The Bombay High Court refused to make former directors personally liable for a wound‑up company’s debts, finding scrap sales of under ₹3 lakh showed no business carried on with intent to defraud.
The Bombay High Court has refused to declare four former directors of a company in liquidation personally liable for its debts under Section 542 of the Companies Act, 1956, holding that minuscule activity after the winding‑up order did not show business carried on with intent to defraud creditors [Official Liquidator of Morya Grain Distilleries Pvt. Ltd. v. Praj Industries Limited, 2026-juristway.com-3364-HC(Bombay)-CORP].
Justice Somasekhar Sundaresan decided the Official Liquidator’s report against the former directors of Morya Grain Distilleries Private Limited. Section 542 allows the Court to declare persons who were knowingly parties to carrying on a company’s business with intent to defraud creditors, or for a fraudulent purpose, personally responsible without limit for its debts. Union Bank of India was the only creditor to lodge a claim, for ₹51.13 crore.
The Official Liquidator relied on the annual report for the year ended 31 Mar 2019, which showed revenue from operations, five Board meetings, a tax return and a statement that no significant order had affected the company, although a winding‑up order had been passed. The directors replied that the revenue came from the sale of scrap, the return was filed to avoid penalty, and no creditor had been defrauded.
The Court held that both the conduct of business and an intent to defraud are essential ingredients. Revenue of ₹2,79,048 and tax deducted at source of about ₹2,100 showed next to no business, and the scrap‑sale explanation appeared believable. The civil standard of proof applies, but the seriousness of the allegation calls for closer scrutiny and cogent material.
The provision also requires a nexus between the activity and fraudulent intent. The Court could not discern any loss caused to the company, a creditor or any other person from such conduct. Following Official Liquidator of John Galt Laboratories Ltd. v. R.B. Sangare (2005), it noted that the allegations must be specific and must identify each person’s role.
The Court found the annual report’s statement that no adverse order had been passed untruthful, but said this was “not a clean chit” and was not made in aid of carrying on business with intent to defraud. The report was disposed of without directions.
2026-juristway.com-3364-HC(Bombay)-CORP
