Topics Covered in this article
Winding up is a legitimate cooperation by which the presence of an organization is ended by accepting power over the reins of the chiefs of the Company from the Board of Directors of the Company, selling its assets and the money recognized from such arrangement is then used for clearing up its obligations and the flood aggregate, expecting to be any, is then coursed among the people from the Company. The Winding up and liquidation methods are enrolled in the Companies Act, 2013.
It is in like manner basic to understand that winding up of the Company doesn’t achieve finishing of “the authentic presence” of the Company for instance despite wrapping up measure began against the association, it continues existing as a “legal corporate substance” in whatever amount of its name continues staying in the Register of Companies. This authentic presence arrives at a resolution exactly when the Court orders the disintegration of the Company.
The impact of such an order for dissolution is that the issues of the Company stop and no business can be led in its name and its name is struck off the Register of Companies – subsequently terminating the “legitimate corporate existence”. The concept of liquidation is Liquidation is the mechanism by which a debt-ridden corporation shuts down operations and sells its properties to pay off its debts and other obligations. A corporation is liquidated when it is determined that it is unable to continue operating. This may be due to a variety of factors, including insolvency (which is generally the primary reason), inability to continue operations, and so on.
In this article, a case of liquidation and the issue of misfeasance is dealt with by the Hon’ble Court which is elaborated below.
Facts of the Case
The present appeal stems from the learned single judge’s decision in the case of Atlas Import and Export Co. Pvt. Ltd. (in liquidation). The official liquidator filed an application under sections 460(4) and 468 of the Companies Act, 1956, to order the company’s respondent directors to hand over the books of accounts and other documents required for the report and also to hand over any other properties to which the company is entitled, if any, and another application was filed under section 543(1) of the Companies Act to keep the company’s director responsible and accountable for the company’s money or property.
The second application under section 543 (1) is brought against Babubhai Chandulal Mody, one of the directors of Atlas Import and Export Co. Pvt. Ltd., which is in liquidation, for five products totalling Rs. 30,090.89, for which the respondents were argued to be liable to account to the company and for a direction from this court to make good the said amount of money.
Prior for the situation, it was contended by the appealing director, that he was not obligated to pay the sum and it was fought that as long as there was no untrustworthiness ascribed to the litigant director, no procedures under area 543(1) of the Act were practical. It was additionally battled that as the legitimate delegates of the chief, J. M. Berry, were not welcomed on record as they are additionally responsible, it was not open to the authority vendor to continue just against the litigant, Babubhai Chandulal Mody. The learned single judge dismissed these arguments outright, and he issued a decree ordering the appellant to pay an amount of Rs. 30,069.89 plus interest at 6% per annum from the date of application to the date of payment, plus costs of Rs. 50.
Distressed by the above order of the learned single appointed authority, this appeal is documented by Babubhai Chandulal Mody, one of the directors of Atlas Import and Export Pvt. Ltd. (in liquidation). It was contended by the appellant for the litigant that since J. M. Berry was dead who was likewise a director during the material time, no procedures under segment 543(1) of the Act can be supported except if the lawful representatives of the deceased director were additionally welcomed on record. It was also contended that upon the facts and circumstances of the case, the learned single judge erred in holding that the surviving appellant-director was liable to pay a sum of Rs. 30,090.89 in respect of five items.
Summary of Court’s Judgement
The Hon’ble Court observed that under section 543(2) of the Companies Act, the directors have become responsible and accountable for any money or property of the company, and they may be forced to restore any money or property of the company. Furthermore, under section 543 of the Companies Act, the directors’ responsibility is mutual and many. In this present case, there were two directors: the appellant-director, Babubhai Chandulal Mody, and the deceased director, J. M. Berry, and both of them are jointly and severally responsible for the money or property misappropriated by them as directors of the company (in liquidation).
The proceedings under section 543 against the legal representatives may be continued in order to determine and declare the company’s loss or injury. However, an application under sub-section (1) of section 543(2) of the Companies Act must be made within five years of the date of the order for winding up or the first appointment as the liquidator in winding up or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer.
Upon the facts and circumstances, it was held by the Hon’ble court that learned judge erred in holding that the appellant-director was incompetent in failing to pursue the above two numbers, and that the appellant-director is liable to pay Rs. 6,209.89. As the respondents had no right to lend the money belonging to the company to a third party because that is not one of the objects of the company. And the object of the company as enlisted in the Memorandum of Association (MOA) extends only to do business in buying, selling, manufacturing, importing, exporting and distributing all commodities either manufactured or as raw materials of all types and grades of all engineering chemical goods, electrical goods.
In light of the above, the Hon’ble Court conclude that the appellant-director is not liable to pay the amount of Rs. 6,209.89 in relation to the two things in question. Furthermore, it was held that the proceedings instituted by the official liquidator under section 543(1) of the Companies Act, 1956, against the appellant-director are valid and in accordance with the law.
Analysis of the Decision
For the purpose of this case, it becomes necessary to under the language of section 543 of the Companies Act which is reproduces as follows.
“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 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.”
The Hon’ble Court observed that the cause of action for misfeasance against the deceased director survives his death, and the deceased director’s assets are liable in the hands of his legal representatives. As a result, even after the delinquent director’s death, the loss can be calculated.
In the present case, the official liquidator has not taken any procedures against the deceased director within the time of five years as examined under sub-condition (2) of Section 543. As the responsibility of the directors of the company is joint and a several, the Hon’ble Court was of the view that the non-impleading of the deceased dire for and his lawful agents won’t vitiate the procedures established against the surviving directors. The Hon’ble Court, subsequently, rejected the primary dispute of learned counsel for the litigant that non-joinder of the deceased director and his lawful agents vitiated the whole procedures established by the official liquidator under section 543(1) of the Companies Act.
In order to arrive at this conclusion, the Hon’ble Court took the view that was observed in the case of Official Liquidator v. Parthasarathi Sinh. For this situation it was held that the commitment arising under the misfeasance systems is set up on the standard that a person who has made the misfortune the organization by an exhibit amounting to a break of trust should make right the disaster, accordingly, segment 543 of the Companies Act doesn’t really make any new obligation. It simply obliges an abstract answer for choosing the whole payable by such individual on proof of the significant fixings. This part affirms the court to direct such individuals chargeable under it to pay a measure of total to the organization as a pay.
This isn’t a game plan proposed to rebuff a man who has been viewed as responsible of misfeasance yet for remunerating the organization in respect of the setback occasioned by his misfeasance. Whenever there is a relationship reliant upon arrangement, semi agreement, some trustee connection or a failure to play out a commitment, there is no lessening of the danger on the death of the violator.
Right when once the commitment is declared, it is accessible to the authority vendor to comprehend the whole due by depending on segment 634 of the Act and area 50 of the Code of Civil Procedure. Moreover, the procedures under segment 543, an explanation of announcement is made. An assertion like this has the is like that of a court request. At the point when such an affirmation is made, it tends to be executed under segment 634 of the Act, and when a request gave by one court should be completed by another, the cycle set out in segment 635 of the Act should be followed.
In the event that the person who is delivered capable kicks the bucket before the request is fulfilled, the arrangements of area 50 of the Code of Civil Procedure should be applied, and the legitimate delegates’ risk ought to be surveyed appropriately. Some other understanding of area 543 of the Act will deliver the entire interaction of deciding an individual’s duty under it inconsequential.
A liquidator has wide powers to guarantee reasonable and even-handed dissemination of its resources. These forces are general in nature, and their degree and degree are notable. What’s more, the Official Liquidator likewise has the ability to force a director or a representative to re-establish any improper advantage emerging out of misfeasance over the span of winding up. Under s. 543, the Liquidator can practice this force by making an application to the Tribunal. In any case, that application must be made, as indicated by s. 543(2), inside a long time from the date of the request for winding up, or first appointment of the liquidator, or of the misfeasance, whichever is the longest.
Moreover, before the Insolvency & Bankruptcy Code being passed, India lacked in dealing with the aspects of liquidation and financial distress. Moreover, there were different laws, every one of which applied to a different individual or type of creditors. The Insolvency and Bankruptcy Code, 2016 (the “IBC”), was brought into effect on May 28, 2016. The legislation tries to unite the laws identifying with insolvency and liquidation for corporates, individuals, partnership firms and other body corporates as might be informed by the Central Government every now and then.