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Judgment
P. Sathasivam, J.—Company Application Nos. 888 of 1995 is by the official liquidator appointed by this court as liquidator of Messrs.
Dhanalakshmi Funds (India) Ltd., praying for certain directions. Company Application No. 1321 of 1995 is by B. Rajagopal and B. Muralidhar,
ex-directors of the company in liquidation seeking for an order to discharge them from the proceedings under Sections 542 and 543 of the
Companies Act, 1956, initiated by the official liquidator in Company Application No. 888 of 1995 in Company Petition No. 88 of 1989.
The case of the official liquidator as set out in his report dated November 14, 1995, is briefly stated hereunder.
Messrs. Dhanalakshmi Funds (India) Ltd., was ordered to be wound up by an order of this court dated November 16, 1990, in Company
Petition No. 88 of 1989 and the official liquidator became the liquidator of the said company. The company in liquidation was incorporated on
August 9, 1985, by the Registrar of Companies, Tamil Nadu. It was declared as a ""Nidhi"" on August 22, 1986, u/s 620A of the Companies Act,
1956. The main object of the company is to encourage and afford all facilities on mutual basis for cultivating thrift, saving and to render all types of
financial assistance to its members only by receiving long and short-term deposits from the members and in particular recurring time deposits, term
deposits, fixed deposits and other deposits and to grant loans only to members on securities. As per the memorandum of association of the
company in liquidation, the authorised share capital is Rs. 2,00,000 divided into 2,00,000 equity shares of Re. 1 each. As per the records of the
Registrar of Companies, Tamil Nadu at Madras, based on the annual return made up to February 16, 1987, the following are the directors of the
company : (1) V.S. Sridhar ; (2) T. Sudarsan ; (3) V. Para-meswaran; (4) P.C. Varghese. There were 48 branches of the company in liquidation.
The official liquidator has taken into his custody available books and records of the company in liquidation at 41 branches and at the registered
office of the company in liquidation. The official liquidator has taken into his custody and control the available assets and effects of the company in
liquidation in respect of the registered office and 26 branches of the company in liquidation. The assets and effects of the company are not taken
possession of in respect of 22 branches, since the whereabouts of the assets are not known. The funds position as on November 9, 1995, of the
company is Rs.75,41,123.85. The former directors of the company in liquidation have not filed the statement of affairs as required u/s 454 of the
Act and the official liquidator has filed an application, viz., C. A. No. 428 of 1991 reporting the default of non-submission of the statement of
affairs and the said application is pending.
It is stated by the official liquidator that in the course of liquidation proceedings, the business of the company in liquidation has been carried on
with intent to defraud the creditors of the company in liquidation or any other persons or for fraudulent purposes and that it appears that the
respondents have misapplied or retained or became liable or accountable for the money or property of the company in liquidation and have been
guilty of misfeasance or breach of trust in relation to the company in liquidation. Therefore, the official liquidator has filed an application in C. A.
No. 2224 of 1993 for permission to appoint an auditor to investigate the affairs and accounts of the company in liquidation and by order dated
November 26, 1993, this court has appointed N. T. Arasu and Company, chartered accountants, to carry out the investigation of the affairs and
accounts of the company in liquidation. The auditors have submitted their reports to the official liquidator and based upon those reports of the
auditors as well as the available books and records of the company in liquidation, the official liquidator submitted the report for appropriate orders
under Sections 542 and 543 of the Companies Act, 1956.
There were two partnership firms, (1) Asian Integrated Finance and Industrial Corporation; and (2) Dhanalakshmi Consolidated Finance and
Industrial Investments. K.V. Sasidhar and B. Muralidhar were the partners of the first above-mentioned firm and B. Rajagopal Nair and K.V.
Sasidhar were the partners of the second above-mentioned firm. According to the statement of the former director P.C. Varghese recorded by the
official liquidator on January 4, 1994, and January 6, 1994, under rule 130 of the Companies (Court) Rules, 1959, B. Rajagopal is the group
president of the Dhanalakshmi group of companies and K.V. Sasidhar is the group chairman of the Dhanalakshmi group of companies and they
were the promoters of the company in liquidation. The registration expenses were met by K.V. Sasidhar and B. Rajagopal and they took steps for
the incorporation of the company in liquidation. Respondents Nos. 1 to 7 in this application are the signatories to the memorandum of association
and articles of association of the company in liquidation. According to P. C Varghese, ex-director of the company in liquidation, respondents Nos.
1 to 7 were the employees of those two firms and they have signed the memorandum of association and articles of association of the company in
liquidation only at the behest of respondents Nos. 8 and 9 herein.
The partners of the two firms did not repay the depositors of the two firms and in order to overcome the provisions of Section 455 of the
Reserve Bank of India Act, 1934, promoted the company in liquidation with respondents Nos. 1 to 7 herein as subscribers to the memorandum of
association and as the first directors of the company in liquidation and continued the business of the partnership firms by indicating that the
company in liquidation is the proprietor of the two firms and by issuing fresh deposit receipts in renewal of the earlier deposit receipts issued in the
name of those two firms to the depositors and paying the interest to the depositors of those two firms from and out of the funds of the company in
liquidation. They have adopted this procedure in order to circumvent and to escape their liability towards the depositors under the provisions of
Section 455 of the Reserve Bank of India Act, 1934, and are therefore liable for the said fraudulent purpose and they have carried on the business
of the company in liquidation with intent to defraud the depositors/ creditors of the company in liquidation. Even though respondents Nos. 8 to 10
do not appear to have been inducted as directors, the facts and circumstances as available clearly indicate that the said respondents Nos. 8 to 10
have been actually carrying on the business of the company in liquidation and they have misapplied, retained, become liable or accountable for
money and property of the company in liquidation and they are guilty of misfeasance or breach of trust in relation to the company in liquidation in
addition to respondents Nos. 1 to 7 as the former directors of the company in liquidation who have acted in aid and assistance of respondents
Nos. 8 to 10 in carrying on the affairs of the company in liquidation with intent to defraud the creditors of the company in liquidation and for having
misapplied and retained and become liable or accountable for the money and property of the company in liquidation and have been guilty of
misfeasance and breach of trust in relation to the company in liquidation.
A perusal of the books and records of the company in liquidation as well as the statement of P.C. Varghese recorded by the official liquidator
on January 4, 1994, and January 6, 1994, under rule 130 of the Companies (Court) Rules, 1959, it is seen that no formal agreement appears to
have been executed between respondents Nos. 8 to 10 as partners of the two firms herein and the company in liquidation for taking over either the
assets and effects or the liability or the business of those two firms by the company in liquidation. The original balance-sheets for the years ended
December 31, 1986, and December 31, 1987, are not available among the records taken possession by the official liquidator. In this regard, the
solemn statement made by V.S. Sridhar and V. Parameswaran, directors of the company in liquidation, in their affidavit in W. P. Nos. 1948 of
1986 and 12900 of 1987 is relevant.
Even though the official liquidator has not called for claims from eligible persons, he has received 4,421 claims filed voluntarily claiming various
amounts aggregating to Rs. 7,04,03,266.22.
Respondents Nos. 1 to 7 and 8 to 10 have incurred the liability in view of the fact that all the assets and effects of the said two firms were not
made over to the company in liquidation, but deposit receipts issued by those two firms in favour of the creditors of those two firms were renewed
by issuing deposit receipts in the name of company in liquidation and by making payments towards interest on the deposit amounts with the two
firms from and out of the funds of the company in liquidation. According to the statement of P.C. Varghese, recorded on January 4, 1994 and
January 6, 1994, by the official liquidator those writings in pencil have been made by B. Rajagopal. It is evident from this that B. Rajagopal is the
pivotal person in respect of the affairs and business of the company in liquidation. From the available records of the company in liquidation and the
report of the auditors N. T. Arasu and Company, as well as the proceedings in C. P. No. 88 of 1989, it is seen that the company in liquidation did
business with non-members also. As per the statement of P.C. Varghese recorded by the official liquidator on January 6, 1994, consequent to the
inspection conducted by the Reserve Bank of India on the accounts of the two firms, B. Rajagopal gave instructions to write up the minutes of the
company in liquidation and accordingly the minutes of the company in liquidation were written up at the residence of V. Parameswaran and that
most of the minutes were written up on a particular day as if the meetings were held periodically. It is clear that proper minutes books were not
maintained and that the minutes of the board of directors as well as the minutes of the general body of company in liquidation were written up after
the search and seizure on March 1, 1986, by the CB CID at the instance of the Reserve Bank of India, Bangalore. The details of various
companies working under the name and style Dhanalakshmi groups of companies have been mentioned in para. 27 of the report. During the
inspection of the records of the Registrar of Companies, Tamil Nadu, it is found that K.V. Sasidhar and B. Rajagopal were either the signatories to
the memorandum and articles of association or the directors of the companies except in some of the companies of the group. In the records
available B. Rajagopal is termed as group president and K.V. Sasidhar is termed as chairman of the Dhanalakshmi group of companies.
As per the statement of the administrators in their report in October, 1990, filed before this court in C. P. No. 88 of 1989, a total sum of Rs.
33,57,350.16 was due and payable to the company in liquidation by the sister concerns of the Dhanalakshmi group. In spite of request by the
concerned authorities, the books and accounts of the associate companies were not produced. The very fact that the books of account of the said
associate companies were not produced lends credence to the diversion of funds from the company in liquidation to its associate concerns. P.C.
Varghese has submitted to the official liquidator a copy of his letter dated October 10, 1988, to K.V. Sasidhar, B. Rajagopal, B. Muralidhar and
K.V. Vijayakumar to the effect that on various occasions on their advice, he had been transferring heavy amounts to their sister concerns and that
they have not left sufficient assets to answer the creditors and that they are responsible for all their and his acts since the same was done at their
instigations. The report further says in that letter they have clearly stated that with their full knowledge and clear mind own their responsibilities,
liabilities, claims, etc., in respect of any consequences, actions, either civil, criminal or statutory that may arise on account of the acts of P.C.
Varghese of commissions, omissions, non-fulfilment of certain legal formalities, etc., which have been done solely on account of their advice and on
their behalf. P.C. Varghese has also produced a copy of the letter dated January 27, 1986, signed by B. Rajagopal as the corporate director of
Dhanalakshmi group wherein it is stated that he takes immense pleasure in informing that with effect from December 7, 1985, the company in
liquidation has taken over the entire rights, assets, liabilities, guarantees, staff, management and other related obligations of M/s. Asian Integrated
Finance and Industrial Corporation. P.V. Varghese has also produced a copy of the deposit certificate in the name of A. Rosaline jointly with Mrs.
M. Mary for Rs. 3,000 issued on July 19, 1986, the date of maturity being July 19, 1989, to indicate that it was issued by Dhanalakshmi Funds
(India) Ltd., as proprietor of the firm Dhanalakshmi Consolidates Finance and Industrial Investments and signed by director/authorised signatory
B. Rajagopal. In the statement recorded by the official liquidator on January 6, 1994, P.C. Varghese has stated that there were transfer of funds
from the company in liquidation to various sister concerns of the group as per the instructions of B. Rajagopal and K.V. Sasidhar. He has further
stated that B. Rajagopal and K.V. Sasidhar are the promoters of the company in liquidation and that they have been giving directions and
instructions to manage the day-to-day affairs of the company in liquidation. After referring to the report of the administrators, auditors and the
details regarding various fixed deposits, it is stated that the partners of the two firms, namely, respondents Nos. 8 to 10 are the pivotal persons
who have conducted the business in the name of the company in liquidation and they are equally liable to the depositors/creditors of the company
in liquidation even though not inducted as directors of the company in liquidation. They have siphoned off funds of the company in liquidation to
their sister concerns.
In para. 41 of the report of the official liquidator, various charges levelled against respondents Nos. 1 to 10 have been enumerated. It includes
payment of Rs. 3,50,00,000 to various depositors, loss of Rs. 9,44,114 incurred due to disbursement of housing loans, false promissory notes to
the extent of Rs. 77,63,210, jewel loan to the extent of Rs. 57,69,200, teachers'' loan to the extent of Rs. 3,12,120, utility loan to the extent of Rs.
1,65,83,950, loss of Rs. 69,47,900 towards loans on deposits, a sum of Rs. 1,15,241.95 towards diversion of funds against vehicle maintenance,
loss of Rs. 3.94 crores due to transfer of funds to the sister concerns. Thus, the company in liquidation has lost an aggregate sum of Rs.
18,32,39,002 and respondents Nos. 1 to 10 are liable to make good the loss and to compensate the said loss. They are jointly and severally liable
for the said amount. All of them are guilty of misfeasance and breach of trust in relation to the affairs of the company in liquidation.
The respondents have filed a separate counter affidavit disputing various averments made by the official liquidator. I am of the view that instead
of referring to those averments in the counter affidavit, it is suffice to refer to the affidavit filed by B. Rajagopal for himself and on behalf of B.
Muralidhar in Company Application No. 1321 of 2001 seeking for an order to discharge them from the proceedings under Sections 542 and 543
of the Companies Act initiated by the official liquidator in C. A. No. 888 of 1995 in C. P. No. 88 of 1989. It is stated that both of them were
carrying on business of accepting deposits from members of the public at interest and advancing the money on interest. The firm was regularly
paying interest to the depositors and the principal amount on maturity, Section 45B of the RBI Act imposed restrictions on entities other than
incorporated companies from accepting deposits from public. In the circumstances, the first applicant, namely, B. Rajagopal and the second
applicant K.V. Sasidhar, respondents Nos. 8 and 10 in C. P. No. 888 of 1995 decided to close down the finance business run by the firm. A
company promoted by respondents Nos. 1 to 7 in C. P. No. 88 of 1989 offered to take over the assets and liabilities of the firm and accordingly,
the assets and liabilities of the firm were taken over by the company as reported by the official liquidator. The said company, namely,
Dhanalakshmi Funds India Ltd. was incorporated with the object of accepting deposits and lending money on interest to its members as a ""Nidhi
company. The applicants in this application were not inducted as directors of the company. They were not involved in the day-to-day management
of the company. For a while, the first applicant was helping K.V. Sasidhar to evolve broad policy matters as requested by him. In Priya Rubber
Estates and Plantations Pvt. Ltd., the first applicant was a non-executive director and K.V. Sasidhar was the chairman and managing director who
was controlling the affairs of the company. All investment decisions were made by K.V. Sasidhar only. The board of management in the two
companies were vested with the relatives and confidants of K.V. Sasidhar. But misunderstandings arose between the applicants herein and K.V.
Sasidhar and the applicants herein resigned from the directorship in consequence of the misunderstanding during end of 1986. Though the
company was regularly paying interest and deposit amounts to the depositors, due to adverse business conditions the company was unable to pay
interest to the deposits and repay the matured amounts. In these circumstances, one of the depositors filed C. P. No. 88 of 1989 for winding up
the company u/s 433(e) and 433(f) of the Companies Act. By order dated November 16, 1990, the company was ordered to be wound up and
the official liquidator was appointed as the liquidator of the company. Though the official liquidator has filed the above application in 1994, the
same was not pursued for many years after it was filed. If the official liquidator''s office had pursued the applications diligently in the context of the
affidavit filed by K.V. Sasidhar owning responsibility for the conduct of the business of the company and offering to settle the dues by sale of
assets worth Rs. 14 crores the official liquidator would have been able to realise substantial amounts and paid off the depositors.
The signatories to the memorandum and articles of association of the company at the time of formation did not include the signature of the
applicants. Neither of the applicants were on the board of directors of the company. In the course of carrying on the business of the company
certain management decisions had been proved to be unwise later on and because of that the company incurred loss. The object of the company
was to carry on business as a ""Nidhi"" company which purpose is lawful and cannot be stated as fraudulent. To fall within the mischief of Section
542 the company ought to have carried on business and incurred debt at a time when there is, to the knowledge of the directors, no reasonable
prospects of creditors ever receiving payments. Taking over the business of the firms by incorporated companies is an accepted method of
carrying on business. No irregularity or illegality can be attributed to it. The take over of the business of the two firms were in pursuance of the
board''s resolution dated August 31, 1985, confirmed by a general body resolution in extraordinary general meeting held on September 1, 1985.
P. C. Var-ghese was an executive director holding wide powers in the company and the other directors were persons with profound banking
experience. P.C. Varghese was in charge of the affairs of the company. That being the case, he had vested interest in making the statement and his
statements have to be taken with a pinch of salt and cannot be relied upon and had to be put to independent proof. The applicants had no financial
interest in the company, neither were they holding any shares in the company. The pencil notings can, at the most, be considered as suggestions in
structuring the minutes made on casual consultation. K.V. Sasidhar himself has owned complete responsibility for the conduct of the business of the
company. On an overall perusal of the official liquidator''s report, it is evident that K.V. Sasidhar and his family members were having substantial
stake and interest in the companies stated to be in the group, and K.V. Sasidhar alone was the moving spirit behind all the concerns. The first
applicant at all points of time had little financial interest in any of the companies. For some time, the first applicant acted in the capacity of a non-
executive director in some of the companies and due to difference of opinion he had resigned and relinquished the said position. The statement of
P.C. Varghese is self-serving and it has no evidentiary value. It was K.V. Sasidhar who had control over the assets of various companies and he
was the pivotal person behind the group of companies where neither of the applicants had beneficial interest. K.V. Sasidhar passed away on
February 13, 1999. It is totally unfair to take action against the applicants after having failed to take action in terms of the offer made by K.V.
Sasidhar during his lifetime. The present proceedings under Sections 542 and 543 are vexatious and is the result of a conspiracy to cover up the
misdeeds of the official liquidator and is an abuse of the process of this court. The applicants cannot be held liable either jointly or severally for the
said loss. The present proceedings u/s 542 of the Act are misconceived and is a result of afterthought.
Though the other respondents have filed a counter affidavit highlighting their stand, in view of their stand taken therein, namely, accusing
respondents Nos. 8 to 10 for all misdeeds, I am of the view that it is unnecessary to refer to the same.
In the light of the above pleadings, I have heard Mr. Arvind P. Datar, learned senior counsel for applicant/official liquidator ; Mr. R.
Vedantham Srinivasan, learned senior counsel and Mrs. Nalini Chidambaram, learned senior counsel for respondents Nos. 8 and 10 ; Mr. P. N.
George Graham for the seventh respondent and Mr. S. Rajeswaran for the third respondent.
For convenience I shall refer to the parties as described in Company Application No. 888 of 1995. The material particulars, relevant dates and
events are stated hereunder. Dhanalakshmi Consolidates Finance and Industrial Investments, a partnership firm in which K.V. Sasidhar, the ninth
respondent herein and B. Rajagopal, the eighth respondent herein were partners. The business of the firm was to accept deposits from the public
for interest and deploy the funds in various activities and pay the interest and principal from the income arising from the said business. On
November 2, 1983, P.C. Varghese, the seventh respondent herein, was appointed as junior accounts officer in the firm. The Banking Laws
(Amendment) Act, 1984, introduced Chapter III-C to the Reserve Bank of India Act, 1934. Section 45B of the Act provides that deposits are
not to be accepted in certain cases. The Reserve Bank of India prohibited partnership firms from carrying on finance business. In view of the
statutory restrictions, the firms ceased carrying on business. On August 9, 1985, Dhanalakshmi Funds (India) Ltd. (in short ""DFIL"") was
incorporated as a ""Nidhi"" company with the object of receiving long and short-term deposits from the members and granting loans to the members
against securities. On August 22, 1986, DFIL was declared a ""Nidhi"" u/s 620A of the Companies Act, 1956 (hereinafter referred to as ""the Act"").
It is further seen that P.C. Varghese, seventh respondent herein, signed the memorandum and articles of association. The following persons,
namely, (1) V. S. Sridhar ; (2) T. Sudharshan ; (3) V. Parameshwaran ; (4) C. P. Viswanathan ; (5) M. V. Krishnan ; (6) V. Prabakaran ; and (7)
P.C. Varghese were the signatories to the memorandum and articles of association and first directors of the company. Those persons are arrayed
as respondents Nos. 1 to 7 in Company Application No. 888 of 1995. It is further seen that a resolution was passed on August 31, 1985, by the
board of directors of the company in liquidation to take over the assets and liabilities of two firms, namely, (1) Asian Integrated Finance and
Industrial Corporation ; and (2) Dhanalakshmi Consolidates Finance and Industrial Investments. It is also seen that the two firms were taken over
by the company in liquidation on December 7, 1985, and the firms dissolved. On July 26, 1989, one of the depositors, namely, O. V.
Subramanian filed C. P. No. 88 of 1989, before the company court for winding up DFIL on the ground that the company is unable to pay its debts
u/s 433(e) of the Companies Act. As per the orders of this court, K.V. Sasidhar, the ninth respondent herein and T. Ramakrishnan, advocate of
this court were appointed as administrators of the company in liquidation. On November 16, 1990, DFIL was ordered to be wound up by this
court in Company Petition No. 88 of 1989 and the official liquidator was appointed as liquidator of the company. The two joint administrators
referred to above were discharged in the same order for non-submission of returns. On August 9, 1991, on the appointment of the liquidators, the
official liquidator took into the custody of all the books and records of the company. It is further seen that a sum of Rs. 3,80,345 has been realised
by official liquidator by sale of movable assets. Rs. 64,20,286 is in deposit in the name of DFIL in Catholic Syrian Bank, Royapettah, Madras 14
remitted to the account of official liquidator in C. A. No. 1202 of 1991. On November 26, 1993, this court appointed M/s. V. T. Arasu and
Company as auditors to carry out the accounts and affairs of the company. On January 4, 1994, and January 6, 1994, former director P. C
Varghese, seventh respondent herein, made a statement and the same was recorded by the official liquidator under rule 130 of the Companies
(Court) Rules, 1959 (hereinafter referred to as the ""Rules""). In the statement, P.C. Varghese has asserted that B. Raja-gopal, eighth respondent
herein is the group president of the Dhanalakshmi group of companies, K.V. Sasidhar, ninth respondent herein, is the group chairman of the
Dhanalakshmi group of companies and the two were the promoters of the company. He also stated that respondents Nos. 1 to 7 were the
employees of the erstwhile firms and signed the memorandum and articles of association at the behest of respondents Nos. 8 to 10. In Company
Application No. 2224 of 1993 filed by the official liquidator for permission to appoint an auditor to investigate into the affairs and accounts of
DFIL. The auditors submitted a report to the official liquidator. Based on the report, the official liquidator filed a report for orders under Sections
542 and 543 of the Act.
Now I shall refer to the relevant details from the report of the official liquidator. It is seen that the business of the company in liquidation has
been carried on with the intent to defraud the interest of the company in liquidation and the respondents, i.e., the directors of the company and B.
Rajagopal and B. Muralidhar, respondents Nos. 8 and 10 respectively have misappropriated and retained or became liable or accountable for the
money or property of the company in liquidation and have been guilty of misfeasance or breach of trust in relation to the company in liquidation.
Even though B. Rajagopal, K.V. Sasidhar and B. Muralidhar, respondents Nos. 8 to 10 respectively were not directors of the company, they have
been actually carrying on the business of the company and misapplied the funds or money or property of the company and are guilty of
misfeasance and breach of trust In addition to these respondents, respondents Nos. 1 to 7, the directors of the company, who had acted in aid and
assistance of respondents Nos. 8 to 10, with intent to defraud the creditors of the company, are also guilty of misfeasance and breach of trust. The
board of directors of the company on August 31, 1995, passed resolutions for taking over the assets and liabilities of the two firms. Even though
the firms were taken over and dissolved on December 7, 1985, there is no reference to this event either in the directors'' report or audited annual
accounts for the year ended December 31, 1986, dated January 16, 1987. The official liquidator has received 4,421 claims claiming various
amounts aggregating to Rs. 7,04,03,266.22, some of the claims are based on F. D. receipts issued by the two firms and some based on F. D.
receipts issued by the company. According to the statement of P.C. Varghese, certain pencil notings in the minutes books are of B. Rajagopal and
hence it is evident that B. Raja-gopal is the pivotal person in respect of the affairs and business of the company. The minutes of the meetings signed
by the directors does not contain the list of members attended the meeting. The report of the auditor as well as proceedings in C. P. No. 88 of
1989 shows that the company did business with non-members also. As per P.C. Varghese''s statement, B. Rajagopal gave instructions to write up
the minutes books of the meeting at the residence of V. Parameswaran, another director. P.C. Varghese also stated that he had never attended the
board meeting. Based on the above aspects, the official liquidator concluded that it is clear that the minutes of the board meetings was not
maintained properly.
From the statement of P.C. Varghese, it is evident that B. Rajagopal has given an advertisement in News Today that the two firms have been
taken over by the company. Respondents Nos. 8 to 10 are common directors in most of the companies. I have already referred to the fact that as
per the records available, B. Rajagopal is termed as group president and K.V. Sasidhar is termed as chairman of the Dhanalakshmi group of
companies. It is further seen that the Department of Company Affairs has taken up inspection of books and accounts of three of the limited
companies to examine the flow of funds from the company in liquidation to the said companies. As far as the company M/s. Mazda Agro
Engineering and Exports Private Limited is concerned, K.V. Vijayakumar was the managing director from January 31, 1987 and K.V. Sasidhar
and A.V. Prabhakar were inducted as additional directors in the board meeting held on October 4, 1989. The managing director of the said
company has evaded to produce the books and records of that company for inspection by the Department of Company Affairs. Dhanalakshmi
Consolidates Transports Private Limited was incorporated on September 12, 1983 and B. Rajagopal and K.V. Sasidhar are the subscribers to
the memorandum and articles of association of the company and the annual return was made up to June 22, 1987 only and the balance-sheet as on
December 31, 1986, was filed with the Registrar of Companies, Tamil Nadu. Since the books of account were not produced, it is presumed that
there are diversion of funds from the company in liquidation to its associate concerns.
It is further seen that P.C. Varghese produced a copy of letter dated October 10, 1988, to K.V. Sasidhar, B. Rajagopal, B. Muralidhar and
K.V. Vijayakumar stating that on various occasions, on their advice, he had been transferring heavy amounts to their sister concerns and that they
have not left sufficient assets to answer the creditors and that if they do not take corrective measures to set things right, they will be personally
liable. A copy of the letter dated October 11, 1988, from K.V. Sasidhar and B. Rajagopal and P. C Varghese shows that they have admitted and
owned financial responsibilities and liabilities on account of P.C. Varghese''s actions done by him on their behalf and also exonerated P.C.
Varghese.
It is further stated that a copy of the letter dated January 27, 1986 signed by B. Rajagopal as the corporate director of Dhanalakshmi group
stating that with effect from December 7, 1985, DFIL has taken over M/s Asian Integrated Finance and Industrial Corporation. Before the official
liquidator, P. C. Var-ghese has produced a copy of the deposit certificate in the name of A. Rosaline jointly with M. Mary for Rs. 3,000 issued on
July 19, 1986, the date of maturity being July 19, 1989, to indicate that it was issued by Dhanalakshmi Funds (India) Limited as proprietor of the
firm Dhanalakshmi Consolidates Finance and Industrial Investments and signed by director/authorised signatory B. Rajagopal.
P.C. Varghese has also stated that after the firms were taken over, the deposit certificates were signed by B. Rajagopal in respect of the firm
Dhanalakshmi Consolidates Finance and Industrial Investments and by K.V. Sasidhar in respect of the firm M/s. Asian Integrated Finance and
Industrial Corporation and the certificates of the company in liquidation were issued by renewing the deposits of the firm. P.C. Varghese has also
stated that there was transfer of funds from the company in liquidation to various concerns of the group as per the instructions of B. Rajagopal and
K.V. Sasidhar. He described B. Rajagopal and K.V. Sasidhar as the promoters of the company giving directions and instructions to manage the
day-to-day affairs of the company and that he had been carrying out their instructions. He further stated that K.V. Sasidhar and B. Rajagopal
instructed him to open bank accounts with various banks at Madras and other places wherever the company''s branches were situated. He also
stated that the bank accounts were opened in the name of the company in liquidation and the accounts were operated by K.V. Vijayakumar and
thereafter he was instructed by K.V. Sasidhar and B. Rajagopal to sign the cheques prepared and verified by the accounts department and V. S.
Sridhar has been operating the bank accounts.
P.C. Varghese has stated that jewel loans were given by Asian Integrated Finance and Industrial Corporation and he is unaware of the quantity
of jewels held by the said firm. The official liquidator has not been given custody of the jewels and the administrator appointed in respect of the
company also has not handed over any jewels to the official liquidator.
It is further seen from the report that the minutes of the first meeting of the administrator (K.V. Sasidhar and advocate T. Ramakrishna) held on
July 19, 1990 shows that K.V. Sasidhar explained in brief the history of the company. He also apprised of the non-participation of erstwhile
directors creating a deadlock in the day-to-day administration of the company. By report dated October 4, 1990, submitted by auditors R. Ranga
Rao, it is observed that the authenticity of the loans purported to have been given by the company to the various borrowers appears to be in
doubt.
A careful analysis of the report of the official liquidator would show that the partners of the two firms, namely, B. Rajagopal, K.V. Sasidhar
and B. Muralidhar, i.e., respondents Nos. 8 to 10 respectively are the pivotal persons who have conducted the business on DFIL and they are
equally liable to the depositors. The report also shows that they have siphoned off funds to the sister concerns. The directors viz., respondents
Nos. 1 to 7 also cannot escape their joint and several liability since they acted in collusion with respondents Nos. 8 to 10.
Mr. Arvind P. Datar, learned senior counsel for the official liquidator, after taking me through the report of the auditors, followed by the official
liquidator, would contend that respondents Nos. 1 to 10 are liable for (1) disbursement of housing loans ; (2) creating false pronotes ; (3) jewel
loan ; (4) teachers'' loan; (5) utility loan; (6) diversion of funds against vehicle maintenance; and (7) transfer of funds to sister concerns. According
to Mr. Arvind P. Datar, the company had lost Rs. 18,32,39,002 under the above accounts and respondents Nos. 1 to 10 are liable to make good
the loss. He also contended that they are jointly and severally liable and pay to the official liquidator a sum of Rs. 18,32,39,002. He further
requested that in the light of the details from the report as well as the statement of P.C. Varghese to declare that respondents Nos. 1 to 10 have
misapplied, retained or become liable or accountable for the money and property of the company or were guilty of misfeasance and breach of trust
and that a total amount of Rs. 18,32,39,002 was totally lost to the company and respondents Nos. 1 to 10 are liable to contribute to the assets of
the company by way of compensation.
Mr. R. Vedantham Srinivasan, and Mrs. Nalini Chidambaram, learned senior counsel for respondents Nos. 8 and 10, after referring to the
relevant provisions from the Companies Act and Rules, would contend that since proceedings under Sections 542 and 543 of the Companies Act
are quasi-criminal in nature, the standard of proof is beyond reasonable doubt and not based on preponderance of probabilities. In addition to the
above contentions, learned senior counsel point out that the reports state that the two firms of which B. Rajagopal and B. Muralidhar were
partners, were collecting substantial sums from the public under special F. D. Scheme. The assets of the two firms were taken over by the
company Dhanalakshmi Funds (India) Limited which was incorporated on August 9, 1985. The company became a nidhi company and thereafter
accepted deposits from the public. The allegation is that the deposits were mobilized by B. Rajagopal and K.V. Sasidhar and the deposit receipts
were signed by B. Rajagopal. All the deposit receipts are of the firm Dhanalakshmi Consolidates Finance and Industrial Investment, a partnership
firm in which K.V. Sasidhar was the managing partner and B. Rajagopal was a partner. All the deposit receipts produced are in the name of the
firm. While B. Rajagopal accepts that he was a partner in the firm, after the company was incorporated, K.V. Sasidhar was in total charge of the
company. Some of the printed receipts of the firm have been used by the company. All the deposits receipts carry B. Rajagopal''s printed
signature. But the receipts are signed by secretaries. Some of the receipts carry the signature of P.C. Varghese. In so far as the letter dated
January 21, 1986, is concerned, the description of B. Rajagopal as a corporate director has no significance since the letter was written soon after
the take over of the assets of the firm by the company. The contents of the letter only indicate that B. Rajagopal is informing about the transfer of
the assets from the firm to the company. As far as the document relating to the information regarding the take over of the M. G. Brother Lorry
Service is concerned, it is only a printed circular bearing the printed signature of B. Rajagopal. It is not a letter inviting deposits from the public as
made out by the auditor. The letter dated May 6, 1987, pertains to Dhanalakshmi Consolidated Trust Limited and hence has got no connection
with the Dhanalakshmi Funds (India) Limited which took over the assets of the firm. The public notice does not pertain to DFIL. The documents
do not pertain to DFIL. The self-serving letter of P.C. Varghese dated October 10, 1988 and the letter dated October 11, 1988, allegedly written
in reply to the letter of P.C. Varghese are fabricated documents. B. Rajagopal denies having written the said letter. The document pertains to the
annual return for the year ending December 31, 1987, filed by the company on November 30, 1988, wherein P.C. Varghese and V.S. Sridhar
have signed and forwarded the document for filing with the Registrar of Companies. If in fact P.C. Varghese had disowned the responsibility for his
conduct, it is improbable that he would have signed annual return of the company on November 30, 1988, just one month after his alleged letter
dated October 10, 1988. The letter dated October 10, 1988, alleged to have been sent by P.C. Varghese to four different addresses by
registered post with acknowledgment due and the reply letter dated October 11, 1988, are concocted documents to extricate himself from any
liability which may arise out of his functioning as finance manager and secretary of the company. If according to P. C Varghese he had disowned all
his responsibilities and V. S. Sasidhar and B. Rajagopal have owned the responsibility, it is curious that B. Rajagopal will be writing to the assistant
manager, DFIL, to co-ordinate with P.C. Varghese to set right the accounts issue. Also it is curious that P.C. Varghese would have acted on the
letter dated December 15, 1988, written by one Thirunavuk-karasu, if P.C. Varghese had already downed his responsibilities from DFIL. What is
relevant is whether B. Rajagopal was in charge of running the company and whether he can be held liable u/s 543 of the Companies Act. The most
significant documents are the two affidavits filed by K.V. Sridhar owning responsibility for the conduct of the business of the company and
curiously both the affidavits are missing both from the file of the official liquidator''s office and this Court Registry.
Pursuant to the orders of this court dated November 16, 1990, ordering winding up of the company in liquidation, auditors were appointed to
go into the affairs of the company. After collecting books of account from various places and after scrutiny, they submitted a report. Based on the
report of the auditors and after considering the statement of P.C. Varghese made on January 4, 1994, and January 6, 1994, under rule 130 of the
Rules, the official liquidator has arrived at a conclusion that the respondents, more particularly respondents Nos. 8 to 10 committed several
irregularities, mismanaged the affairs of the company in liquidation, diverted funds of the company for their use, transferred funds to sister concerns
and because of their act, the company in liquidation has lost an aggregate sum of Rs. 18,32,39,002. It is the specific case of the official liquidator
that all of them are guilty of misfeasance in relation to the affairs of the company in liquidation.
Now I shall consider whether the present proceedings initiated under Sections 542 and 543 of the Companies Act are maintainable ; whether
the statement of P.C. Varghese can be taken note of; and whether the official liquidator is entitled for any relief in Company Application No. 888
of 1995 ? Incidentally I shall also consider the claim of respondents Nos. 8 and 10 in Company Application No. 1321 of 2001.
Learned senior counsel for respondents Nos. 8 and 10 by referring a decision in Smt. Abhilash Vinodkumar Jain Vs. Cox and Kings (India)
Ltd. and others, , would contend that the proceedings u/s 630 of the Companies Act is a quasi-criminal in nature. While construing Section 630 of
the Act, their Lordships of the Supreme Court have held that the provisions are quasi-criminal and that they have been enacted with the main
object of providing speedy relief to a company when its property is wrongfully obtained or wrongfully withheld by an employee or officer or an ex-
employee or ex-officer or anyone claiming under them. They further held that a proper construction of the section would be that the term ""officer or
employee"" of a company in Section 630 of the Act would by a deeming fiction include the legal heirs and representatives of the employee or the
officer concerned continuing in occupation of the property of the company after the death of the employee or the officer. The said decision makes
it clear that action can be taken even against the legal heirs and representatives of the employee or the officer concerned continuing in occupation
of the property of the company after the death of the employee or the said officer. The said decision is not with reference to Sections 542 and 543
of the Act; hence the same is not helpful to the respondents.
It is contended on the side of respondents Nos. 8 and 10 that misfeasance is a serious charge, accordingly the application should contain
specific acts of commissions and omissions on the part of the each of the directors. They also contended that the burden of proof is on the
liquidator. It is also contended that the liquidator is under a misconception that proceedings relating to misfeasance are summary in nature. It is their
contention that the proceedings being in the nature of quasi-criminal, the liquidator is bound to examine himself and witnesses giving a right of
cross-examination to the directors and persons charged with misfeasance. They also contended that the confession of a co-accused cannot form
the basis of proceedings against another accused. According to them, the statement of P.C. Varghese cannot be construed as evidence within the
meaning of Section 3 of the Indian Evidence Act. It is further contended that the self-serving documents and statements of a director, who is also
impleaded as a respondent in misfeasance proceedings, cannot be the basis for proceedings against B. Rajagopal and B. Muralidhar. It is relevant
to refer a decision of the Supreme Court in Ramanbhai Nagjibhai Patel Vs. Jashvant Singh Udesingh and Others, , wherein the Supreme Court has
held that in election case, the charge of bribery should be proved beyond reasonable doubt. The Supreme Court has also held that the evidence
must be (1) clear cut; (2) wholly credible; and (3) reliable. I have already extensively referred to the report of the official liquidator and the
chartered accountant. As rightly contended by Mr. Arvind P. Datar, the report of the official liquidator and the chartered accountant satisfied the
three requirements as pointed out by the Supreme Court. The other decision referred to by the learned senior counsel for respondents Nos. 8 and
10 is in the case of Anantharam Veerasinghaiah and Co. Vs. Commissioner of Income Tax , Andhra Pradesh, , which related to penalty
proceedings under the Income Tax Act wherein the Supreme Court has held that the tax authority must consider the matter afresh in penalty
proceedings. As rightly pointed out, this case will have no relevance at all to the present case. Another decision, namely, Laxmi Narayan Nayak v.
Ramratan Chaturvedi : AIR1991SC2001 by the contesting respondents relates to corrupt practice under election case under the Representation of
People Act, 1951, wherein the Supreme Court has held that the evidence was inconsistent and vague and that strict proof is necessary. The other
decision, namely, H.V. Panchaksharappa Vs. K.G. Eshwar, , referred to by the learned senior counsel for respondents Nos. 8 and 10 relates to
professional misconduct of an advocate and the other decision in J.R. Parashar, Advocate and Others Vs. Prasant Bhushan, Advocate and
Others, relates to the Contempt of Courts Act. After going through the factual details, I am of the view that these cases are not helpful to
respondents Nos. 8 and 10. On the other hand, it is demonstrated before me by learned senior counsel for the official liquidator that the facts
necessary to establish liability under Sections 542 and 543 of the Act have been established in the light of the detailed report filed by the auditors
and the pleadings of the parties as well as the subsequent documentary evidence.
The report of the official liquidator contains specific acts of omission and commissions on the part of respondents Nos. 8 and 9. It also refers
to the role of the tenth respondent as a promoter of the company. The burden of proof has been discharged by the official liquidator in placing the
evidence of fraud, misfeasance etc., before this court. The details furnished by the official liquidator satisfied the requirements specified in Official
Liquidator v. Raghawa Desikachar [1975] 45 Comp Cas 136. Sections 478 and 519 of the Act confer discretionary powers on the court and the
right of cross-examination will depend on the facts and circumstances of the individual case. Admittedly, respondents Nos. 8 and 10 have not
challenged the official liquidator''s report by filing counter affidavit and also have not been able to controvert or dispute the averments in the official
liquidator''s report. In such a circumstance as rightly contended, the question of cross-examination does not arise.
Coming to the argument relating to ""confession of co-accused"", the principles regarding confession of co-accused and evidence will have no
application in the present case. The report is primarily regarding fraudulent diversion of funds into various new companies, bogus entries regarding
jewel loan, teacher loan, utility loan etc. There is ample evidence from the auditor''s report and the statement of P.C. Varghese corroborates the
findings of the auditor.
A reading of Section 477 of the Act shows that it enables the court to summon the persons not only who have property of the company but
also persons who are concerned with the promotion, formation, dealings etc. or affairs of the company. In such a circumstance, there is no
requirement that recovery has to be only under the general civil law. Further, Section 542 applies not merely to officers or directors but also to a
person described as ""group president"", if he has exercised control over the affairs of the company. The entire evidence clearly points to the deep
involvement of B. Rajagopal, K.V. Sasi-dhar and B. Muralidhar and they cannot escape by taking the plea that they are not directors. Section
2(30) of the Act defines an officer to include persons in accordance with whose directions or instructions, the board of directors is accustomed to
act. Section 7 excludes cases where the advice is given by a person in professional capacity. By reading both these provisions together, it is clear
that these persons, namely, B. Rajagopal, K.V. Sasidhar and B. Muralidhar respondents Nos. 8 and 10, though not directors of the company, are
officers in terms of Section 2(30) and will be liable under both Sections 542 and 543 of the Act, The particulars furnished in the official liquidator''s
report show that the company was never a board managed company. It was run like a partnership firm which respondents Nos. 8 and 10 acting
like managing partners. It also shows that various investments have been made in promoting new companies by diverting funds of Dhanalakshmi
Funds (India) Ltd. These decisions were not taken by the board but respondents Nos. 8 to 10 unilaterally. The liability of these persons is not
merely on the statement of any outsider, but it is clear from the report of the auditor and also various documents filed before this court.
Now I shall consider the liability under Sections 542 and 543 of the Act. The language used in Section 542 covers ""any other person"" ;
accordingly this will apply to group president, chairman and B. Muralidhar. As far as Section 543 is concerned, it will apply to promoters of the
company. A reading of Sections 542 and 543 and the report of the official liquidator based on the auditor''s report and statement of P.C.
Varghese would show that the conditions stated in both these provisions will cover B. Rajagopal and B. Muralidhar, respondents Nos. 8 and 10
respectively. I have already referred to the fact that the chartered accountants M/s. N. T. Arasu and Co. had submitted their report after
examination of whatever records were available. Based on the report of the chartered accountants, the official liquidator has made his report in
support of the present application under Sections 542 and 543 of the Act. No doubt, respondents Nos. 8 and 10 (ninth respondent is no more)
filed a counter affidavit in this application as well as Company Application No. 1321 of 2001 wherein they completely denied their involvement in
the company. However, the auditor in his report on examination of documents/letters/correspondences, arrived at a conclusion that B. Rajagopal
was the group president and K.V. Sasidhar was the group chairman. During the course of argument, learned senior counsel for the official
liquidator has produced certain original documents and xerox copies of all the documents. The signature of B. Rajagopal, eighth respondent found
in the original and in the affidavit filed before this court tallies with the signature in all other documents filed in this court. Mr. Arvind P. Datar has
also stated that the documents filed are only samples and there are numerous letters written by B. Rajagopal and K.V. Sasidhar. In , so far as B.
Muralidhar is concerned, he had been the erstwhile partner in the firm (M. G. Brothers Lorry Co.) which were then converted into companies. A
perusal of the official liquidator''s report shows that there are several serious charges. They are :
(1) Formation of Dhanalakshmi Funds (India) Ltd., by take over of all assets and liabilities of the two firms ;
(2) Non-repayment of deposits by the two firms, formation of company to circumvent obligation, though respondents Nos. 8 to 10 were not
directors, as per available records, they have been actually carrying on the business of the company in liquidation ;
(3) Balance-sheets for December 31, 1986, and December 31, 1987, are not available amongst records of the company ;
(4) Criminal cases pending against the erstwhile two firms for non-repayment of deposits ;
(5) All the assets and effects of the aforesaid two firms were not made over to the company in liquidation but deposit receipts were issued by the
two firms in favour of the creditors by the company in liquidation, thus the company was made liable without transfer of corresponding assets ;
(6) B. Rajagopal was the pivotal person in respect of the affairs of the company and the business in liquidation ;
(7) Several new companies were started and no information as to the status of these companies, and how the funds were invested, sources of
funds, assets and liabilities, etc. B. Rajagopal has himself written family letters regarding acquisition of M. G. Brothers and Gangothri Chemicals.
(8) Letter dated October 10, 1988, of P.C. Varghese and admission of B. Rajagopal and B. Muralidhar (letter dated October 11, 1988) ;
(9) Company have 14,000 deposit holders with deposits of Rs. 10.5 crores. Loans of Rs. 3.9 crores had been advanced to sister concerns ;
(10) Serious charges regarding falsification of records, non-existence of borrowers for jewel loans, housing loans, teachers loan, false pronote
loans, etc.
(11) Total loss to the company in liquidation is Rs. 18,32,39,002. Though B. Rajagopal, eighth respondent initially has stated that himself and 10th
respondent have nothing to do with the company, on examination of the records, it was found that B. Rajagopal was the group president and B.
Muralidhar was in charge of the MG Brorthers Lorry Services. In view of the stand taken by him, original documents were placed before this
court. A careful perusal of the same would show that he had signed various letters as group president. Several letters produced contain the
signature of B. Rajagopal as group president. It was he who took decision regarding posting of persons, as branch managers. He signed in fixed
deposit receipt and also informed all deposit holders about the take over of different companies. The records produced also show that Rajagopal
along with K.V. Sasidhar and B. Muralidhar were de facto in charge of the affairs of the company. As rightly contended, they have not placed
themselves as directors in order to avoid any statutory liability. In view of the details furnished in the official liquidator''s report I am not referring to
each and every incident elaborately in this order. The documents and records as well as the auditor''s report clearly show that B. Rajagopal, and
K.V. Sasidhar and B. Muralidhar, respondents Nos. 8 to 10 were in charge of the affairs of the business. As rightly contended, except the general
denial in the counter affidavit, they have not substantiated their defence by placing acceptable materials before this court. There is ample evidence
to show that respondents Nos. 8 to 10 received deposits and used them to start new companies. At that time the funds were used recklessly and
carelessly. The funds were invested with full knowledge that there was no reasonable prospects of repaying the deposits. As pointed out in Official
Liquidator, Palai Central Bank Ltd. (in liquidation), Ernakulam Vs. K. Joseph Augusti, Kayalackakam House, Palai and Others, , misapplication
u/s 543 need not involve mens rea. Likewise, if there is gross negligence, Section 633 cannot afford any relief. It is settled position that if a person
has been grossly negligent, it can scarcely be said that he has acted reasonably. As rightly argued, once misapplication is proved, the burden of
proving that he acted honestly and reasonably lies on the alleged delinquent.
Both the learned senior counsel appearing for respondents Nos. 8 and 10 contended that they lost the right of cross-examination due to non-
examination of witnesses before this court. In this regard, learned senior counsel for the official liquidator has pressed into service a judgment of the
Supreme Court in K.L. Tripathi Vs. State Bank of India and Others, . With regard to ""requirement of natural justice"" the following observation of
their Lordships is relevant (paragraphs 31 to 33) :
Wade on Administrative Law, fifth edition, at pages 472-475 has observed that it is not possible to lay down rigid rules as to when the
principles of natural justice are to apply : nor as to their scope and extent. Everything depends on the subject matter, the application of principles of
natural justice, resting as it does upon statutory implication, must always be in conformity with the scheme of the Act and with the subject matter of
the case. In the application of the concept of fair play there must be real flexibility. There must also have been some real prejudice to the
complainant; there is no such thing as a merely technical infringement of natural justice. The requirements of natural justice must depend on the facts
and the circumstances of the case, the nature of the inquiry, the rules under which the Tribunal is acting, the subject matter to be dealt with and so
forth.
... The concept of fair play in action must depend upon the particular lis, if there be any, between the parties. If the credibility of a person who
has testified or given some information is in doubt, or if the version or the statement of the person, who has testified, is, in dispute, right of cross-
examination must inevitably form part of fair play in action but where there is no lis regarding the facts but certain explanation of the circumstances
there is no requirement of cross-examination to be fulfilled to justify fair play in action. When on the question of facts there was no dispute, no real
prejudice has been caused to a party aggrieved by an order, by absence of any formal opportunity of cross-examination per se does not invalidate
or vitiate the decision arrived at fairly. This is more so when the party against whom an order has been passed does not dispute the facts and does
not demand to test the veracity of the version of the credibility of the statement.
The party who does not want to controvert the veracity of the evidence from record or testimony gathered behind his back, cannot expect to
succeed in any subsequent demand that there was no opportunity of cross-examination, specially when it was not asked for and there was no
dispute about the veracity of the statements. Where there is no dispute as to the facts, or the weight to be attached on disputed facts/ but only an
explanation of the acts, absence of opportunity to cross-examination does not create any prejudice in such cases.
I have already referred to the fact that none of the respondents filed objection questioning the contents of the report of the official liquidator.
Only in this application, some of them filed counter affidavit disputing certain averments. The principles of natural justice do not stipulate a
mandatory right of cross-examination against all persons who have either sworn to affidavits or filed their reports. It is clear from the above
decision that cross-examination is not an absolute must, it is only one of the rules and its applicability will depend on the facts of the individual case.
There is no dispute that if witnesses are examined, the other side is entitled to cross-examine them. In other words, cross-examination will be
necessary if witnesses are examined. Accordingly/ where a report is filed (here in the present case the official liquidator has filed only as a report),
cross-examination may be permitted only if the contents of the report are seriously disputed or the court seriously doubts the statement/report or
where some explanation is required. In this regard, it is relevant to note Rules 260 and 261 of the Rules. These rules (Rules 260 and 261) refer to
making of claims and making a statement of defence. There is no specific procedure that has been prescribed. As rightly argued, it is only
necessary that reasonable particulars should be given to the respondents to make out their case in defence. I have already referred to the factual
position that the contents of the report have not been challenged on the merits or on facts. In such a circumstance, in the light of the law laid down
by the Supreme Court and in view of the factual position, in the absence of controvertible averments in the report, there is no question of cross-
examination and violation of natural justice. The perusal of Rules 260 and 261 leaves the entire matter to the discretion of the court and no
mandatory duty has been cast upon the court to follow a particular form of procedure. In this regard it is relevant to note the judgment of the
Calcutta High Court in A Stock and Co Ltd., In re [1992] 1 Comp LJ 323 wherein it is held that ""Rule 261 read as a whole would show that the
matter is entirely discretionary and no mandatory duty has been cast upon the court to follow a particular form of procedure"". I have already
referred to the fact that subsequent to the order of winding up, this court appointed N. T. Arasu and Co. as auditors to go into the affairs of the
company in liquidation. Pursuant to the said direction, the auditors collected the books of account from various places and after gathering
information regarding the affairs of the company, submitted a report to the official liquidator. By virtue of the powers conferred on him, the official
liquidator recorded a statement from P.C. Varghese, seventh respondent herein and based on all the above materials, including the documents
collected, he filed the present application under Sections 542 and 543 of the Act, hence I am satisfied that in view of the abundant materials
available in this application, the need to examine the parties does not arise. It is settled law that it is left to the opinion of the court as to whether a
director or any other person should be publicly examined. Once full and fair opportunities have been given to the respondents, they cannot
complain that there is a violation of natural justice or deprive the opportunity of cross-examination, etc. Apart from this, it is clear that public
examination under Sections 477 and 478 of the Companies Act is not mandatory. It is also relevant to refer a decision of the Supreme Court in
State of Jammu and Kashmir Vs. Bakshi Ghulam Mohammad, , wherein their Lordships have considered the right of cross-examination. It was
said that the rules require that Bakshi Gulam Mohammed should have been given a right to cross-examine all those persons who had sworn
affidavits supporting the allegations against him. It was argued that rules of natural justice require that a party against whom an allegation is being
inquired into should be given a hearing. It was further argued that the right to the hearing included a right to cross-examine. The Supreme Court has
rejected the contention saying that ""we are unable to agree that that is so"".
Next I will consider whether a criminal case is made out and action u/s 545 of the Act is to be taken ? Section 545 of the Act enables the
company court to direct the liquidator to prosecute the offender or refer the matter to the Registrar. Section 2(30) defines ""officer"" as follows :
''officer'' includes any director, manager or secretary or any person in accordance with whose directions or instructions the board of directors or
any one or more of the directors is or are accustomed to act.
I have already referred to the factual details that B. Rajagopal, eighth respondent held himself as group president and issued directions to the
board of directors who were none else than the employees of the company itself. In the letter dated October 11, 1988, written by B. Rajagopal
and K.V. Sasidhar, they have accepted the fact that they are responsible for all the affairs of the company. It is also clear that respondents Nos. 8
to 10 were persons in accordance with whose directions or instructions, the board is accustomed to act. Since K.V. Sasidhar, ninth respondent,
died on February 13, 1999, B. Rajagopal and B. Muralidhar, respondents Nos. 8 and 10 alone are liable for prosecution u/s 545 of the Act.
Learned senior counsel for the official liquidator has also pressed into service a decision of the Kerala High Court in Official Liquidator, Palai
Central Bank Ltd. (in liquidation), Ernakulam Vs. K. Joseph Augusti, Kayalackakam House, Palai and Others, . The following observation is
relevant (page 363) :
The word ''misapplication'' by itself involves no mens rea. It imports no mental element such as dishonesty or fraud, not even negligence. It only
means wrong or incorrect application, not necessarily a wrongful application, and there can be a perfectly innocent misapplication. But it is well-
settled that liability u/s 543 can be imposed only if there has been dishonesty, or fraud or at least negligence, not ordinary negligence but gross and
culpable negligence. If u/s 543 standing by itself, at least gross negligence has to be found before liability can be imposed it is difficult to see how
Section 633 can afford relief from such liability since, if a person has been grossly negligent, it can scarcely be said that he has acted reasonably.
Yet, Section 633 expressly refers to liability on account of breach of trust and that points to the statutory basis being the combined effect of the
two sections. If that be so it would appear that once misapplication is proved, the burden of proving that he acted honestly and reasonably lies on
the alleged delinquent.
A bare statement that the directors did not know what was going on is no defence. Their duty as directors was to know. They cannot be allowed
to throw up their hands and say ''we knew nothing and believed that everything was all right''. . .
I am in respectful agreement with the above view. As stated in the above decision, once misapplication is proved, the burden of proving that he
acted honestly and reasonably lies on the alleged delinquent. I have already referred to the materials placed by the official liquidator, namely, his
report, auditor''s report, statement of P.C. Varghese supported by a number of documents which prove the role played by respondents Nos. 8 to
10 in the affairs of the company in liquidation. The mere statement that they did not know what was going on or mere denial is no defence. I am
satisfied that the company had lost Rs. 18,32,39,002 under various accounts and respondents Nos. 1 to 10 are liable to make good the loss. They
are jointly and severally liable to pay the official liquidator the sum of Rs. 18,32,39,002. The materials placed by the official liquidator clearly show
that respondents Nos. 1 to 10 have misapplied or retained or became liable or accountable for the money and property of the company or are
guilty of misfeasance and breach of trust and that a total amount of Rs. 18,32,39,002 was lost to the company; accordingly respondents Nos. 1 to
10 are liable to contribute to the assets of the company by way of compensation. Among the respondents, B. Rajagopal, K.V. Sasidhar and B.
Muralidhar, respondents No. 8 to 10 (ninth respondent is no more) were at the helm of the affairs and in charge of day-to-day affairs of the
company; hence they are guilty of misfeasance and breach of trust. They are liable to be proceeded against under Sections 542 and 542 of the
Companies Act. They are also liable to be prosecuted u/s 545 of the Companies Act.
In the result, prayers (a) to (i) in Company Application No. 888 of 1995 are ordered ; consequently, Company Application No. 888 of 1995
filed by the applicant-official liquidator is allowed ; and Company Application No. 1321 of 2001 filed by B. Rajagopal and B. Muralidhar is
dismissed. No costs.