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FACTS OF THE CASE
The applicant is a dealer in paper of various kinds, and was supplying paper to the company in liquidation for use in their printing and publishing business. The respondents were obtaining “credit purchases” from the applicant. The company had ceased to carry on business since 1970. Even after the commencement of the winding-up in January, 1973, the company continued to purchase paper on credit without disclosing the above state of affairs. Obtaining credit facilities after stoppage of business and even after commencement of winding-up, without informing the applicant of the true situation, amounted to misrepresentation and fraud. Supplies were obtained with intent to defraud. Over Rs. 43,000 are due to the applicant as per its accounts regularly kept in the course of business, and the respondents are personally liable for this debt of the company, under Section 542[4].
ISSUE RAISED IN THE CASE
- Whether the directors and managers of the company are personally liable for payment of over Rs. 43,000 to the applicant?
- Whether the fraud or misrepresentation perpetuated by the respondents?
CONTENTION OF THE PARTIES IN THE CASE
Contention of the petitioners:-
The petitioners tried to show before the Court the fraud or misrepresentation made by the respondents. One attempt made by P.W. 1 to suggest anything near fraud was to state that the directors of the company had not informed the applicant about the pendency of the winding up petition (from January 1, 1973) and that had this been done, no supplies would have thereafter been made.
P.W.2 contended that “ in spite of the pendency of liquidation proceedings, they had not informed us about it and continued to get paper from us on credit basis. We had not asked them whether liquidation proceedings were pending. Really they have not made any statement at all, but what they have done is to suppress.”
Contention of the respondents:-
In reply to the contention of the petitioners above mentioned, the respondents contended that the suggestions of fraud given by the petitioners is a far cry from the ” false representations ” or the ” false pretence ” alleged in the affidavit, and it has not been referred by any authority to hold that the carrying on of business after the presentation of a winding-up petition, without disclosing the pendency of the proceedings, should by itself be presumed to be fraudulent.
It was further contended that where such presentation is actually followed by a winding-up order, even if it be nearly four years later as in this case, the effect of it is to hold that the company was unable to pay its debts at the time the petition was presented, and that the directors should be presumed to know even at that time that there was no reasonable prospect of repayment. A proposition so wide has not received judicial recognition so far. A company may actually be insolvent at a given time; but its directors may bona fide hold a different view.
GROUNDS TAKEN
- Section 542[5] of the Companies Act, 1956:-
Liability for fraudulent conduct of business.
- 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.
- (a) Where the Court makes any such declaration, it may give such further 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 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.
- 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.
- 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.
- Section 543[6] of the Companies Act, 1956:-
Power of Court to assess damages against delinquent directors, etc.
- 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, managing agent, secretaries and treasurers, manager, liquidator or officer of the company-
- has misapplied, or 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; 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)[7], 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.
- 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 the winding up, or of the misapplication, retainer,. misfeasance or breach of trust, as the case may be, whichever is longer.
- This section shall apply notwithstanding that the matter is one for which the person concerned may be criminally liable.
- Section 531[8] of the Companies Act, 1956:-
Fraudulent preference.
- Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly: Provided that, in relation to things made, taken or done before the commencement of this Act, this sub- section shall have effect with the substitution, for the reference to six months, of a reference to three months.
- For the purposes of sub- section (1)[9], the presentation of a petition for winding up in the case of a winding up by or subject to the supervision of the Court, and the passing of a resolution for winding up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual.
DECISION IN THE CASE
The petitioners in this case tried to draw the attention of the Court on different sections of the Companies Act, 1956[10] and also submitted many documents in the Court to show the fraud and misrepresentation on part of the respondents. However the documents discussed and submitted did not show the attempt by the company to fraud the applicant, or to indulge in the fraudulent training.
P.W. 1 stated in his evidence that some of the goods supplied on credit were being kept in the premises of Sree Rama Vilasam at Trivandrum under lock and key and that ” though the key was with us, they opened the room where these goods were kept and used the goods without our consent”.
But he added in cross-examination :
” We had opened the room and supplied the paper to R-1’s account even from the last consignment. I cannot say what part of it was so handed over. Acknowledgment must have been obtained for the paper given. We had not issued any notice to the company about the alleged breaking open of the room there. Our manager went there and the directors promised to pay, though not in writing.”
- W. 1 did not say who broke open the premises or when. He could not also say what quantity of paper was unauthorisedly taken away. Assuming that his evidence is sufficient to hold that such an incident had taken place, that again cannot amount to a carrying on of business with the intent to defraud. The applicant’s case in the affidavit was that the company was not doing any business after 1970 and that without disclosing this, it continued to obtain supplies of paper. In the course of their evidence, however, both P. W. 1 and P. W. 2 gave up this case and attempted to set up a different one. And the short answer to this, if it requires answering, is that the incident complained of is not a trading, fraudulent or otherwise.
Therefore, after considering all the facts and documents as well as the statements of the parties, Court came to the conclusion that there was no merit in this case and therefore, the Court dismissed the petition as there was nothing to prove the fraud and misrepresentation on part of the directors and managers to held them personally liable.
ANALYSIS
This application for making the directors and managers of the company as personally liable was brought by one of the creditors of the company which was at the time of the application in liquidation. The applicants tried to prove that there was commitment of fraud and misrepresentation on part of the directors and managers of the company and it was also alleged by the applicants that the company continued its operations even when its order of winding-up has been passed. The applicants through every means tried to prove the company as well as its directors and the managers wrong in their positions, however, the arguments by the respondents and the reasoning given by the Court at the instances of fraud shown by the applicants brought the applicants in a position where they gave up this case and attempted for a new one. The Court also after considering all the relevant provisions and the documents and the thesis of the parties found that there was no merit in the case and therefore dismissed the application accordingly.
CONCLUSION
This case came as the eye-opener for the applicants where they after consistently trying to prove the respondents wrong ultimately did not get able to satisfy the Court and therefore, finally gave up this case and attempted for a new one. This case also found to be meritless as per the Court and therefore, the Court correctly after taking all the points into consideration dismissed the petition as the applicants in no way were able to prove the wrong on part of the respondents.
[1] South India Paper Mills Pvt. Ltd. v. Sree Ram Vilas Press, (1982) 52 CopmCas 145 (Ker)
[2] The Companies Act, 1956, s. 542(1).
[3] The Companies Act, 1956 (Act No. 1 of 1956).
[4] The Companies Act, 1956, s. 542.
[5] The Companies Act, 1956, s. 542.
[6] The Companies Act, 1956, s. 543.
[7] The Companies Act, 1956, s. 543(2).
[8] The Companies Act, 1956, s. 531.
[9] The Companies Act, 1956, s. 531(1).
[10] The Companies Act, 1956 (Act No. 1 of 1956).
