Rajendra Nath Bhaskar And Anr. vs Bhaskar Stoneware Pipes Pvt. Ltd. ...
1991 Latest Caselaw 402 Del

JUDGMENT

M.C. Jain, J.

(1) This appeal is directed against the order of learned Single Judge dated 8th February, 1990 whereby the petitioner's application No. 2300 of 1988 in Co. P. 41 of 1982 for bringing the heirs and legal representatives of the deceased respondent No. 2 Vivek N. Bhaskar on record, was dismissed. The learned Judge placing reliance on the observations made in J. K. Investment Trust (1) Ltd. & Ors. vs. Muir Mills Co. Ltd. & Ors., came to the conclusion that in the petition under Sections 397 and 398 of the Companies Act, the legal heirs and legal representatives of the deceased V. N. Bhaskar are neither necessary parties nor proper parties. The learned Judge observed that the acts of oppression which have been alleged against the deceased V. N. Bhaskar cannot be ascribed to his legal representatives and no cause of action can be said to exist against the legal representatives of the deceased V. N. Bhaskar. It was also observed by the learned Judge that this Court cannot pass any orders against the legal representatives which could have been passed under some other provisions of the law. It may be stated that the deceased V. N. Bhaskar died during the pendency of Company Petition under Sections 397, 398 and 433 of the Companies Act.

(2) The petitioner in the aforesaid petition has averred how and in what manner the deceased acted resulting -into diversion of the company's funds whereby promoting and supporting Ins various concerns at the cost and detriment of the company and for their own benefit and benefit of their company, la this connection averments made in para 25 of the petition are relevant which are as under :- "25.It is submitted that these poor results of the company have been caused and achieved by the diversion of funds from the coffers of the company to support and promote various concerns, companies and activities of B. N. Bhaskar family at the cost and detriment of the company and for their own benefit by, inter alia, the following means :

(i) The B. N. Bhaskar family has the following family concerns/companies known to the petitioners : (a) B. N. Bhaskar and Sons, a partnership concert in which all the partners belong to the B. N. Bhaskar family. (b) Haryana Filters Pvt. Ltd., a company in which the B. N. Bhaskar family holds almost the entire shareholding. (e) B.N.B.S. Cement and Products Pvt. Ltd., a company in which the B. N. Bhaskar family holds the entire shareholding. (d) Dutt Minerals Pvt. Ltd., a company in which the B. N. Bhaskar family holds the entire shareholding. (e) General Refractories Pvt. Ltd., a company of the B. N. Bhaskar family.

(II)Land, buildings and machinery have been given by the company to B. N. Bhaskar and Sons. Haryana Filters Pvt. Ltd. and B.N.B.S. Cements and Products Pvt. Ltd., at the factory premises of the company at Amar Nagar. Distt. Faridabad, Haryana, at a very nominal rent. The company carries on its pay-roll most of the staff of the said concerns/companies, bears water, electricity and other fuel charges and expenses of the companies/ concerns in its accounts as its own overheads. In addition, raw materials are supplied to the said companies/concerns from the inventories of Bhaskar Stoneware Pipes Pvt. Ltd. free of charge or at concessional rates.

(III)The company accommodates within its office premises at Iswar Nagar, the office of B. N. Bhaskar and Sons, Dutt Minerals Pvt. Ltd. and Haryana Filters Pvt. Ltd. The said companies/ concerns have nominal office staff on their payrolls, and utilise the staff of the company for their work and/or carry their staff on the pay-roll of the Bhaskar Stoneware Pipes Pvt. Ltd. Further, most of the office and sales overheads, expenditure, transport, water, electricity and rental of the said companies/concerns are borne by and/ or shown in the books of Bhaskar Stoneware Pipes Pvt. Ltd.

(IV)Further, although Shri Viveek N. Bhaskar and Shri Vidhur Bhaskar are actively engaged in directing and managing the affairs of the above companies/concerns, they are drawing salaries, perquisites and facilities as managing director and joint managing director, respectively, exclusively from the pay-rolls of Bhaskar Stoneware Pipes Pvt. Ltd. and were debiting the said company for all their expenses for the other companies/ concerns aforesaid.

(V)Further, funds have been averted by payments of commission and other charges by the company to General Refractories Pvt. Ltd. which is believed to be a paper concern of the B. N. Bhaskar family.

(VI)It is reasonably believed and apprehended that there are other firms and concerns whom the company deals with. in which members of the B. N. Bhaskar family have substantial undisclosed interest, and from or through whom purchases are made or through whom sales are made on considerations other than the prevailing market prices, to the prejudice of the company. The petitioners crave leave to refer to and rely upon the company's records when produced.

(VII)In addition, the petitioners reasonably believe that respondent Nos. 2 and 3 have diverted monies from the coffers, of the company for other means, for which the petitioners will crave inspection of the company's records".

(3) Further we may reproduce the prayer clause made in the petition so that it can be judged as to whether in view of the prayers made by the petitioner it is necessary to bring on record the heirs and legal representatives of the deceased Shri V. N. Bhaskar. The prayer clause reads as under :- "In the circumstances, it is respectfully submitted that the facts and circumstances of the case would justify the making of winding up order on the ground that it is just and equitable that the company be wound up and that the affairs of the company are being conducted in a manner oppressive to the members of the company, other than the Bnb family, and in a manner prejudicial to the interests of the company, and in a manner prejudicial to the public interest, and that a material change has taken place in the management and control of the company and in the ownership of the company's shares by reason of which the affairs of the company are being aaJ will continue to be conducted in a manner oppressive and prejudicial to the shareholders of the company, other than the members of V. N. Bhaskar family, and in a manner prejudicial to the public interest and to the interest of the company.

(B)It is, however, submitted that if matters complained of could be rectified, the winding up of the company may be avoided.

ITis, therefore, prayed that this Hon'ble Court be pleased :

(I)To pass an order requiring the company to purchase 50 shares issued to Bnbs Cements and Products' P. Ltd. and the shareholding mentioned in annexure E hereto representing the erstwhile shareholding of the Ravindra Nath Bhaskar in the company at value of Rs. 50 per share paid therefore.

(II)To reconstitute the board of directors of the company so that the B. N. Bhaskar family, D. N. Bhaskar family, and Rajendra Nath ' Bhaskar family each have two directors on the board of directors of the company with the eldest as chairman; or

(III)Alternatively, the company be wound up; and/or

(IV)TOpass such other order(s) as this Hon'ble Court in the circumstances deem fit".

(4) It would appear from the prayer clause that the petitioner alleged that there are circumstances which render just and equitable that the company should be wound up and in case the company is not wound up, the company's affairs may be rectified. It has been prayed by the petitioner that the court may pass an order requiring the company to purchase 50 shares issued to B. N. Bhaskar Cement Product P. Ltd. and the shareholding mentioned in annexure E representing the erstwhile share of Rajendra Nath Bhaskar in the company at the value of Rs. 50 per share. Thus in this petition a prayer with regard to repurchase of shares issued to B. N. Bhaskar Cement Products P. Ltd. has also been made and re-purchase of shares which were not transferred from the members of the R. N. Bhaskar group to the members of T. N. Bhaskar group has also been sought.

(5) Mr. V. N. Kaura, learned counsel for the appellant submitted that in an application under sections 397, 398 of the Companies Act, the allegations made by the petitioner would be investigated and enquired into and if those allegations are found in favor of the petitioner, after inquiry, necessary orders under section 402 of the Companies Act can be passed by the Company Judge and if the allegations relating to misfeasance, misapplication of fund, breach of trust are prima facie found, then application under section 543 can be moved for getting necessary relief for assessment of damages. Even for claiming of that relief a finding is required to be arrived at and it would be in the fitness of things that such allegations may be enquired into in the presence of the heirs and legal representatives of the deceased Shri V. N. Bhaskar and if an order under section 402 of the Act is passed for the purchase of the shares as prayed, such an order would affect the heirs and legal representatives of the deceased. It is necessary that before any such order is passed by the court, heirs and the legal representatives of the deceased may be heard and the question may be considered and dealt with by the company Judge in the presence of heirs and the legal representatives of the deceased. He 'submitted that the question as to whether heirs and the legal representatives of the deceased are to be brought on record or not is required to be examined in the light of averments made in the petition and in the light of the prayers sought for by the petitioner in the petition.

(6) According to him the scope of sections 397, 398 is not only ia respect of oppressive management but court has very wide powers under section 402 of the Act and if any order is passed under section. 402 affecting the rights of any one then in that situation the persons, affected should be heard. And if viewed from this point of view the order of the learned Single Judge is not sustainable in law. The learned Judge has confined himself only to acts of 0ppression or mis-management. And for such acts it is true that the legal representatives are in no way responsible and nothing can be ascribed to them. In that situation of course they may not be called upon to be imp leaded but in the instant petition, according to the learned counsel for the appellant, the rights of the legal heirs- and legal representatives of the deceased may be affected by re-purchase of the shares by the company and as such, such an order cannot be passed in the absence of the heirs and legal representatives of the deceased Shri V. N. BhasKar.

A question arises for consideration. 1. Whether the heirs and legal representatives of the deceased Shri V. N. Bhaskar should be joined or substituted as parties in the present petition in view of the provisions contained in Section 543, although there may be averments which may cover the provision ?

(7) Section 543 confers power on the court to assess damages against the delinquent directors. It is as follows :- SECTION 543. Power of Court to assess damages against delinquent director's etc.--

(1)If in the course of winding up a company, it appears that any person Who has taken part in the promotion or formation of the company, or any past or present director, manager, liquidator or officer of the company :-

(A)has misapplied, or retained, or become liable or accountable for, any money or property of the company; or

(B)has been guilty of any misfeasance or breach of trust in relation to the company; the Court may, on the application of the Official Liquidator of the liquidator, or of any creditor or contributory, made within the time specified in 'hat behalf in sub-section (2), examine into the conduct of the person, director, manager, liquidator or officer aforesaid, and compel him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Court thinks just or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer misfeasance or breach of trust, as the Court thinks just.

(2)An application under sub-section (1) shall bs made within five years from the date of the order for winding-up, or of the first appointment of the liquidator in the winding-up, or .of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer.

(3)This section shall apply notwithstanding that the matter is one for which the person concerned may be criminally liable."

(8) A perusal of the aforesaid provision would show, whether any such thing, as is mentioned in clause (a) and (b) of sub-section (1), is prima facie found, in the course of winding up proceedings, then an application can be moved either by the Official Liquidator or the liquidator or any creditor or contributory made within the time specified under sub-section (2 ) and on that application the conduct of the director, or managing agent managers or liquidator or other officers can be examined and on finding them to be guilty of any misfeasance, breach of trust or on finding that there has been misapplication of money or property of the company or its retention or in any way they are liable or accountable of the company's money or property, then they may be directed to re-pay or restore the property of the company with interest or to contribute to such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust. Such an application can be made within 5 years from the date as contemplated in sub-section (2) of section 543. Section 543 envisages making of an application by the persons mentioned in the said provision, if prima facie any such misconduct is found. 9. Rule Ii of the Companies (Court) Rules 1959 provide for petitions. Rule 10 makes a provision as to how applications have to be made. It lays down that unless otherwise provided by these rules or permitted by the Judge, all applications under the Act shall be made by a petition or by a Judge's sunmons. Clause 19 of sub-rule (a) of rule Ii provide for an application by a creditor or member under section 543 (XT Schedule) in the course of proceedings under section 397 or 398 to enquire into the conduct or any of the persons mentioned in .section 543 (XI Schedule) and compel him to repay or restore any money or property to the company or pay compensation. This rule also envisages an application by creditor or member under Section 543 in the course of proceedings under sections 397 and 398.

10. Thus a perusal of section 543 as well as a perusal of the aforesaid rule makes it clear that an application under section 543 is required to be made if any such relief is prayed in the course of winding up proceedings. If during the winding up proceedings prima facie it is found that any such misconduct as is provided under section 543 is committed, then an application seeking relief as contemplated in the said provision can be made. Such a relief can be availed against the heirs and legal representatives of the deceased director or other officer as mentioned in the said provision and no relief, in our opinion, can be granted to the petitioner in the absence of heirs and legal representatives of the director or any other officer as provided in section 543. The liability may be limited to the extent of property inherited by them but no order can be passed against them in their absence without giving them an opportunity of being heard. What is material is that an application with the necessary prayer should be there. It is only in that event that heirs and legal representatives of the deceased are to be heard. In the present case there is no such prayer asking for compensation or claiming for payment or restoration of any money or property. So at this stage with respect to the relief under section 543. the heirs and representatives of Shri V. N. Bhaskar need not be substituted in place of the deceased or need not be joined as parties.

11. We may refer to a decision in Official Liquidator vs. Parthasarathi Sinha & Others,(2) (1983) 53 Comp. Cas. 163, on which reliance has been placed by the learned counsel for the- appellant. In that case Ballygunge Real Property and Building Society Ltd. was ordered to be wound up on January 8, 1958- and thereafter on January 2, 1963 the Official Liquidator took out summons under section 543(1) of the Companies Act against its directors including Dr. S. N. Sinha, for a declaration that said directors were guilty of misfeasance and breach of trust. There was a prayer directing them to repay or restore the money of the company in liquidation. Dr. S. N. Sinha died during the proceedings under section 543 and his heirs and legal representatives were brought on record. That application was allowed by the learned Company Judge but that order was reversed by a Division Bench and the matter came up before the Supreme Court. Their Lordships held that the view taken by the Division Bench of the High Court of Calcutta was erroneous and the appeal was allowed and the judgment of the learned Single Judge was restored.

12. It would appear from this decision that there was an application under section 543 and there was a prayer sought for under that provision and so in the proceedings under section 543, if any order is to be given in respect of money or property retained by the deceased that could be given only after an opportunity is given to the heirs and legal representatives of the deceased, as the property in their hands could not be proceeded against under the law without they being heard. In the present case there is no such prayer made in the petition and the law also does not contemplate, as considered above. Section 543 as well as the aforesaid rule contemplates moving of an application during the course of winding up proceedings. Had there been any prayer in the petition itself, the matter would, have been considered on that Basis but as there is no prayer in the petition, on the ground of averments based on Section 543 it cannot be held that heirs and the legal representatives have to be imp leaded or substituted in place of the deceased.

13. Shri P. H. Parekh, learned counsel for the respondent submitted that m an application under sections 397 and 398 heirs of the deceased director are not required to be substituted and reliance is placed by him on the authority referred to by the learned Single Judge which is a Division Bench decision of the Allahabad High Court referred to above. It has been laid down in that decision that in proceedings instituted under Sections 397 and 398 it is not permissible to implead the legal heirs ana legal representatives of the deceased director and to continue proceedings against them.

14. This question was considered as to whether in proceedings .under Sections 397, 398 the legal representatives are to be imp leaded or not. It was observed that by application of sections 539 to 544 the liability of respondent No. 5 as a director could be enforced in the present proceedings. It was also observed that it is settled that the liability can be enforced only against the living director and not against the heirs and the legal representatives after 'bis .death. It was further observed that it is, therefore, not possible to accept the argument that the heirs of the deceased Shri H. S. Bagla cannot be brought on record and proceeded against in these proceedings without having recourse to section 406 of the provisions of sections mentioned therein. This authority, in our opinion, also emphasises that recourse has to be taken to section 406 and consequently to the provisions of Sections 539 to 544 if heirs and the legal representatives are to be proceeded against.

15. Reference has also been made by Shri Parekh to a Single Bench decision of the Gujarat High Court in Colaba Land &;Mills-Co. Vs. Vasant (3) Corpon., Vol (1963) 2 Comp. L.J. F 89, wherein it has been held as under :- "The scheme of section 543 (Schedule XI) read in the light of the scheme of sections under Chapter Vi, is that if evidence or materials came to be brought on the record of a proceeding under section 397 or section 398 then it is open to a creditor or a member of a company to start proceedings against refinement dircetor, etc. under section 543 (Schedule XI). The Court Js not only not bound but it would he improper for the Court to record any finding about .the existence of a .prima facie case of misfeasance in a proceeding under section 397 or section 398.

Afresh application is necessary for starting proceedings under section 543 (Schedule XI). and that application cap be made not only by a petitioner under section 397 or 398, but may be made by any member or even by a creditor of the Company.

The existence of a prima facie case against the delinquent director, etc. in a proceeding under section 397 or section 398, is, however, a sine qua non for a proceeding under section 543 (Schedule XI). It is clear from the Act that joint petitions under section 397 or 398 and under section 543. cannot be combined together or made sirnultaneously; the petition under section 543 must follow after a prima facie case has come to light in the course of proceedings under section 397 or 398. The application must ordinarily be made by an independent application and not by a sub-application under the main application under section 397 or 398."

The decision does not deal with the question as to whether and when the heirs and the legal representatives of the deceased directors can be brought on record or joined as parties in a petition under sections 397 and 398 of the Companies Act.

(16) Further, there is another aspect of the matter which is weighing with us and that is based on the specific prayer of the petitioner relating to passing of an order requiring the company to purchase the shares issued to B. N. Bhaskar Company P. Ltd. and the share-holding which were got transferred from the members of the Ravinder Bhaskar group to the members of B.N. Bhaskar group and T.N. Bhaskar group. If such an order is passed by the court, which, in our opinion, could be passed under Section 402 of the Companies Act, the rights of the heirs and legal representatives of the deceased may be affected. For the grant of such a relief to the petitioner, in our opinion, heirs and legal representatives are required to be heard and it would not be proper that orders to that effect may be passed by the court without giving an opportunity of hearing. In our opinion that would be in violation of the principles of natural justice as well. If the heirs and legal representatives of the deceased are allowed to be substituted and' joined as parties, then they will have an opportunity of meeting the petitioner's case in respect of the aforesaid prayer. So, in our opinion, looking to the nature of the pleading and the prayer, the learned Judge should have allowed substitution of the heirs and legal representatives in place of the deceased.

17. In the above view of the matter,, this appeal deserves to be allowed. Accordingly the appeal is allowed and the order of the learned Single Judge is set aside and the application for bringing the heirs and legal representatives of the diseased Shri V.N. Bhaskar on record, is also allowed. They shall be added as respondents, as prayed by the petitioner/appellant- No orders as to costs.