IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 3.11.2010 CORAM THE HON'BLE MR. JUSTICE P.JYOTHIMANI C.A.No.1467 of 2009 in C.P.No.215 of 2003 ORDER This application is taken out by the Official Liquidator to take action for misfeasance against the Ex- Directors of the company under liquidation and for further reliefs. 2.1. Based on the orders of the BIFR and the subsequent order passed by this Court dated 9.9.2004 in C.P.No.215 of 2003, M/s.Lakshmi Synthetics Machineries Manufacturers Limited came to be wound up and the Official Liquidator, as Liquidator of the company, has taken charge of the available assets and effects of the company, which is having its registered office and factory premises at Nallattipalayam, Thamarai Kulam (P.O.), Pollachi Taluk, Coimbatore District, consisting of land and building, plant and machinery and other assets and vehicles, etc.. 2.2. The said company was incorporated in the year 1988 with a nominal capital of ` 4,65,75,000/- having registered office at No.1100, Avanashi Road, Coimbatore  37 and the factory premises is situated at Nallattipalayam, Thamarai Kulam (P.O.), Pollachi Taluk, Coimbatore District. The registered office of the company was later shifted to the factory premises on 7.5.2003. The main object of the company was to develop cheaper version of draw text rising machine. 2.3. As per the records, the respondents in these applications were Directors of the company and the statement of affairs filed by the Ex-Directors shows that the following are the secured creditors of the company: (i)Union Bank of India, Coimbatore. (ii)State Bank of India, Coimbatore. (iii)Corporation Bank, Coimbatore. (iv)Industrial Development Bank of India, Bombay (v)Industrial Finance Corporation of India, New Delhi (vi)The Industrial Credit and Investment Corporation of India Limited (Subsequently assigned to Standard Chartered Bank). 2.4. In the meeting of the secured creditors conducted on 12.10.2009 by the Official Liquidator, the State Bank of India, Coimbatore had given a letter dated 11.10.2004 stating that they propose to stand outside the liquidation proceedings. 2.5. The Official Liquidator on 12.10.2004 took possession of the assets, books of accounts and records, after giving notice to the secured creditors and Ex-Directors. The company's land to the extent of 21.77 Acres with several buildings/sheds, etc. were valued by the Valuer and the assets were sold for a total consideration of ` 14 Crores. 2.6. The Ex-Directors have also filed the statement of affairs showing the assets and liabilities as on the date of winding up, viz., on 19.10.2004. On going through the statement of affairs, the Official Liquidator has found the bank balance at ` 26,551.16; Fixed Deposit in the form of sales tax deposit at Bank ` 10,111.89; Cash in hand of ` 6,593.73; Realizable trade debtors of ` 4,07,867.52; Realizable loans and advances of ` 17,75,943.62; Investments other than marketable securities of ` 15,00,000/-; Realizable vehicle value of ` 6,16,500/-; Realizable assets specifically charged, viz., land and buildings, plant and machinery, raw materials, components, etc. with liabilities to the secured creditors shown as ` 31,89,33,610.98; and the liabilities to the workmen creditors shown as ` 72,42,434/- and the amount payable to unsecured creditors was shown as ` 43,43,567/- and the final deficiency was shown as ` 23,85,70,100/-. 2.7. As per the latest balance sheet filed by the Ex-Directors for the period ending 31.3.2003, the accumulated loss has been shown at ` 28,63,38,609/-. 2.8. On the Official Liquidator calling for the claims from the creditors of the company in liquidation, 139 claims were received and the claims of 111 workers have been adjudicated under Section 529A of the Companies Act, 1956 by admitting a sum of ` 66,83,214/-. The claim received from the secured creditors and the amount paid to them as per the report of the Official Liquidator is as follows: S.No. Name of the Bank Amount claimed ` Amount admitted ` Amount Paid ` 1 IFCI Limited (Joint Mortgage deed by IFCI & ICICI) 2,55,71,725/- 2,55,60,863/- 2,35,25,987/- 2 Corporation Bank 2,40,85,652/- 2,40,85,652/- 9,00,000/- 3 Union Bank of India 3,86,70,755/- 3,86,70,755/- 15,00,000/- 4 Standard Chartered Bank Limited 3,27,77,206/- 3,27,77,206/- 3,01,55,030/- 5 IDBI 8,07,31,748/- 8,07,31,748/- 7,42,73,208/- 6 State Bank of India 5,53,37,558/- 10,00,000/- 1,00,000/- 2.9. This Court, by order dated 2.7.2008 made in C.A.No.1940 of 2008, has permitted the Official Liquidator to pay dividend at 92 Paise in a Rupee to the workmen creditors and an amount of ` 48,36,278/- has been paid to the workmen creditors shown in the first list of creditors and to 80 workmen in the second list. According to the Official Liquidator, 31 workmen shown in the second list remain to paid. 2.10. It is stated that the Official Liquidator has realised a sum of ` 57,501.50 from the sundry debtors out of the due of ` 40,78,671/-. The fund position of the company in liquidation is as follows: i.Cash : ` 429/- ii.Bank : Nil iii.Investment : ` 85,00,000/- and the Official Liquidator has to pay ` 61,532/- towards Government Commission and ` 51,998/- towards audit fee, apart from paying the workmen creditors as per List II, who have not been paid 92 Paise in a Rupee as per the order passed by this Court and the claims are pending for adjudication for want of sufficient documentary proof. 2.11. While the Ex-Directors have stated that the realizable value of the movable and immovable assets as ` 26.67 Crores in the year 2004, the Official Liquidator was able to realize only ` 14 Crores in the year 2007 and therefore, according to the Official Liquidator, the Ex-Directors have inflated the value of the assets more than 100% to show a different picture about the affairs of the company and with the amount realized, the Official Liquidator could settled only 92% of the liabilities of the secured creditors and workmen creditors, who stand first in the queue. It is also stated that the Official Liquidator could settle the three other secured creditors, viz., State Bank of India, Corporation Bank and Union Bank of India only ` 25 Lakhs out of the total liability of ` 6.76 Crores, as the Banks have lent money/loan on current assets valued at ` 29.10 Lakhs only and against the meagre allocation and payment, the State Bank of India has also filed an appeal. 2.12. The Commercial Tax Department has filed a claim for ` 7,96,10,577/- and the ordinary creditors like suppliers and service providers have filed claims for ` 91,55,963/- and as there is no scope for payment to the preferential and other creditors, these creditors have been deprived of their dues. It is stated that the Commissioner of Customs has claimed a sum of ` 62,687/- and therefore, according to the Official Liquidator, the Ex-Directors are liable to pay an amount of ` 8,88,29,227/- in the following manner: Payment to ordinary creditors - ` 91,55,963/- Payment to the Commercial Tax - ` 7,96,10,577/- Department Commissioner of Customs - ` 62,687/- (Section 530) ========== ` 8,88,29,227/- ========== 2.13. It is stated that the funds available to the extent of ` 85 Lakhs would be utilized for payment of 92 Paise in a Rupee to the workmen creditors as per the second list and if any amount still remains, it would be utilized to pay the secured creditors and workmen creditors. 2.14. According to the Official Liquidator, respondents 1 to 6 are, therefore, liable and accountable for money and the property of the company in liquidation; guilty of misfeasance; and liable to pay a total sum of ` 8,88,29,227/- along with interest at the rate of 12% per annum. 2.15. Therefore, this application has been filed to examine the conduct of the respondents under Section 543(1) of the Companies Act and to direct them to jointly and severally contribute such sum to the assets of the company in liquidation by way of compensation for the loss caused by them to the extent of ` 8,88,29,227/- with interest at the rate of 12% per annum from the date of winding up till the date of recovery of the entire amount; to declare that the respondents are personally liable for all the debt or liabilities; to declare the liability of the respondents for the said sum of ` 8,88,29,227/- and for other future claims of creditors together with interest thereon which shall constitute the first charge on the property and effects; and for costs. 3.1. Respondents 2, 3 and 4 having received the notice, as it is seen in the acknowledgment filed in the proof of service, have failed to appear. The sixth respondent has filed a counter affidavit, wherein it is stated that the first respondent  L.G.Varadarajulu has passed away on 19.5.2010, as it is also reflected in the newspaper report filed by the sixth respondent. 3.2. It is stated in the counter affidavit filed by the sixth respondent that the second respondent is a German national resident in Germany. While the third respondent is a leading industrialist of Coimbatore City, the fourth respondent is an industrialist based in Mumbai, the fifth respondent is a lawyer practicing in the Mumbai High Court and a Senior Partner of leading firm of Solicitors  M/s.Crawford Bayley & Co., and the sixth respondent himself is a Senior Executive of a reputed company in Coimbatore. 3.3. It is the case of the sixth respondent that the application filed by the Official Liquidator is vague, without explaining any circumstance to show any intentional act on the part of the respondents or deliberate conduct of the Ex-Directors. It is stated that the realizable value of movable and immovable assets given as at 2004 to the extent of ` 26.67 Crores in the statement of affairs covers not only the land, but also buildings, machinery, computer equipment, furniture and office equipment, library, material handling equipment, jigs and fixtures, dies and patterns, lab and testing equipment, capital work in progress, machinery in transit, stock in trade work in progress, material in transit customs duty, etc. It is stated that the estimated realizable value of the land amounted to only ` 65 Lakhs, while the remaining amount relates to the above said items. 3.4. It is the case of the sixth respondent that even though the realizable estimate was given by the Directors in the year 2004, the sale was effected by the Official Liquidator only in the year 2007 and therefore, in the course of these three years time, since the above materials were kept idle, the value would have definitely deteriorated and that cannot be imputed on the Directors. It is also stated that the value was given by the Directors based on the valuation report of M/s.Karthikeyan Ashok Engineering Consultants, Coimbatore, who are approved valuers and therefore, the former directors have only believed bonafide the estimate and in the absence of any proof on the side of the Official Liquidator that the estimated realizable value was incorrect as on 2004, no motive can be attributed on the respondents. If the assets realize lesser value, the Directors cannot be penalized and for the realization of lesser value, many factors would have contributed, including want of maintenance, deterioration, reduction in value, etc., and the sale would have been a distress sale. 3.5. It is stated that the value was not inflated. The book value of the assets is generally less than the realizable value and therefore, the correct estimate was made at ` 26.67 Crores in 2004 and the actual realization of ` 14 Crores in 2007 was due to the market conditions and deterioration in the assets in the three years period. 3.6. It is stated that there is no fraudulent conduct of business, misfeasance, breach of trust, misappropriation of property of the company as alleged by the Official Liquidator and therefore, this application does not fall within the ambit of Sections 542 and 543 of the Companies Act, 1956. 3.7. It is also stated by the sixth respondent that he is not having any personal knowledge about the present state of affairs of the company and according to the sixth respondent, there is no misfeasance. 4. I have heard the learned counsel for the applicant and the respondents and given my anxious thought to the issue involved in this case. 5. Section 543(1) of the Companies Act, 1956 makes it clear that the liability is attributable to the Ex-Directors only if it is found that the moneys of the company under liquidation have been misapplied or there has been misfeasance or breach of trust. The term misfeasance or breach of trust is certainly relatable not only to intentional act of the directors, but also to the deliberate conduct of the ex-directors which has resulted in the loss to the company under liquidation. Therefore, to constitute misfeasance under the said provision, the intentional act or deliberate conduct which is detrimental to the interest of the company under liquidation on the part of the ex- directors is a sine qua non. 6. It is trite that when an application under Sections 542 and 543 of the Companies Act, 1956 is made relating to allegations of fraud or breach of trust or misapplication, to prove such allegation, which is criminal in nature, it is necessary that there should be mens rea on the part of the erstwhile directors either in committing fraud or causing loss to the company in liquidation. The charges in these sort of cases have to be specific and it must be brought to the notice of this Court that the term misfeasance or breach of trust is certainly relatable not only to intentional act of the directors, but also to the deliberate conduct of the ex-directors which has resulted in the loss to the company under liquidation, for the rule actus non facit reum nisi mens sit rea is applicable in these cases of misfeasance. 7. This Court in Official Liquidator, High Court Madras v. V.Selvaraj and others, [2009] 152 Company Cases 177 (Madras), while construing Sections 542 and 543 of the Companies Act, 1956, has held as follows: "... it is clear that when an application under sections 542 and 543 of the Companies Act is made relating to the allegation of fraud or breach of trust or misappropriation, to prove such allegation which is being criminal in nature, it is necessary that there should be mens rea aspect on the part of the ex-director either in committing fraud or causing loss to the company under liquidation. Such conduct of fraud or breach of trust must be specifically pleaded and proved and in the absence of such specific pleading and proof, on the facts of the present case, it is not possible to accept the contention of the learned Official Liquidator that there has been deliberate conduct of fraud or breach of trust on the part of the ex-directors of the company under liquidation." 8. On a reference to the factual aspect, which has been stated above, it is clear that there is no specific instance of misfeasance which has been pointed out. There is nothing on record to show that the loss is only on account of misfeasance. It must be noted that for the purpose of proceeding under Section 542 of the Act, the essential ingredient is that the Directors must have taken the company on a route which they are consciously aware of as leading to a case of total mismanagement, thereby bringing down the company's existence. In the absence of any material to substantiate the allegation, one cannot go in a mechanical manner to sustain the contention put forth in the application. 9. Even though it is the case of the Official Liquidator that the Ex-Directors have given the realizable value of the movable and immovable assets as ` 26.67 Crores in the year 2004, while the same were sold only for ` 14 Crores in the year 2007 and there is an inflation of value by the Ex-Directors, admittedly, the assets were sold only in the year 2007, viz., after three years from the valuation, and the reason for lesser realization of value cannot be imputed on the respondents, especially when the Official Liquidator with the existing value of the assets could settle 92% of the liabilities of the secured creditors and workmen creditors, which is of utmost importance. Having regard to the seriousness of the provisions and there being no material against the Ex- Directors, the allegations stand unproved. This application does not merit acceptance and therefore, the same stands dismissed. sasi