Topics Covered in this article
The Winding up & liquidation procedures are enlisted in the Companies Act, 2013. Winding up is a process authorised under the law by which the existence of a company is terminated by assuming control over the reins of the executives of the Company from the Board of Directors of the Company, auctioning off its resources and the cash acknowledged from such deal is then utilized for clearing up its debts and the overflow sum, assuming any, is then circulated among the individuals from the Company.
It is likewise critical to comprehend that ending up of the Company doesn’t bring about ending of “the legitimate presence” of the Company for example notwithstanding winding up measure started against the organization, it keeps on existing as a “lawful corporate substance” in however much its name keeps on remaining in the Register of Companies. This legitimate presence reaches a conclusion just when the Court orders the dissolution 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. Present case deals with the concepts like fraudulent transaction, fiduciary responsibilities of the directors and the process of liquidation under the Companies Act.
Facts of the Case
This is an application by one of the creditors of the Sree Rama Vilasam Press and Publications (P.) Ltd., now in liquidation, for a declaration under Section 542(1) of the Companies Act, 1956, that its former directors and general manager are personally liable for payment of over Rs. 43,000 to the applicant. The company was ordered to be wound up in November, 1976, on a petition for winding up, filed in January, 1973. Provisional liquidator was appointed in November, 1975.
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.
The respondents have adduced no evidence. Their case is that they had not perpetuated any fraud, and that they were not parties to any fraudulent trading. Some of them were not directors (or managers) during the relevant periods. They were not even aware that the transactions in question were being entered into by the company. The company was carrying on business till the provisional liquidator was appointed.
The issue that has arisen for consideration before this Hon’ble Court is that
“Whether the directors are liable for allegations of fraud under section 542 of the Companies?”
Summary of the Decision
The Hon’ble High Court of Kerala held that present case lacks any merit, rejecting all the contentions of the respondent the case was dismissed.
The umbrella provisions under the companies Act for the winding up is dealt under section 542. It provides that that when it shows up in the Winding up of the company that its business was being continued with goal to swindle creditors or other people or for any deceitful reason, all people who were knowingly parties to such direct be by and by expected to take responsibility, with no restriction of risk, for every one of the obligations or different liabilities of the company. The obligation is to be resolved and imposed by the company court in procedures started by the liquidator or creditor.
What is to be demonstrated in such procedures is that the business was being continued with a deceitful aim or for a fake reason, and that the respondents were intentionally gatherings to it; and it’s important to understand that when a company apparently has carried on business and brought about obligations when, to the knowledge of the people concerned, there was no sensible possibility of the creditors truly getting payment of those obligations, a inference of fraud can be clearly made out.
Since fraud is the reason for the obligation, a component of dishonesty plays a vital role and must be set up for making out a case under this section; and deceitfulness won’t be surmised where the direct of the people concerned is suspectable of more than one explanation. In the present as, the directors were in the office when the alleged transaction took place. Therefore, it also noteworthy to state that the it is necessary to identify the parties who contribute to the alleged transactions.
It will be helpful to contrast the arrangements of Section 542 and those of Sections 543 and 531. Section 543 enables the court to evaluate harms against delinquent directors and other people who possess a fiduciary position according to an company. They are required to act consistently in light of a legitimate concern for the organization, shunning extortion, underhand dealings and intentions of individual magnification. They additionally owe an obligation of care. In the event that they are discovered to be in breach of the obligations appended to their exceptional position, they are responsible in damages under Section 543, and the court can arrange them to make great the misfortune supported by the organization because of their direct.
Misfeasance procedures under the part section for break of any obligation, regardless of whether it doesn’t add up to an execution of extortion. The basis of Section 531, then again, is against “deceitful inclination “, i.e., leaving behind the resources of the organization for a couple of creditors with the end goal of overcoming the others. The court is given force under this part to negate such exchanges made just before winding up. The three sections are subsequently important for a plan for diminishing the liabilities of the company, recuperating its resources and recovering its misfortunes, if the conditions recommended by them are found to exist on an assessment of its issues, in the wake of winding up.
While Section 542 tries to alleviate the organization of the liabilities brought about by fraudulent transactions making those liable for the extortion actually liable, the object behind Section 531 is to recuperate resources which ought to have had a place with the organization yet for deceitful inclination. Misrepresentation is a typical element for both, though the procedures under Section 543 are intended to recover misfortunes supported by a break of obligation which may miss the mark concerning fraud.
While dealing with the concept of fraud, the important obligations of the director which is fiduciary duty becomes significant to discuss. Fiduciaries often have a duty of good faith, which requires them to behave in an honest and forthright manner, without manipulating or exploiting their clients. Any commercial transaction involves a fiduciary relationship. Furthermore, the agent’s particular position or duty against the principal defines the relationship i.e., the relationship of corporate management and boards of directors to shareholders, lawyer to client, or broker to client, and governed by the laws associated with those transactions.
When two people have a fiduciary relationship, one is obligated to protect the interests of the other, and if the former takes advantage of that relationship to achieve an unjust enrichment or benefit from another, it violates the ethos of fiduciary duty. A director’s fiduciary obligation is comparable to the obligations owed to a beneficiary by a trustee. The directors, as trustees, are obligated to behave in the best interests of their beneficiary, the corporation or its stakeholders. The general rule is that there is no fiduciary relationship between a director and a shareholder; it only exists between the corporation and the director.
Further, the directors of an organization which has its very own legitimate character, don’t owe any fiduciary or authoritative obligation to people who manage it; they are not at risk to pay obligations brought about by the organization even when they realized that it generally will be bankrupt. Nevertheless, section 542 is a special exception to the above-mentioned case. The exception, in any case, doesn’t thoroughly dismiss the standard identifying with corporate character in light of the fact that the impact of a request by the court under Section 542 isn’t to make the directors and others actually responsible to the leaser who has been defrauded. The sum decided is to be paid to the liquidator for being applied alongside different assets of the company, in paying every one of the creditors.
As a focal rule of company law in India and across different locales, an company is considered as a different lawful element, and free of the clutches of the mistakes people in it commit. This company is generally perceived as the shroud of incorporation, a rule that isolates the legitimate character of an company from its individuals, subsequently bearing the cost of them security against individual risk towards the obligations and commitments of the company. A company is simply a lawful individual and not a characteristic one, it is worked and overseen through its Directors who are answerable for its every day issues and go about as specialists or trustees of the company, and the way that a artificial person doesn’t have the capacity to act in an illicit or deceitful way can’t be disregarded.
Hence, because of the increasing maltreatment of the standard of the consideration, courts don’t stop for a second in lifting the corporate veil and make such directors actually responsible for any misfeasance or false exercises done by them under the name of the corporate character.While the part of criminal obligation of directors for fraudulent transaction was consistently present under Companies Act, 2013, it was not useful during the interaction of liquidation since there was no chance to get of recovering the misfortunes caused to the corporate account holder and its creditors.
Most of the Directors are either exploitative or unconcerned in their activities in spite of realizing that their demonstrations may influence the worth of the organization or even increment its obligation towards banks, particularly whenever done in the sundown period. This was on the grounds that directors utilized the shroud of restricted obligation to pull off the activities that may have influenced the working of the organization gambling liquidation, or even uncovered the organization into additional misfortunes.
Attributes of determination, trustworthiness, and straightforwardness in dealing with the undertakings of the company establish fundamental conditions for standing firm on the footing of a director. In compatibility of the abovementioned, it is significant that overseers of the organization should make a quick move in the event of the previously mentioned offenses submitted by the organization that draws in risk of directors. Moreover, it is significant that such activity and the issue with the deceitful exchange should be properly recorded in the minutes of the executive gathering to get away from risk presented by the rule.
In the present case, given the documentary and oral evidence it was rightly provided that the transactions in the books of accounts doesn’t have proven to be fraudulent on the part of director and the company.