IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.R.RAMAN & THE HONOURABLE MR. JUSTICE P.R.RAMACHANDRA MENON FRIDAY, THE 30TH OCTOBER 2009 / 8TH KARTHIKA 1931 Co.Appeal.No. 14 of 2003 -------------------------- ( AGAINST THE ORDER IN MCA.209/1993 IN C.P. 23 OF 1988 .................... APPELLANTS/ RESPONDENTS: --------------------------------- 1. L.K.PRABHU, S/O.LAKSHMANA PRABHU, ESSACK MANZIL, CONVENT ROAD, ERNAKULAM, KOCHI - 11. 2. L.BHASKARA PRABHU, S/O.LAKSHMANA PRABHU, 38/597, CONVENT ROAD, ERNAKULAM, KOCHI-11. BY ADV. SRI.DINESH R.SHENOY RESPONDENT/APPLICANT: -------------------------- THE OFFICIAL LIQUIDATOR, HIGH COURT OF KERALA, ERNAKULAM REP. TO M/S. PREMIER STEELS (P) (IN LIQN). BY ADV. SRI.K.MONI THIS COMPANY APPEAL HAVING BEEN FINALLY HEARD ON 30/10/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ORDER ON I.A.No. 698 OF 2003 IN CO. APPEAL NO. 14 OF 2003. DISMISSED. Sd/- P.R. RAMAN, JUDGE. 30.10.2009 Sd/- P.R. RAMACHANDRA MENON, JUDGE. /TRUE COPY/ P.R. RAMAN & P.R. RAMACHANDRA MENON, JJ. ................................................................................ COMPANY APPEAL No. 14 OF 2003 ......................................................................... Dated this the 30th October, 2009 J U D G M E N T P.R. Ramachandra Menon, J: Sustainability of the verdict passed by the Company Court, fixing the liability on the appellant in a misfeasance proceedings under Section 543 of the Companies Act read with Rule 261 of the Company Court Rules forms the subject matter of this Appeal. 2. With regard to the factual scenario, it is to be noted that the concerned Company by name Premier Steels (P) Ltd., was sought to be wound up in C.P. 23 of 88 and as per the order dated 20.07.1988, the Official Liquidator was appointed as the provisional liquidator. Subsequently, the Company was wound up as per the order dated 07.10.1988 and the provisional liquidator was appointed as the Liquidator of the Company. It is stated that the appellants herein were holding the office as the COMPANY APPEAL No. 14 OF 2003 2 Directors of the said Company at the relevant time. But subsequently, after assuming charge by the Official Liquidator, it was found on verification that the relevant Books of Accounts and other records subsequent to the period 1982 were not handed over to the Official Liquidator, despite the many a request made in this regard. However, in connection with the inspection done by the departmental authorities of the Sales Tax Department in some other sister concern and other establishments, it was brought to light that the Company in liquidation was doing business even after 1982, till 1988. By virtue of the said business stated as conducted by the Company and the substantial loss resulted in this regard, the Official Liquidator filed a petition under Section 543 of the Companies Act in respect of 'misfeasance' and 'breach of trust', based on Ext. A1 report submitted by one Chartered Accountant by name T.N. Radhakrishnan (engaged by the Official Liquidator, after obtaining necessary permission from the Company Court) claiming a sum of Rs.77,87,939/- with interest thereon. 3. On entering appearance, the respondents 1 and 2 , who COMPANY APPEAL No. 14 OF 2003 3 are the appellants before this Court contended that they were not the Directors for the whole period; that there was absolutely no situation to have initiated any proceedings under Section 543 leading to misfeasance; that the Company was being run even by procuring funds from their own pockets and that no loan was procured from any other source and there was absolutely no diversion of funds from the Company. 4. On the side of the Official Liquidator, P.Ws. 1 and 2 were examined and Exts. 1 to A13 were marked; whereas on the side of the respondents/appellants herein, R.W.1 was examined and Exts. B1 to B4 were marked. 5. The question considered by the Company Court was whether the respondents before the said Court, as Ex-Directors of the Company under liquidation, were controlling the affairs of the Company from 1982 onwards till the date of winding up of the Company on 07.10.1988 and whether they were guilty of misfeasance. 6. The learned Counsel appearing for the appellants submits that the sole basis for arriving at the guilt on the part of the COMPANY APPEAL No. 14 OF 2003 4 appellants was Ext. A1 report submitted by the Chartered Accountant, T.N. Radhakrishnan, which by itself was finalised without any notice to the appellants or without their involvement in any manner. That apart, it is also brought to the notice of this Court that the foundation for the said report was the mere finding rendered by the Sales Tax authorities, particularly with regard to the assessment year 1985-86, wherein addition of 50% was made in respect of the turnover in the assessment proceedings finalised under Section 17(3) of the K.G.S.T. Act on the basis of the best judgment, after rejecting the returns filed from the part of the Company. 7. The learned Counsel further submits that the appellants were not in a position to submit the records before the Sales tax authorities, mainly for the reason that they were not having the custody of the documents which were stealthily removed by the employees of the Company. It is stated that, for the very same reason, the complaint filed in the concerned Magistrate's Court and subsequently transferred to the Company Court for the offence in respect of the non-submission of the COMPANY APPEAL No. 14 OF 2003 5 accounts, was considered by the Company Court and had acquitted the accused/appellants herein. It is also brought to the notice of this Court that the factum of acquittal as above, is not disputed from the part of the respondents in this appeal (though copy of the relevant verdict was not produced by either side, the despite many an opportunity given by this Court). However, since no serious objection is made from the part of the Official Liquidator as to the acquittal in the above complaint, for non production of the accounts, the very same reasoning is liable to be adopted in the present case as well; submits the learned Counsel for the appellants. 8. It is revealed from the discussion made by the learned Company Judge that the report submitted by the Chartered Accountant by name T.N. Radhakrishnan, which forms the basis for mulcting the liability upon the appellants, was prepared solely based on the sales tax assessment records. It is also revealed that no other document was made available to the said Chartered Accountant before arriving at the 'profit margin' as well, while fixing the extent of liability, that was sought to be COMPANY APPEAL No. 14 OF 2003 6 realised from the appellants. After analysing the materials on record, the Company Court held that even after 1982, the Company was pursuing its business till 1987-88; that the appellants had failed to produce the relevant documents and that when the Company was doing the business, it was for the Company to produce the books of accounts, registers and to establish that the report made by the Chartered Accountant was not correct. Further, after observing that the Company was wilfully avoiding the production of the registers and books of accounts before the Official Liquidator, it was held that an element of “guess work” had to be adopted in fixing the income on the basis of the available documents. After observing that even though there was some exaggeration in fixing the income in the report of the Chartered Accountant , it was held that the Court could very well rectify it by reducing the margin of profit. Accordingly, the 'profit element' was reduced to an extent of 7.5% of the purchase turnover fixed by the Chartered Accountant and the income was estimated and fixed at Rs.38,94,950/- which was shown as the liability of the COMPANY APPEAL No. 14 OF 2003 7 respondents, finding them guilty of 'misfeasance' and 'breach of trust' and in turn subjected to challenge in this Appeal for the reasons as stated herein before. 9. Referring to the materials brought to light, the learned Counsel for the appellants submits that the Steel Industry, as a whole, was running on loss during the relevant time and that there is absolutely no rationale for having fixed the 'profit margin' at the rate of 7.5% . It is submitted that the assessment was made by the Sales Tax authorities adding 50% of the turnover to the actual turnover, stating that the books of accounts were not produced, that too, without giving due weightage to the specific contention raised by the appellant that they were not having the books of accounts with them, which were stealthily removed by the employees. It is also brought to the notice of this Court that the 'profit margin' during the relevant time even in exceptional cases as deposed by RW.1 examined from the part of the appellant was much less than 1%. It is pointed out that if the addition of the turnover, as pursued by the sales tax authorities and also the alleged 'profit margin' COMPANY APPEAL No. 14 OF 2003 8 are deleted, there could absolutely be no chance to have any amount to be deemed as income or loss resulted at the hands of the appellants in respect of the Company under liquidation. This being the position, it is contended that the Company Court has gone miserably wrong in all respects. 10. The basic question to be considered in the instant case is whether the appellants were at fault in not producing the books of accounts before the Sales Tax authorities, the failure of which has resulted in the 'best judgment' order passed by the said authorities, adding substantial amounts towards the deemed turnover in respect of the period in question, which in turn has attributed to the alleged loss to the Company under liquidation. As stated already, it is the specific case of the appellants that, after the winding up order passed by this Court and after taking charge by the Official Liquidator, it was the duty of the Official Liquidator to have contested the matter before the Sales Tax authorities as well. Though there is a contention for the respondents that the Official Liquidator has already issued notice to the Directors, who are the appellants herein, to COMPANY APPEAL No. 14 OF 2003 9 produce the books of accounts and to challenge the proceedings pursued by the Sales Tax authorities, absolutely no material/proof has been produced before this Court to show that any such notice was given to the Directors making them aware of the necessity to file the appeals, which is more so, when the Directors have already made their position clear that they were not in possession of the records. 11. The sequence of events is very much discernible from the report No.36 dated 21.03.1991. It is stated in paragraph No.3 of the report that, on receipt of the notice and proceedings from the Sales Tax Officer, as to the assessment of Rs.10,61,738/- in respect of the year 1985-86, demanding remittance within 30 days, the Official Liquidator had issued a letter dated 07.10.1988 to the Additional Sales Tax Officer-I, IIIrd Circle, Kozhikode intimating the position of the Company and requesting that the notice might be revoked and a fresh notice might be issued to the Official Liquidator for hearing the matter afresh in respect of the assessment year 1985-86 and for the other periods in question. It was also specifically pointed COMPANY APPEAL No. 14 OF 2003 10 out by the Official Liquidator that the 'best judgment order' was passed by the Sales Tax authorities, without giving any opportunity to the Official Liquidator, which was very much essential in view of the fact that the Company had already been ordered to be wound up and the Official Liquidator had already taken charge. It is further stated that, in reply to the said letter, the Addl. Sales Tax Officer, Kozhikode vide his letter dated 12.10.1988 conveyed that he had come to know about the appointment of the Provisional Liquidator only on 24.09.1988 and that the assessment order for the year 1985-86 was passed on 09.09.1988. The Sales Tax Officer informed that, under the relevant provisions of the KGST Act and Rules, he was not competent to revoke the assessment and that the Official Liquidator had to seek appropriate remedy under Section 34 of the KGST Act. It is also averred that when the State Bank of India, the secured creditor of the Company was addressed in the matter, enquiring whether they were willing to meet the expenses for taking up the matter in appeal (as the Company had no funds to meet the expenses), the authorities of the Bank COMPANY APPEAL No. 14 OF 2003 11 had informed that they were not willing to meet the expenses for filing the appeal, pointing out that it was for the Official Liquidator to move the Company Court for appropriate orders. In the said circumstances, the Official Liquidator chose to submit the above report, pointing out that the liability towards the Sales Tax Department could only be regarded as a provable debt and since there was no sufficient fund to meet the interest of the secured creditor, there was no meaning in filing the appeal. It was accordingly that the Official Liquidator filed his report No.1 in Report No.4 with a prayer to set aside the ex parte assessment order passed by the Sales Tax Officer-I, III Circle, Kozhikode for the year 1985-86 and to direct the Sales Tax Authorities to prefer their claim before the Official Liquidator with respect to the dues prior to winding up. 12. Paragraph No.4 of the very same report reveals that the stand taken by the Official Liquidator was to the effect that the demand made by the Sales Tax authorities in respect of the years 1973-74 and 1974-75 would not stand as per the Board Circulars bearing No.C-4-39808/76 dated 29.01.1979 and COMPANY APPEAL No. 14 OF 2003 12 hence that the amount of Rs.1,97,511.70/- claimed by the Sales Tax Officer was liable to be rejected. However, observing that the assets of the Company under liquidation would not even be sufficient to pay off the secured creditor and the Workmen in full, despite the lapses (factual as well as legal) on the part of the Sales Tax authorities as mentioned above, the Official Liquidator, as stated in paragraph No.7 of the said report, had sought for permission of the Company Court to 'admit' the amount of Rs.11,56,897.03/- claimed by the Sales Tax Department in respect of the years concerned, as an ordinary and unsecured claim, simultaneously seeking to reject the amount of Rs.1,97,511.70/- in respect of the assessment years 1973-74 and 1974-75. 13. It is relevant to note that the appellants have got a contention that the proceedings finalised by the Sales Tax authorities are in total violation of the statutory provisions and the assessment orders were passed by the said authorities only much later, without obtaining prior permission of the Company Court. The position in this regard, at least to a certain extent, COMPANY APPEAL No. 14 OF 2003 13 stands conceded from the part of the departmental authorities, in view of the statement made by the Official Liquidator as referred to herein before, particularly with reference to the contents of the paragraph No.3 of the Report No.36 dated 21.03.1991 of the Official Liquidator . In any view of the matter, it is stated as conceded from the part of the Sales Tax authorities as well, that no notice whatsoever was issued to the Official Liquidator before finalisation of the proceedings as above. In view of the undisputed facts as above, we cannot, but make a mention that it was for the Official Liquidator to have taken up the matter before the appropriate authorities, being the competent authority to represent the Company after the winding up order and after having taken over charge of the Company in liquidation. 14. Coming to the extent of the alleged 'profit' reckoned in respect of the years in question, the evidence tendered by R.W.1 is not seen properly appreciated by the Company Court. The specific pleadings and evidence on record that the Steel Industries in those years were being run in heavy loss and the COMPANY APPEAL No. 14 OF 2003 14 normal 'profit margin' that could have been reasonably expected in those years was only much less than 1%, whereas in the instant case, the Company in liquidation was being run on loss, which inevitably led to the winding up proceedings. The Company Court, while fixing the probable element of profit, has not stated any reason as to why the said evidence brought on record is not acceptable, more so, when Ext.A1 report made by the Chartered Accountant has been heavily relied on for fixing the liability. Obviously, there is no reliable material on record to arrive at any finding that the Company under liquidation was in a position to derive profit at 7.5%, as fixed by the Court below. In the absence of any positive evidence in this regard, no such finding could have been rendered, merely on the surmises and conjunctures. The manner in which the proceedings have been finalised by the Company Court, is very much discernible from the penultimate paragraph of the impugned verdict, wherein it has been observed as follows: “When the Company was wilfully avoiding the registers without producing before the official COMPANY APPEAL No. 14 OF 2003 15 liquidator, an element of guess work has to be adopted in fixing the income on the basis of the available documents. “ But whether the Company was wilfully avoiding production of registers is not seen properly considered, particularly in view of the specific case of the appellants that they were not in a position to produce those records, which were stated as stealthily removed by the employees and for the very same reason, the Company Court had acquitted the very same Directors in the relevant proceedings filed by the Official Liquidator seeking to prosecute them for non-production of the records; the finality of which verdict is not seen disputed from the part of the Official Liquidator. That apart, the proceedings under Section 543 of the Companies Act is rather 'quasi-criminal' in nature, where degree of proof and adequacy of evidence are matters, which are to be considered with more circumspection. The way in which the Company Court appreciated the case does not appear to be correct or proper in a proceeding of this nature, COMPANY APPEAL No. 14 OF 2003 16 so as to have fixed the liability upon the shoulders of the appellants . In the above facts and circumstances, we find that the order impugned in the appeal, fixing liability upon the appellants to pay a sum of Rs.38,94,950/-, with interest at the rate of 6% per annum from 07.12.1988, is not correct or sustainable under any circumstance. As such, we set aside the impugned order and the appeal is allowed. No cost. P.R. RAMAN, JUDGE. P.R. RAMACHANDRA MENON, JUDGE. lk COMPANY APPEAL No. 14 OF 2003 17 P.R. RAMAN & P.R. RAMACHANDRA MENON, JJ. ................................................... COMPANY APPEAL No. 14 of 2003 ................................................... Dated this the 30th October, 2009 J U D G M E N T