Section 322
DIRECTORS
WITH UNLIMITED LIABILITY
[2002]
40 SCL 676 (Ker.)
v.
P. K. V. Group Industries
S.
Sankarasubban and R. Bhaskaran, JJ.
A.S.
No. 1020 of 1998
and
C.M.A. No. 247 of 1998
Section
322 of the Companies Act, 1956 - Directors - Directors, etc., with unlimited
liability in limited company - Whether there is any provision in the Companies
Act, which makes managing director of a company personally liable for recovery
of dues against company - Held, no
A suit was filed for realisation of the
balance amount from the respondent- assessee. A petition for attachment was
filed on the ground that the property in the schedule belonged to
respondent-company which was a company incorporated under the Indian Companies
Act. In the objection to the attachment, it was contended that the property
belonged to the appellant who was the managing director of the company and,
therefore, it could not be attached for the debts of the company.
During proceedings several documents were
produced regarding the property purchased personally by the appellant and also
copy of sale deed in favour of the appellant. However, the sub-judge took the
view that under section 322 the liability of the director was unlimited and,
hence, held that the property could be attached.
On appeal:
There was no dispute that the company is a
separate legal entity and the liability of the company cannot be imposed on its
officers or directors. The lower Court went wrong in relying on section 322.
There is no provision in the Companies Act or the Industrial Disputes Act
making the managing director personally liable. In the above view of the fact
there was no justification for the orders passed by the Court below and,
therefore, the orders passed were to be set aside.
Ramachandran v. State of Kerala [1984] 55
Comp. Cas. 590 (Ker.), Punalur Paper Mills Ltd. v. District Collector, Quilon
[1985] KLT 758, Kundan Singh v. Moga Transport Co. (P.) Ltd. [1987] 62 Comp.
Cas. 600 (P&H), H.S. Sidana v. Rajesh Enterprises [1993] 77 Comp. Cas. 251
(P&H) and Santanu Ray v. Union of India [1989] 65 Comp. Cas. 196 (Delhi).
L. Gopalakrishnan Potti and A. Dinesh Rao for the Appellant. V.
Giri for the Respondent.
Sankarasubban J. - These two appeals are filed against the
interim orders in O.S. No. 33 of 1998 on the file of the Principal Sub-Judge,
N. Paravur. C.M.A. No. 247 of 1998 is filed against the order in I.A. No. 303
of 1998 in the same suit. That is an order by which attachment before judgment
of certain properties was made absolute. In A.S. No. 1020 of 1998, the order
challenged is the order in I.A. No. 736 of 1998, which is a claim petition
filed by the appellant regarding the properties attached and made absolute as
per the order in I.A. No. 303 of 1998. The claim petition was dismissed. Hence
the appeal is filed.
The first respondent in A.S. No. 1020 of 1998
and the respondent in C.M.A. No. 247 of 1998 - PKV Group Industries - is the
plaintiff. The suit was filed for realisation of the balance amount from the
defendant Jikku Chit Fund (Pvt.) Ltd. According to the plaintiff, an amount of
Rs. 3,83,250 is due from the defendant. A petition for attachment was filed on
the ground that the property in the schedule belongs to Jikku Chit Fund. Jikku
Chit Fund is a company incorporated under the Indian Companies Act. In the
objection to the attachment, among other things, it was contended that the
schedule property belongs to the Managing Director Kuriakose and it cannot be
attached for the debts of the company. The learned sub-judge who heard the
matter, took the view that under section 322 of the Indian Companies Act, the
liability of the director is unlimited and hence held that the property can be
attached. It was at that time that the claim petition was filed by the Managing
Director - Kuriakose.
2. In
the claim petition, evidence was adduced to show that the property was
purchased personally by Kuriakose. Ex. A-1 is the copy of the sale deed in
favour of the appellant. Ex. A-2 is the certificate issued by the Federal Bank
showing that the title deed is deposited in the bank as security for the
purpose of the loan granted to the appellant. It is dated May 5, 1986. Ex. A-3
is the tax receipt for the payment of tax of the property in the name of the
appellant. Ex. A-4 shows that the chit fund was incorporated as a company under
the Companies Act and the certificate was issued by the Registrar of Companies,
Delhi and Haryana. Thus, the exhibits clearly show that the property belongs to
Kuriakose and the chit fund is a company incorporated under the Companies Act.
3. The
question is whether the property of the appellant in A.S. No. 1020 of 1998 can
be attached for the purpose of the debts of the Jikku Chit Fund. There is no
dispute that the company is a separate legal entity and the liability of the
company cannot be imposed on its officers or directors. The lower court went
wrong in relying on section 322 of the Companies Act. It is only with regard to
the liability of the shareholders towards the company and it is not for the
outsiders.
4. The
decisions reported in Ramachandran v. State of Kerala [1984] 55 Comp. Cas. 590
(Ker.) and Punalur Paper Mills Ltd. v. District Collector, Quilon [1985] KLT
758 were cited for the proposition that unless by special law, the Managing
Director is mulcted with personal liability he is not liable. In Kundan Singh
v. Moga Transport Co. (P.) Ltd. [1987] 62 Comp. Cas. 600 (P&H), the
question arose under the Industrial Disputes Act. There is no provision in the
Companies Act or the Industrial Disputes Act making the Managing Director
personally liable. The Punjab and Haryana High Court held that there is no
provision either in the Companies Act or in the Industrial Disputes Act, which
makes the Managing Director of a company personally liable for recovery of dues
against the company. In another decision reported in H.S. Sidana v. Rajesh
Enterprises [1993] 77 Comp. Cas. 251 (P&H), the same High Court has held
that where there was a decree for recovery of sums due to a bank from a company
in a suit against the company and its managing director, the liability to
discharge the decretal amount was that of the company and not of its Managing
Director. The executing court could proceed against the Managing Director of
the judgment debtor company only if it came to the conclusion that the Managing
Director was personally liable to discharge the decretal amount. Learned
counsel for the respondent argued that as a matter of fact, the company is only
a camouflage. The entire thing is run by the appellant. It may be so. But so
long as the defendant is the company, it is the liability of the company and
not the person. Learned counsel for the respondent brought to our notice the
decision reported in Santanu Ray v. Union of India [1989] 65 Comp. Cas. 196
(Delhi). It only says that in certain circumstances, the court may disregard
special legal entity of the company, if it was formed or is used to facilitate
evasion of legal obligations where individual directors of a company were
sought to be proceeded against for evasion of excise duty, the corporate veil
was directed to be lifted to determine whether a particular director could be
proceeded against or whether he was liable for payment of all duties. That question
does not arise in this case, because admittedly the suit was filed against the
company for realisation of the balance amount. If that be so, only the company
is made liable for the amount.
5. In the above view of the fact, we do not find any justification in the orders passed by the court below and the orders passed are set aside. A.S. No. 1020 of 1998 and C.M.A. No. 247 of 1998 are allowed. I.A. No. 303 of 1998 is dismissed, while I.A. No. 33 of 1998 is allowed.
[1989] 65 COMP. CAS. 92 (Punj. & Har.)
Smart Advertising Co. (P.) Ltd.
v.
R.N.
MITTAL J.
Company Petition No. 56 of 1987 in Company
Petition No. 41 of 1983
SEPTEMBER
17, 1987
D.P. Verma for the petitioner.
R.N. Mittal J.—The petitioner-company was ordered to be wound up by this
court, vide order dated August 31, 1984, in Company Petition No, 41 of 1983 and
the official liquidator was appointed as its liquidator. Respondents Nos. 1 and
2 were its managing director and director, respectively, during the time it
functioned. The respondents, it is alleged, did not take any active part in the
functioning of, the company and some of their acts were considered fraudulent
and against the interest of the company and its creditors. They are, therefore,
guilty of misfeasance and breach of trust in relation to the company.
It
was further pleaded that on going through the statement of affairs, it was
found that all the debts due from various parties to the company had become
time-barred before it came into liquidation and the respondents did not take
any action for realisation of those debts. The debts aggregate to Rs. 4,056.77
as detailed below :
|
Serial No. |
Name and address |
Amount |
|
|
|
Rs. P. |
|
1. |
The Indian Farming Ministry of Agriculture, Govt. of India |
44.10 |
|
2. |
The Indian Express, Delhi |
19.80 |
|
3. |
The Indian Express, Mount Road, Madras |
29.40 |
|
4. |
The Times of India, Ahmedabad |
6.00 |
|
5. |
Sh. Ajit Singh, Sherpur Engg., Garh Road, Meerut |
16.20 |
|
6. |
Pt. Hem Raj Sharma Raj Jyotishi, V. & P.O., Kartarpur |
600.00 |
|
7 |
M/s Bagga Art Studio, Gill Road, Rani Market, Ludhiana |
395.07 |
|
8. |
Ramesh K. Nanchahal, Impression International G. T. Road,
Miller Ganj, Ludhiana-3 |
718.48 |
|
9. |
The Director of Commercials, All India Radio, Backbay
Reclamation, Bombay-1 |
1,443.75 |
|
10. |
M/s. Dynamio Sales Corpn., Rohit House, Tolstoy Marg, New Delh |
100.00 |
|
11. |
Gurunanak Fertilizers, V. & P.O. Gill, Ludhiana |
139.20 |
|
12. |
M/s. Peshawar Perfumery Products, Janta Nagar, Gill Road,
Ludhiana |
210.00 |
|
13 |
M/s. Sellaids, G.T. Road, Miller Ganj, Ludhiana-3 |
274.41 |
|
14 |
The Harathweda, Aurangabad |
60.36 |
|
|
Total |
4,056.77 |
The above debts are the
only assets of the company and the creditors can be paid on realisation
thereof. The respondents are personally liable to pay the aforesaid amount. Consequently,
it is prayed that a decree for recovery of Rs. 4,056.77 with interest at the
rate of 12% per annum from the date of the winding-up order, i.e., August 31,
1984, till the date of realisation of the amount, be passed in favour of the
petitioner company and against the respondents jointly and severally.
Notice of the petition was
issued to the respondents. The respondents did not appear to contest the case.
Consequently, they were proceeded against ex parte.
The petitioner, in order to
prove the case, produced Shri R. S. Negi, official liquidator. He deposed about
the aforesaid facts. He further deposed that respondent No. 1 filed the
statement of affairs with the list of debtors and creditors on November 17,
1984. After going through the statement, it was found that a sum of Rs.
4,056.77 was realisable from the debtors by the company (in liquidation). The
amount had become time-barred before the winding-up order passed by the court.
From the aforesaid
statement, it is clear that the respondents did not institute any proceedings
against the debtors for recovery of the amounts due to the company and allowed
them to become time-barred Section 543 of the Companies Act, inter alia,
provides that if it appears that any past or present director of the company
has been guilty of misfeasance or breach of trust in relation to the company,
the court may, on the application of the official liquidator, or the
liquidator, examine into the conduct of the director and compel him to
contribute such sum to the assets of the company by way of compensation in
respect of misfeasance or breach of trust as the court thinks just. The words
"misfeasance and breach of trust" have been defined by the Supreme
Court in P.K.
Nedungadi v. Malayalee Bank Ltd. [1972] 42 Comp Cas 120; AIR 1971 SC 829, wherein it was observed that misfeasance and
breach of trust include breach of duty to the company resulting directly in
misapplication or loss of the company's assets. Allegations or proof of fraud
are not essential. It is immaterial that the offender is also criminally
liable. Breach of such duty makes him liable to repay or restore the company's
loss.
From the aforesaid
definition, it is clear that if the company suffers any loss on account of
breach of duty on the part of a director, he is liable to reimburse the company
to the extent of such loss. In the present case the breach of duty on the part
of the respondents is apparent from the facts of the case. Therefore, they are
liable to reimburse the company to the tune of Rs. 4,056.77. The petitioner has
further claimed interest on the said amount from the date of filing of the
petition till the date of realisation of the amount at the rate of 12% per
annum. In my view, this claim of the petitioner is justified.
For the aforesaid reasons,
I pass a decree for recovery of Rs. 4,056 77 with interest at the rate of 12%
per annum from the date of filing of the petition, i.e., April 10, 1987, till
the amount is realised jointly and severally against the respondents.
The respondents shall also pay
costs of this petition, which I assess at rupees three hundred and fifty.
[2003]
43 scl 496 (delhi)
v.
R.M. Marketing & Services (P.) Ltd.
A.K.
Sikri, J.
May 16,
2001
Section 322 of the Companies Act, 1956 -
Directors - Liability of - Defendant No. 1, a company incorporated under Act,
availed of a loan from plaintiff-bank but failed to pay same - Plaintiff-bank
filed suit for recovery of loan - Whether defendant Nos. 2 and 3 who had given
their personal guarantee for due payment of loan as directors of defendant No.
1, would be liable as guarantors - Held, yes - Whether, however, defendant Nos.
4 to 6 who did not give any personal guarantee for payment of loan, simply because
they were directors of defendant No. 1, could be fastened with liability in
respect of loan - Held, no
K. Anand
Singh for the Petitioner.
1. This suit is filed
by Indian Overseas Bank which is a Nationalised Bank and a body corporate
constituted under the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970. The suit is for recovery of Rs. 7,92,563.46 p.
Averments contained in the plaint are that the defendant No. 1 which is engaged
in carrying on business of providing consultancy and engineering service to
foreign Indian buyers, assembly and fabrication of automatic capsule etc.
approached the plaintiff-Bank for sanction of various loan facilities and among
these was a cash credit limit of Rs. 1 lakh. The plaintiff-Bank considered the
request of the defendant No. 1 and sanctioned among other facilities a cash
credit limit to the tune of Rs. 1 lakh for which the following documents were
executed :—
1. Resolutions dated 19th Oct., 1981 and
31st August, 1983.
2. Demand Promissory Note for Rs. 1 lakh
dated 20th Oct., 1983.
3. Letter of continuity (F-16) for Rs. 1
lakh.
4. Deed of Hypothecation in case of open
advance dated 20th Oct., 1983 for Rs. 1 lakh.
5. Form No. 8 on the Companies Act, 1956.
6. Letter of Undertaking by the Company.
2. The defendants 2
and 3 gave personal guarantees dated 30th April, 1983 for Rs. 12 lakhs and
defendant No. 2 gave another guarantee dated 12th Oct., 1983 for Rs. 1 lakh and
another personal guarantee dated 20th Oct., 1983 for Rs. 1 lakh. A Cash Credit
Account was opened with the plaintiff Bank in its Defence Colony Branch and the
amount of Rs. 1 lakh was transferred to the said amount. The defendant No. 1
availed the loan and it was kept over drawn however it did not adhere to the
clearing of cash credit limits. The plaintiff approached the defendant No. 1
for adjusting the loan amount on 28th June, 1986. The defendants confirmed the
debt balance of Rs. 4,36,217.45 p. Revival letter No. F-301 dated 28th June,
1986 was also signed by the defendant No. 2 as Managing Director of the
defendant No. 1. However, even thereafter the outstanding amount was not
adjusted. The defendant had agreed to pay interest at the rate of 13.5 per cent
at quarterly rests. The amount was debited from time to time with the aforesaid
interest and as on the date of filing of the suit the amount came to Rs.
7,92,563.46 p.
3. Summons in the
suit were duly served on all the defendants. However, only the defendants 1 and
2 appeared and filed the written statement. Following issues were framed on
18th Sept., 2000 :—
1. Whether the plaint has been signed and
filed by the authorised person ?
2. Whether the plaint has been filed
within limitation ?
3. To what rate of interest, the plaintiff
is entitled from the defendants ?
4. Whether the suit is maintainable
against defendant No. 2 ?
4. Thereafter, the
defendants 1 and 2 also stopped appearing and all the defendants were proceeded
ex parte. The plaintiff was allowed to lead evidence by way of affidavit. The
plaintiff has filed the affidavit of Shri B.S. Jait, Assistant Manager, Indian
Overseas Bank, Defence Colony Branch, Defence Colony, New Delhi. He has proved
on record various documents as well. Exh. PW1/1 is the Power of Attorney in
favour of Shri S.S. Sharma, the then Chief Manager, Indian Overseas Bank,
Defence Colony Branch, Defence Colony, New Delhi who has signed and verified
the plaint and have filed this Suit. Various documents executed by the defendant
No. 1 are exhibited as Exh. PW. 1/4 to PW. 1/8. The personal guarantees of the
defendants 2 and 3 are exhibited as Exh. PW. 1/9 to PW. 1/12. The balance
confirmation given by the defendant No. 1 is exhibited as Exh. PW. 1/13 and the
revival letter is Exh. PW. 1/14. The plaintiff-Bank has also given legal notice
which is Exh. PW. 1/15. The witness has also stated that as per the record a
total amount of Rs. 7,92,563.46 p. is outstanding statement of account duly
certified by the bankers under the Evidence Act has been filed along with the
plaint. In the affidavit, it is also stated that the defendant No. 3 has paid a
sum of Rs. 5,92,887.70 p. during the pendency of the suit and the defendant has
absolved him from the liabilities. After adjusting the aforesaid payment, as
per this affidavit, balance sum of Rs. 1,96,675.76 p. only is due and decree
for this amount is prayed for.
5. The defendants 4
to 6 are also impleaded on the ground that they were Directors of the defendant
No. 1. However, these defendants did not give any personal guarantee for due
payment of loan and simply because they were Directors of the defendant No. 1,
they could not be fastened with the liability as the defendant No. 1 which is a
Company incorporated under the Companies Act is separate legal entity. The
defendants 2 and 3 would be liable as Guarantors. Since the defendant No. 3 has
also been absolved from the liabilities no decree need to be passed against the
defendant No. 3 as well.
6. Decree in the sum
of Rs. 1,96,675.76 p. is accordingly passed against the defendants 1 and 2
along with interest on this amount at the rate of 16.5 per cent per annum from
the date of institution of suit till recovery thereof. The plaintiff shall also
be entitled to cost. Decree be drawn accordingly.
Order
accordingly.