Section 542, read with section 543, of the Companies Act

HIGH COURT OF MADRAS Official liquidator, High Court v. Gautham Dhiraj Mal Ranka S, RAJESWARAN, J. C.P NO. 365 OF 1997 AND CA NO. 609 OF 2005 November 7, 2007 Section 542, read with section 543, of the Companies Act, 1956 - Liability for fraudulent conduct of business - Respondent nos. 1 to 5 were ex-directors of company in liquidation against which winding up order had been passed - From statement of affairs of company, Official Liquidator found that ex-directors acted against interests of company, conducted business contrary to provisions of Act and failed to account for to him - Official Liquidator, thus, filed instant application under sections 460(4), 542 and 543 to examine conduct of respondents and order that they were jointly and severally liable to contribute to assets of company in liquidation by way of compensation for loss caused by them to company in liquidation - Whether on basis of general and sweeping allegations, court cannot proceed against directors under sections 542 and 543 - Held, yes - Whether, since, in instant case, report of Official Liquidator was found wanting with regard to material particulars and specific acts of commissions and omissions, which were a must to proceed against ex-directors under sections 542 and 543, application filed by him was to be rejected - Held, yes FACTS By an order dated 7-4-2000, the court ordered the company in liquidation to be wound up. Respondents Nos. 1 to 5 were the ex-directors of the company. Pursuant to taking possession of the available assets of the company in liquidation the Official Liquidator sold the movables. When the immovable assets were brought for sale by the Official Liquidator, no offer was made and the Court directed the secured creditor bank to bring prospective buyers. As the ex-directors failed to file the statement of affairs within the time stipulated, the Official Liquidator filed company application and this Court while disposing of the application permitted the ex-directors to peruse the books of account and to file the statement of affairs. Accordingly, the ex-directors filed the statement of affairs. From the statement of affairs, the Official Liquidator found that the ex-directors acted against the interest of the company, conducted the business contrary to the provisions of the Act and failed to account for to the liquidator. The Official Liquidator, thus, filed instant application under sections 460(4), 542 and 543 to examine the conduct of the respondents and order that they were jointly and severally liable to contribute to the assets of the company in liquidation by way of compensation for the loss caused by them to the company in liquidation. HELD In the light of legal principles settled in Official Liquidator v. Raghawa Desikachar [1975] 45 Comp.Cas 136 and Security and Finance (P.) Ltd. v. B.K. Bedi [1991] 71 Comp. Cas 101, if in the instant case the report of the official liquidator filed in support of the application was considered, it would reveal that the alleged misfeasance and non-feasance were general in nature without pinpointing a specific act of dishonesty and misappropriation on the part of the individual ex-directors. Therefore, on the basis of such general and sweeping allegations, the court could not proceed against the respondents under sections 542 and 543. As the report of the official liquidator was found wanting with regard to material particulars and specific acts of commissions and omissions, which are a must to proceed against the ex-directors under sections 542 and 543, the instant applications was to be rejected. [Para 17] CASE REVIEW: Official Liquidator v. Raghawa Desikachar [1975] 45 Comp.Cas 136; Security and Finance (P.) Ltd. v. B.K. Bedi [1991] 71 Comp. Cas 101 - Followed.