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Civil Original No. 13 of 1972, decided on 21st September, 1987.

(a) Companies Act (VII of 1913)‑‑

‑‑‑S. 235‑‑Mismanagement, misfeasance and breach of trust Power of Court to examine into the conduct of director and compel him to repay or restore the money or any part thereof with interest 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‑‑Limitation‑‑Where the official liquidator was appointed in 1971; breach of trust or misfeasance was alleged to have occurred during the period 1966‑71 and an ex‑director was not impleaded as respondent in the petitions in the years 1971, 1972, 1973 and questionnaire was served on the said ex‑director in persuance of order of the Court dated 27‑5‑1986, such director, at best, held, could be treated to have been impleaded on 27‑5‑1986 which was beyond the period of three years as prescribed under S. 235‑‑Bar of limitation therefore, successfully could be pleaded by such ex‑director.

(b) Companies Act (VII of 1913)‑‑

‑‑‑Ss. 196 & 235‑‑Mismanagement, misfeasance and breach of trust‑ Proceedings under Ss. 196 & 235‑‑Legal heirs of ex‑directors, impleading of‑‑Proceedings contemplated under Ss. 196 & 235 are in the nature of misfeasance summons and idea behind is to bring to the book in the summary proceedings all the persons who have been mishandling the assets or property of a company‑‑Such proceedings are judicial proceedings and are essentially of civil nature‑‑Legal heirs of deceased directors as such can be impleaded in these proceedings.

Phillips v. Homfray (1883) 24 Ch. D 439 (453) and Philips v. Forthergill's (1886) 11 A.C. 466 ref.

(c) Companies Act (VII of 1913)‑‑

‑‑‑Ss. 196 & 235‑‑Mismanagement, misfeasance and breach of trust‑ Proceedings under Ss. 196 & 235‑‑Action against legal representatives of ex‑directors‑‑Conditions to be fulfilled‑‑Court is not conferred with power 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 S. 235 of the Companies Act, 1913 had not devolved.

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 of funds alleged against him and such an estate which has so been benefited 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 reply 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 these upon whom the assets or estate of the deceased delinquent director who may have become liable under section 235, Companies Act had not devolved.

(d) Companies Act (VII of 1913)‑‑

‑‑‑Ss. 196 & 235‑‑Mismanagement, misfeasance and breach of trust‑ Proceedings under Ss. 196 & 235 against deceased directors‑‑Ex directors cannot be made to share the liability of a deceased director‑ Where the deceased directors could not be made to discharge their liabilities, there was, held, no alternative but to discontinue the proceedings against deceased directors.

(e) Companies Act (VII of 1913)‑‑

‑‑‑S. 235‑‑Mismanagement, misfeasance and breach of trust‑‑In order to bring a case under S. 235, it is essential to establish that there has been a breach of trust and the breach has resulted in pecuniary loss to the company.

Canadian Land Reclaiming and Colonizing Co. (1880) 14 Ch. D 660 and Cavendesh Bentick v. Fenn (1887) 12 A.C. 652 ref.

(f) Companies Act (VII of 1913)‑‑

‑‑‑S. 235‑‑Words "wilful neglect or default"‑‑Connotation‑‑Allegation of misfeasance, breach of trust or wilful neglect or default‑‑Provisions of S. 235 provide 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‑‑Provisions of S. 235 do not confer upon the Court power to make an order against the directors enmasse for all acts of misfeasance etc without any specific finding against individuals who are actually responsible for the particular acts of misfeasance‑‑Liability arising under 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 as provision of S. 235 is not intended to punish a man who has been found guilty of misfeasance.

Royal Hotel Co. of Great Yarmouth (1867) 4 Eq 244 at p. 248; 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; Jehangir B. Karani and Co. Ltd. I L R 19 Bom. 88 at 94 (bot.) 95; K. Sheshadri Doraswamy v. Pestonjee Jamsetjee, 5 Bom LR 632 at 636‑637 and Indus Nandan Goswami v. Ashutosh Goswami ILR 29 Cal. 688 at 694 and National Bank of Upper India Lucknow v. Dina Nath Sapru and others A I R 1926 Oudh 243 ref.

(g) Companies Act (VII of 1913)‑‑

‑‑‑S. 237‑‑Prosecution of delinquent directors‑‑Provisions of S. 237 provide summary procedure for compensating the company in respect of loss occasioned by misfeasance which means a breach of duty resulting in loss.

(h) Companies Act (VII of 1913)‑‑

‑‑‑S. 235‑‑Misfeasance‑‑Provisions of S. 235 cover 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‑ Misfeasance as mentioned in S. 235 is not misfeasance in the nature of a breach of trust which may not necessarily involve fraud but which has resulted in loss to the Company.

City Equitable Fire Insurance Company (1925) 1 Ch 407 at page 507 ref.

(i) Companies Act (VII of 1913)‑‑

‑‑‑S. 235‑‑Misfeasance‑‑No case of breach of trust or misfeasance, held, was made out, where amount of loss was calculated on speculations.

(j) Companies Act (VII of 1913)‑‑

‑‑‑S. 235‑‑Misfeasance‑‑Company by its subsequent act may be estopped from claiming from a director any damages for negligence where company in general meeting had adopted same or took advantage of such transaction initiated by such director

(k) Companies Act (VII of 1913)‑‑

‑‑‑S. 235‑‑Intent and purpose of S. 235 is to recover loss from the deliquent director or officer for the benefit of shareholders and the creditors‑‑Where the shareholders had received the benefits and sufficient funds were available to satisfy the claims of creditors, no reasonable basis, held, existed for holding the ex‑directors liable to pay the sum demanded.

Mian Mushtaq Hussain, Official Liquidator. Muhammad Akram for the Ex‑Directors. Mirza Fazal‑e‑Haq, Managing Director present in person.

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 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, expired. 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 23‑6‑1985. 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.

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. Kh. 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 Mirza 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 1 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 moneys Where here is nothing among the assets of 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 ex‑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. D 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 tithe 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 creditors 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 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 betaken 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.l, 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 1 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 1 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 Doraswamy v. Pestonjee Jamsetjee, 5 Bom. LR 632 at 636‑637 and Indu Nandan Goswami v. Ashutosh Goswami, 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 A I R 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 A misfeasance in the nature of a breach of trust which may not necessarily , involve fraud but which has resulted in loss to the Company. See City Equitable Fire Insurance Company (1925) 1 Ch. 407 at page 507; Nadungadi v. Malayable Bank A I R 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.l

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 some times 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 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 the transaction initiated by him. There is admittedly a resolution of the share‑holders passed in the Annual General Meeting approving sale of at least seven buses. Moreover resolution of the Board of Directors as it represents 90% of the share‑capital in ordinary circumstances should furnish sufficient answer as far as the share‑holders are concerned unless it is shown that the remaining 10% share‑holders were defrauded or were made to suffer any loss. It is well‑known in the transport business circles that due to liberal grant of route permits to every one on production of a vehicle, the transport companies started operating the vehicles on commission basis and this practice was adopted even by the well established and old transport companies. In view of the changed circumstances, definite evidence should have been produced on record to show that the decision taken to operate the buses on commission was not in the interest of the company. These buses were sold to the directors, share‑holders and their relatives. This will show that the benefit was received by the share‑holders themselves. This being the position any of the share‑holders or even the company which is the legal name of the share‑holders cannot turn round to claim that they were put to any loss. The intent and purpose of section 235 is to recover loss from the deliquent director or officer for the benefit of the share‑holders and the creditors. The share‑holders having received benefits it is not understandable, for whose benefit then the official liquidator wants to recover the so called loss from the fifteen directors. As regards creditors, their claims could be fully satisfied had there

been no misappropriation by the deceased official liquidator. The net result of the above discussion is that no reasonable basis exists for holding the ex‑directors liable to pay the sum demanded. The question is answered accordingly.

17. Question No.8

A sum of Rs.11,40,785 (Rs. eleven lacs, forty thousand, seven hundred and eighty‑five) shown as repayment of loans and Rs.3,07,099 (Rs.three lacs, seven thousand and ninty‑nine) representing payment of interest thereon has been claimed from each director in proportion to the length of tenure of office held by him. The basis of the claim is the absence of legal necessity for borrowing; lack of proper sanction of the competent authority to borrow money; and absence of the need for each borrowing. A few instances, have been quoted in the arguments by the official liquidator td contend that either the entries made .in the books are fictitious or are of doubtful nature. These instances pertain to small amounts. The argument in reply of the ex‑managing director was that the borrowing was made authorisedly under resolutions of the Board of Directors dated 24‑11‑1967, 3‑7‑1968, 10‑10‑1968 and 18‑11‑196fi. He also placed reliance on the resolution passed in the Annual General Meetings held on 25‑1‑1968, 26‑11969 and 10‑1‑1970. It was further pleaded that since incorporation of the company and during 27 years of its existence, loans were obtained and interest was paid on these loans after obtaining sanction in the Annual General Meetings. It was further pleaded that the Income‑tax Authorities did never object to either the loans obtained or the interest paid thereon. It was also pointed out that the auditors after scrutiny of the accounts verified and recognized not only the existence of these loans but also the repayments made and as such it would not be correct that these loans were obtained without lawful authority or without sanction of the share‑holders or the Board of Directors. The counter argument of the official liquidator was that reliance on the two resolutions of the General Meeting was misplaced as these resolutions authorised repayment of the loans obtained by the company. The plea is that sanction for obtaining the loans is lacking. The argument is self‑defeating. The share‑holders having authorised repayment of the loans, the existence of the prior sanction to raise loans has either to be assumed or it is to be taken that the objection or lack of sanction, if any, was waived by the 'share‑holders. It is also pertinent to note that during the entire life of the company, none of the share‑holders challenged the genuineness of either the borrowing made or the amount repaid. The Income‑tax authorities also seem not to have challenged these borrowings or the repayment of the principal amount or of the interest. These observations would not, however, apply to the alleged payment of Rs.1,04,000 (Rs. one lac, four thousand) shown to have been made to Mirza Muhammad Farooq, Mst. Rozma Jabeen, Mirza Zulfiqar Haider, Mirza Hamid Zarar and Malik Habib Jan as these loans have altogether different back ground. These loans will be dealt with under questions No.11 to 17. The alleged liability on account of other repayments made, thus, has not been established.

Questions Nos.11 to 17.

18. The acts of omission or commission amounting to breach of trust, subject matter of these questions, briefly stated are that one vehicle each was sold respectively to Mirza Hatnid Zarar, Malik Muhammad Nawaz and Malik Muhammad Rafique on 30‑8‑1968, 18‑11‑1968 and 26‑1‑1969. The sale on 13‑7‑1970 of 7 vehicles to Jhelum Transport Company formed by Malik Nazir Ahmad, Mirza Fazal Haq, Mirza Tariq Mahmood, Mirza Hamid Zarar, Mirza Muhammad Fazil, Malik Muhammad Rafique and Malik Muhammad Nawaz and also on the same day, sale of 7 vehicles to Mirza Fazal Haq Transport Company constituted by Mirza Fazal Haq, Mirza Hamid Zarar, Mirza Muhammad Fazal and Mirza Tariq Mahmood, was objected to as fraudulent and unauthorized. On this very day, one bus was shown to have been sold to Malik Nazir Ahmad, ex‑director for Rs.17,000 (Rupees seventeen thousand) but the sale price was actually not received.

According to the official liquidator, the sale of 15 buses on 13‑7‑1970 by the ex‑directors to the aforesaid two companies formed by them and to Malik Nazir Ahmad, sealed the fate of the company in liquidation as it was left with only three vehicles to operate. The directors on 5‑7‑1970 adopted a resolution to close the company and to dispose of the buses first to pay off the loans. This resolution was subsequently withdrawn in the meeting held on 1‑9‑1970. Despite the withdrawal of the resolution, dated 5‑7‑1970, pertaining to the disposal of the buses, the sale made by the aforenamed ex‑directors to the companies formed by them were not got rescinded and reverse action was not taken. It is also the allegation of the official liquidator that the sale of the vehicle No. JM‑7151 to Malik Nazir Ahmad and the sale of other 14 buses in two lots to Jhelum Transport Company and Mirza Fazal Haq Transport Company shown to have been effected against the cash payment were in fact not made against cash payment. According to him, as per entries contained in the books of the company, the aforesaid two companies were advanced money amounting to Rs.1,66,000 (Rupees one lac and sixty‑six thousand) by the company in liquidation and from this amount so advanced, these vehicles were shown to have been purchased. So the allegation is that the transactions on 13‑7‑1970 were paper transactions. The official liquidator also challenged the entries of Rs.89,000 (Rupees eighty nine thousand) contained in the Day Book showing payment made by Mirza Fazal Haq Transport Company on 13‑7‑1970 towards repayment of advance made by the company in liquidation. This entry has also been challenged as fictitious entry as loan was in fact not advanced to the company as the company in liquidation had not even Rs.5,000 (Rupees five thousand) available with it on that date. It was argued that winding up of the company commenced on 29‑7‑1970 and as such the resolution of the Board of Directors dated 1‑9‑1970 confirming the report of the Sale Committee pertaining to the sale of 15 buses had no legal validity. The side issues raised under some of these questions were not pressed and the challenge was mainly laid against (a) sale of the bus to Ch. Mehr Din on 15‑11‑1970 for Rs.8,000 (Rupees eight thousand), (b) three borrowings entered in the books on 4‑3‑1971 and 20‑3‑1971 amounting to Rs.70,000 (c) repayment of loan amounting to Rs.1,87,000 (Rupees one lac and eighty seven thousand) and (d) sale of 15 buses, the details of which have already been given. The sum of Rs.1,87,000 said to have been repaid under 23 transactions includes the repayment of Rs.1,04,000 (Rupees one lac and four thousand), subject‑matter of question No.8. Mirza Fazal Haq, managing director, in the written arguments, took up the plea that the then Company Judge directed that if any property of the company is to be sold then the complainant be allowed opportunity to purchase the same on the price fixed by the directors, or otherwise ,it be sold to any one on the fixed price. He pleaded that if any bus was sold, it was sold under this very authority and that the complainant was duly asked to purchase anything on the fixed price, but he never expressed willingness to purchase any vehicle or other property. It was added that he acted in the interest of the Company throughout the period that he remained the managing director of the Company. The other directors who were involved in the purchase of these 15 vehicles have advanced pleas similar to that of Mirza Fazal Haq. At this stage, it will be appropriate to refer to the statement made by Fazal Haq in his public examination. He stated that the sale proceeds of the buses, listed in Exh.P.7, were adjusted towards the loan payable to the transferees, Mirza, Fazal Haq Transport Company and the partners of Jhelum Transport Company. He after seeing the ledger pertaining to 13th July, 1970 stated that the payment was made after the sale of buses to 5 creditors namely Malik Habib Jan in the amount of Rs.50,000 (Rupees fifty thousand), Mirza Muhammad Farooq in the amount of Rs.14,000 (Rupees fourteen thousand), Mst. Rozma Jabin in the amount of Rs.25,000 (Rupees twenty five thousand). Zulfiqar Haider in the amount of Rs.20,000 (Rupees twenty‑thousand) and Mirza Hamid Zarar in the amount of Rs.30,000 (Rupees thirty thousand). He admitted that out of the proceeds of Rs.1,66,000 (Rupees one lac and sixty six thousand) a sum of Rs.1,04,000 was paid to these creditors. He added that one of the buses was sold to Nazir Ahmad, Chairman of the Company, for a sum of Rs.17,000 as the company was indebted to him and there was no cash payment involved and there was adjustment of the sale proceeds against the loan. He could not explain as to how the adjustment of loan was made in the case of Mst. Rozma Jabin and Malik Habib Jan, Farooq Mahmood and other creditors who were partners in either or both the firms or any of the two firms namely Jhelum Transport Company and Mirza Fazal Haq Transport Company. During public examination Mirza Fazal Haq had to admit eventually that a sum of Rs.1,66,000 shown as advance to the two registered firms was not actually given to them and that it was a book entry only. He further conceded that these two firms had now to pay the amount of Rs.1,66,000 to the company. It is also apparent from the answers given in the public examination that in the books of accounts Rs.77,000 was shown to have been advanced to Jhelum Transport Company and Rs.89,000 (Rupees eighty nine thousand) to Mirza Fazal Haq Transport Company for the purchase of buses. Again the entries showing refund /repayment of these very amounts by these two companies were recorded in the books of accounts. The adjustment of loan to Habib Jan Tariq Mahmood, Mst. Rozma Jabin, Zulfiqar Haider and Hamid Zarar amounting to Rs.1,04,000 were also shown by making entries in the books of accounts, All these entries were paper entries as admittedly no payment was actually made to either of them or to the company. Malik Nazir Ahmad was sold a vehicle for Rs.17,000 (Rupees seventeen thousand). He is accordingly held liable to pay Rs.17,000 to the company in liquidation. This amount is directed to be deposited in the Liquidation Account within one month.

19. Mirza Fazal Haq Transport Company received 7 vehicles and the price then fixed was Rs.89,000 (Rupees eighty nine thousand). This company was formed by Mirza Fazal Haq, Hamid Zarar, Muhammad Fazil and Tariq Mahmood. They are jointly held liable in equal shares to pay Rs.89,000 (Rupees eighty nine thousand) to the company in liquidation. This amount will be deposited within one month in the Liquidation Account. Jhelum Transport Company purchased 7 vehicles for Rs.77,000 (Rupees seventy seven thousand). Malik Nazir Ahmad, Mirza Fazal Haq, Tariq Mahmood, Hamid Zarar, Muhammad Fazil, Malik Muhammad Rafique and Malik Muhammad Nawaz who formed this company, are held liable jointly in equal shares to refund Rs.77,000 (Rupees seventy seven thousand) to the company in liquidation. The amount shall be deposited in the Liquidation Account within one month.

20. No liability can be fixed on account of sale of bus to Ch. Mehr Din as the sale of the property of the company by the then directors was not stayed by the High Court and as it was not the case of Allah Bakhsh that he had offered to purchase the vehicles on the price fixed by the Sale Committee. As regards borrowing of Rs.70,000 (Rupees seventy thousand) in March, 1971, sufficient material has not been brought on record to establish that the assets of the company were unduly encumbered or that the company was otherwise put to any loss. These questions are answered accordingly.

21. Additional Question.

The matter of receipt of certain amount through cheques by the ex‑directors, subject matter of additional question, has already been dealt with in my order dated 11th of January, 1987. The matter of liability of the ex‑director under section 235 Companies Act, 1913 stands disposed of accordingly.

Report No. 90.

Malik Allah Bakhsh and. Haji Lal Din, ex‑directors, it is reported, have not yet deposited Rs.5,376 and Rs.1,500 in the Liquidation Account. Kh. Muhammad Akram, Advocate undertakes to make the deposit within one week. In case the deposit is not made, official liquidator will submit report in Chamber for obtaining warrants of detention of the defaulters.

Para. 2.

The debtors of Rs.1,000 and above are thirteen in number. The notices issued to these debtors seem to have been received by four debtors only as the acknowledgment receipts have been received back. It is, therefore, presumed that they have received the notices. The remaining nine have not been served for the reason that either they were not found at the given addresses or the acknowledgment receipts have not yet been returned. There are two debtors whose particulars are not available at all. In these circumstances, no useful purpose will be served by pursuing the matter as against nine debtors. The particulars of four debtors who have received the notices, will be provided to the office. Notices will then issue to them to show cause on the next date of hearing as to why the recovery be not effected by ordering detention in civil prison on account of persistent default in discharging their liability. The Senior Civil Judges concerned will be directed to take special measures to serve the notices.

Claims of (1) Mirza Fazal Haq Transport Company and (2) Mirza Fazal Haq.

Two claims for Rs.42,198/21 and Rs.13,192/93 have been filed by the aforementioned claimants. Mirza Fazal Haq had formed a transport company for operation of vehicles which in fact belonged to New Jhelum Transport Company. In accounts certain amounts were shown to have been paid to the Company under liquidation by the aforenoted claimants out of the amount advanced as loan by the company under liquidation. These transactions have not been upheld by me and the persons responsible including Mirza Fazal Haq, who were directors, have been held liable to pay the said amount to the company. The amounts subject matter of these two claims, have been shown in the account books, as the amounts due on account of transactions, transacted over a period commencing from 8‑9‑1970 to 28‑3‑1971. All these transactions have, admittedly, been entered and recorded after the winding‑up. Except for entries, there is nothing to vouchsafe the genuineness of these entries. These transactions fall within the connotation of the term disposition of property 'made after initiation of winding up 'proceedings' and as such are void under section 227(2) of the Companies Act, 1913. These claims are, therefore, rejected.

Abdul Wahab Qureshi.

Abdul Wahab Qureshi was appointed as Investigator. He states that till the question of his remuneration is finally determined, direction be passed to pay him Rs.5,000 (Rupees five thousand) as an interim measure. Till date he has received Rs.17,000 (Rupees seventeen thousand). Official liquidator and Mirza Fazal Haq suggest that a sum of Rs.2,000 may be paid to him out of the Liquidation Account as interim payment and the question whether he is entitled to receive any other amount on account of services rendered, be taken up on the next date of hearing. Order accordingly. Official liquidator may release Rs.2,000 (Rupees two thousand) to Abdul Wahab Qureshi.

Adjourned to 25‑10‑1987.

M.B.A /O‑1/L Claims rejected.

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