Madras High Court
N.Srinivasan (Cdc Nominee) vs The Official Liquidator on 16 September, 2025
Author: Senthilkumar Ramamoorthy
Bench: Senthilkumar Ramamoorthy
2025:MHC:2212
Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Orders Reserved on 26.08.2025
Orders Pronounced on 16.09.2025
CORAM
THE HON'BLE MR. JUSTICE SENTHILKUMAR RAMAMOORTHY
Comp.A.Nos.397 to 400 of 2024
and 86 to 88 of 2025
in Comp.A.No.276 of 2024
in C.P.No.255 of 2014
Comp.A.Nos.397 to 400 of 2024
N.Srinivasan (CDC Nominee)
Currently residing at 22-01, Tribeca, 60,
Kim Seng Road, Singapore-239491.
Previously at D.32, Nizamudehin Post,
New Delhi-110013,
Represented by his power of attorney
Mr.Arun Prakash Srinivasa Rao Korati,
433, 8th cross, near Madhavan Park,
Jayanagar 1st Block,
Bangalore South, Bengaluru,
Karnataka-560011.
..Applicant
Vs
1. The Official Liquidator
High Court, Madras as the Provisional Liquidator
of M/s. First Leasing Company of India Limited,
(In Provisional Liquidation),
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
No.29, Corporate Bhavan, 2nd floor, Rajaji salai,
Chennai-600 001.
2. Farouk M. Irani, S/o. Merwan Rustom Irani,
(Managing Director of FLCIL), DIN 00174018,
Address: La Reve, 10, River View Road,
Kotturpuram, Chennai-600 085.
3. Maharaj Jai Singh,
S/o.Maharaja Sawai Manisingh
(Director of FLCIL) DIN 00041513,
Address : Bungalow No.12, Civil Lines,
Jaipur-06.
4. Shri. A.C.Muthiah,
S/o.Muthaiah Chidambaram Annamalai,
(Chairman of FLCIL) DIN 00041905,
Address : H.No. Adyar Villa, Kotturpuram,
Chennai-600 085.
Dhanasekar (Deceased)
S/o.Saravanabavanantham, Vallajah,
(Director of FLCIL), DIN:00211656, Address:32, South
Boag Road, T.Nagar, Chennai-600 017.
5. A.L.Vadivelu, S/o.Alagappa Chettiyar,
(Director of FLCIL), Address: H.No.10, 1st
Floor, MAC Sunny Side, Dr.Alagappa Road,
Chennai-600 084. M.D.Narayan (Deceased)
(Director of FLCIL), Address : H.No.60, 9th
Main Road, Raja Mahal Vilas,
Bangalore-560 080.
Vice Admiral Rustom Khushro Gandhi
(deceased), 6A, Dolphin plot,
Bander Road, Colaba, Mumbai-400005.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
6. V.Sreenivasulu, S/o.V.Subbaiah,
(CDC Nominee), Address : H.No.14/1,
Kanakapura Road, Near Lalbagh West Gate,
Bangalore South, Basavangudi-560 004.
7. Babu K Varghese, S/o.K.Joseph Verghese,
(Director of FLCIL) DIN.00046699,
Address : H.No.492, 3rd South Main Road,
Kapaleswar Nagar, Neelankarai, Chennai-41,
Address also at: No.10, Ranganattan Avenue,
Uthandi, Chennai-600 119.
8. Vishwanath Tumu, S/o.Seetharam Das Tumu,
(Director of FLCIL), DIN.02031020,
Address : H.No.10-2-289/74, Shanthi Nagar,
Humayun Nagar, Hyderabad-28.
9. Sathishkumar Anavangot,
S/o.Nair Annikath Sethu Madavan
(Director of FLCIL) DIN.00087283,
Address: H.No.B002, Keshav Dugar, 1/30,
East Avenue, Kesavapuram, Chennai-28, Address
also at: H.No.102, Casa Grand Vitaliya,
Palaniswamy Street, Race Course,
Coimbatore-641 018.
10.Mr.Dilliraj, S/o.Kuppaswamy Somasundaram,
(Sr.Vice President (Treasury) and acting CFO of
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
FLCIL), Address. H.No.Flat No.202,
Shri Sudarshna Apartments, Srinagar Colony,
Hyderabad-500 073.
11.L.Sivaramakrishnan,
(Chief Financial Officer of FLCIL)
Address: H.No.A-4, 20, Venkatesanagaram,
Extension 1st Virugambakkam,
Chennai-600 092. Address also at: H.No.9A,
Baskar Nagar, Nehru Nagar, Saligramam,
Chennai-600 093.
12.V.Balaraman, S/o.K.V.Raman,
(Company Secretary of FLCIL),
Address. H.No.Flat No.A-2, 32,
Jambulingam Street, Chennai-600 034.
13.S.Hari Prasad, S/o.S.Sridhar,
(Company Secretary of FLCIL),
Address.H.No.B-3, Narayani Apartments,
Velian Nagar, Valasaravakkam,
Chennai-600 087.
14.Deepa Chellam, D/o.B.Ruthnaswamy,
(Company Secretary of FLCIL),
Address. H.No.T-27, G. Block,
TNHB Church Road, Mylapore,
Chennai-600 004.
15.N.Kumar, S/o.Natarajan Nagarajan,
(Company Secretary of FLCIL),
Address: H.No.Old No.3, New No.13,
VGN Street, Dasarathapuram, Saligramam,
Chennai-600 093, Address also at No.1E,
B.S.Apartments, Sayee Nagar, Virugambakkam,
Chennai-600 092.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
..Respondents
Comp.A.Nos.86 to 88 of 2025
V.Sreenivasulu
S/o.V.Subbaiah, (CDC Nominee),
Address: H.No.14/1, Kanakapura Road,
Near Lalbagh West Gate, Bangalore South,
Basavangudi-560004.
..Applicant
Vs
1. The Official Liquidator
High Court, Madras as the Provisional Liquidator of
M/s.First Leasing Company of India Limited, (In Provisional Liquidation),
No.29, Corporate Bhavan, 2nd floor, Rajaji Salai, Chennai-600 001.
2. Farouk M. Irani, S/o. Merwan Rustom Irani,
(Managing Director of FLCIL), DIN 00174018,
Address: La Reve, 10, River View Road,
Kotturpuram, Chennai-600 085.
3.Maharaj Jai Singh,
S/o.Maharaja Sawai Manisingh
(Director of FLCIL) DIN 00041513,
Address : Bungalow No.12, Civil Lines,
Jaipur-06.
4.Shri. A.C.Muthiah,
S/o.Muthaiah Chidambaram Annamalai,
(Chairman of FLCIL) DIN 00041905,
Address : H.No. Adyar Villa, Kotturpuram,
Chennai-600 085.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
Dhanasekar (Deceased)
S/o.Saravanabavanantham, Vallajah,
(Director of FLCIL), DIN:00211656, Address:32,
South Boag Road, T.Nagar, Chennai-600 017.
5.A.L.Vadivelu, S/o.Alagappa Chettiyar,
(Director of FLCIL), Address: H.No.10,
1st Floor, MAC Sunny Side, Dr.Alagappa Road,
Chennai-600 084.
M.D.Narayan (Deceased)
(Director of FLCIL), Address : H.No.60,
9th Main Road, Raja Mahal Vilas,
Bangalore-560 080.
Vice Admiral Rustom Khushro Gandhi (deceased),
6A, Dolphin plot, Bander Road, Colaba, Mumbai-400005.
6. N.Srinivasan (CDC Nominee)
D.32, Nizamudehin Post,
New Delhi-110 013.
7. Babu K Varghese, S/o.K.Joseph Verghese,
(Director of FLCIL) DIN 00046699,
Address : H.No.492, 3rd South Main Road,
Kapaleswar Nagar, Neelankarai, Chennai-41,
Address also at: No.10, Ranganattan Avenue,
Uthandi, Chennai-600 119.
8. Vishwanath Tumu, S/o.Seetharam Das Tumu,
(Director of FLCIL), DIN 02031020,
Address : H.No.10-2-289/74,
Shanthi Nagar, Humayun Nagar, Hyderabad-28.
9.Sathishkumar Anavangot,
S/o.Nair Annikath Sethu Madavan
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(Director of FLCIL) DIN 00087283,
Address: H.No.B002, Keshav Dugar,
1/30, East Avenue, Kesavapuram, Chennai-28,
Address also at: H.No.102, Casa Grand Vitaliya,
Palaniswamy Street, Race Course, Coimbatore-641 018.
10.Mr.Dilliraj, S/o.Kuppaswamy Somasundaram,
(Sr.Vice President (Treasury) and acting CFO of FLCIL),
Address. H.No.Flat No.202,
Shri Sudarshna Apartments, Srinagar Colony, Hyderabad-500 073.
11.L.Sivaramakrishnan,
(Chief Financial Officer of FLCIL)
Address: H.No.A-4, 20, Venkatesanagaram,
Extension 1st Virugambakkam,
Chennai-600 092. Address also at: H.No.9A,
Baskar Nagar, Nehru Nagar, Saligramam,
Chennai-600 093.
12. V.Balaraman, S/o.K.V.Raman,
(Company Secretary of FLCIL),
Address. H.No.Flat No.A-2, 32,
Jambulingam Street, Chennai-600 034.
13.S.Hari Prasad, S/o.S.Sridhar,
(Company Secretary of FLCIL), Address: H.No.B-3,
Narayani Apartments, Velian Nagar, Valasaravakkam,
Chennai-600 087.
14.Deepa Chellam, D/o.B.Ruthnaswamy,
(Company Secretary of FLCIL),
Address. H.No.T-27, G. Block,
TNHB Church Road, Mylapore,
Chennai-600 004.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
15.N.Kumar,
S/o.Natarajan Nagarajan,
(Company Secretary of FLCIL),
Address:
H.No.Old No.3,
New No.13,
VGN Street, Dasarathapuram,
Saligramam,
Chennai-600 093,
Address also at
No.1E,
B.S.Apartments,
Sayee Nagar,
Virugambakkam,
Chennai-600 092. ... Respondents
Prayer in Comp.A.No.397 of 2024: Application is filed under Order XIV Rule 8
of the Original Side Rules Read With Order I Rule 10 of the Code of Civil
Procedure, 1908 and Rules 9 & 11(b) of the Companies (Court) Rules, 1959, to
pass an order to strike out the name of the applicant / respondent No.9, being
N.Srinivasan from the list of respondents in Company Application No.276 of
2024 in Company Petition No.255 of 2014.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
Prayer in Comp.A.No.398 of 2024: Application is filed under Order XIV Rule
8 of the Original Side Rules Read With Section 151 of the Code of Civil
Procedure, 1908 and Rules 9 & 11(b) of the Companies (Court) Rules, 1959, to
pass an order, pending the hearing and final disposal of the present
Application, to stay all further proceedings (including, interlocutory
applications, if any) in company application No.276 of 2024 in company
petition No.255 of 2014 as against the Applicant / respondent No.9.
Prayer in Comp.A.No.399 of 2024: Application is filed under Order XIV Rule
8 of the Original Side Rules Read With Order XXXIX Rule 4 of the Code of
Civil Procedure, 1908 and Rules 9 & 11(b) of the Companies (Court) Rules,
1959, to vacate the order dated 09.08.2024 passed by this Hon'ble Court in
company application No.276 of 2024 in company petition No.255 of 2014 as
against the Applicant / respondent No.9 in toto.
Prayer in Comp.A.No.400 of 2024: Application is filed under Order XIV Rule
8 of the Original Side Rules Read With Order VII Rule 11 of the Code of Civil
Procedure, 1908 and Rules 9 & 11(b) of the Companies (Court) Rules, 1959, to
pass an order to dismiss the company application No.276 of 2024 in company
petition No.255 of 2014 as against the Applicant / respondent No.9.
Prayer in Comp.A.No.86 of 2025: Application is filed under Order XIV Rule 8
of the Original Side Rules Read With Rules 9 & 11(b) of the Companies
(Court) Rules, 1959, to stay all further proceedings in C.A.No.276 of 2024 in
C.P.No.255 of 2014 against the Applicant/Respondent No.8, pending final
hearing of the present application.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
Prayer in Comp.A.No.87 of 2025: Application is filed under Order XIV Rule 8
of the Original Side Rules Read With Rules 9 & 11(b) of the Companies
(Court) Rules, 1959, to pass an order to strike out the name of the Applicant /
Respondent No.8, being V.Sreenivasulu, from the list of Respondents in
Company Application No.276 of 2024 in Company Petition No.255 of 2014.
Prayer in Comp.A.No.88 of 2025: Application is filed under Order XIV Rule 8
of the Original Side Rules Read With Rules 9 & 11(b) of the Companies
(Court) Rules, 1959, to vacate the order dated 09.08.2024 passed by this
Hon'ble Court in Company Application No.276 of 2024 in C.P.No.255 of 2014
as against the Applicant/Respondent No.8 in toto.
For Applicant in Comp.A.Nos.397 to 400 of 2024 :
Mr.J.Sivanandaraj, senior counsel
for Ms.Preeti Mohan
Ms.Ridhima Sharma
Mr.Rajendra Barot
Ms.Priyanka Shetty
For Applicant in Comp.A.Nos.86 to 88 of 2025:
Mr.P.Giridharan
Mr.Karthik Murali
For 1st Respondent/Official Liquidator in all company applications:
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
Mr.V.Chandrasekaran, SPC,
assisted by Mr. R.Hariprasad
COMMON ORDER
The Official Liquidator filed Comp.A.No.276 of 2024 under Section 542
of the Companies Act, 1956 (CA 1956) seeking a declaration that the
respondents conducted the business of the First Leasing Company of India
Limited (FLCIL)/ company in liquidation (the Company) fraudulently and that
they are personally liable without any limitation of liability for all the debts of
the Company. In particular, a declaration has been sought that the respondents
are jointly and severally liable to contribute Rs.1,302/- crores, which is due and
payable to the creditors of the Company as per the report of the Special Fraud
Investigation Office (SFIO) with interest thereon at 12% per annum from the
date of provisional liquidation. Various interim orders were prayed for in the
said application. By order dated 09.08.2024, the respondents were restrained
from mortgaging or creating a charge or lien or third party interest over or
alienating movable and immovable properties owned by them until further
orders. They were further restrained from operating their respective bank
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
accounts and the Central Depository Services Limited (CDSL) and National
Securities Depository Limited (NSDL) were directed to freeze the securities
owned or held by the respondents in any companies/societies until further
orders. This order was modified by order dated 30.08.2024 in respect of
respondents 1, 2, 5, 8, 10, 12, 14, 16 and 18 by suspending the order restraining
operation of their respective bank accounts until further orders. By subsequent
order dated 04.09.2024, the benefit of order dated 30.08.2024 was extended to
the 9th respondent.
2. Eighteen respondents were arrayed in Comp.A.No.276 of 2024. The
applicant in Comp.A.Nos.397 to 400 of 2024, Mr.N.Srinivasan (Srinivasan), is
the 9th respondent therein and the applicant in Comp.A.Nos.86 to 88 of 2025,
Mr.V.Sreenivasulu (Sreenivasulu), is the 8th respondent therein.
3. By these applications, the respective applicant seeks to: vacate the
order dated 09.08.2024 insofar as it pertains to the respondent concerned; strike
out the respective applicant from the array of respondents in Comp.A.No.276 of
2024 or dismiss the said application insofar as it pertains to such applicant; and
pending consideration of such request, stay further proceedings in
Comp.A.No.276 of 2024.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
4. In the affidavit in support of the applications filed by Srinivasan, it is
stated that the Commonwealth Development Corporation, a statutory
corporation of the Government of the United Kingdom, which was later
converted into a public limited company called CDC Group plc (CDC), had
invested in the Company. It is further stated that he was the nominee of CDC on
the board of directors of the Company and served as a non-executive director of
the Company from 2001 to mid 2002. The name of CDC is said to have been
changed thereafter to British International Investment plc (BII), and he states
that he is currently the Managing Director and Head of Asia of the said entity.
5. Since he was not a part of the management and was not in-charge of
the day-to-day affairs of the Company, it is stated therein that Section 542 of
CA 1956 cannot be invoked against him. It is further stated that the allegations
in Comp.A.No.276 of 2024 are lacking in particulars; that not a single instance
of wrong doing by him has been cited therein; and that this is not in conformity
with pleading requirements when fraud is alleged. Therefore, it is stated that
there is no cause of action against him; that the application is liable to be
rejected against him by invoking Order VII Rule 11 or Order I Rule 10 of the
Code of Civil Procedure, 1908 (the CPC).
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
6. In the affidavit of Sreenivasulu, he asserts that the requirements for the
grant of an ex parte order were not satisfied in this case and that even a copy of
such order was not provided to him, thereby contravening Order XXXIX CPC.
After stating that his life savings have been invested in mutual funds and debt
securities managed by a wealth manager, he states that the freezing of his demat
account has a significant adverse impact on his corpus and hampers his access
to liquidity. He also states that he was a nominee non-executive director
between 19.03.1999 and early July 2020. The other averments in his affidavit
are substantially similar to those in the affidavit of Srinivasan.
7. The Official Liquidator filed counter affidavits in both sets of
applications. In such counters, it is stated that the applicants were admittedly
directors of the Company; that fraudulent activities were carried out by the
management of the Company during the said period; and that all the directors
participated in board meetings wherein relevant decisions were taken. As
members of the board, the Official Liquidator states that the applicants were
duty bound to act in good faith and prevent the misuse of funds by the
promoters. In view of the failure to discharge fiduciary duties, it is asserted that
they are liable for prosecution. Therefore, the Official Liquidator states that no
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
case is made out by the applicants and that all the applications are liable to be
dismissed.
Counsel and their contentions:
8. Oral arguments on behalf of the applicant in Comp.A.Nos.397 to 400
of 2024 were advanced by Mr.J.Sivanandaraj, learned senior counsel, assisted
by Ms.Ridhima Sharma, learned counsel. Oral arguments on behalf of the
applicant in Comp.A.Nos.86 to 88 of 2025 were advanced by Mr.P.Giridharan,
learned counsel. Mr.V.Chandrasekaran, learned SPC, assisted by
Mr.R.Hariprasad, learned counsel, advanced arguments on behalf of the
Official Liquidator. The respective applicant submitted written submissions
also.
9. The first contention of Mr. J.Sivanandaraj was that the only charges in
the SFIO report relating to Srinivasan were charge nos.3.1, 3.2 & 5. Charge
no.3.1 relates to the falsification of the financial statements of FLCIL/the
Company for financial years 1997-1998 to 2011-2012. He submitted as follows
in this regard. The charge was framed under Section 211 read with Sections 628
of CA 1956. Section 211 deals with the contents of the balance sheet and profit
and loss account, and makes reference to the persons referred to in sub-section
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(6) of Section 209. Section 209(6) makes the directors of a company liable for
non-compliance with the requirements of Section 209 only if such company
does not have a Managing Director or Manager. Since the Company had a
Managing Director, Srinivasan, who was only a nominee non-executive
director, cannot be made liable in respect of alleged falsification of financial
statements. Charge no.3.2 pertains to falsification of board reports for financial
years 1997-1998 to 2011-2012. Section 217 of CA 1956 was invoked in relation
to this charge. Srinivasan did not sign the balance sheet or profit and loss
account of the Company during the period when he was a nominee director. The
Company had a Managing Director and a whole-time secretary. Therefore, the
responsibility cannot be foisted on Srinivasan for the alleged contravention of
Section 217. Charge no. 5 relates to unauthorised contribution as donation to the
MAC Public Charitable Trust (the MAC Trust) and to the exercise of powers by
the board of directors without the consent of the Company in a general meeting.
Sections 293 and 629A were invoked in relation to this charge. Section 293
deals with restrictions on the powers of the board of directors, including in
relation to contribution to charitable funds not directly related to the business of
the company. As in the case of other charges, this charge cannot be foisted on a
non-executive director unless such person played an active role in the relevant
transaction.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
10. After pointing out that the role of Srinivasan is dealt with at pages 241
to 243 of the SFIO report, learned senior counsel submitted that even the tenure
of directorship is erroneously mentioned in the report. He also submitted that
the report noticed letter dated 10.01.2022 from Srinivasan stating that he was
not involved in the day-to-day management of the affairs of the Company and
that he does not have cogent material to respond to questions put to him. Apart
from recording that a nominee director cannot escape from the fiduciary
responsibilities of corporate governance, learned senior counsel contended that
no specific allegation has been made against Srinivasan in the said report.
During his term as nominee director, learned senior counsel submitted that
Srinivasan attended only 3 board meetings held on 20.08.2001, 26.12.2001 and
28.03.2002, wherein financial statements, board reports and donations to
charitable trusts were not discussed.
11. In this factual context, by referring to precedents, learned senior
counsel proceeded to contend that: there is no basis to invoke Section 542 of
CA 1956 against Srinivasan; that the said provision may only be invoked on the
basis of specific allegations that the respondent concerned had knowingly
participated in carrying on the business fraudulently; there is no cause of action
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
against him thereby justifying rejection of the application under Order VII Rule
11 CPC; and Srinivasan is neither a necessary nor proper party thereby
justifying deletion under Order I Rule 10 CPC.
12. The following judgments were relied on by him in support of the
above contentions:
(i) Chintalapati Srinivasa Raju v. Securities and Exchange Board of
India, (2018) 7 SCC 443, particularly paragraphs 2, 5, 19 to 25 & 29, regarding
the limited role played by a non-executive director and that such individual
cannot be made responsible for actions taken by those in the management of
Satyam Computer Services Limited.
(ii) Security and Finance Pvt. Limited v. B.K.Bedi and others, 1990 SCC
OnLine Del 102, particularly paragraphs 1 & 31 to 33 thereof, regarding the
requirement of providing particulars in an application under Section 542.
(iii) Official Liquidator, High Court, Madras v. Gautham Dhiraj Mal
Ranka & others, 2007 SCC OnLine Mad 888 (Gautham Dhiraj Mal Ranka),
particularly paragraphs 13 & 14 thereof, wherein this Court followed the
judgment of the Supreme Court in Official Liquidator v. Raghawa Desikachar,
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(1974) 2 SCC 741, and held that the burden of proving misfeasance rests on the
Official Liquidator.
(iv) Official Liquidator, High Court, Calcutta v. Padam Kumar Khaitan
and others, 2008 SCC OnLine Cal 508, particularly paragraphs 9 to 20 thereof,
for the proposition that an application to delete the name of a party from the
array of parties in an application under Section 443 of CA 1956 may be allowed
in cases where the application contains no allegations against such applicant.
(v) Official Liquidator Milan Chit Fund & Finance P. Ltd. v. Joginder
Singh Kohli and others, 1977 SCC OnLine Del 43, wherein the Delhi High
Court concluded that an application under inter alia Section 542 of CA 1956
cannot be sustained on the basis of vague non-specific allegations against all the
directors.
(vi) Official Liquidator of Shubh Laxmi Savings and Finance P. Limited
(in liquidation) v. Brij Mohan Gogna and another, 2006 SCC OnLine Raj 111,
particularly paragraphs 8, 9 and 11 thereof, with regard to the requirement of
specific acts of commission or omission on the part of each director.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(vii) National Sugar Mills Limited (In liquidation), 1975 SCC OnLine
Cal 303, particularly paragraphs 15 to 17 thereof.
(viii) The Official Liquidator v. Raghawa Desikachar and others, (1974)
2 SCC 741(Raghava Desikachar), particularly paragraph 7 thereof, wherein the
Supreme Court held that a misfeasance action against the directors is a serious
charge and that the burden of proving the same rests on the Official Liquidator.
(ix) T.S. PL.S. Thinnappa Chettiar v. Official Liquidator, Oriental
Investment Trust Ltd., 1944 SCC OnLine Mad 273, wherein a Division Bench of
this Court dealt with the difference between a Managing Director and an
ordinary director with regard to responsibility.
(x) Faridabad Rubber Soles Private Limited (In liquidation) v.
S.L.Chopra & another, 1994 SCC OnLine P & H 543, wherein the Court
concluded that liability cannot be imposed under Sections 542 & 543 merely on
the ground that action was not initiated to recover the debts of the company in
liquidation.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(xi) Official Liquidator, High Court, Madras v. L.G.Varadarajulu &
others, 2010 SCC OnLine Mad 5624 (Varadarajulu), particularly paragraph 25
thereof, regarding the requirement of mens rea to sustain an application under
Sections 542 & 543 of CA 1956.
(xii) Union of India v. H.C.Tandon, 2007 SCC OnLine All 1557,
particularly paragraph 14 thereof, regarding the requirement of establishing that
the party made respondent in an application under Section 543 should have
benefitted from the transaction.
(xiii) Official Liquidator v. Nagin B. Parikh & others,
MANU/WB/0910/2011, particularly paragraph 20 thereof, to the effect that an
application under Order VII Rule 11 of the Code of Civil Procedure, 1908 (the
CPC) is maintainable in respect of an application under Section 542 of CA
1956.
(xiv) Official Liquidator, High Court, Madras v. V.Selvaraj and others,
2009 SCC OnLine Mad 2929 (Selvaraj), particularly paragraph 17 thereof,
regarding the requirement of mens rea on the part of the ex-director and the
further requirement that fraud or breach of trust should be specifically pleaded.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(xv) Re Maidstone Buildings Provisions Limited, 1973 (3) All ER 363
(Maidstone Buildings), particularly at pages 368 and 369, for the proposition
that the expression 'party to the carrying on of a business' does not cover
everyone who is aware that the business of the company is being carried on
fraudulently.
(xvi) Kamalkishor Shrigopal Taparia v. India Ener-Gen Private Limited
& another, 2025 SCC OnLine SC 321, regarding the non-liability of a
non-executive director for the dishonour of a cheque under Section 141 of the
Negotiable Instruments Act, 1881 (the NI Act).
(xvii) Sunita Palita & others v. Panchami Stone Quarry, (2022) 10 SCC
152, particularly paragraph 42 thereof, for the proposition that a non-executive
director is not involved in the day-to-day affairs of the company or in the
running of its business.
(xviii) Om Prakash Khaitan v. Shree Keshariya Investment Limited and
others, ILR (1977) II Delhi 470, particularly paragraph 5 thereof, for the
proposition that it is necessary to make a distinction between directors in
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
effective control of the management and affairs of the company and nominee
directors.
(xix) K.Ramakrishnan v. Income Tax Department, Crl.O.P.Nos.16082 to
16084 of 2018 and connected petitions, order dated 25.10.2019, particularly
paragraphs 9 to 11 thereof, regarding the unsustainability of prosecuting a
non-executive nominee director without foundation.
(xx) Chanakya Bhupen Chakravarti and another v. Rajeshri Karwa, 2018
SCC OnLine Del 12968, particularly paragraphs 7 & 8 thereof, regarding the
position and status of a non-executive director.
(xxi) K.S.Mehta v. M/s. Morgan Securities and Credits Private Limited,
2025 INSC 315, particularly paragraphs 17 & 18 thereof, for the proposition that
financial liability cannot be imposed on a director merely on the ground of such
director having attended board meetings.
13. Mr. P.Giridharan, learned counsel for Sreenivasulu, who is the
applicant in Comp.A.Nos.86 to 88 of 2025, contended that the power under
Section 633 of CA 1956 may be exercised to relieve a nominee
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
non-executive director from liability for misfeasance. He also submitted that the
misfeasance application is liable to be rejected because it is not based on the
independent opinion of the Official Liquidator that the business of the Company
had been carried on with intent to defraud creditors or for any other fraudulent
purpose. Instead, he contended that the Official Liquidator appears to have
acted mechanically on the basis of recommendations in the SFIO report.
Finally, he contended that Sreenivasulu should be deleted from the array of
parties in Comp.A.No.276 of 2024 on account of the absence of any specific
allegations against him in the affidavit in support of such application. He
referred to and relied upon Order VI Rule 4 of the CPC in this regard.
14. In support of his contentions, he referred to and relied on the
following judgments:
(i) Official Liquidator & Liquidator of Wopolin Plastics Ltd. v.
Hargovind Gangabisan Bajaj & others, MANU/MH/2522/2021, particularly
paragraph 9 thereof, with regard to the requirements of proving breach of trust
and pecuniary loss to the company in an application for misfeasance.
(ii) Reserve Bank of India v. Kubar Mutal Benefits Limited, 2023 SCC
OnLine All 3948, particularly paragraphs 44 & 45 thereof, regarding the wide
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
powers of a liquidator under Section 457 of CA 1956 and for the proposition
that an investigation under Chapter XIV of the Companies Act, 2013 should not
be initiated in a matter where a winding up order has been passed under CA
1956.
(iiii) Official Liquidator, High Court, Madras v. V.Selvaraj & others,
2009 SCC OnLine Mad 2929, particularly paragraph 14 thereof.
(iv) Official Liquidator, High Court, Madras v. L.G.Varadarajulu &
others, 2010 SCC OnLine Mad 5624.
(v) Madhavan Nambiar v. Registrar of Companies,
MANU/TN/0766/2001, particularly paragraphs 23, 26 & 30 thereof, regarding
the power to relieve an officer of liability under Section 633 if such officer had
acted bona fide and not committed wilful omission or commission.
(vi) Vidya C.G. & others v. Serious Fraud Investigation Office,
MANU/KA/1358/2024, particularly paragraph 61 thereof, to the effect that the
initiation of proceedings under Section 36 read with Sections 447 & 448 of the
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
Companies Act, 2013 lacks legal authority in relation to alleged offences
committed when CA 1956 was in force.
15. Mr. V.Chandrasekaran responded on behalf of the Official Liquidator.
His first contention was that Section 542 of CA 1956 is wider in ambit than
Section 141 of the NI Act. Consequently, he contended that the determination
that the applicants are not liable cannot be made at the pre-trial stage. After
pointing out that each applicant attended about three or four board meetings, he
also made reference to letter dated 25.06.2001 from M/s.Fraser & Ross,
Chartered Accountants, to the board of directors of the Company with reference
to financial irregularities. After further submitting that paragraphs 4.6.14 of the
SFIO report draws reference to this letter, he contended that Srinivasan was
inducted on the board on 25.06.2001. By referring to paragraph 19 of the SFIO
report and paragraph 16 of the affidavit in support of Comp.A.No.276 of 2024,
learned counsel contended that an allegation has been made against all the
directors of the Company regarding the fraudulent conduct of the affairs of the
Company and regarding their participation in board meetings with knowledge
thereof. After further submitting that Section 542 requires fraudulent intent to
be established and that such intent is capable of being established only by
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
leading evidence during trial, he contended that these applications cannot be
allowed at this juncture.
16. He placed reliance on the following judgments:
(i) Official Liquidator, Supreme Bank Limited v. P.A.Tendolkar (Dead)
by legal heirs & others, MANU/SC/0005/1973, particularly paragraphs 37 to 41
thereof, for the proposition that a director cannot shut his eyes to what must be
obvious to anyone who examines the affairs of the company even superficially.
(ii) Jagjivan Hiralal Doshi and others v. Registrar of Companies,
MANU/MH/0009/1989, particularly paragraphs 12 & 23, for the proposition that
the law does not make a distinction between part-time directors and
whole-time directors and that their liability depends on the facts and
circumstances of each case.
(iii) G.D.Bhargava & others v. Registrar of Companies & others,
MANU/UP/0099/1970, particularly paragraphs 7 to 9 thereof, regarding the
discretionary nature of the power under Section 633 of CA 1956.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(iv) Official Liquidator v. Ram Swarup & others, MANU/UP/0011/1997,
particularly paragraph 11 thereof, for the principle that ex-directors of the
company cannot succeed on the bald plea that they were only nominee directors
and they were not in-charge of affairs of the company.
(v) Kothari (Madras) Ltd. v. Myleaf Tobacco Development Co. Pvt. Ltd.
and others, MANU/KA/0008/1984, particularly paragraphs 12 & 17 thereof, for
the principle that all directors of a company stand on the same footing and their
duties, responsibilities and obligations are uniformly controlled by the
provisions of CA 1956 and the articles of association of the company.
17. By way of rejoinder, Mr.J.Sivanandaraj, learned senior counsel,
submitted that Section 542 requires pleadings that each respondent was
knowingly a party to the carrying on of business fraudulently. He pointed out
that the principal financial fraud or irregularity complained of in the SFIO
report relates to loans and transactions with satellite companies of the Company,
and that Srinivasan has not been charged with any offence relating to such
transactions with satellite companies. He further submitted that Srinivasan was
appointed as a director on 25.06.2001 and was merely an invitee at the relevant
board meeting on 25.06.2001. In conclusion, after reiterating that there is no
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
material against Srinivasan either in the SFIO report or in the affidavit in
support of the application under Section 542, he submitted that Srinivasan is
entitled to the relief claimed. He also contended that in the absence of even a
prima facie case against Srinivasan, the interim orders against him are also
liable to be vacated.
Discussion, analysis and conclusion:
18. By order dated 05.07.2016 in Comp.A.No.238 of 2015, this Court
directed the SFIO to undertake an investigation to ascertain whether the funds
of the Company were diverted to the companies referred to in the schedule
appended to the Judge's summons. Pursuant thereto, the SFIO submitted
investigation report dated 31.01.2022 and corrigendum dated 24.05.2022.
Comp.A.No.276 of 2024 under Section 542 of CA 1956 was filed upon receipt
of the above mentioned report and letter dated 05.07.2022 from the Ministry of
Corporate Affairs. On perusal of the affidavit in support of Comp.A.No.276 of
2024, it is noticeable that the Official Liquidator has relied heavily on the SFIO
report, which appears to be the sheet anchor of the application.
19. The pleadings in Comp.A.No.276 of 2024 are not complete as on date
because several respondents have not filed their counters. It is, therefore,
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
needless to say that trial has not commenced. Both the sets of applications have
been lodged at this preliminary stage.
20. Both the applicants, i.e. Srinivasan and Sreenivasulu, were nominee
directors on the board of the Company representing an entity previously known
as CDC and currently known as BII. CDC/BII had invested in the Company in
the year 1995 and exited in the year 2002. Sreenivasalu was a nominee director
of CDC on the board of the Company between 19.03.1999 to about 07.07.2000
and Srinivasan was a nominee director from 25.06.2001 to 10.06.2002.
21. Both Srinivasan and Sreenivasulu contend that the SFIO report and
Comp.A.No.276 of 2024 do not contain specific allegations against them. In
support of this contention, they relied upon the sections of the SFIO report
dealing with their involvement. Therefore, the observations and findings in the
SFIO report and the minutes of board meetings held when the respective
applicant was a director warrant consideration. While the SFIO report is on
record, it is incomplete inasmuch as the annexures are unavailable, but for
Annexure D-13, the letter from M/s Fraser & Ross, Chartered Accountants. The
SFIO report lists 4 types of annexures at the foot thereof: orders (annexures A1-
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
A7); financial statements (annexures B1-B15); statements (annexures S1-S49);
and documents (annexures D1-D80).
22. The role of Srinivasan is dealt with at paragraph 4.86 of the SFIO
report. The tenure of directorship mentioned therein does not tally with the
records. It is stated therein that Srinivasan was a director in financial year 1999
– 2000, whereas the record shows that he became a director on 25.06.2001. The
minutes of the board meeting held on 25.06.2001 may be referred to regarding
his appointment and that of 03.07.2002 regarding his withdrawal. The operative
portion of the report relating to Srinivasan is set out below:
“4.86.2 Being part of Board Meetings he has been
privy to all fraudulent transactions taken place during his
tenure viz., Formation of satellite companies and granting of
loans thereof; Creation of fictitious assets and inflating
profits; Falsification and Concealment of facts in Board
Reports and Audited Financial Statements; Loan availments
from Banks/Financial Institutions, lendings to related parties,
appointment of Auditors; Approval of donations to MAC
Public Charitable Trust; Unlawful declaration of dividends
out of false profits leading to unauthorised money transfers
for personal enrichment of promoters and group etc.
4.86.3. Being a member of the Board, in addition to
protecting the interests of CDC, Mr.N.Srinivasan was
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
expected to serve the best interest of sound public policy and
bring about higher levels of corporate governance. Further,
his presence on the Board also entailed a close monitoring of
the affairs of FLCIL by working assiduously towards
observance of good corporate governance practices in the
company with due regard to the legitimate interests of the
various stakeholders, attending the Board meetings regularly
and actively participate in the proceedings of the Boards
apart from duly safeguarding the interest of CDC and also
ensure proper utilisation of investment made in FLCIL and
prevent any misuse/diversion of funds by the
promoters/management of the companies.
However, it was observed that vide his letter 10/1/2022,
Mr.N.Srinivasan stated he was not involved in the day to day
management of the affairs of FLCIL as he was a
Non-Executive Director and that presently, he did not have
any cogent material in relation to the questionnaire issued in
this specific case. Further he also mentioned that as a
Non-Executive Director, representing a government owned
Developmental Financial Institution, having been on the
Board of FLCIL, with a minority investment and having
resigned more than 20 years back, there has been no assets
or properties acquired pursuant to his association with
FLCIL. He also informed that as a matter of good corporate
governance, CDC cooperates with any lawful regulatory
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
investigation. However, also expressed apprehension about
documents related thereto being available or lost or have
destroyed given the passage of almost 20 years since CDC
exited the Company.
Since the entire Board of Directors is responsible for the
governance of its Company, every member of the Board is
expected to contribute for the well being of the organisation
through adoption of best practices for Corporate
Governance, failing which he remains liable for prosecution.
Donning the cap of a Nominee Director cannot make one
escape from his fiduciary responsibilities of Corporate
Governance, all the more in a listed company. Hence Mr.
N.Srinivasan is privy and therefore liable for all fraudulent
actions of FLCIL as a Nominee Director during his tenure
with FLCIL. ”
23. The role of Sreenivasulu is dealt with in paragraph 4.85 of the SFIO
report. As in the case of Srinivasan, his tenure of directorship is wrongly
mentioned in the report. He was a director from 19.03.1999 till 31.07.2000. The
first two paragraphs extracted above from the section of the report dealing with
Srinivasan are identical to those in the section of the report dealing with
Sreenivasulu. Thereafter, the report records as under regarding Sreenivasulu:
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
“4.85.4 However, it was observed that vide his
responses dt 6/1/2022, he was not forthcoming with the actual
happenings in the company and was evasive and does not
provide any information. He repeatedly stated that he was
only a junior nominee director on the Board who did not have
any decision making responsibilities on behalf of CDC given
his junior role, age, lack of experience and no accounting
knowledge. As regards promoters, he stated that Mr. Farouk
Irani was the full time MD and Mr.Muthiah was the
Chairman and promoter of FLCIL. He also attributed the
passage of a long time of 25 years and feigned ignorance
about the whole issue.
4.85.5 Since the entire Board of Directors is
responsible for the governance of its Company, every member
of the Board is expected to contribute for the wellbeing of the
organisation through adoption of best practices for
Corporate Governance, failing which he remains liable for
prosecution. During his tenure, he failed to discharge his
duties and responsibilities and therefore he is liable for penal
action. ”
24. As discussed while narrating the contentions, the SFIO summarised
the charges against the directors and officers of the Company. As regards both
Srinivasan and Sreenivasulu, they are shown as accused in relation to charge
no.3.1 (falsification of financial statements of FLCIL), charge no.3.2
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(falsification of board report) and charge no.5 (unauthorised contribution
towards donation to the MAC Trust). A recommendation has been made to
charge them with carrying on the business of FLCIL fraudulently and also with
an intent to defraud creditors. They are not listed as accused persons inter alia
in the charges relating to grant of loans to satellite companies under the same
management and the charges of unlawful declaration of dividends or failure to
make qualifications by statutory auditors.
25. The SFIO report specifically dealt with donations to the MAC Trust at
paragraphs 4.77-4.77.6 thereof. Details of these donations aggregating to Rs.303
lakhs are set out in paragraph 4.77.4 along with the dates of board meetings at
which such donations were approved. The second board meeting mentioned
therein is the meeting on 28.06.1999, which is during the period when
Sreenivasulu was a director. Minutes of board meetings held in the years 2000-
2003 and the minutes of meetings attended by Sreenivasulu and Srinivasan were
filed by learned counsel for the Official Liquidator. On examining the same, I
find that the minutes of meeting held on 28.06.1999 are unavailable. In fact, I
find that the documentation is incomplete and that minutes of meetings referred
to in some minutes are also not available. On comparing the data set out in
paragraph 4.77.4 with the available minutes of board meetings, it appears that a
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
donation of Rs.25,00,000/- to the MAC Trust was approved by the board at the
meeting on 27.03.2000. This donation is not referred to in paragraph 4.77.4.
Sreenivasulu was a director during this time, but leave of absence was given to
him. In the absence of the notice, agenda and his request for leave of absence, it
is not possible to ascertain, whether he was informed of the proposed donation
in the agenda and, if so, his response thereto. Similarly, the available minutes
include minutes of meeting held on 28.06.2001 when a donation of
Rs.25,00,000/- to the MAC Trust by approved by the board. Srinivasan was a
director during this period but requested for and was granted leave of absence.
As in the case of Sreenivasulu, in the absence of material documents, at this
juncture, it is not possible to ascertain, whether he was informed of the
proposed donation in the agenda and, if so, his response thereto.
26. The SFIO report discusses the discrepancy between the business done
report and the audited financial statements at paragraph 4.65. According to the
SFIO, this reveals that the directors were aware of the actual state of affairs. On
correlating this section of the report with the available minutes, it appears that a
report of business done in the preceding quarter was placed before the board of
directors at most board meetings. For instance, as per the relevant minutes, at
board meetings held on 28.03.2002 and 26.12.2001, both of which were
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
attended by Srinivasan, the business done reports for the preceding quarters
were placed before the board as per the minutes. Similarly, the minutes of
meeting held on 04.05.2000, which was attended by Sreenivasulu, records that
the business done in the previous quarter was disclosed in a report. In paragraph
4.6.14 of the SFIO report, the letter dated 25.06.2001 of Fraser & Ross is
referred to. On perusal of the minutes of the board meeting held on 25.06.2001,
it appears that Srinivasan attended the meeting and was inducted on the said
date as a director. The minutes do not refer to the letter but make general
reference to points raised by the auditors. In the light of even the minutes of
meetings being incomplete, a definitive conclusion cannot be reached as to
whether the letter from M/s Fraser & Ross was discussed at a subsequent
meeting.
27. The minutes of available meetings reveal a couple of more aspects of
relevance. Both minutes of meetings held on 28.03.2002 and 26.12.2001, which
were attended by Srinivasan, disclose that the list of loans disbursed in the
preceding quarter were placed before the board. The minutes of meeting on
24.12.1999, which was attended by Sreenivasulu, reveals that the loan register
was placed before the board and that all the directors noted the loan register and
approved the loans and investments of the Company.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
28. On perusal of the affidavit in support of Comp.A.No.276 of 2024, it is
noticeable that the SFIO report is extensively referred to and several paragraphs
thereof have been reproduced in the affidavit. Thereafter, at paragraph 19, it is
stated as under:
“19) The SFIO report revealed fraudulent conduct of
business of the company under liquidation by the respondents
to defraud creditors (Bankers) of the Company. The company
under liquidation obtained loans from consortium member
Bankers amounting to Rs.1302.00 crores by deceiving them
as such the respondents are liable for the same. The SFIO
report recommended the Official Liquidator to take action
against Shri.Farouk Irani, the Ex-Managing Director, and
other Directors of FLCIL and persons responsible for
fraudulent conduct of the business under section 542 of the
Companies Act, 1956 and recover the dues payable to the
company in liquidation. It is to submit that as per section 542
of Companies Act, 1956, if the business of the company is
conducted with an intent to defraud the creditors of the
company, then parties knowingly carrying out the business
shall be made personally responsible for the liabilities of the
company.”
Paragraph 21 is also of some relevance and reads as under:
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& 86 to 88 of 2025
“21) That it is further submitted that the individual
Respondents were associated and responsible for conduct of
affairs of the Company in provisional liquidation, during the
period when fraudulent acts were committed. Therefore, the
corporate veil of these corporate entities is required to be
lifted and fraud committed through the “directing mind and
will” of the companies is brought to the kind attention of this
Hon'ble Court. ”
29. The conclusion that follows upon examination of the above material
is that no specific allegations have been made against either applicant in the
SFIO report or the affidavit in support of this application. The general allegation
that both the applicants were on the board of directors and that they were
consequently privy to all fraudulent transactions during their respective tenure
has been made. On the basis that each applicant herein failed to discharge the
fiduciary duty to the Company, the SFIO recommended that proceedings for
misfeasance be initiated against them.
30. By relying on Order VI Rule 4 of the CPC and several judgments, it
was contended that non-executive nominee directors cannot be made liable
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
especially in the absence of specific allegations against them. Order VI Rule 4
of the CPC is set out below:
“4. Particulars to be given where necessary— In all
cases in which the party pleading relies on any
misrepresentation, fraud, breach of trust, wilful default, or
undue influence, and in all other cases in which particulars
may be necessary beyond such as are exemplified in the forms
aforesaid, particulars (with dates and items if necessary)
shall be stated in the pleading.”
Rule 3 of Order VI prescribes that the forms in appendix A shall be used for all
pleadings, including by making requisite changes to conform as closely as
possible to the forms in Appendix A. Rule 4 refers to the necessity to go beyond
the forms and provide necessary particulars in cases where an
assertion/allegation of misrepresentation, fraud, breach of trust, wilful default or
undue influence is made. The object and purpose is not far to seek. The self-
evident rationale is that these are serious allegations and the counter party
concerned should have a reasonable opportunity to refute such allegations once
the said allegations are made known with particularity.
31. Unlike the typical applicant for relief before a Court, the Official
Liquidator is at a distinct disadvantage inasmuch as the Official Liquidator is
dependent on materials made available when custody is taken of the records and
affairs of the company concerned. The law requires that the Official Liquidator
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& 86 to 88 of 2025
should call upon the ex-directors of the company in liquidation to submit the
statement of affairs, which is then the starting point for further action by the
Official Liquidator. This case is atypical to the extent that this Court directed
the SFIO to undertake an investigation and submit a report thereon. Even so, it
should be recognised that the Official Liquidator does not have an independent
machinery for investigation and would be constrained to resort to measures such
as the examination of officers and others associated with the company in
liquidation under Section 477 and related provisions of CA 1956. While this
does not mean that the law on pleadings relating to misrepresentation or fraud is
made inapplicable to pleadings by the Official Liquidator, some latitude should
be extended albeit by safeguarding the rights of persons accused of fraud and
the like. In the circumstances, after gathering evidence, if the Official
Liquidator intends to make any specific allegation against either or both
applicants, an appropriate balance may be struck by directing the Official
Liquidator to file an additional affidavit and by providing an opportunity to the
applicant concerned to file a reply thereto before evidence is recorded.
32. Not only the SFIO report but the minutes of the board meetings of the
Company disclose that the two applicants participated in a few board meetings
during the period of alleged financial irregularity. As is also evident from
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
discussions in the preceding paragraphs, while the available material does not
lead to the inference that they were actively involved in wrong doing, their
knowledge of such wrong doing and participation in meetings wherein material
decisions were taken cannot be ruled out at this juncture. In spite of being
specifically called upon to provide the investment agreement or analogous
agreement relating to the terms and conditions on which CDC/BII made
investment in the Company, neither the Official Liquidator nor the respective
applicant submitted the same. Given that Srinivasan is currently the Managing
Director of BII Asia, he should have been in a position to file the same.
Typically, such agreement would specify the quantum of investment and the
corporate actions requiring the consent of the investing company. It would also
more broadly indicate the extent of control exercised by the investing company
in the affairs of the investee company. In other words, if such control existed in
respect of key decisions, the responsibility of the investee company and, by
extension, its nominee, for decisions made by the investing company would be
greater. In the absence of relevant material, it is not possible to make an
assessment on this issue at this juncture.
33. The allegations against the management of the Company are grave.
Section 542 of CA 1956 is intended to enable the Court to declare that persons
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& 86 to 88 of 2025
who were knowingly parties to the carrying on of the business of the company
with intent to defraud the creditors of the company or any other persons or for
any fraudulent purpose are personally liable for the debts or liabilities of the
company. Section 542 reads as under:
“Liability for Fraudulent Conduct of Business
542. (1) If in the course of the winding up of a
company, it appears that any business of the company has
been carried on, with intent to defraud creditors of the
company or any other persons, or for any fraudulent purpose,
the Court, on the application of the Official Liquidator, or the
liquidator or any creditor or contributory of the company,
may, if it thinks it proper so to do, declare that any persons
who were knowingly parties to the carrying on of the
business in the manner aforesaid shall be personally
responsible, without any limitation of liability, for all or any
of the debts or other liabilities of the company as the Court
may direct. (emphasis added)
On the hearing of an application under this sub-section, the
Official Liquidator or the liquidator, as the case may be, may
himself give evidence or call witnesses.
(2) (a) Where the Court makes any such declaration, it
may give such further directions as it thinks proper for the
purpose of giving effect to that declaration.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(b) In particular, the Court may make provision for
making the liability of any such person under the declaration
a charge on any debt or obligation due from the company to
him, or on any mortgage or charge or any interest in any
mortgage or charge on any assets of the company held by or
vested in him, or any person on his behalf, or any person
claiming as assignee from or through the person liable or any
person acting on his behalf.
(c) The Court may, from time to time, make such
further order as may be necessary for the purpose of
enforcing any charge imposed under this sub-section.
(d) For the purpose of this sub-section, the expression
"assignee" includes any person to whom or in whose favour,
by the directions of the person liable, the debt, obligation,
mortgage or charge was created, issued or transferred or the
interest was created, but does not include an assignee for
valuable consideration (not including consideration by way of
marriage) given in good faith and without notice of any of the
matters on the ground of which the declaration is made.
(3) Where any business of a company is carried on with
such intent or for such purpose as is mentioned in sub-section
(1), every person who was knowingly a party to the carrying
on of the business in the manner aforesaid, shall be
punishable with imprisonment for a term which may extend to
two years, or with fine which may extend to [fifty] thousand
rupees, or with both.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
(4) This section shall apply, notwithstanding that the
person concerned may be criminally liable in respect of the
matters on the ground of which the declaration is to be
made.”
Sub-section (1) extends liability to 'any persons who were knowingly parties to
the carrying on of the business'. If the intention were to confine liability only to
persons who were in management of the company, the relevant phrase would
have been framed as 'any persons who were knowingly carrying on the
business'. Instead, the expression 'knowingly parties to the carrying on of the
business' is used and this phraseology, in my view, expands the scope of sub-
section (1) to take within its fold all persons who were parties to the carrying on
of the business of the company with intent to defraud creditors of the company
or any other persons or for any fraudulent purpose, even if such persons were
not formally part of the management.
34. The interpretation placed on sub-section (1) of Section 542 in the
preceding paragraph is entirely in line with the interpretation of the pari
materia provision in the UK Companies Act, 1948 and the UK Insolvency Act,
1986 (UK Insolvency Act). Section 213 of the UK Insolvency Act reads as
under:
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& 86 to 88 of 2025
“(1) If in the course of the winding up of a company it
appears that any business of the company has been carried
on with intent to defraud the creditors of the company or
creditors of any other person, or for any fraudulent purpose,
the following has effect.
(2) The Court, on the application of the liquidator may
declare that any persons who were knowingly parties to the
carrying on of the business in the manner above-mentioned
are to be liable to make such contributions (if any) to the
company's assets as the Court thinks proper.” (emphasis
added)
As is noticeable from the above extract, Section 213 of the UK Insolvency Act,
like Section 542(1) of CA 1956, uses the expression 'any persons who were
knowingly parties to the carrying on of the business'. Therefore, the provisions
are in pari materia.
35. The Chancery Division of the English Court in Re Bank of Credit and
Commerce International SA & another Banque Arabe Internationale D'
Investissement SA v Morris & others interpreted Section 213(2) of the UK Act
and held as under:
“First, as a matter of ordinary language, the ambit of
S.213(2) is not limited to those who perform a managerial or
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& 86 to 88 of 2025
controlling role within the company concerned. Although I
accept that the language of S.213(2) is a little unusual, it
appears to me that the concept of being 'parties to the
carrying on' by a company of a type of business, or of a
business in a certain way, is not limited to the person who
actually directs or manages the business concerned. If
anything it is a more natural reference to people who are not
employed by the company at all, but who are third parties to
the company.”
The Court also noticed the decision in Maidstone Buildings, which was relied
on by Mr.J.Sivanandaraj, but concluded that the said judgment dealt with an
employee of the company, who was merely carrying out orders.
36. The respective applicant herein was undoubtedly a director of the
Company during specific financial periods when it is alleged that financial
irregularity was committed. As directors, they would fall within the scope of
persons carrying on the business of the company concerned. While it may be
legitimate to exempt non-executive directors, including nominee directors, from
liability after detailed assessment of the facts and circumstances, it cannot be
said as a general rule that non-executive directors, including nominee directors,
are not persons carrying on the business of the company while they are
directors. Effectively, even if Section 542(1) were not interpreted as embracing
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
persons who are not a part of the management, the respective applicant would
fall within the scope thereof. Because a large number of judgments were cited,
it is profitable to examine a few of them before drawing conclusions.
37. The two applicants relied on a large number of cases. Most of these
cases were final disposals of misfeasance applications. It is sufficient to discuss
a few of them. In Raghava Desikachar, the Supreme Court held that the burden
of proof in a misfeasance application rests on the Official Liquidator and that
such burden had not been discharged merely by relying on evidence recorded in
course of public examination. On perusal, it is clear that it was a post-trial
judgment wherein evidence was recorded. In Gautham Dhiraj Mal Ranka, this
Court relied on Raghava Desikachar and held that the application for
misfeasance was not sustainable in the factual context inter alia of allegations
that the assets did not fetch the value indicated by the ex-directors and failure
to recover debts. It appears from the order that evidence was not adduced, but it
is a final order in the misfeasance application. Selvaraj is also a final order in a
misfeasance application in the factual matrix of a debt of Rs.97000 becoming
time barred and the Official Liquidator not pressing the charge that there were
dues of Rs.19,89,038 to unsecured creditors by admitting there were no such
creditors. In Varadarajulu, the principal allegation was that only Rs.14 crores
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& 86 to 88 of 2025
could be realised from the assets against the stated value of Rs.26.67 crores and
the explanation of the respondents was that all assets, except land, had
depreciated in value over time. In those facts and circumstances, the
misfeasance application was rejected. Thus, these orders were issued rejecting
the misfeasance application upon an assessment of the facts and circumstances
in exercise of discretionary jurisdiction. Hence, these judgments do not advance
the cause of the two applicants for rejection of the misfeasance application at
the threshold merely on the ground of non-specificity of pleadings.
38. Given the fact that the respective applicant would fall within the
ambit of Section 542(1) even on a more restrictive interpretation thereof than
the interpretation placed by me on the said provision, the follow on question
would be: what should be the standard for determining whether an application
for misfeasance against such person is liable to be rejected at the threshold? Put
differently, in the case of a person who is not part of the management of a
company, such as a non-director employee or a third party transacting or being
otherwise involved with the company, it may be relatively easy to consider and
decide, at the pre-trial stage, whether an application under Section 542 is
maintainable against such person. On the contrary, as regards a person who
clearly falls within the ambit of Section 542(1), in my view, any application for
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
rejection of misfeasance proceedings at the pre-trial stage against such person
should be tested on ex facie basis. In other words, if the unequivocal conclusion
that flows from the material at the preliminary stage is that such person could
never be knowingly a party to the carrying on of the business with intent to
defraud creditors or any other persons or for any fraudulent purpose, the
application for misfeasance would be liable to be rejected at the threshold. In all
other cases, the respondent concerned would have to await trial.
39. Although no specific allegations were made against the respective
applicant either in the SFIO report or the affidavit in support of Comp.A.No.276
of 2024, the general allegation that they participated in board meetings at which
material decisions were taken and that they failed to discharge their fiduciary
obligation was made. Sub-section (1) of Section 542 expressly provides that the
Official Liquidator is entitled to depose personally or call upon witnesses to
establish misfeasance. Upon consideration of the material on record at this
juncture, including by noticing the incompleteness thereof, I conclude that it is
sufficient to warrant a trial but insufficient to draw any conclusions on the role
of the respective applicant, as a representative of CDC/BII, which was the
investor. Therefore, notwithstanding the generic nature of pleading against the
respective applicant, I conclude that it cannot be said ex facie that there is no
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& 86 to 88 of 2025
case under Section 542 against the respective applicant. It is, nonetheless,
possible that there is no evidence against the respective applicant even after the
Official Liquidator adduces evidence. In such event, the respective applicant is
granted leave to reapply for the remedies declined at this juncture.
40. The respective applicant also contended that a prima facie case does
not exist warranting continuance of ex parte order dated 09.08.2024, as
modified by orders dated 30.08.2024 and 04.09.2024, as against such applicant.
By order dated 09.08.2024 as modified, all the respondents, including the
respective applicant, have been restrained from mortgaging, creating a charge or
lien over, or alienating their movable or immovable properties. They have also
been restrained from dealing with securities owned or held by them in demat
accounts under the custody of CDSL and NSDL. These orders are evidently
drastic in nature and would cause grave prejudice to the respective applicant.
Indeed, Sreenivasulu expressly averred that his life savings are in mutual funds
and debt securities and that the order has a significant adverse impact on his
corpus and on his access to liquidity. At this juncture, in the absence of any
specific allegations or any documentary evidence indicating their complicity in
financial irregularity or fraud, a prima facie case has not been made out against
the respective applicant. For reasons discussed above, the balance of
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
convenience is not in favour of continuing the interim order against these
persons and such order is likely to cause great hardship to them. Therefore, the
interim order issued on 09.08.2024 is vacated insofar as respondents 8 & 9 in
Comp.A.No.276 of 2024 are concerned.
41. For reasons aforesaid, these applications are disposed of on the
following terms:
(i) The interim order dated 09.08.2024 is vacated in respect of each
applicant;
(ii) The request to strike off the name of the respective applicant from the
array of respondents or to dismiss the application for misfeasance or stay
proceedings for misfeasance against them is rejected;
(iii) After the Official Liquidator collates evidence, if it is intended to
make specific allegations against either or both applicants broadly within the
scope of the general allegations made in the affidavit in support of Company
Application No.276 of 2024, the Official Liquidator shall file an additional
affidavit and the applicant(s) concerned shall be entitled to reply thereto before
evidence is recorded;
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& 86 to 88 of 2025
(iv) After evidence is adduced by the Official Liquidator, if the respective
applicant forms the reasonable opinion that there is no evidence against him,
leave to re-apply for remedies rejected by this order is granted.
(v) There shall be no order as to costs.
16.09.2025
Index : Yes/No
Internet : Yes/No
Neutral Citation : Yes/No
kj
To
The Official Liquidator
As the Provisional Liquidator of
First Leasing Company of India Ltd.
(In Provisional Liquidation)
No.29, Corporate Bhavan, 2nd Floor,
Rajaji Salai, Chennai-600001.
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Comp.A.Nos.397 to 400 of 2024
& 86 to 88 of 2025
SENTHILKUMAR RAMAMOORTHY J.
kj
Pre-delivery orders in
Comp.A.Nos.397 to 400 of 2024
and 86 to 88 of 2025
in C.P.No.255 of 2014.
16.09.2025
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