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Judgment
C.M. Poonacha, J
The present application is filed under Section 543(1) of the Companies Act, 1956 (Hereinafter referred to as the ‘Companies Act’) read with Rule 260 of the Companies (Court) Rules, 1959 (Hereinafter referred to as the ‘Companies Rules’.)
It is the case of the applicant that M/s. Shree Mookambika Finance Corporation was ordered to be wound up by this Court vide order dated 14.11.2005 passed in Company Petition No.171/2023 and the Official Liquidator (Hereinafter referred to as the ‘OL’) attached to this Court has been appointed to be the Liquidator of the company. That the respondents were the directors of the company in liquidation as on the date of the winding up. That the registered partnership firm was constituted on 1.4.1992 under the Indian Partnership Act, 1932 under the name and style M/s.Mookambika Finance Corporation with the main object to carryon business of financiers, investment and trading, hire purchase, leasing finance, money lending, accepting deposits, undertaking real-estate transactions and acting as pawn brokers and agency. The respondent Nos.1 to 8 were the partners of the firm in liquidation and were jointly and severally responsible to account for the assets of the firm.
It is the further case of the applicant that after the order of winding up, the respondents have filed statement of affairs and balance sheet as on 18.11.2005. That pursuant to the order dated 11.8.2010, M/s. N.M.Arun Kumar and Company, Chartered Accountants, has been appointed, who have inspected the books and records of the firm and submitted a detailed report on the investigation conducted by them. That the present application is filed on the basis of the said report for a direction to respondent Nos.1 to 8 jointly and severally to pay the applicant the sum of ₹5,14,16,357/- together with interest at 18% pa., from 14.11.2005.
The points of claim in the application are as under:
i
Loan/investments to related parties
₹5,10,42,792/-
ii
Investment in shares
₹3,73,565/-
Total
₹5,14,16,357/-
Pursuant to the notice issued in the present application, the respondents have entered appearance and filed statement of objections. In the statement of objections, it is contended that the records are kept in the registered office of the firm situated at Puttur and that the Chartered Accountant (Hereinafter referred to as the ‘CA’) never inspected the registered office and verified the documents to submit his report. That the OL took custody of the registered office of the firm immediately after winding up of the firm. That the report is only a guess work. It is further contended that the appointment of the CA was on 11.8.2010. However, the company was ordered to be wound up on 14.11.2005. That after nearly 5 years from the date of the winding up the CA has been appointed. That the CA has sent his report to the OL on 10.11.2010 and hence, there was no time for the CA to inspect all the records and submit a report. Hence, the facts and figures submitted by the CA are without any basis and without referring to the records. It is further contended that the applicant has just reproduced certain portions of the report of the CA and the applicant has not applied his mind. Hence, the application is a mere mechanical submission of certain portions of the report. It is further contended that the claims made by the applicant are unsustainable and liable to be rejected.
The respondents have specifically contended that the first respondent was looking after the affairs of the firm and the others were not involved in the day-to-day affairs of the firm. That the firm became sick due to various reasons including the change in the policy of the Reserve Bank of India. It is further contended that some of the non banking institutions at South Canara became sick and the same was widely published stating that the said firms/institutions suffered loss and the depositors may not get the deposit amount. Hence, the borrowers from the firm stopped paying the amount and therefore, the firm became sick and they could not honour their commitment. That the respondents also initiated various legal proceedings including filing of the civil suits for recovery, which list has been submitted to the OL. That the OL has taken charge of the assets of the firm and seized the registered office, wherein all the records of the firm were kept. That not only the custody of the assets were taken, but also the books and records were also taken. That no proper security was provided and some of the records were destroyed due to heavy rain and leakage of water. That some miscreants have broken open the lock and taken away the furniture and fixtures along with some documents and the same was intimated by the respondents to the OL, despite which no action was taken to safeguard the records and properties of the firm in liquidation. That no action was taken to dispose of the assets which deteriorated over passage of time. That the sheet roof on the second floor of the building of the registered office was completely damaged due to leakage. It is further contended by the respondents that the CA has not looked into the documents and records available at the registered office of the firm and the report has been prepared without verifying the books. That the OL has initiated the proceedings merely on the basis of the report.
It is further contended by the respondents that the claim made by the OL is without taking into consideration the nature of business transaction of the firm and the reason for the sickness of the firm. That the loss suffered by the firm is due to the course of business. That the respondents have not used the money of the firm either for their benefit or for the benefit of their business concern. That the loss is due to the decision of the Reserve Bank of India in the case of non banking financial corporations. That the respondent have not mis-utilized or misappropriated the money of the firm and have carried on business in good faith in accordance with the business norms. Hence, the respondents sought for dismissal of the application.
Having regard to the pleadings of the parties, the question that arises for consideration is;
“whether the claims made by the applicant against the respondents in the present pleadings is liable to be granted?
In order to consider the said question, having noticed the pleadings, it is now necessary to consider the evidence on record.
The CA has been examined as PW.1 and he has filed his affidavit by way of evidence and has also been cross-examined by the learned counsel for the respondents. The first respondent examined himself as RW.1 and he has been cross-examined by the counsel for the applicant/OL.
In the affidavit of PW.1, he has deposed that the firm in liquidation has lent amounts by way of investments for a total sum of ₹5,10,42,782/- to the following firms:
1
Sree Raghavendra
Service Division
Shree Mookambika Krupa Bldg, Yalmudy, Puttur, D.K
2,90,642/-
2
Sree Mookambika
Agencies
Nayak Bldg, Balwar, Puttur, D.K
97,22,678/-
3
Sree Mookambika
Finance and investments
K.V.VSangha Bldg, Yelmudy, Puttur, D.K.
22,15,451/-
4
Sree Raghavendra
Agro Service
B.B.Alaby Raodm, Mangalore
5,91,594/-
5
Sree Mookambika
Finance (Regd)
KVV Sangha Bldg, Yelmudy, Puttur, D.K
3,80,15,547/-
6
Sree Raghavendra
Traders
Manjunath Kripa Bldg, Vittal, Bantwal Taluk,D.K.
2,06,880/-
Total
5,10,42,792/-
It is further deposed by PW.1 that the respondents herein who are the partners of the firm were involved in each of the firms to whom the firm in liquidation had lent the amounts. In the affidavit of PW.1, a detailed statement has been given as to which of the respondents were partners in the firms to whom money has been lent. Hence, it is the contention of the applicant that the firm in liquidation lent amounts to related parties in which they were partners and the firm in liquidation failed to recover the same. Hence, it is the contention of the applicant that the same amounts to misfeasance on the part of the firm.
A claim is made with respect to the decreed debts, wherein the cases are pending. However, no specified amount is claimed in order to recover the same.
Another point of claim is towards investment in shares, wherein it is deposed that upon verification of the documents and records PW.1 is unable to get bifurcation of the amounts invested in shares. Hence, it is alleged that there is misfeasance in a sum of ₹3,73,565/-.
PW.1 has been cross-examined. The relevant portions of the cross-examination PW.1 are extracted herein below for ready reference:
“1. I have referred to the statement of affairs for furnishing my reports. It is true to suggest that except statement of affairs, no other documents have been furnished to me. Witness further volunteers that there is an audited balance sheet attached to the statement of affairs. I had no written correspondence with OL either before or at the time of filing my report. No documents were made available to me from the office of Registrar of Firms. I had verified that the firm in question was consisting of 8 partners at the time of presenting of winding up petition. I had not been furnished with documents relating to court proceedings initiated by the firm for recovery.
……
…. There was no necessity for me to call the other partners of the firm for providing necessary and lacking information in view of letter by Managing Partner. The Managing Partner in his letter stated that he could not produce certain documents as they were taken over by the officials of the OL. I cannot recollect the inventory prepared by officials of OL at the time of taking over of documents. It is true to suggest that my narration in respect of para 7(2) of my report is based on draft partnership deed and it was the only available document. It is false to suggest that the list of partners narrated in para 7 of my report is baseless. ….”
(emphasis supplied)
RW.1 in his affidavit by way of examination in chief deposed in consonance with the objections filed by the respondents. Further, with regard to the loans/investments to related parties, it is specifically contended that the findings of the CA are based on the information and investigation carried out by him of the books and records of the firm in liquidation, which are without any justification. That the factual aspects have not been asserted with respect to the documents and evidence available on record. That on the basis of the report of the CA, the OL has filed a claim without applying his independent mind.
It is further deposed that he was looking after the affairs of the firm and the other respondents were not involved in the day-to-day affairs of the firm. He has further deposed that the firm became sick due to various reasons including the policy of Reserve Bank of India in case of non banking firms/institutions in South Canara which was widely published, as a result of which the borrowers stopped paying the amounts due to the firm and hence, the firm became sick and could not honour their commitments. That the loss is due to the decision of the Reserve Bank of India in the case of non banking financial corporations and as such there is no misutilization or misappropriation of the money of the firm. It is further specifically deposed that the CA – PW.1 has admitted in his cross-examination that except the statement of affairs, no other documents have been furnished to him for giving his report. Hence, the report is a mere formality and the OL has not verified the report and submitted his application.
RW.1 has been cross-examined by the counsel for the OL, wherein he admits that he is the partner of all the firms to whom money has been lent by the firm in liquidation. However, he denied the suggestion that he was an interested person in all the six firms and that he did not take steps for recovery of the loans and advances paid to the six firms and hence, the firm in liquidation suffered loss.
Learned counsel for the applicant Sri. Shrishail Navalgund has vehemently contended that various loans and advances have been made by the firm in liquidation to other firms where the first respondent was also a partner and hence, the same being related party transactions, the respondents are liable to return the money. Hence, he seeks for allowing of the application.
Per contra, learned counsel for the respondents Sri. K.V. Satish submits that the present application itself is not maintainable since no official representing the OL has been examined. That only the CA has been examined as PW.1. It is further contended that CA has admittedly not visited the registered office of the firm for the purpose of preparing the report and only on the basis of the statement of affairs, the CA has prepared the report.
The submissions of both the learned counsel have been considered and the material on record has been perused.
As noticed in the application, the claim is with regard to two aspects i.e., a sum of ₹5,10,42,792/- in respect of loans/investments to related parties and a sum of ₹3,73,565/-with regard to investment in shares. Although there is a claim made with regard to the decreed debts/cases pending, the amount is not quantified and although the respondents have stated that they have filed various suits for recovery of moneys against the borrowers who have parted the moneys and the list of the said suits have been furnished to the OL, no specific amount has been claimed on the head of decreed debts/cases pending and no material has been furnished regarding the suits filed. Hence, the said claim is not being adjudicated in the present application.
With regard to the investments in shares, in the affidavit of PW.1, he has deposed that he is unable to get bifurcation of the amounts invested in the shares. However, based on the amounts mentioned in the statement of affairs, he has opined that there is misfeasance of ₹3,73,565/-. It is clear and forthcoming that there is absolutely no basis for the said claim of ₹3,73,565/- and the same is made without properly verifying the documents of the firm in liquidation available in their registered office.
With regard to the claim of the loans/investments to related parties in a sum of ₹5,10,42,792/-, it is relevant to note that although the first respondent has been shown to be a partner in all the firms to whom amounts have been transferred by the firm in liquidation, the reason for the transfer has not been considered in the report. It is further forthcoming from the material on record as noticed above that the report has been prepared without looking into all the documents available with the firm. It is specifically admitted by PW.1 that no documents were made available from the office of the Registrar of Firms or relating to the Court proceedings initiated for recovery. It is further specifically admitted that he has not called the partners of the firm for providing information. It is further admitted that he is unable to recollect as to the inventory prepared by the officials attached to the office of the OL at the time of taking over the documents. That the narration at para 7(2) of the report has been made on the basis of the draft Partnership Deed.
The respondents have specifically contended that the registered office of the firm in liquidation has been seized by the OL and various documents have remained in the registered office without the same being adequately protected. That due to vagaries of nature, lot of articles in the registered office have also been destroyed and no action has been taken by the OL regarding the same, despite the same being brought to their notice.
It is clear and forthcoming from the aforementioned that the report of the CA has been prepared without scrutinizing all the material on record. There is no material placed on record to indicate that the CA has scrutinized the records of the applicant including the records that were seized from the registered office of the applicant. In the absence of the same, merely placing reliance on few entries in the statement of affairs and in the audited balance sheet, the present claim is made with respect to investments made in related party transactions for a total sum of ₹5,10,42,792/- . There is no evidence adduced by the applicant as to the details/particulars etc., of the amounts which formed the basis of the claim with regard to the related party transactions. In order to sustain the claim of misfeasance, the applicant is required to demonstrate that the respondents have committed breach of trust.
In the case of Official Liquidator v. Raghawa Desikachar (1974) 2 SCC 741 the Hon’ble Supreme Court has held as follows:
“7. ………… 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 omissions. The burden of proving misfeasance or non-feasance rests on the Official Liquidator. ………”
It is clear from the settled position of law as aforementioned that the applicant in the present case has miserably failed in proving by way of a detailed narration as to the specific acts of omission and commission to prove the misfeasance alleged to be committed. The present pleadings alleging a serious change of misfeasance and breach of trust have been initialed merely on the basis of the report of the CA, which has been prepared without making available to him all the necessary documents of the firm in liquidation so as to enable scrutiny of all the material so as to justify the said claim made.
Hence, the claim made in the present application is not liable to be granted and the question framed for consideration is answered in the negative.
In view of the aforementioned, the application is dismissed as being devoid of merit.
No costs.