IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 6-8-2008 CORAM THE HONOURABLE MR.JUSTICE M.CHOCKALINGAM AND THE HONOURABLE MR.JUSTICE M.VENUGOPAL O.S.A.Nos.479 and 480 of 2002 and 56 of 2004 and CMP Nos.19149 & 19151 of 2002 and 3776 of 2004 and 11149 of 2005 and C.A.Nos.888 of 1995 & 1321 of 2001 in C.P.No.88 of 1989 O.S.A.NOS.479 AND 480 OF 2002: 1.B.Rajagopal 2.B.Muralidhar .. Appellants /Applicants in both the Appeals Vs. 1.The Official Liquidator, High Court Madras as the Liquidator of M/s.Dhanalakshmi Funds (India) Limited, (in Liquidation) .. Respondent/Respondent No.1 in O.S.A.Nos.479 and 480 of 2002 2.T.Sudarsan 3.V.Parameswaran 4.V.S.Sridhar 5.G.P.Viswanathan 6.M.V.Raghavan 7.V.Prabhakar 8.P.C.Varghese 9.K.V.Sasidhar .. Respondents/Respondents 2 to 9 in O.S.A.No.479 of 2002 O.S.A.NO.56 OF 2004: P.C.Varghese .. Appellant / Applicant https://hcservices.ecourts.gov.in/hcservices/ Vs. 1.The Official Liquidator, High Court, Madras as the Liquidator of M/s.Dhanalakshmi Funds (I) Ltd., (in liquidation) 2.T.Sudarson 3.V.Parameswaran 4.V.S.Sridhar 5.G.P.Viswanathan 6.M.V.Raghavan 7.V.Prabakar 8.B.Rajagopal 9.K.V.Sasidhar 10.B.Muralidhar .. Respondents / Respondents These O.S.As. have been preferred under Order 36 Rule 11 of O.S. Rules read with Clause 15 of Letters Patent against the judgment and decree of the learned Single judge made in C.A.Nos.888 of 1995 and 1321 of 2001 in C.P.No.88 of 1989, dated 13.12.2002. For Appellants : Mrs.Nalini Chidambaram, SC for Ms.Gladys Daniel in OSA Nos.479 and 480 of 2002 Mr.P.N.George Graham for M/s.Devadason & Sagar in OSA No.56 of 2004 For Respondents : Mr.Arvind P.Datar, SC for Official Liquidator Mr.P.N.George Graham for M/s.Devadason & Sagar for R-8 in OSA No.479 of 2002 No appearance for other respondents in OSA No.56 of 2004 - - - - COMMON JUDGMENT (The judgment of the Court was made by M.CHOCKALINGAM, J.) These appeals have arisen from the common order of the learned Single Judge of this Court made in C.A.No.888 of 1995 and C.A.No.1321 of 2001 in C.P.No.88 of 1989. While the former filed by the Official Liquidator was allowed granting all the reliefs, the latter at the instance of the respondents 8 and 10 in C.A.No.888/95 was dismissed. 2.The parties hereinafter will be referred to as Official Liquidator and the respondents as shown in C.A.No.888 of 1995. https://hcservices.ecourts.gov.in/hcservices/ 3.The brief facts of the case in Company Application No.888 of 1995 are thus: a)M/s.Dhanalakshmi Funds (India) Limited was ordered to be wound up by an order of this Court, dated 16.11.1990 in C.P.No.88 of 1989 and the Official Liquidator became the Liquidator of the said Company. The company in liquidation was incorporated on 9.8.1985, and it was declared as "Nidhi" on 22.8.1986 under the Companies Act, 1956. The main object of the company is to encourage and afford all facilities on mutual basis for cultivating thrifts, 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 of the company is Rs.2,00,000/- divided into 2,00,000 equity shares of Re.1/- each. As per the provisional balance sheet of the company in liquidation as on 31.3.1989, the share capital of the company was Rs.1,96,090/-. There were 48 branches of the company. The Official Liquidator has taken into his custody the books and records of the company of 41 branches and the Registered Office of the company. The Official Liquidator has taken into his custody and control the available assets and effects of the Company in respect of the registered office and 26 branches of the company. The fund position of the company as on 9.11.1995 was Rs.75,41,123.85. The former Directors of the Company have not filed the statement of affairs as required under the Act and the Official Liquidator has filed C.A.No.428 of 1991 reporting the default of non submission of the statement of affairs and the said application is pending. b)It is stated by the Official Liquidator that the business of the company in liquidation has been carried on with intent to defraud the creditors of the company. By an order, dated 26.11.1993 in C.A.No.2224 of 1993, this Court has appointed M/s.M.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 as well as the available books and records of the Company, 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 Consolidates Finance and Industrial Investments. According to the statement of the former Director Sri P.C.Varghese recorded by the Official Liquidator on 4.1.1994 and 6.1.1994 under Rule 130 of the Companies (Court) Rules, 1959, Sri B.Rajagopal is the Group President of the Dhanalakshmi Group of Companies and Sri K.V.Sasidhar is the Group Chairman of the Dhanalakshmi Group of Companies, and they were the promoters of the Company in liquidation. The partners of the two firms did not repay the depositors of the two firms. From a perusal of the books and records of the company in liquidation as well as the statement of Sri P.C.Varghese recorded by the Official Liquidator on 4.1.1994 and 6.1.1994 under Rule 130 of the Companies (Court) Rules, 1959, it is seen that no formal agreement appears to have been executed between the respondents 8 to 10 as partners of the two firms herein and the company in liquidation for taking over either the assets and effects https://hcservices.ecourts.gov.in/hcservices/ or the liability or the business of those two firms by the company in liquidation. c)The original balance sheets for the years ended 31.12.1986 and 31.12.1987 are not available among the records taken possession by the Official Liquidator. Even though claims have not been called for, the Official Liquidator has received 4421 claims filed voluntarily claiming various amounts aggregating to Rs.7,04,03,266.22. As per the statement of the Administrators in their report in October, 1990 filed before the 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. The partners of the two firms namely the respondents 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 deposits/creditors of the company in liquidation even though not inducted as Directors of the Company in liquidation. They have siphoned of funds of the company in liquidation to their sister concerns. In paragraph 41 of the report of the Official Liquidator, various charges levelled against the respondents 1 to 10 have been enumerated. All of them are guilty of misfeasance and breach of trust in relation to the affairs of the company in liquidation. 4.The respondents 8 and 10 have filed counter affidavit stating that the Official Liquidator has filed the application after the expiry of the period of limitation prescribed under Section 543(2) of the Companies Act, 1956; that neither B.Rajagopal nor B.Muralidhar had taken part in the promotion or formation of the Company; that the charges of misfeasance and breach of trust has been levelled against these respondents based on some materials, but those materials have not been forwarded to them in spite of specific request made by them to the Official Liquidator; that the liability of the Company could be ascertained only after calling for claims and only after ascertaining the truthfulness of these claims; that the lapse on the part of the Official Liquidator to recover the amounts due to the company has resulted in loss to the company and the said amount has to be computed and to that extent these respondents' liability has to be reduced and that the report of the Official Liquidator is bereft of any material particulars and is based on surmises and conjectures and the charges levelled against Mr.B.Rajagopal and Mr.B.Muralidhar are vague and baseless and therefore, the application was to be dismissed. 5.The 8th and 10th respondents in C.A.No.888 of 1995 have filed C.A.No.1321 of 2001, seeking 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 with the following allegations: a)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, https://hcservices.ecourts.gov.in/hcservices/ decided to close down the finance business run by the firm. The company promoted by respondents 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 Company, namely Dhanalakshmi Funds India Limited was incorporated with the object of accepting deposits and lending money on interest to its members as "Nidhi" company. The applicants in this application were not inducted as Directors of the company and they were not involved in the day-to- day management of the company. For a while, the first applicant was helping Mr.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 Mr.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. 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 the end of 1986. b)In these circumstances, one of the depositors filed C.P.No.88 of 1989 for winding up the company under the provisions of the Companies Act and by order dated, 16.11.1990, the company was ordered to be wound up and the Official Liquidator was appointed as Liquidator of the company. Though the Official Liquidator has filed the above application in 1995, the same was not pursued for many years after it was filed. If the Official Liquidator 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. 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 admitted method of carrying on business. No irregularity or illegalities can be attributed to it. The taking over of the business of the two firms were in pursuance of the Board resolution, dated 31.8.1985 confirmed by a General Body resolution in EGM held on 1.9.1985. Mr.P.C.Varghese was in charge of the affairs of the company. The applicants had no financial interest in the company, neither they were holding any shares in the company. 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. It was Mr.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 interests. The said K.V.Sasidhar passed away on 13.02.1999 and 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 life time. The present proceedings under Sections 542 and 543 of the Act is vexatious and is the result of a conspiracy to cover up the misdeeds of the Official Liquidator and is an abuse of process of the court. https://hcservices.ecourts.gov.in/hcservices/ The applicants cannot be held liable either jointly or severally for the said loss and the present proceedings under Section 542 of the Act is misconceived and is a result of an after thought. 6.Counter affidavit has been filed by the Official Liquidator in C.A.No.1321 of 2001 stating that the records of the company clearly indicate that the applicant in C.A.No.1321 of 2001 was involved in the day-to-day affairs of the company and he had signed the share certificates. The first applicant states that for a while, the first applicant was helping Mr.K.V.Sasidhar to evolve broad policy matters in the affairs of the company though there were Directors in the company. The broad policy matters can be taken only at the top management level and therefore, it is very clear that they have occupied top management positions in the company. The applicants cannot say that only K.V.Sasidhar has taken all business decisions. The applicants herein have purposely avoided signing documents and as per their instructions only, the employees-signatories had signed the Memorandum and Articles of association of the company in liquidation. Though the first applicant was not a Director, he had given instructions to the Board of Directors from time to time and the Board of Directors have also acted as per his instructions. The applicants also admit the fact that they had little financial interest in the Dhanalakshmi Group of Companies. From the above facts admitted by the applicants, it is evident that their involvement in the company in liquidation is proved beyond doubt and therefore, the present application is not maintainable. 7.The points for determination in these appeals are: (i)Whether the Official Liquidator is entitled for the reliefs asked for? (ii)Whether the appellants are entitled for discharge? 8.The learned Senior Counsel for the appellants in OSA Nos.479 and 480 of 2002 would submit that the application filed by the Official Liquidator is based on the auditor's report; that the appellants have filed an application denying the allegations; that they were not given reasonable opportunity in connection with the allegation of misfeasance and malfeasance; that the principles of natural justice has not been followed; that only xerox copies of the documents have been produced by the Official Liquidator; that the appellants are not able to question the finding of financial irregularities committed by the company in the course of the business; that the Official Liquidator has failed in his obligation to examine Sasidhar under Rule 130; that instead, the Official Liquidator examined only Varghese; that it is pertinent to point out that the report of the Official Liquidator should have been filed only after the receipt of the statement of affairs; that filing of the report without receiving the statement of affairs was a grave procedural irregularity; that no credibility could be attached to the auditor's report relied on by the Liquidator; that the Liquidator failed to prove the allegation as per the procedure established by law; that the statement of Varghese cannot be taken as evidence; that any evidence sought to be relied upon by the Official Liquidator should be proved in a duly constituted trial before the Company Court https://hcservices.ecourts.gov.in/hcservices/ with an opportunity to the appellants to cross-examine the witnesses and controvert the opinion of the auditor regarding the involvement of the appellants in the fraudulent conduct of the business of the company and also to contradict the same by adducing evidence on their part to disprove the allegations and accusations made; that in the instant case, the Liquidator failed to discharge his burden; that Sections 542, 543 and 545 of the Companies Act have a distinct legal connotation and the court can exercise power to order prosecution and make a declaration and indict a person under the said provisions only after it follows the procedure established by law and not deal with the issues in a summary manner; that it is pertinent to point out that the copies of the subsequent documentary evidence were not given to the appellants; that the documents produced at the instance of Varghese in no way prove that the appellants were involved in the fraudulent conduct of the business of the company in liquidation; that Sasidhar offered to bring in Rs.1 crore immediately; that despite that, the Liquidator failed in his obligation to take timely step to preserve the assets and protect the interest of the depositors; that the learned Single Judge failed to appreciate that Sasidhar filed an affidavit owning responsibility for the conduct of the business of the company; that under the circumstances, non- production of the records of the company cannot be attributed to the appellants, and for these reasons, the order of the learned Single Judge has got to be set aside by allowing the appeals, and the appellants be discharged from the claim. 9.The learned Counsel for the appellant in OSA No.56/2004 would contend that the learned Single Judge should have discharged the appellant as the learned Single Judge has come to the conclusion that the respondents 8 to 10 alone misappropriated the funds of the company under liquidation; that the company under liquidation was incorporated on the direction of the respondents 8 to 10; that they are the founders of the company; that under the circumstances, the appellant should have been discharged from the claim of the Liquidator; that it is pertinent to point out that the respondents 8 to 10 have given unconditional undertaking about their involvement in the company under liquidation and the responsibilities undertaken by them through the letter issued to the appellant dated 11.10.1988; that the appellant is not liable to contribute towards damages for the company; that he is not guilty of misfeasance and breach of trust when he acted as per the directions of the respondents 8 to 10, and hence, the order of the learned Single Judge has got to be set aside, and the appellant be discharged from the claim. 10.The Court heard the learned Senior Counsel for the Official Liquidator on the above contentions. He would submit that the learned Single Judge was perfectly correct in granting the relief in the application made by the Liquidator; that the materials produced by the Liquidator have been considered by the learned Single Judge; that as per the provisions of law, the application has been filed by the Liquidator; that there is nothing to disturb the finding recorded by the learned Single Judge and hence, all the appeals have got to be dismissed. 11.As could be seen above, the Official Liquidator sought the reliefs specifically alleging that the company had lost https://hcservices.ecourts.gov.in/hcservices/ Rs.18,32,39,002/- which the respondents 1 to 10 were jointly and severally liable; that they were liable to make good the loss; that they are guilty of fraud played, misfeasance and breach of trust in relation to the affairs of the company in liquidation; and that their acts made them liable under the heads (1) disbursement of housing loans; (2) creating false pronotes; (3) jewel loans; (4) teachers' loan; (5) utility loan; (6) diversion of funds against the vehicle maintenance and (7) transfer of funds to sister concerns. In order to substantiate the claim, the Official Liquidator relied on not only the report of the auditor appointed by this Court, but also the statement given by the seventh respondent Mr.P.C.Varghese and also number of letters written by the contesting respondents and also all circumstances attendant. 12.The respondents contested the application in C.A.No.888 of 1995 inter alia stating that they were carrying on business in which they were partners, by accepting deposits from the members of the public and also advancing moneys on interest; that on maturity, the depositors were paid interest regularly; that in view of the restrictions on payment of interest, the respondents 8 to 10 decided to close down their financial business run by the firms; that at that time, a company was promoted by the respondents 1 to 7 who offered to take the assets and liabilities of the firms; that accordingly, the assets and liabilities of the two firms were taken over by the company in liquidation as reported by the Official Liquidator; that the said Dhanalakshmi Funds India Limited was incorporated with the object of accepting the deposits and lending money on interest; that they were neither inducted as Directors of the company nor involved in the day-to-day management of the company; that the 8th respondent was some time helping Mr.Sasidhar to evolve broad policy matters; that all investment decisions were taken by the 9th respondent; that the Board of Management in two companies were vested with the relations and the confidants of the 9th respondent Sasidhar; that in view of the misunderstanding between the respondents 8 and 10 and 9 in 1986, they resigned from their respective posts, and thus, the company has come exclusively under the management of the 9th respondent Sasidhar; that while the matter stood thus, the company petition was filed in C.P.No.88/89; that winding up was ordered; that the administration was taken up by the Official Liquidator; that the interim Administrators were appointed; that subsequently, they were discharged; and that the Official Liquidator has taken over the entire company's assets. It is further contended that at the time of the formation of the company in liquidation, these respondents never signed the memorandum of articles of association, nor they were on the Board of Directors of the company; that under such circumstances, at no stretch of imagination, no liability could be attributed to them; that it was a company constituted for a lawful purpose and cannot be stated to be fraudulent; that the application filed under Sections 542 and 543 of the Companies Act has got to be dismissed as non-maintainable since the facts and circumstances do not warrant an application under Sections 542 and 543 of the Companies Act; that as far as Sec.542 was concerned, it was a quasi criminal in nature; that in order to decide the same, evidence was to be adduced; that only on appreciation of evidence, it could be decided; that as far as Sec.543 was concerned, they were neither Directors nor Promoters of the company; that under the circumstances, they could not be found https://hcservices.ecourts.gov.in/hcservices/ liable, and hence, the application filed by the Official Liquidator must be dismissed and the application filed by the respondents 8 and 10 be ordered. 13.Originally, there were two partnership firms namely Asian Integrated Finance and Industrial Corporation and Dhanalakshmi Consolidates Finance and Industrial Investments in which the respondents 9 and 10 were partners in the former and the respondents 8 and 9 were partners in the latter. The business of the firms was to receive deposits from the public and also paying interest to the depositors. At that time, since they could not make payment of interest on the higher rate, they decided to close down the business in view of the prohibition under Sec.45b of the Reserve Bank of India Act. At that time, the company in liquidation was registered with the Registrar of Companies on 9.8.1985. It was also declared as "Nidhi" on 22.8.1986. It was adumbrated that the main object of the company was to encourage and afford all facilities on mutual basis for cultivating thrifts, saving and to render all types of financial assistance to its members only by receiving loan and term deposits from the members. At this juncture, from the materials available, it would be quite clear that these two firms were dissolved. According to the respondents, a resolution was passed in that regard, and pursuant to the resolution passed, the assets and liabilities were taken over by