 455 and 463 of 29 Comp Cas):
“It has been held that section 235 of the Indian Companies Act, 1913, gives a
summary remedy only against such directors and officers as have been personally
guilty of some act of misfeasance, and it does not confer upon the court the power
to make an order against the directors en masse for all acts of misfeasance, without
any specific finding against the individuals who are actually responsible for the
particular acts of misfeasance. Reference may be made to the cases in Royal Hotel
Co. of Great Yarmouth, In re, [1867] 4 Eq Cas 244, 248, New Mashonaland
Exploration Co., In re, [1892] 3 Ch 577, National Bank of Wales Ltd., In re, [1899]
2 Ch 29, Jehangir B. Karani, In re, [1894] ILR 19 Bom 88, Jadu Nandan Goswami v.
Ashutosh Goswami, [1902] ILR 29 Cal 688 and Kumarpuram Sheshadri Doraswamy
v. Pestonjee Jamsedji Padshah, [1903] 5 Bom LR 633.

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It is also well-settled that the directors are not bound to examine the entries in
the company's books of account: Denham, and Co., In re, [1884] 25 Ch 752; Dovey
v. Cory, [1901] AC 477; Prefontaine v. Grenier, [1907] AC 101; City Equitable Fire
Insurance Co., In re, [1925] 1 Ch 407; S.C. Mitra v. Naivab Ali Khan, AIR 1926
Oudh 153 and Thinnappa Chettiar v. Official Liquidator, [1944] 14 Comp Cas 207
(Mad).
Before I part with this case, I should dispose of another point which is of a
technical nature and which has been raised on behalf of the respondents. It is
argued that the application is not maintainable because of the non-joinder of the
two other directors, Mr. Khandelwal and Mr. S.K. Neogy. It may be pointed out that
Mr. Kandelwal has died during the pendency of these proceedings. With regard to
Mr. Neogy, it is contended that as he has not been made a party to the proceedings
the entire application must fail. Reference has been made to Clerk and Lindsell on
Torts, 11th Edition, page 257, where it is pointed out that if accord is made with
one joint tortfeasor and satisfaction accepted or if he be released all others are
discharged. Attention has also been drawn to the passage in Halsbury, volume 32,
pages 188-189, paragraph 282 and to the case reported in Cocke v. Jennor, [1614]
80 ER 214 and London Association for Protection of Trade v. Greenlands Ltd.,
[1916] 2 AC 15. Now it may be pointed out that the propositions laid down in Clerk
and Lindsell on Torts and in Halsbury are based on the fact that there is no right of
contribution amongst joint tortfeasors and release or discharge of one would be
release or discharge of others. But, it has been held that an application for
misfeasance stands on a different footing and a director can maintain a suit for
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contribution against his co-directors in respect of damages paid for misfeasance and
the liability to contribute survives in the case of death of a co-director. Reference
may be made to the case of Ramskill v. Edwards, [1886] 31 Ch 100. So, the
general principle of liability of joint tortfeasors cannot apply to misfeasance
proceedings. It has also been pointed out by Mr. A.K. Sen on behalf of the liquidator
that the directors in the present case cannot be regarded as joint tortfeasors in any
sense of the term. In order that persons may be joint tortfeasors, there must be a
common design and a concerted action. Learned counsel has referred to Clerk and
Lindsell on Torts, page 108, 11th edition, and to The Koursk, 1924 page 140 at 151
to 152 per Bankes L.J. and at pages 156 to 159 per Scrut-ton L.J. In the present
case, no conspiracy or concerted action is alleged or proved. It has also been
pointed out by Mr. Sen, and I think rightly, that separate suits or applications can
be filed against different directors for acts of misfeasance. Reference has been
made to

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Salmond on Torts, 11th edition, pages 87 and 88, paragraph 25 and also to Winfield
on Torts, page 170 (5th edition) and Bullen and Leake, 8th edition, page 19. It
appears to me, therefore, that this contention of the respondents that the application
is not maintainable in the absence of the directors who have not been impleaded as
parties to these proceedings, is without substance.”

21. In K.P. Shankara, Official Liquidator, People's Insurance Co. Ltd. v. Sardul Singh
Caveeshar, ILR 1968 Delhi 225, while dealing with the principles governing the grant
of relief under section 235 of the Indian Companies Act, 1913, and also the scope of
the expressions “misfeasance” and “breach of trust” in relation to the company, this
court held:
“A director or an officer can be held liable under section 235 if he is guilty of an
act or omission in the nature of a breach of trust resulting in a loss to the company
as the term ‘misfeasance’ is not used in the section in the abstract. It covers every
misconduct by an officer for which he might, apart from the section, have been
sued. The directors of a company are collectively in charge of and responsible for
the management of its affairs. They cannot divest themselves of their responsibility
by delegating the powers of management to someone else. In case they delegate
their powers and the delegatee proves unfaithful, the directors would, except in
certain circumstances, be as much liable as if they had themselves been unfaithful.
Negligence actionable under section 235 must be such as would make him liable in
an action and mere imprudence or error of judgment or want of judgment is not
such negligence. Broadly speaking, it is the duty of each director to be vigilant and
to assure that the company's assets are properly applied. They must not even
certify any documents or accounts without being sure of their correctness. For
instance, they are expected to satisfy themselves before signing a balance-sheet
that the value of the company's assets has been correctly shown and depending on
blind assurance by one of their colleagues or the auditors may not, subject to
certain exceptions, be sufficient. Circumstances do arise where the directors may be
justified in placing faith and reliance in one or other of their colleagues in various
matters including the valuation of stocks or investments or matters in which it will
be normal and convenient for such a colleague of theirs to have day-to-day control.
One of such cases may be where such a colleague is himself an expert. The
Legislature has not formulated precise rules for guidance in these matters and it is,
therefore, undesirable on my part to attempt to do so and each case must turn on
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its own facts. The wise application of the Act appears to be to hold

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that the amount of check, control and caution to be exercised by a director is a

question of degree in each individual case. The achievement of goals for which a
corporation is brought into existence would be impossible if people could not trust
others for the express purpose of attending to the details of management. I would,
therefore, decline an application under section 235 on the mere ground that the
directors trusted regularly authorised officers of the company and failed to detect and
have been misled by concealment by such officers when there was no reason for
doubting their fidelity. The test in all such cases should be whether there has been an
act of commission or omission on the part of the directors amounting to a breach of
duty to the company in consequence whereof loss has resulted to the company. It
would be a breach of duty if the directors wilfully shut their eyes to the acts of the
persons in charge of the management and recklessly sanctioned such acts thereby
aiding misfeasance. It must also be borne in mind that the section is intended to
provide a remedy against directors personally guilty of some act of misfeasance and,
therefore, there must be a finding against each individual director or officer before he
can be held responsible.

A director or officer of a company would be liable or under section 235 if he has

(a) misapplied, (b) retained, (c) become liable or accountable for any money or
property of the company, or (d) been guilty of any misfeasance or breach of trust in
relation to the company. So far as the liability on the ground that the officer “has
misapplied or retained or become liable or accountable for any money or property of
the company is concerned, the liability would arise only if such director or officer
would be otherwise liable in an action since the section merely provides a summary
remedy. The expression “breach of trust in relation to the company” presents no
difficulty of interpretation. The expression ‘misfeasance’, in my opinion, includes
‘non-feasance’ and connotes every act or omission resulting in loss to the company
which is actionable in law.”
22. In National Sugar Mills Ltd. (In Liquidation), In re, [1978] 48 Comp Cas 339
(Cal), the official liquidator made an application under section 543 of the Act against
various directors for recovery of various amounts, on account of various acts of
misfeasance. The learned single judge of the Calcutta High Court held (page 346):
“In order to establish a case of misfeasance, the applicant must prove, (i) that
there has been a breach of trust, and (ii) the breach has resulted in pecuniary loss
to the company. An innocent director is not liable for the fraud of his co-director.
The general principle of liability of joint tortfeasors cannot apply to misfeasance

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proceedings. In this particular case, there is no doubt that a sum of Rs. 83,000 odd
has been totally lost to the company without any benefit to the company which
directly resulted in the liquidation of the said company. So, there is no reason to doubt
that there was a breach of trust by a director or directors in respect of this sum and
this breach of trust has undoubtedly resulted in pecuniary loss to the company
resulting in its liquidation to the great detriment of its shareholders. If the directors
acted honestly, they would not have committed any breach of trust and consequently
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there would not have been any loss to the company. But from the evidence on record
as adduced by the official liquidator I am satisfied that respondent No. 3, Ranadeb
Chowdhury, was an innocent director and is not liable for the fraud of his other co-
director, namely, M.N. Mitra. It has also been held that it is no part of the duty of the
directors to scrutinise or examine the entries in the books of account of the company
and when there is nothing to raise suspicion in the mind of a director no question of
any abstention from any enquiry can arise. Following this principle, it was in the
knowledge of M.N. Mitra and M.N. Mitra alone about the misappropriation of this huge
sum of money belonging to the company and I am satisfied that Mr. Ranadeb
Chowdhury had no knowledge of that and as it was no part of his duty to scrutinise or
examine the books of account of the company, he is not liable for such breach of
trust.”

23. In P.K. Nedungadi v. Malayalee Bank Ltd. (in liquidation), (1971) 3 SCC 598 :
AIR 1971 SC 829, 831-32; [1972] 42 Comp Cas 120, 124-25, while interpreting
section 235 of the Indian Companies Act, 1913, the Supreme Court held:
“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 Halsbury's Laws of
England, 3rd Edition, Volume 6, it has been stated at page

Page: 114

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. 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.

In the present case, the High Court has found and that finding has not been
shown to be wrong or erroneous in any manner that it was the appellant who
enabled M to perpetrate the fraud which apparently resulted in loss to the company.
The appellant himself also derived a certain benefit from the fraudulent acts of M.
He would thus be clearly liable to repay or restore to the bank the amount in
respect of which there was misapplication, misfeasance and breach of trust
resulting in loss to the company. The appellant cannot escape liability for the entire
amount for which an order has been made against him by the High Court.”
24. In Official Liquidator, Supreme Bank Ltd. v. P.A. Tendolkar, [1973] 43 Comp
Cas 382, their Lordships of the Supreme Court held (headnote):
“It is a question of fact 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
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to be not merely cognizant of but liable for fraud in the conduct of business of the
company even though no specific act of dishonesty is proved against him
personally. He cannot 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.
It is not necessary that the liquidator must make a specific or separate
application for public examination of the directors of a banking company in
liquidation. All that section 45G of the Ranking Regulation Act, 1949, requires is the
submission of a report showing that loss has been caused to the banking company
in the opinion of the

Page: 115

liquidator. After that, it is the opinion of the court on the question whether the director
concerned should be publicly examined that matters.”

25. In Beejay Engineers Pvt. Ltd., In re, [1983] 53 Comp Cas 918 (Delhi) the
reference to the Division Bench raised two questions, namely, (1) whether the court
has jurisdiction to grant relief to an officer of a company as envisaged under section
633 of the Act against the liability for negligence, default, breach of duty, etc., of the
provisions of Acts other than the Act; (2) whether, while exercising jurisdiction under
section 633 of the Act, the court can justifiably draw any distinction amongst the
directors who are on the board purely by virtue of their technical skill or expertise or
because they represent certain special interests and those who are in effective control
of the management and affairs of the company. The Division Bench gave the answer in
the affirmative to question No. 1. While dealing with question No. 2, the Division
Bench held (at pages 925, 926):
“While we do find some force in the argument that the circumstances of a person
being purely on the board on account of his special skill or expertise may be a
relevant factor in deciding whether he has acted honestly and reasonably in
conjunction with other circumstances of the case it is per se no ground for
exonerating such a director from liability on account of negligence, breach of duty,
misfeasance or breach of trust, etc. He has, like any other director, to satisfy the
conscience of the court that he fulfils the criteria to earn relief from liability as laid
down in the section, and his being on the board on account of his expertise or
special skill will not in itself be enough to exonerate him from liability; it will be just
one of the circumstances to be taken notice of as a factor justifying the
reasonableness and honesty of the applicant's actions. Looked at from this angle,
the fact of a person being on the board of directors because of his special skill or
expert knowledge cannot be said to be a wholly extraneous circumstance having no
bearing whatsoever on the point in issue. We are, therefore, inclined to answer this
question accordingly.”
26. For my benefit, reference can be made to two other judgments.
27. In Official Liquidator, Milan Chit Fund and Finance P. Ltd. v. Joginder Singh
Kohli, [1978] 48 Comp Cas 357 (Delhi), one of the questions which arose for
determination was whether, in the absence of any specific allegations against some of
the respondents as directors of the company in liquidation in the application filed by
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the official liquidator under sections 542 and 543 of the Act, the proceedings

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could continue against such respondents. H.L. Anand J. held (at pages 366, 367):

“It, however, appears on a perusal of the application that apart from the vague
allegations made against all the directors in relation to the conduct of the business
of the company there is no specific allegation made against this respondent in the
application. In the circumstances, it would be an abuse of the process of this court
to proceed against this respondent in the absence of any specific allegations. The
application must, therefore, be dismissed in so far as this respondent is concerned.
On behalf of respondents Nos. 4 and 5, who happen to be husband and wife,
respectively, a preliminary objection is raised that the application could not proceed
in the absence of specific allegations against these respondents and that the
allegations made in the application in relation to respondent No. 5 do not attract
the provisions of the aforesaid sections. In paragraph 2 of the application the
factum of these respondents being directors of the company is mentioned. In
paragraph 8, it is stated that the amounts were advanced to the directors and
others by way of loans and advances but the amounts were never recovered. Details
of the loans and advances are then set out. The names of these respondents do not
appear in the list of persons who were recipients of these loans and advances. No
specific conduct is attributed to any of these respondents. However, in paragraph
11, it is alleged that a number of members of the company, including respondent
No. 4, had made default in payment of the final call of Rs. 40 per share which was
payable by March 31, 1965. The liability of a member of a joint stock company to
contribute to the assets of the company is provided under section 426 of the Act.
The failure to make the requisite contribution does not appear to attract any of the
provisions of sections 542 and 543 of the Act. The official liquidator is entitled to
take appropriate proceedings to enforce this liability. Counsel for the applicant was
unable to show how such a liabilty could be enforced under any of the provisions
which had been invoked in the present application. The application must, therefore,
be dismissed in relation to these two respondents as well.
On behalf of respondent No. 6, it is urged that there are no specific allegations
made against this respondent which may attract the provisions of sections 542 and
543 of the Act and that the claim made against this respondent is beyond the scope
of these provisions. It was not disputed that no specific act or conduct is alleged
against this respondent. It is further urged that this respondent was one of the
shareholders of the company who had failed to pay the 50% of the

Page: 117

value of the shares which was payable on March 31, 1965. A sum of Rs. 3,000 is thus
shown as payable by this respondent. As has been pointed out above, the liability of a
member to pay for the unpaid value of a share could be enforced under section 426 of
the Act and the failure of a member to make such a payment would not attract the
provisions of sections 542 and 543 of the Act, even if he happened to be a director of
the company. The liability to pay such an amount can neither be considered a
fraudulent act nor tantamount to misapplication or retention of money or property of
the company or be described as an act of misfeasance or breach of trust in relation to
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the company. It amounts to a failure to discharge a legal obligation as a member

which can be enforced in accordance with law. The petition must, therefore, fail as
against this respondent as well.

In the result the application is dismissed as against respondents Nos. 3 to 6.

C.A. No. 157 of 1975 is disposed of in these terms. The application is, however,
proper and competent against the other respondents.”
28. In Premier Credit and Motors Co. (P.) Ltd. (In Liquidation) v. Shafiqur Rehman,
[1987] 3 Comp LJ 197 (All), the case was that after the order of winding up, the
official liquidator filed an application under sections 542, 543, etc., of the Act against
the delinquent directors for various reliefs, inter alia, on the grounds that the
delinquent directors had conducted the business of the company in a fraudulent
manner and for fraudulent purposes in relation to its creditors and other persons
having dealings with the company. While dealing with the scope of sections 542 and
543 of the Act, Mr. Justice V.K. Mehro-tra of the Allahabad High Court considered
several judgments and held:
“Section 542 was introduced for the first time in the Indian Companies Act,
1956, with effect from April 1, 1956. There was no similar provision in the earlier
Act of 1913. The language of sub-section (1) shows that where in the course of
winding up of a company, it appears that any business of the company has been
carried on (a) with intent to defraud creditors of the company; (b) or any other
person; or (c) for any fraudulent purpose, the court may, if it thinks proper to do
so, declare that any persons who were knowingly parties to the carrying on of the
business in the manner aforesaid, shall be personally responsible for all or any of
the debts or any liability of the company. The emphasis about the liability of a
person who was knowingly a party to the carrying on of the business in the manner
aforesaid is clear also from the provision contained in sub-section (3) of section
542. The enquiry has, therefore, to be confined to the

Page: 118

purpose with which the business of the company had been carried on and about the
persons who were knowingly parties to such carrying on of the business. The
declaration may be made by the court about the personal responsibility of such
persons if it appears to the court that they had knowingly been parties to the carrying
on of the business, inter alia, for any fraudulent purpose….

The provision enables the court to examine into the conduct of the director,
manager or officer of the company to find out whether he has misapplied, retained
or become liable or accountable for any money or property of the company or has
been guilty of any misfeasance or breach of trust in relation to the company and
where any such conduct is found attributable to any such person, compel him to
repay or restore the money or property or any part thereof to the company. This
section, thus, calls for the examination of the conduct of an individual director or
officer and the passing of an order against him, only if he is personally found to be
liable for misapplication, etc., of the money or property of the company or guilty of
any misfeasance or breach of trust in relation to the company. Obviously, therefore,
there has to be positive evidence in respect of an individual director or officer of an
act of the nature contemplated by section 543(1). In the absence of such positive
evidence, it may not be possible to compel him to reimburse or compensate the
company. To borrow the words of the Supreme Court in Official Liquidator v.
Raghawa Desikachar, (1974) 2 SCC 741 : AIR 1974 SC 2069; [1975] 45 Comp Cas
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136 (SC) at page 142:

‘… it may be mentioned that misfeasance action against the directors is a
serious charge. It is a charge of misconduct or misappropriation or breach of
trust. For this reason, the application should contain a detailed narration of the
specific acts of commission and omission on the part of each director quantifying
the loss to the company arising out of such acts or omission. The burden of
proving misfeasance or non-feasance rests on the official liquidator…. The
application made by the official liquidator did not give sufficient particulars
which, in our view, it should have.’
These observations clearly upheld the view taken by this court in Official
Liquidator v. Mathura Prasad, AIR 1963 All 55, in which the principles about the
pleadings and proof in proceedings under section 235 of the Act of 1913 were laid
down succinctly by A.P. Srivastava J. And the principles are that the investigation
contemplated by section 235 could not be a general and roving enquiry into the
conduct of the person sought to be made liable nor could it be started without any
definite allegation being made which the respondent could be called upon to meet.
Specific allegation must be made

Page: 119

before the court could start investigation into the conduct of the respondent. Enough
particulars must be furnished so that the respondent may meet the charges levelled
against him. The fact that the proceedings under this section do not amount to a suit
or that a plaint is not required to be filed could not justify dispensing with the
requirement of making definite allegations about the acts complained of in respect of
which the respondent had to explain his conduct.

Liability could be fixed under this section only for acts amounting to (i)
misapplication; (ii) retention; (iii) becoming liable or accountable for any money or
property of the company; (iv) misfeasance, or (v) breach of trust. Before the
application can succeed, it is necessary for the liquidator to establish one or more of
these facts by proper evidence. The distinction (in the matter of misfeasance) is to
be made between the directors on the one hand and the director-in-charge. The
directors cannot be held responsible for the acts or omission of the director-in-
charge in the absence of any proof that they knew about all these acts and
omissions and could take any steps to mend matters.”
29. In the light of the principles as laid down by the above-noticed judgments,
now, I proceed to examine the present case.
30. Sections 542 and 543 of the Act read as under:
“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.
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.
(2)(a) Where the court makes any such declaration, it may give such further
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directions as it thinks proper for the purpose of giving effect to that

declaration.
(b) In particular, the court may make provision for making the liability of any
such person under the declaration a charge on any

Page: 120

debt or obligation due from the company to him, or on any mortgage or charge or any
interest in any mortgage or charge on any assets of the company held by or vested in
him, or any person on his behalf, or any person claiming as assignee from or through
the person liable or any person acting on his behalf.

(c) The court may, from time to time, make such further order as may be
necessary for the purpose of enforcing any charge imposed under this sub-
section.
(d) For the purpose of this sub-section, the expression ‘assignee’ includes any
person to whom or in whose favour, by the directions of the person liable, the
debt, obligation, mortgage or charge was created, issued or transferred or the
interest was created, but does not include an assignee for valuable
consideration (not including consideration by way of marriage) given in good
faith and without notice of any of the matters on the ground of which the
declaration is made.
(3) Where any business of a company is carried on with such intent or for such
purpose as is mentioned in sub-section (1), every person who was knowingly a
party to the carrying on of the business in the manner aforesaid, shall be
punishable with imprisonment for a term which may extend to two years, or with
fine which may extend to five thousand rupees, or with both.
(4) This section shall apply, notwithstanding that the person concerned may be
criminally liable in respect of the matters on the ground of which the declaration
is to be made.
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 or formation of the company, or any past or present director,
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, or 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, 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

Page: 121

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,
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(2) An application under sub-section (1) shall be made within five years from the
date of the order for winding up, or of the first appointment of the liquidator in
winding up or of the misapplication, retainer, misfeasance or breach of trust, as the
case may be, whichever is longer.
(3) This section shall apply notwithstanding that the matter is one for which the
person concerned may be criminally liable.”
31. In my view, there is no need to treat the present application as one under
section 633 of the Act. Depending upon the facts and circumstances of a case and to
meet the ends of justice and/or to prevent the abuse of the process of court, the court
can drop proceedings under sections 542 and 543 of the Act or dismiss such an
application against any party to the proceedings at any stage.
32. In the present case, the petition for winding up was filed on February 19, 1968,
and the company was wound up, vide order dated July 17, 1969. The official liquidator
filed the application, being C.A. No. 311 of 1974, under sections 542 and 543 of the
Act on July 22, 1974, against 12 respondents. Respondent No. 4 filed the present
application only in the year 1986. Thus, under these circumstances, it is necessary to
dispose of the application of respondent No. 4 without awaiting the disposal of the
main application which may take a considerable time.
33. Under section 542 of the Act, the courts may declare that any person, who was
knowingly a party to the carrying on of the business of the company, which was
carried on with an intent to defraud its creditors or other persons, or was for fraudulent
purpose, is personally responsible, without any limitation of liability, for all or any of
the debts or other liabilities of the company. It must be shown that the business of
the company has been carried on with an intent to defraud creditors of the company or
any other person or for any fraudulent purpose. Further, that the person who is being
made liable was knowingly a party to the carrying on of the business for fraudulent
purpose. Under law, the particulars of fraud must be given in the application so as to
afford an opportunity to that person to meet the allegation. Dishonesty is an essential
ingredient of fraudulent conduct of business. Hence, the pleadings must be specific
with regard to the alleged delinquency of a director. The words “any person who was
knowingly a party to the carrying on of the business in the

Page: 122

manner aforesaid” are very significant and the intention of the Legislature is very clear
in inserting these words. Mere vague and general allegations are not sufficient to meet
the requirement of this section, because the court has come to the conclusion that the
business of the company was carried on with an intention to defraud the creditors
and/or for any fraudulent purpose. Further, that the person against whom the
allegations are made was knowingly a party to the carrying on of such business. If the
allegations are not specific and details of fraud are not given, then, the court cannot
indulge in a fishing or roving enquiry. Thus, the enquiry, therefore, is to be confined to
the purpose with which the business of the company had been carried on and about
the persons who were knowingly parties to such carrying on of the business.

34. Under section 543 of the Act, the court is vested with jurisdiction to examine
the conduct of the past or present director, manager, liquidator or any other officer of
the company to find out whether he has misapplied or retained or become liable or
accountable for any money or property of the company; or he has been guilty of any
misfeasance or breach of trust in relation to the company and, where any such conduct
is found attributed to any such person, then, to compel him to repay and restore the
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money or property, or any part thereof to the company. In other words, under this
section, the court is to examine the conduct of an individual director or officer and to
pass an order against him, if such a person is personally found to be liable for
misapplication, etc., of the money or property of the company or, otherwise, is guilty
of any misfeasance or breach of trust in relation to the company. It is thus clear that,
to enable the court to examine the conduct of an individual director or officer and to
pass an effective order to make him personally liable for misapplication, etc., of the
money or the property of the company, there has to be positive and specific evidence
and pleadings in respect of the individual director of an act of the nature contemplated
by the section. In the absence of such specific allegations and positive evidence, it is
not possible or proper for the court to indulge in a fishing or roving enquiry so as to
compel the individual director to reimburse and/or compensate the company. The
principles with regard to the pleadings and proof are well-settled. There cannot be a
general and roving enquiry into the conduct of a person sought to be made liable.
35. As held in Central Calcutta Bank Ltd., In re, [1959] 29 Comp Cas 437; AIR
1959 Cal 625, the general principle of liability of joint tortfeasors cannot apply to
misfeasance proceedings and, in order that a person may be a joint tortfeasor, there
must be a common design and a concerted action.

Page: 123

36. I am in respectful agreement with Official Liquidator, Milan Chit Fund Finance P.
Ltd., [1978] 48 Comp Cas 357 (Delhi), that where, in an application under sections
542 and 543 of the Act, there are no specific allegations made against any specific
director, the application can be dismissed in so far as that director is concerned.
37. It may be noted that after the pleadings were complete in Company Application
No. 311 of 1974, the official liquidator filed the points of claim and some of the
respondents, including respondent No. 4, filed points of defence. Even statements of
some witnesses have been recorded by way of cross-examination.
38. Except for one specific allegation against respondent No. 4, the other
allegations, as made in the application, being Company Application No. 311 of 1974,
are either vague and general or do not concern respondent No. 4 or relate to the
period subsequent to the resignation of respondent No. 4.
39. In the application, it is alleged that a car bearing No. DLE 5179 was sold on
July 2, 1965. This car was with one Shri P.S. Bedi, director of the company. The sale
proceeds of Rs. 11,500 has not been credited to the company and was
misappropriated by the directors. Another car bearing No. RSL 800 which had been
purchased for Shri P.S. Bedi in August, 1965, for Rs. 16,785, had been sold in
January, 1968, for Rs. 11,000. According to the official liquidator, this amount was
misappropriated by the directors.
40. In reply to the application, points of defence and the affidavits, respondent No.
4 has stated that he had one car bearing No. RSL 800. This car was delivered on the
basis of a letter dated November 11, 1967, at the request of Shri B.K. Bedi, the joint
managing director, to Shri M.S. Ahluwalia, against receipt dated November 18, 1967.
Respondent No. 4 has filed two affidavits, dated September 13, 1989, and September
18, 1989. The official liquidator has not filed any reply to the same. So, this fact is
admitted. Further, Mr. B.K. Bedi in his cross-examination admitted that the aforesaid
car was delivered back to Mr. Ahluwalia, pursuant to his letter to Shri P.S. Bedi. He has
admitted the photostat copy of the letter dated April 12, 1968, as it was signed by
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him. The letter is exhibit RW 4-A. He also admitted the original receipt signed by Mr.
M.S. Ahluwalia in token of taking delivery of the car from respondent No. 4. The
receipt is exhibit RW 4-B.
41. Under these circumstances, it is clear that even this specific allegation was
made without any basis against respondent No. 4 as he had only one car bearing No.
RSL 800, which was delivered to one

Page: 124

Shri M.S. Ahluwalia, on the basis of the letter written by Shri B.K. Bedi, the then joint
managing director of the company.

42. It is not disputed that respondent No. 4 was an employee, though later on he
was made one of the directors of the company for administrative purposes.
Respondent No. 4 resigned as a director from the company with effect from October
14, 1967. His resignation was accepted by the board of directors at its meeting held
on March 6, 1968, much before the order of winding up.
43. It is made clear that a director who resigns can be proceeded against under
sections 542 and 543 of the Act. But, this is an important fact in the present case that
respondent No. 4 resigned with effect from October 14, 1967. In his affidavit, the
official liquidator, however, maintained that respondent No. 4 continued to be the
director till the passing of the order of winding up. Even in his cross-examination, held
on August 7, 1984, the official liquidator, namely, Shri O.P. Gupta, reiterated the
position that respondent No. 4 was a director of the company on the date of its
winding up. But he stated that he could make a definite statement only after
verification from the original minutes book. On the next date, i.e., October 26, 1984,
the official liquidator brought the minutes book and admitted that the resignation of
respondent No. 4 and others was accepted by the board of directors at its meeting
held on March 6, 1968. The return in respect of the acceptance of the resignation was
filed with the Registrar of Companies. The certified copy of the return is exhibit PW-1-
A.
44. It goes to show that, even with regard to the factual position of the resignation
of respondent No. 4, the stand of the official liquidator was incorrect and was made
without any application of mind or without consulting the records of the company.
45. It is also not disputed that the four promoters of the company were the
permanent directors of the company. It has been brought on record that Shri G.S. Puri
(now deceased) continued to be the managing director till Col. Khanna took over as
the managing director of the company. Shri B.K. Bedi was the joint managing director.
Respondent No. 4 was not in control of the affairs, including financial, administrative,
etc., of the company. Respondent No. 4 was placed in such a position in the company
that he could not even interfere in the affairs of the company. According to respondent
No. 4, the entire and exclusive management and control was with Shri B.K. Bedi and
Shri G.S. Puri. Though in his affidavit and cross-examination, Shri B.K. Bedi has stated
that it was Shri G.S. Puri who was controlling all the affairs including the accounts, I
am not

Page: 125

going to comment on this controversy. But the fact remains that as far as respondent
No. 4 was concerned, he was not controlling, directly or indirectly, any of the
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departments, including the accounts of the company. Moreover, he resigned with

effect from October 14, 1967. In his affidavits which are not rebutted, respondent No.
4 has stated that he was not in charge of the accounts of the company and the records
of the company were not tampered with on account of any act of omission or
commission, nor was he responsible for any recoveries. So long as he was a director,
he acted in a bona fide and honest manner in doing his duty and no act of omission or
commission, directly or indirectly, can be attributed to him which may amount to
misfeasance or malfeasance against him. He always acted reasonably, honestly and
diligently with a view to promote the interest of the company, during his period as a
director. This position is unrebutted.

46. In the present circumstances, in my view, it will be an abuse of the process of

court to proceed against respondent No. 4 in the absence of any specific allegations.
Thus, respondent No. 4 succeeds and proceedings against him are dropped. Company
Application No. 311 of 1974 is dismissed against respondent No. 4. C.A. No. 1122 of
1986 is disposed of accordingly. No order as to costs.
———
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