Case Law: Parasrampuria Trading & Finance Ltd. 2006

Introduction

Whenever the company moves into liquidation, there is an official liquidator appointed by the Central Government under Section 448 of the Companies Act. The current case is filed by official liquidator regarding the winding up of a company and pressing charges against the ex-directors of the Company as they have been accused of misfeasance and running the business of the company in a manner as if it is a Private company even when the Company was converted into a Public Company. The ex-directors of the company are also accused of retaining the advances received by them and for defrauding the creditors and shareholders by making personal gains from the Company’s account. All of this led to severe losses to the company.

Statement of Facts

The facts of the case describe that an application was filed under Section 542 (Liability for fraudulent conduct of business) and 543 (power of the court to assess damages against delinquent directors) of the Companies Act 1956, by the official liquidator against the ex-directors of M/s Parasrampuria Trading and Finance Ltd. which was under the liquidation process namely Shri Gopal Pandey, Sri Vishnu Kant Misra, Smt. Chandra Kala Parasram Puria and Shri Sudhir Kumar Parasram Puria (Respondents). All the ex-directors are alleged to be committing misfeasance and leading their business of the company as a private company even when it was converted into a Public Company. The liquidator also accused them of retaining the advances received by them for the Company and within 5 years of winding up of the Company defrauding creditors and shareholders and causing heavy losses to the company. 

The Company was wound up on March 25 1998 when the petition was filed by the creditor M/s GTC Industries Ltd. and the ex-directors filed the “statement of affairs” under Section 454 of the Act for showing that there were huge losses. Before the company was wound up, in 1994 the Company went for an inspection by the Central Government under Section 209A of the Companies Act 1956. The Deputy Director in Regional Directorate, NR, Department of Company Affairs made a request to the liquidator for annexing the copy of the inspection report with all the listed findings against the ex-directors showing that they were guilty of the offenses under Section 43A, 227, 269/390/198, 211, 292, 295, 299/301 and 372 of the Companies Act. The Deputy Director suggested taking action against these ex-directors and file an application for misfeasance and misappropriation of funds against them. Thus, the present case was filed in pursuance of this letter under Section 542 and 543 of the Companies Act against the ex-directors of the Company.

Issues of the Case 

The primary issue of the case is that the ex-directors have been accused of fraudulent conduct of business and for retaining the advances of the Company. Apart from that, the Deputy Director made the request to the liquidator to annex the copy of the investigating report to keep a record of the offenses the respondents are guilty of. The main issue of the case is-

• Whether the report of the Deputy Directorate of 1995 is enough evidence to prove the charges pressed by the liquidator against the ex-directors of the Company?

The court has delved into this issue and derived inferences based on the arguments presented by both, the liquidator and respondents.

Contentions/ Arguments from both the sides 

The present petition was filed by the liquidator on the basis of the report given by the Deputy Directorate under the provision of 542 and 543 of the Companies Act stating that the directors were fraudulently conducting the business and the Court wanted to assess the damages caused by such delinquent directors.

The contentions, presented by the learned counsel of the Respondents made an objection regarding the applicability of this application and stated that the allegations made were not supported with the necessary particulars and details given in the application and there was no solid proof to prove the charges alleged against the ex-directors. The report of the Central Government against the Company was given in 1995 and cannot be relied upon. It is further submitted by the counsel of respondents that the Reporthttps://thecorporate.ninja/section-316-company-liquidator-to-submit-report-on-progress-of-winding-up/ cannot be substituted for the lack of necessary evidence and pleadings in the present application.

The counsel of the Respondents has relied upon the judgment of Official Liquidator v. Raghawa Desikachar stating that “the charge of misfeasance is a serious charge and it involves the charge of misappropriation or misconduct or breach of trust. So, whenever an application is made by the official liquidator it should contain detailed information regarding the specific acts committed or omitted by each of the Directors which led to certain amounts of loss to the Company. The onus of proving the misfeasance or non-feasance lies on the shoulder of the official liquidator.” And in this case, the liquidator merely relied on the evidence recorded in the public examination of the directors and few other documents for evidence.

Even at the stage of public examination of Directors, there was no such evidence of misfeasance against the directors and the directors stated that there was no such reason to hold them responsible for recovering the amounts of the loss caused to the company by misfeasance.” As the application of the Liquidator didn’t furnish enough particulars against the directors for the charge of misfeasance. Even a show-cause notice was given to respondents, but the liquidator failed to provide any further leads or evidence showing that Respondent no. 1 to 4 was responsible for causing misfeasance to the Company.

When the Central Government in the exercise of its powers under Section 209A of the Companies Act carried out inspections in 1994 and inspected the accounts, books of the Company and found that it was running in losses. There were ample allegations of misfeasance and misappropriation of Company funds against the ex-directors. The Report of the Deputy Directorate records inspections made for the period of March 31st, 1990 to March 31st 1994. The final conclusion made after the reports were-

• The inspection exposed the directors that they were treating the company as their own and not as a Corporate entity. The funds of the company were being used by the directors for their personal gains and there was the constant withdrawal of funds without the prior approval of the Board of Directors or general meeting etc.
• There is non-compliance with provisions while preparing the balance-sheets. The Auditors have not even changed the status of the Company even after its conversion to a public company
• There has been extraneous misuse of funds by directors and their relatives to such extent that they are eligible for a petition under Section 433/439 of the Act also. As per the records of the Company, it can be stated that the agency of the company with GTC Industries has come to an end and there is no proposal for diversification or adoption of new business.
• The report suggests that the company is running into losses stating that the company’s reserves and surpluses have reduced to Rs 3,46,838 on March 31st, 1992, to Rs 3,40,385 on March 31st, 1993, to Rs 1,95,300 on March 31st, 1994. Even the fixed assets, investments of the company, and current assets have declined substantially. The turn-over of the company has reduced significantly and despite making adjustments, sale of instruments/ fixing assets, etc the losses cannot be reduced.
• The report also mentioned the contravention of Section 295 and 292 of the Companies Act and it was seen that Shri Sudhir Kumar Parasrampuria and Smt. Parwati Parasrampuria and their relatives were maintaining their personal accounts in books of the Company which mentions the various transactions of loans. There was heavy withdrawal and depositing of amounts from and with the company. It was also recorded that the Company was making payments on their behalf to third parties.
• The company was also found to contravene Section 43A of the Act as the turnover of the company in the years June 30, 1983, June 30, 1984, and June 30 1985 was Rs 6,64,483, Rs 1,23,27, 937, and Rs 2,16,36,263 respectively. The amount of turnover attracted Section 43A and the Company became a public limited company but was still treated as a Private company till the year 1998-9 till the ROC changed the certification of incorporation.

Thus, as per these findings of the report of the Central government, it became very well evident that even though the report was made in 1994 but the losses need to be appropriated and the accounts of books made it clear that ex-directors were indulged in misfeasance from their Company’s account.

Summary of Court decision and Judgement 

The findings of the inspections supported by the books of accounts of the Company have prima facie and amount to a violation of Section 542/543 of the Companies Act and the objections raised by the respondent’s counsel are rejected. The Court has thus charged the ex-directors with-

• That the ex-directors of M/s Parasrampuria Trading and Finance Ltd. (wound up on March 25, 1998) made an investment in Kanpur Cigarettes Ltd., Kalpana Mercantile Ltd., Vishwa Jyoti Marketing Ltd., Nath Mercantile Ltd., and Ambar Mercantile Ltd. in shares of State Bank of India during March 31st, 1994 is said to be in violation of Section 37(1) and Section 372(6), (7) of Companies Act. The company has also failed to make statutory entries within 7 days of investment under Section 372(6) and (7) and hence conducted the business in a prejudicial manner against the interest of shareholders and creditors violating Section 542 and 543 of Companies Act punishable under Section 542(3).
• The ex-directors of the Company having registered their turnover during the financial years of 1983, 1984, and 1985, the average of these 3 consecutive financial years of exceeded the amount of Rs 1 crore and attracted Section 43A of the Act but the company failed to inform ROC within 3 months from the date when the company became a public company and the company was treated to be a private company till 1999 and thus it violated Section 295, 211, 269, 227 and 43A of the Act and has committed an offense under Section 542 and 543 of the Act.
• The ex-directors are also guilty of taking loans from the Company time and again in their names and their relatives’ names without disclosing the amount due to which the directors in balance-sheet without any interest failed to repay the same. it was confirmed that the auditors were not given the information and explanation which was necessary for the purpose of the audit and thus couldn’t discharge their duties and have contravened the provision of 292, 295, and 227 of the Act 1956 and committed an offense under Section 542(3) of the Act.

Hence, the ex-directors of the Company were liable for misfeasance and defrauding of their creditors and punished with imprisonment for 2 years or fine of Rs 5000 or both, as per Sec 542(3) of the Act and the liquidator is asked by the Court to present its further evidence and the respondents may file their reply to charges as well.

Analysis of the Case

As per the findings specified in the report of the Central government against the ex-directors and the books of accounts of the Company. It could be well decided that the charges pressed against the ex-directors of the Company were appropriate, as they were guilty of fraudulently conducting the business in various ways such as making transactions in their own names and their relative’s names, taking loans from the Company’s accounts, making payment from the Company’s accounts to third parties without the approval of Board of Directors, creditors, etc. Thus, the charges pressed against the delinquent director were accurate on behalf of the Court.

The decision made by the Court conforms to the existing Company law and is regarded as a serious offense as well as a charge against the directors of the company, especially when the Company is going under liquidation. The reasoning presented by the Court with respect to the case in accordance with the Report and books of accounts of the Company seems suitable and prudent. There was no such point made by the respondent which would have proven that the directors were not fraudulently running their business and treating it as their personal account rather than a corporate entity. It will definitely influence other cases where the liquidator files petition against such delinquent directors. There are no points left or omitted by the Court and all of the contraventions of the Companies Act are taken into consideration.

The Court has rightfully still requested the liquidator to present recent evidence against the Company’s ex-directors rather than just relying on the report of the Central government of 1994 as it cannot be used to look into the present condition of directors. Thus, it is wise of the High Court of Allahabad to ask the liquidator to get the latest particulars and pieces of evidence against the Company and even the respondents have been allowed to make their replies before the court. Thus, the judgment has been decided correctly after taking note of all the particulars mentioned in the report and the contraventions committed by the directors.

Conclusion 

Therefore, the case can be summarised into that the ex-directors of the Company were using the company for their own personal gains and benefits rather than treating it as corporate personality. The directors were liable for making extraneous expenses from the accounts of the Company and that too without the approval of the Board which led to heavy losses for the Company and lastly there was no other option left but to liquidate the company in order to return funds to the creditors and shareholders of the company. Apart from the fraudulent conduct of the business, another reason due to which the company had to be liquidated was that they didn’t have any new business plan or venture for the Company and continued to play the sole selling agent of GTC Industries for cigarettes which finally reduced the earnings of the Company. Thus, the High Court of Allahabad has rightfully charged the ex-directors of the Company for misfeasance and fraudulent conduct of business, but no punishment has been clearly specified against the directors apart from the fact that they are liable for punishment under Section 542(3) of the Act, which might act as a negative impact on the case.