The Official Liquidator Vs. Raghava
Desikachar & Ors  INSC 154 (23 August 1974)
REDDY, P. JAGANMOHAN REDDY, P. JAGANMOHAN
BEG, M. HAMEEDULLAH ALAGIRISWAMI, A.
CITATION: 1974 AIR 2069 1975 SCR (1) 890
RF 1991 SC1654 (43)
Code of Civil Procedure--O.41, r. 27--Scope
Respondent No. 5, who was the Managing
Director of a limited company, resigned his post and in his capacity as a
shareholder filed an application in the District Court for compulsory winding
up of the company, which was ordered.
The Official Liquidator made an application
before the District Judge that as the four Directors, respondent 1 to 4, had
illegally, withheld or retained certain amounts, they became liable to refund
them. Contesting this application respondents 1 to 4 requested that they might
be allowed to cross examine respondent no. 5, which application was rejected.
On appeal the High Court set aside the order of the District Judge and remanded
the case to the City Civil Court, Bombay to record additional evidence under
Order 41 Rule 27, Code of Civil Procedure.
On appeal it was contended in this Court that
the High Court was wrong in directing additional evidence to be allowed under
Dismissing the appeal,
HELD : The High Court rightly ordered that
additional evidence be recorded in this case. There was no justification
whatsoever for the District Court to reject the evidence which the respondent
had intended to lead or to disallow the production of documents. [895 H; 896 A]
Under O. 41 r. 27 it is only where the Court had improperly refused to admit
evidence or where the appellate court required additional evidence to be
recorded in order to enable it to pronounce judgment that it could make such an
order. Under cl. (b) of this rule the Court may require additional evidence
either to enable it to pronounce judgment or when it may require additional
evidence to be recorded for any other substantial cause, [894 A-B] Arjan Singh
v. Kaetar Singh and others  SCR 258, state of U.P. V. Manbodhan Lal
Srivastava,  SCR 533, Municipal Corporation for Greater Bombay v. Lala
Pancham of Bombay,  SCR 542 at 548 referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 1283 of 1967.
Appeal from the Judgment & Decree dated
the 22nd March/26th April/26th June, 1963 of the Bombay High Court in Appeal
No.38 of 1959.
V. S. Desai and S. K. Gambhir for the
S. T. Desai, Ramesh D. Divan and R. P. Kapur,
for the Respondent Nos. 1-4.
R. M. Mehta, S. K. Dholakia and R. C. Bhatia,
for the Respondent No. 5.
The Judgment of the Court was delivered by
JAGANMOHAN REDDY, -J-This appeal is by certificate against the judgment of the
High Court of Bombay varying the judgment and decree passed against respondents
1 to 4 by the District Judge of Jagpur on an application under s. 235 of the
Indian Companies Act 7 of 1913-hereinafter called the Act'.
891 It appears that in or about April 1949
the Industrial & Agricultural Engineering Company (C.P.) Ltd.-hereinafter
referred to as the Company' was formed under the Act with its registered office
situated at Nagpur. From the date of the Company's incorporation till August
27, 1952 one Shantilal Nemchand Shah respondent 5 was the Managing Director,
while respondents 1 to 4 were the Directors of the Company. On August 27, 1952,
respondent 5 resigned as Managing Director and in his place two Directors C.V.Krisbnamurthi
respondent 2 and M. Ganpatram respondent 3 were appointed Directors. These two
new Directors were the employees and Directors of a concern known as Industrial
& Agricultural Engineering Company (Bombay) Ltd.-hereinafter called the
Bombay Company'. Respondent 4 T. K. Shamu is the cousin of respondent 1 Raghawa
Desikachar. There was also a partnership firm consisting of respondent 1 and some
The office of this partnership was located in
the office of the Bombay Company. After August 27, 1952, respondent 5 having
resigned the office of Managing Director was only a shareholder and it
transpired that as the Company was not making profits, the Directors called a
meeting of the shareholders of the Company on July 29, 1954, in order to obtain
a Special Resolution for voluntary liquidation of the Company. Even before this
meeting took place, respondent 5 as share-holder of the Company filed an application
on July 26, 1954 in the District Court at Nagpur against the Company,
respondents 1 to 4 and other parties praying for an order for compulsory
winding up of the Company. The District Judge passed an order on July 13, 1955
directing compulsory winding up of the Company and appointed one K. S. Misra as
the Official Liquidator of the said Company. The Official Liquidator Misra made
a report to the District Court on April' 28, 1956 asking the Court to pass an
order for the public examination of respondents 1 to 4-the Directors of the
Company. The District Judge passed the order prayed for under s. 196 of the Act
on July 7, 1956.
Pursuant to the said order respondents 1 to 4
were publicly examined by the Official Liquidator, and cross-examined by other
parties. The Official Liquidator also asked for the examination of respondent 5
who however was directed by the District Judge to be present in the Court. But
since the District Judge was not in a position to know why and for what purpose
respondent 5 was to be examined he directed the official Liquidator or Mr. Mani
to make an application for that purpose. On June 29, 1957 the Official
Liquidator stated that he did not want to examine respondent 5. Again on July
10, 1957 the Official Liquidator requested the Court to examine respondent 5
and the learned Judge passed an order on the same day directing examination of
respondent 5 at 3 P.M. on that day892 O July 11, 1957, the Official Liquidator
made an application that as the four Directors respondents 1 to 4 had illegally
withheld or retained certain amounts specified therein they became liable to
refund or repay the amounts with costs and with such interest as the Court
deems fit. The items which were said tobe withheld were as follows Commission
in respect of sales of General Motors pumping sets worth about Rs. 5 lakhs at 4
per cent. to Bombay Rs. 20,000-0-0 (2) Three percent commission on General
Motors supplied, transaction worth Rs. 12 lakhs. Rs. 36,000-0-0 (3) Commission
due on other articles supplied to Model Mills and Power House etc.
Rs. 30,000-0-0 (4) For stock, furniture,
motor car etc.
purchased by the Bombay Company at a very low
price. The amount mentioned being the difference between the real price and the
purchase price Rs. 30,000-0-0 (5) Improperly remitted to a sister concern I. A.
R. C. (Hyderabad) Ltd.' Rs.2,686-3-0 (6) Commission on the sale of' a boiler
manufactured by Stein-Muller to M. P. Electricity Board for Itarsi Power House
through the instrumentality of the Nagpur Company. Rs. 1,30,000-0-0 TOTAL Rs.
2,48,686-3-0 Thereafter the Official Liquidator applied for certain amendments
to the application and for impleading respondents 1 to 4-Directors of the
Company in liquidation. The District Judge by his order dated December 7, 1967
allowed the application and accordingly the application dated July 11, 1956 was
amended. Respondents 1 to 4 by their reply dated December 27, 1957, showed
cause against the said application of the Official Liquidator and requested
that they may be allowed to lead evidence in connection with the charges
mentioned in the application of the Official Liquidator. They also requested
that they be allowed to cross-examine respondent 5 Managing Director of the
said Company. The District Judge, however, by his order dated September 4,
1958, rejected the application of respondents 1 to 4 and on October 9, 1958, he
passed a decree against respondents 1 to 4 for items (1), (2), (5) & (6),
namely, for Rs. 20,000/-; Rs. 36,0001-; Rs. 2,686/3/and Rs.
1,30,000/with interest at 4 percent. p. a.
The District Judge further directed the Official Liquidator to furnish a
statement in respect of the amounts due on certain charges which was
accordingly furnished by him on October 23, 1958.
On October 25, 1958, the District Judge
ordered respondents 1 to 4 to pay further amounts of Rs. 36,649-32 p.
893 and Rs. 21,700-75p as per the report of
the Official Liquidator. This order formed part of the decree dated October 9,
Respondents 1 to 4 preferred an appeal to the
High Court of Bombay which by an interlocutory judgment dated January 25, 1963
set aside the order made by the District Judge refusing respondents 1 to 4
permission to lead evidence and permission to cross-exemine respondent 5.
Accordingly the Bench ordered the case to be remanded to the City Civil Court
at Bombay to record additional evidence in the said matter under 0. 41 r. 27
Code of Civil Procedure and remit to it that evidence.
On an application dated February 11, 1963,
the Bench of the High Court by its order dated February 12, 1963, refused to
allow respondents 1 to 4 to produce certain documents which were not produced
by them at an earlier stage. Pursuant to the aforesaid orders dated January 25,
1963 and February 12, 1963 respondents 1 to 4 led the evidence of 11 witnesses
including themselves and cross-examined respondent 5. They also filed certain
documents. Noevidence was led by the Official Liquidator or respondent 5. After
the record of the evidence was transmitted to the High Court the Bench by its
judgment dated March 22, 1963 passed a decree against respondents 1, 2 and 3 to
pay to the Official Liquidator of the Company a sum of Rs 11,973/12/in respect
of certain stock-in-trade, furniture, motorcycle and motor car sold by the said
Company and a further sum of Rs. 2,686/8/3 being part of the debt remitted by
the said Company with interest on the aforesaid amounts at 6 per cent from July
25, 1954 until payment. The remaining claim of the Official Liquidator was set
aside and the decree of the District Court was reversed to that extent..
The first question that has been urged before
us is whether the High Court of Bombay was right in directing additional
evidence to be led by respondents 1 to 4 under 0. 41 r. 27 Code of Civil
Procedure. This Court has, in several decisions, laid down the circumstances in
which an Appellate Court will be justified in directing additional evidence to
be recorded for the disposal of the appeal. Order 41 r. 27 Code of Civil
Procedure under which additional evidence could be called for states thus :
"(1) The parties to an appeal shall not
be entitled to produce additional evidence, whether oral or documentary, in the
Appellate Court. But if(a) the Court from whose decree the appeal is preferred
has refused to admit evidence which ought to have beep. admitted,. or (b) the
Appellate Court requires any document to be produced or any witness to be
examined to enable it to pronounce judgment, or for any other substantial
cause, the Appellate Court may allow such evidence or document to be produced,.
or witness to be examined.
(2) Wherever additional evidence is allow to
produced by an Appellate Court, the Court shall record the reason for its
admission." 894 It is apparent that by the terms of the above rule, it is
only where the Court has improperly refused to admit evidence or where the
Appellate Court requires additional evidence to be recorded in order to enable
it to pronounce judgment that it can make such an order. Under 0. 41 r.
27(1) (b) the Court may require additional evidence
either to enable it to pronounce judgment or it may require additional evidence
to be recorded for any other substantial cause, in Arjan Singh V. Kartar Singh
and others(1) it was held that the legitimate occasion for admitting additional
evidence in appeal is when on examining the evidence as it stands some inherent
lacuna or defeat becomes apparent, not where a discovery is made outside the
Court, of fresh evidence, and an application is made to import it. The true
test is whether the appellate court is able to pronounce judgment on the
materials before it, without taking into consideration the additional evidence
sought to be adduced.
See also State of U. P. v. Manbodhan Lal
Srivastava(2) and Municipal Corporation for Greater Bombay v. Lala Pancham of
Bombay and others(3). The learned Advocate for the appellant, while admitting
that the Appellate Court has power to record additional evidence submits that
the High Court did not go through the evidence, nor did it apply its mind as to
whether the case was such that it could not pronounce judgment on the materials
before it without taking into consideration the additional evidence sought to
be adduced. This argument, however, ignores the provisions of
0. 41 r. 27(1)(a) under which an Appellate
Court can direct additional evidence to be recorded if the Trial Court had
refused to allow or declined to record evidence which the party against whom
the decree had been passed was prepared to produce before it. What we must,
therefore, see is whether the District Judge had improperly rejected the
request to record the evidence of the respondents and consequently whether the
High Court was justified in directing additional evidence to be recorded. On a
perusal of the record we have no doubt that the District Judge had improperly
rejected the prayer of the respondents that they should be allowed to lead
evidence in connection with the charges mentioned in the application filed by
the Official Liquidator and that they should be allowed to cross-examine
The Roznama dated September 4, 1958 shows
that on that day the four respondents, namely respondents 1 to 4 represented by
Mr. Amin, and the Official Liquidator in person, appeared before the District
Judge. The order made in those proceedings is as follows:
"Mr. Amin for the respondents wanted
that the petitioner should be put into the witness box so as to enable him to
cross-examine the petitioner on the point of alleged misfeasance. From the
record it appears that the petitioner was under cross-examination for a great
length of time and it is on the material elicited in his evidence, as also on
the record otherwise available here, that the charge of misfeasance is made.
Mr. Amin's contention (1)  S.C.R. 258. (2)  S.C.R. 533.
(3)  1 S.C.R. 542 at 548.
895 is that when the petitioner was
cross-examined by Mr. Mani, Mr. Mani represented the four different companies
and not these respondents.
This may be so, but I do not think now I
should allow another cross-examination of the petitioner when from the record
it appears that a detailed and searching crossexamination was made of the
petitioner Besides, there was no question of leading any evidence, since the
case was fixed for argument from 21-1-58. The only part which the parties had
to play was to point out the documents on which each relied for proving or
disproving the alleged misfeasance.
I do not think it is possible for me to put
the hands of the clock behind by reverting to the stage of leading evidence,
when this matter has been fixed for argument since 21-11958. Hence the request
is rejected." The above proceedings clearly show that no opportunity was
given to respondents 1 to 4 because proceedings of January 12, 1958 show that
as soon as written statement was filed on December 30, 1957 the District Judge
fixed the case for argument. The proceedings of July 7, 1958 further show that
Mr. Amin had brought to the notice of the Official Liquidator that he should be
supplied with materials on which the Official Liquidator would rely for the
alleged malfeasance on the part of his clients, but no materials were furnished
by the Official Liquidator. Accordingly on the second hearing after the
aforesaid application, a petition for submitting fresh evidence and for crossexamining
respondent 5 was made but it was rejected. The show cause notice was given by
the Official Liquidator on the basis of the public examination of respondents 1
it is only in answer to the show cause notice
that respondents 1 to 4 could lead evidence and crossexamine respondent 5. It
may be mentioned that misfeasance action against the Directors is a serious
charge. It is a charge of misconduct or misappropriation or breach of trust.
For this reason the application should contain a detailed narration of the
specific acts of commission and omission on the part of each Director
quantifying the loss to the Company arising out of such acts or emissions. The
burden of proving misfeasance or nonfeasance rests on the Official Liquidator.
The Official Liquidator it may be mentioned, merely relied upon the evidence
recorded in public examination of the Directors and on a few documents tendered
in evidence. At the stage of public examination there was no charge of
misfeasance against the Directors and they were not in a position to know what
would be the grounds that would be alleged against them for recovering any
amounts, for the loss said to have been caused to the Company by reason of such
misfeasance. The application made by the Official Liquidator did not give
sufficient particulars which, in our view, it should have. Once a show cause
notice was given to respondents 1 to 4 the Official Liquidator did not lead any
evidence nor rely upon any other documents, nor did respondent 5 who was
instrumental in initiating the misfeasance case against respondents 1 to 4 lead
any evidence. In our view, there was no justification whatsoever for the
District Court to reject the evidence which 896 the respondents had intended to
lead or to disallow the production of documents other than those already
produced, and for that reason the High Court rightly ordered that additional
evidence be recorded in this case.
Now coming to the merits of the appeal. The
first challenge is to the disallowance of Rs. 1,30,000/-. This amount
represented the commission on the sale to M. P. Electricity Board of a
Stein-Muller Boiler for Itarsi Power House through the instrumentality of the
Nagpur Company. The reason why the High Court disallowed this amount is because
the Official Liquidator failed to establish that there was any connection with
the Nagpur Company and the sale of this Boiler to the Itarsi Power House of the
M. P. Electricity Board. On the admitted facts of the case itself this
conclusion is amply justified. It appears that there was a partnership firm
known as Industrial and Agricultural Engineering Company hereinafter called the
I.D.D. This partnership firm was the sole selling agent for Stein-Muller
machinery and products. On October 31,1953, the M.P. Electricity Board agreed
to purchase from the partnership a Stein Muller Boiler for a sum of about
pound, 86,000 in respect of which there was an agreement between the I. D. D. and
the Electricity Board. The Electricity Board agreed to pay a sum of Rs.
1,50,000 to the I. D. D. for certain, services. Out of this sum the Official
Liquidator claimed Rs. 1,30,000/on the ground that it amounted to 10 percent.
of the commission which was due to the Nagpur
Company from the I.D.D. and which was wrongly withhold by the latter Company,
with the acquiescence of respondent I who was one of the partners of the I. D.
D. The case of the Official Liquidator was that Shantilal Shah then Managing
Director of the Company bad contacted the officers of the M. P.
Electricity Board and it was through his
efforts that the ultimate contract was entered upon. Accordingly a part of the
commission which the I. D. D. was claiming on behalf of the Nagpur Company may
be allowed to the Company.
The defence of respondents 1 to 4 is that the
Nagpur Company had nothing to do with the I. D. D. and that the order was
obtained by the I. D. D. partnership itself. In our view, it is not the case of
the Official Liquidator that there was an agreement under which a part of the
commission was payable by the I. D. D. to the Nagpur Company and much less is
there any justification for our holding that respondents 1 to 4, even if there
was any agreement, which on the evidence we say there was not, had intended to
with-hold the amount. The High Court has gone into the evidence very carefully
and we do not see any reason for disagreeing with its conclusion.
With respect to item (1), namely, commission
in respect of sales of General Motors pumping sets worth about Rs. 5 lakhs at 4
per cent viz. Rs. 20,000/-, the foundation of the claim is the payment made by
one Premnath Transport Company at Delhi to the Bombay Company as infringement
commission, because they had sold certain machinery of the General Motors Ltd.
in Bhopal area, the agency of which was held by the Company, and consequently
the Company agreed to give an infringement commission of 4 per cent to the
897 This amount of Rs. 20,000/is claimed out
of that amount.
It is contended that Bhopal was within the
area allotted to the Nagpur Company and, therefore, it was entitled to the
commission. This was denied by Directors. The Official Liquidator failed to
establish that the Nagpur Company was entitled to the whole or part of the
infringement commission by reason of the fact that it was a sole selling agent
of the General Motors parts in that particular area or it had an exclusive
sub-agency from the Bombay Company. The High Court considered that the evidence
in the case was not sufficient to establish either of these claims. We have not
been persuaded to hold otherwise.
In so far as item (2) for Rs. 36,000/is
concerned, here again the Nagpur Company was being paid 15 per cent and 20 per
cent commission in respect of machinery and spare parts respectively by the
Bombay Company which Company was retaining 5 per cent of the commission in
respect of the orders placed by the Nagpur Company. According to the Official
Liquidator the Bombay Company was only entitled to retain 2 per cent and
consequently the Nagpur Company would be entailed to a further 3 per cent which
had been wrongly withheld. Here again the High Court considered that there was
not sufficient evidence to sustain the claim. Shantilal Shah who gave evidence
did not spell out the actual terms of the agreement between the Nagpur Company
and the Bombay Company by reason of which the Bombay Company was entitled to
retain only 2 per cent and not 5 percent. It was held, and there is nothing to
establish to the contrary. Inasmuch as the evidence of respondents 1 to 4 as
Directors of the Company was confirmed by the first minutes, the explanation
given by the respondents must be accepted. Reliance was placed on sub-item (2)
of Item 2 of the minutes of the Board of Directors of the sister companies at
which Shantilal Shah was also present. It was agreed and accepted by all the
associates that a commission of 2 per cent on all such imports on the c. i. f.
or f. o. b. invoice value, as the case may be, should be paid to the Bombay
Office. But in so far as sub-item V of Item III was concerned, it was
unanimously agreed that the associated offices should pay a commission of 5
percent on their imports covered by, the licences owned by the Bombay office.
The third item is for Rs. 30,000/in
connection with the supplies to Model Mills and the Power House in Nagpur with
the products of the Mysore Electric Company Ltd. There was some suggestion that
the Bombay Company should reduce its commission from 5 per cent to 2 per cent
but as the High Court pointed Out that it had absolutely no connection
whatsoever with the inter-Company transaction in respect of goods of which
agency was held by the Bombay Company. The evidence of Shantilal Shah in this
regard was considered to be highly unsatisfactory. Apart from that Exhibit T-a
letter dated February 2, 1950 clearly showed that the arrangement between the
Nagpur Company and the Bombay Company was to give commission at a particular
rate. The High Court extracted the relevant portion of the letter which merits
repetition, It says :
"I am glad to inform you that we have
been able to get some additional concession by way of extra discounts from the
Mysore 11-M192SupCI/75 898 Lamp Works and as intimated to you personally during
your recent visit, we shall give you a portion of this extra commission, thus
in all 25 and 2 1/2 per cent, discount on the list price." It is no one's
case that the commission according to this letter was not paid, and as the
Nagpur Company has received this commission it cannot claim any additional
Ins ofar as item (4) is concerned, it has
reference to four amounts, namely Rs. 7,689/12/Rs. 2,184/-; Rs. 9,827 and Rs.
2,100/-. Nothing has been shown as to why these claims were not properly
allowed. The appellant, however, challenges the item for Rs. 9,827/as not being
the correct amount. In fact the book value is Rs. 39,309/4/9. The High Court
took the difference between the book value and the stock purchased by the
Bombay Company after August 23, 1952, since the date of resignation of
Accordingly it took the opening stock as per
the balance sheet dated March, 31, 1953 at Rs. 53,574-4-0, The closing stock as
per audit report dated March, 13, 1953,reduced to the extent of 7/9 was Rs.
24,092-0-0 leaving an amount of Rs 29,482-4-9. This amount was transferred to
the Bombay office and the difference between the above amounts amounted to Rs.
9,827 /-. Shantilal Shah was questioned about this but he did not know how it
was made up of. No explanation was also given on behalf of the Official
Liquidator as to how the item was made up of. For this reason this item was not
allowed. Similarly no exception can be taken to the amount of Rs. 2,100/which
was allowed because within few months of its purchase the scooter was sold to
the Delhi Branch for only Rs. 6,001. These two items, namely Rs. 9,827/and Rs.
2,100/which are allowable to the Liquidator come to Rs. 11,927 the other two
items for Rs.
7,689/12/and Rs. 2,184/which relate to the
purchases actually made by the Bombay Company in pursuance of their offer and
in pursuance of the majority resolution of April 25, 1953 and the difference
between the book value and the purchase value of the car by the Bombay Company
were also allowed. Apart from this, item (5) for a sum of Rs. 2,686/3/in
connection with the wrongful remission to the Hyderabad Company was also allowed.
There seems to be no dispute on this account because the whole of the amount as
claimed has been allowed.
In the result we find no reason to interfere
with the Judgment of the Bombay High Court under appeal. Accordingly the appeal
is dismissed with costs.