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Petitioner: OFFICIAL LIQUIDATOR, THE NEW JHELUM TRANSPORT COMPANY LTD. (IN LIQUIDATION), JHELUM VS Respondent: Mirza FAZ AL HAQ and 9 OTHERS
Court Name: Lahore High Court Judge(s): Khalil-Ur-Rehman Khan Title:OFFICIAL LIQUIDATOR, THE NEW JHELUM TRANSPORT COMPANY LTD. (IN
LIQUIDATION), JHELUM vs Mirza FAZ AL HAQ and 9 OTHERS Case No.: Civil Original No, 13 of 1972, Date of Judgment:1987-09-21 Reported As: PLD 1987 Lahore 618 Result: Order accordingly Judgment ORDER This order will dispose of Civil Misc. No,164-L of 1971, Civil Original No,13 of 1972 and Civil Original No,59 of 1973 filed respectively by Khawaja Dilawar Hussain, a share-holder and the Official Liquidator under sections 196, 235 and 237. Companies Act 1913 against the respondents/Directors for their public examination for ordering contribution towards assets of the Company of certain amounts alongwith interest on account of misfeasance and for directing criminal prosecution of the .Directors. These petitions were filed in the Civil Original No,43 of 1970 moved by Malik Allah Bakhsh under section 162 Companies Act 1913 seeking winding up of the New Jhelum Transport Company Ltd. Jhelum. The winding up proceedings thus commenced on 29-7-1970 and on 26-3- 1971 the winding up order was passed and Mian Faqir Muhammad was appointed Official Liquidator. 2. The respondents-Ex-directors who were ten in number were directed to be summoned for their public examination for the 20th September, 1972 but the public examination of any of the directors did not commence for almost six years. In the meanwhile M/s Hassan Rehman and Company examined and audited the company's accounts for the period commencing from 1966 to 1971 and they estimated defalcation of Rs .68,04,700 during the aforesaid period. In order to bring out specific items of fraud, misappropriation and breach of trust and with a view to conduct the public examination, Mr. A. Wahab Qureshi was appointed investigator vide order dated 16-6-1977 on report No,53. The official liquidator was required to submit lists of the persons whom he would like to examine in public examination as also his own witnesses for fixing the liability by 3-6-1976. The list, however, was not filed by the said date and instead the official liquidator stated that the first
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person to be publicly examined would be Mirza Fazal-e-Haq, the ex-managing director of the company. The examination of Mirza Fazal-e-Haq commenced on 20-5-1978 and was concluded on 11-3-1981. 3. During the pendency of these proceedings, out of the ten ex-directors, namely, Mirza Fazal-e- Haq, Mirza Tariq Mahmood, Mirza Hamid Zarrar, Mirza Muhammad Fazal, Mirza Hadi Hussain, Malik Nazir Ahmad, Malik Muhammad Nawaz, Malik Muhammad Rafiq, Syed Mubarik Shah and Mian Muhammad Islam, who were impleaded as respondents, the two ex-directors, namely, Mian Muhammad Islam and Mirza Hadi Hussain, eApifecl. It may be noted that there were 14 directors in all at the time of commencement of winding up proceedings and out of them aforesaid ten directors were impleaded as respondents but the others, namely, Malik Allah Bakhsh, Syed Haider Shah, Haji Lal Din and Ch. Abdul Aziz were not impleaded as respondents though right was reserved to nominate any other director later on. Mian Faqir Muhammad, the official liquidator, died on 14-9-1978 and in his place Mian Mushtaq Hussain, Advocate, was appointed as official Liquidator vide order dated 23-10-1978. The official liquidator after obtaining books, record and other documents of the company from the heirs of the deceased official liquidator traced out deficit of over Rs, five lacs in the liquidation account. With the consent of the auditors the deficit was debited to the personal account of Mian Faqir Muhammad deceased official liquidator as statedly in spite of efforts made no property belonging to the deceased official liquidator could' be found in the possession of his heirs. 4. Some of the other facts worth noticing are that on 24-3-1982 the then learned Company Judge directed that the official liquidator may hold a meeting of the contributories, creditors and counsel for the parties for looking into the situation under which some amount was drawn by the deceased official liquidator and as to where the same had gone. It appears that the meeting was accordingly held as deliberations of the meeting and the decision taken therein stand recorded in the order dated 2-6-1982, as under:- "2. The Official Liquidator has held a meeting of the creditors and contributories. 65$ out of the contributories and 70% out of the creditors have expressed their wish to close these proceedings as no good is going to come out of it. The learned counsel for the dissenting contributories wants to go through the report of the auditors and public examination of Mirza Fazal-e-Haq. Let them do so. To come up on 30th June, 1962." Thereafter on 27-4-1983 Mr. M.A. Aziz, Advocate, for creditors stated that public examination of the remaining directors including the Chairman should be carried through. The matter, it appears, did not come up thereafter before the Court uptil 10-4-1985 when the learned Judge directed that notice be issued to the official liquidator for 16-4-1985. 5. The service was not yet complete when the file was ordered to be sent to Rawalpindi Bench vide order dated 23-6-198'5. On an application made, the matter was ordered to be dealt with at the Principal Seat and the matter was then fixed before me on 6-5-1986. Seven directors attended the Court on that date. Three of the directors had died in the meanwhile. The four directors, namely, Abdul Aziz, Haji Lal Din, Muhammad Rafiq and Haider Shah were, therefore; ordered to be notified for 27-5-1986. The official liquidator in order to have the public examination completed prepared questionnaire and the same was ordered to be served on all the directors for filing replies before the next date of hearing. The four directors who were not made respondents initially were also directed to be supplied questionnaire as in view of the facts emerging from the record and the public examination of Mirza Fazal-e-Haq the official liquidator was of the opinion that these four directors were also accountable for the alleged breach of trust, misfeasance or mismanagement. All the living directors thereafter submitted their replies to the questionnaire. The official liquidator as well as the ex-directors have also placed on record their respective written arguments.
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6. The official liquidator in the questionnaire pointed out 17 instances of breach of trust and misfeasance in the form of 17 questions and claimed that 11 living ex-directors including Malik Allah Bakhsh ex-director who died after submission of written arguments, were liable to compensate the company by contributing jointly Rs,40,69,297 whereas the deceased ex-directors were liable to contribute Rs,11,09,383. He suggested that the four deceased ex-directors be not burdened with the liability and their share of liability be written off or in the alternative the entire liability of Rs,51,78,680 be imposed on the living directors. According to the official liquidator the four directors who were not impleaded as respondents to these petitions were equally liable as they were throughout not only the directors but also the members of, the Managing Committee as well as the Sale Committee appointed by the directors and as they had actively associated in all affairs and transactions which are now the subject matter of the public examination. 7. K h. Muhammad Akram Advocate learned counsel for Malik Allah Bakhsh, Haji Lal Din and Syed Haider Shah argued that as these ex-directors were not impleaded as respondents in these petitions, service of questionnaire pursuant to the order dated 27-5-1986 does not amount to impleading them as respondents to these petitions. It was argued that even assuming that they are to be treated as respondents no order under section 235 Companies Act can legally be passed against them. As they were not impleaded within the period of three years from the date of first appointment of the official liquidator or of the alleged misapplication, misfeasance or breach of trust. 8. Section 235 provides, inter alia, that Court on the application of the Liquidator or of any creditor or contributory may within three years from the date 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, examine into the conduct of the director and compel him to repay or restore the money or any part thereof 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 misapplication, misfeasance or breach of trust as the Court thinks just. The official liquidator was appointed in this case on 26-3-1971. The breach of trust or misfeasance if any is alleged to have occurred in the period commencing from 1966 to 1971. These four ex-directors were admittedly not impleaded as respondents in these petitions filed in the year 1971, 1972 and 1973. The questionnaire was served on them in pursuance of order dated 27-5-1986. These directors at best can be treated to have been impleaded on 27-5-1986. This will be obviously beyond the period of three years prescribed in section 235 Companies Act 1913. The bar of limitation as such can be successfully pleaded by them. The objection is, therefore, upheld. 9. Now the case of the ex-directors who were originally impleaded as respondents but have died during the pendency of these proceedings may be taken up. They are Haji Ali Akbar, Mian Muhammad Islam, Haji Islamuddin and Mina Hadi Hussain. Malik Allah Bakhsh ex-director has also died but he was not impleaded as a respondent in the petitions as originally filed. The proceedings contemplated under sections 196 and 235 Companies Act 1913 are in the nature of misfeasance summons and the idea behind is to bring to book in the summary proceedings all the persons who have been mishandling the assets or the property of a company. These proceedings are judicial proceedings and are essentially of civil nature. The legal heirs of the deceased directors as such can be impleaded in these proceedings. The leading case in England in this respect is Phillips v. Homfray (1883) 24 Ch. D 439 (453) and on appeal Phillips v. Forthergill's case (1886) 11 A.C. 466. In this case the principles laid down can be deduced from the following extract:- "The only cases in which, apart from questions of breach of contract expressed or implied, a remedy for a wrongful act can be pursued against the estate of a deceased person who has done the act, appear to us, to be those in which property or the proceeds or value of property belonging to another have been appropriated by the deceased person and added to his own estate or
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moneys Where there is nothing among the assets cf the deceased that in law or in equity belongs to the plaintiff, and the damages which have been done to him are unliquidated and uncertain the executors of a wrong-doer cannot be sued merely because it is worth the wrong doer's while to commit the act which is complained of, and an indirect benefit may have been reaped thereby . The profits arising from a wrong done by a deceased man which can be followed against his estate are only such profits as take the shape of property, or the proceeds or value of property, withdrawn from the rightful owner and acquired by the wrong-doer." It follows from the above that if action against the legal representatives can at all be taken the first thing to be established is that there has been benefit to the estate of the deceased director or other person as a consequence of the misfeasance, breach of trust or misapplication alleged against him and such an estate which has so been benefitted is in possession or enjoyment of the legal representative. The second question is whether the legal representatives who are so found in possession of such an estate can be made to repay or restore the money or any part thereof or to contribute such sum to the assets of the company by way of compensation in respect of the alleged misapplication, retainer, misfeasance or breach of trust. There is nothing in section 235 which may be construed as conferring such a power on the Court to take compulsory proceedings as may become necessary against those upon whom the assets or estate of the deceased delinquent director, who may have become liable under section 235 Companies Act (now section 412 Companies Ordinance 1984) might have devolved. The question whether the order contemplated under section 235 Companies Act 1913 can be passed against the legal representative of a deceased director need not be discussed further as in the instant case neither the legal representatives of all the deceased ex-directors were impleaded as respondents nor any material was brought on record to show that the estate of the deceased directors had received any benefit on account of the alleged misfeasance, breach of trust or mismanagement. The official liquidator in fact did argue that in case the deceased directors cannot be made to discharge their liabilities the living ex-directors be made to jointly share the entire financial liability. 10. I have considered this submission. Neither in law nor in equity an ex-director can be made to share the liability of a deceased director. In these circumstances there is no alternative but to discontinue the proceedings as against these four deceased ex-directors. Order accordingly. 11. Before examining the various instances of misfeasance etc on merit, some more relevant facts, features and pleas be noted. Mian Faqir Muhammad the deceased official liquidator instituted the present petitions against ten directors out of 15 directors who constituted the Board of Directors from time to time in the relevant period but the case of the present official liquidator is that all the fifteen ex-directors are equally liable for the mismanagement, misfeasance and breach of trust and as such all of them be required to contribute towards the total liability, as they had participated in the Board meetings, were members of the Managing Committee as well as the Sale Committee and some of the impugned actions were in fact taken on the move made by these ex- directors. It is also pertinent to note that 15 directors constituting the Board of Directors represented 90% of the share capital of the company. Haji Allah Bakhsh, Syed Haider Shah. And Haji Lal Din held respectively 4.8%, 3% and 2.6% of the equity, so they were owners of 10% of the share capital. The respondents including Mirza Fazal-e--Haq and his group owned the remaining 90% of the equity. The total number of share-holders of the company were 46 and its paid up capital was rupees ten lacs only. The company was paying income-tax on the basis of the accounts being maintained by it. It is also to be noted that on 2-6-1982, 65% of the contributories and 70% of the creditor's expressed their wish to close these proceedings as because of the misappropriation by the deceased official liquidator of rupees five lacs approximately, they held the view that no good is going to come out by continuing these proceedings. Even before me during the arguments all the contributories and creditors who were then attending the proceedings excepting Khawaja Dilawar
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Hussain and the four ex-directors represented by Kh. Muhammad Akram Advocate expressed the view that these proceedings which have lingered on for the last fifteen years be brought to an end as due to the misappropriation of the assets of the company by the deceased official liquidator nothing can be achieved out of these proceedings. Khawaja Dilawar Hussain and aforesaid four directors, however, stated that these proceedings be continued as against Mirza Fazal-e-Haq and his group. This stance was taken being conscious of the legal position obtaining in the matter that no action can be taken against them on account of the bar of limitation contained in the provisions of section 235 Companies Act, 1913. In the background of the afore-noted facts and factors, the question of liability, if any, of the living ex-directors is to be determined. At this stage it is also pertinent to note that 17 instances of breach of trust, misfeasance and mismanagement in the form of 17 questions have been cited but during arguments, the acts or omissions which are subject matter of questions No,1, 2, 4, 8 and 11 to 17 were only pressed. 12. Before dealing with each question on merits it appears appropriate to state the principles which should be kept in view while determining the question of liability of the ex-directors. The foremost principle settled by authority is that in order to bring a case within section 235 Companies Act 1913 it is essential to establish that (1) there has been a breach of trust and (2) that the breach has resulted in pecuniary loss to the Company. See Canadian Land Reclaiming and Colonizing Co. (1880) 14 Ch D 660; Cavendesh Bentick v. Fenn (1887) 12 A C 652. It is also well settled that section 235 Companies Act gives a summary remedy only against such directors or officers as have been personally guilty of some act of misfeasance, breach of trust or wilful neglect or default but it does not confer upon the Court the power to make an order against the directors on masse for all acts of misfeasance etc without any specific finding against the individuals who are actually responsible for the particular acts of misfeasance. Reference may be made to In re Royal Hotel Co. Of Great Yarmouth (1867) 4 Eq 244 at p. 248; In re New Mashonaland Exploration Co. (1892) 3 Ch. 577 at 581, 584 middle and 586 top; In re National Bank of Wales Ltd. (1899) 2 Ch. 629 at 654 (last para), 675 (second para); In re Jehangir B. Karani and Co. Ltd. ILR 19 Bom. 88 at 94 (bot), 95; K. Sheshadri Doraswa my v. Pestonjee Jamsetjee, 5 Bom. LR 632 at 636-637 and Indu Nandan Goswa mi v. Ashutosh Goswa mi, I L R 29 Cal. 688 at 694. The words "wilful neglect or default" used in section 235 Companies Act 1913 used in a similar Article were explained by Romer J in the case of City Equitable Fire Insurance Company Limited (1925) 1 Ch. 407 at page 507, as under:- "An act, or an omission to do an act, is wilful where the person who acts, or omits to act, knows that he is doing, and intends to do, what he is doing, but if that act or omission amounts to a breach of that person's duty, and therefore, to negligence he is not guilty of wilful neglect or default unless he knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of his duty." This statement was approved of by Warrington and Sargant L.JJ., in the Court of Appeal. This view was adopted in the case of National Bank of Upper India Lucknow v. Dina Nath Sapru and others AIR 1926 Oudh 243. It is. Also apparent from the provisions of section 235 that the liability arising under the misfeasance proceedings is founded on the principle that a person who has caused loss to the Company by an act amounting to breach of trust should make good the loss. This is not a provision intended to punish a man who has been found guilty of misfeasance as for that purpose resort is to be had to the provisions of section 237 Companies Act 1913. This section provides summary procedure for compensating the Company in respect of the loss occasioned by the misfeasance which means a breach of duty resulting in loss. It may also be noted that section 235 covers many acts other than misfeasance such as misapplication of any money or property of the Company in addition to any act of misfeasance or breach of trust. The misfeasance spoken of is not misfeasance in the abstract but the misfeasance in the nature of a breach of trust which may not necessarily involve fraud but which has resulted in loss to the
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Company. See City Equitable Fire Insurance Company (1925) 1 Ch. 407 at page 507; Nadungadi v. Malayable Bank AIR 1971 S.C. 829. ' In the light of the aforenoted principle the acts of misfeasance, mismanagement or breach of trust and the question of loss caused may now be examined. 13. Question No,1 ' The main allegation is that amount received from the sale of 26 buses struck off from the lorry stock were not shown in the account books. The official liquidator has claimed Rs,10,39,681 (Rs, ten lacs, thirty-nine thousand, six hundred and eighty-one) as loss on account of misappropriation of sale proceeds of these lorries and loss of earnings which the Company would have otherwise received. It is however, not disputed that Resolution dated 4-5-1968 of the Board of Directors makes mention of sale of 19 buses. Haider Shah ex-director a member of the dissenting group in his reply to the questionnaire stated that useable parts of these vehicles were utilized in the other vehicles while the frames of these vehicles were used in the construction of certain rooms. It also appears from the record that 43 skeltons of these vehicles were disposed of by the official liquidator. The allegation that these vehicles were not sold and were in fact operating on certain routes is based on the four entries of the Register called "Outside Repair Register". The explanation offered by the ex-directors is that sometimes the bills were submitted late and these entries were recorded in the said Register as and when these bills were paid. These bills as is apparent from the entries were paid within a month or so of the last day of the recorded operation of these vehicles. The explanation offered seem plausible specially when no other material to corroborate the plea of plying the vehicles has been produced. Thus, no reliable evidence exists for coming to the conclusion that these buses were in fact being plied on road and income so realized was being misappropriated. In these circumstances the ex-directors cannot be held liable to make good the alleged loss. 14. Question No,2. ' A sum of Rs,1,63,350 (Rs,one lac, sixty-three thousand, three hundred and fifty) has been calculated as loss sustained by the company on account of non-operation of bus No,JM-5777 which was sold to and then repurchased from one Raja Anar Khan. The basis of the demand is that the bus was sold to Raja Anar Khan on 15-7-1963 for Rs,7,000 and was taken back on 2-11-1966 at the same price and the explanation was that this was so done as the sale was made due to adverse competition offered by the Ex-Servicemen Public Transport Company which operated three services unlawfully against one permit on the route. The sale and purchase of the vehicle was approved by the directors in the Board meeting dated 24-7-1967. The cause given in the resolution for selling the bus has not been believed for the reason that it was not known what and where competition existed and in what manner one solitary bus run by another company could create adverse competition. The aforesaid can hardly furnish a basis for making out a case of misfeasance and breach of trust against the full board of directors which represented 90% of the share-capital. The amount of loss has been calculated on speculations. I am, therefore, inclined to hold that case of breach of trust or misfeasance has not been made out. 15. Question No,4. ' The loss of Rs,10,67,941 (Rs, ten lacs, sixty-seven thousand, .. Nine hundred and forty-one) has been assessed against all the ex-directors on account of sale of buses. The case of the official liquidator is that in 131 months, six buses owned by the company were operated on commission basis thereby filling the pocket of the purchaser of buses and causing loss to the Company correspondingly of Rs,8,53,141 (Rs, eight lacs, fifty-three thousand, one hundred and forty-one) which would otherwise have come in the company's account in the normal course. The remaining sum represents the alleged fraudulent sale and under sale of nine buses. The resolution dated 13-8-1968 moved by
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Syed Haider Shah was adopted by the Board of Directors and the sale of the vehicles was also confirmed by the share-holders in their meeting held on 26-1-1969. 16. Despite the confirmation by the share-holders of the sale of the vehicles, the official liquidator insists that all the fifteen ex-directors be held liable to make good the loss to the company as the resolution speaks of acceptance of the price fixed for only seven buses and that the share-holders did not confirm the sale of the buses as approved by the directors in their resolution dated 13-8- 1968. It is well settled that the company may by its subsequent act become estopped from claiming from a director any damages for negligence as where the company in general meeting adopts or takes advantage of L the transaction initiated by him. There is admittedly a resolution of the share-holders passed in the…
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