BEFORE THE A.P.STATE CONSUMER DISPUTES REDRESSAL COMMISSION:

HYDERABAD.

C.D.No. 11 OF 2005

Between:

Consumer Interests Protection and

Research Association (CIPRA)

004 Sri Dharma Sasta Nilayam,

Vigneswara Heaven Apartment,

Khairatabad, Hyderabad-4.

(on behalf of chit subscribers in

Udayatara Chit & Finance Co. P. Ltd.)                                                     ..Complainant.

            And

1. Sri Siripurapu Pattabhi Rama Rao,

    Chairman, Udayatara Finance & Chit

    Fund Pvt. Ltd., Flat No.102 & 103,

    74-1-23, Vijaya Soudha, Patamata,

    Vijayawada-10.

2. Sri Siripurapu Vishnu Mohan,

    Managing Director, Udayatara Finance & Chit

    Fund Pvt. Ltd., Flat No.102 & 103,

    74-1-23, Vijaya Soudha, Patamata,

    Vijayawada-10.

3. Sri Kamineni Nagabhushanam,

     Director, Udayatara Finance & Chit

    Fund Pvt. Ltd., Nallurivari Street,

    Door No.67-4-2,  Patamata,

    Vijayawada-10.

4. Sri Kamineni Hanumantha Rao,

    Director, Udayatara Finance & Chit

    Fund Pvt. Ltd., Door No.67-8-4,

    Near Venkateswara Swamy Temple,

    Vijayawada-10.                

5. Smt. Siripurapu Kanaka Durga,

    Director, Udayatara Finance & Chit

    Fund Pvt. Ltd., Flat No.102 & 103,

    74-1-23, Vijaya Soudha, Patamata,

    Vijayawada-10.

6. Sri S.P.R.Sagar,

    Director (From 5-9-1982 to 7-12-2001),

    S/o.S.Pattabhi Rama Rao,

    K.P.Nagar, Plot No.73,

    Door No.59A-12-5, Patamata, 

    Vijayawada-10.

7. Sri S.Pattabhi,

     Director, Udayatara Finance & Chit Fund

     Pvt. Ltd., C/o.M.Sreekanth of C/o.Narasimbhai

     B.Patel, S-201, Sivam Apartments, Behind

     Zarna park, Near Loco Shed, Abrahama,

     VALSAD   396001 (Gujarat State).

8. Siripurapu Shankar,

      S/o.Siripurapu Pattabhi Rama Rao, Flat No.

     G-1, Door No.74-8-16, G/R Srivinayaka

     Apartments, J.D.Nagar, Patamata Vijayawada-10.

     (Gift in favour of son of the Chairman)                                   .Opposite Parties

For the  Complainant:CIPRA

Counsel for the Opposite parties:Mr.K.Venugopal Reddy-O.Ps.1,6&7.

                                                          Mr.Y.Balaji-O.Ps.2 & 5

          Mr.P.Venkateswarlu & M.Hari Babu-O.Ps. 3 & 4.

                                                          Mr.P.Nagender Reddy-O.P.8

Coram: SMT.M.SHREESHA, I/c. PRESIDENT.

AND

SRI G.BHOOPATHI REDDY, MEMBER.

WEDNESDAY, THE ELEVENTH DAY OF JULY

TWO THOUSAND SEVEN.

Oral Order:(Per Smt.M.Shreesha, Hon’ble Incharge President).

***

This complaint is filed on behalf of the de-facto complainants i.e. chit subscribers of Udayatara Finance & Chit Fund Pvt. Ltd., by CIPRA.  Opposite parties 1 to 7 are the Management Dignitaries and handling the transactions of Udayatara Finance & Chit Fund Pvt. Ltd.,  Opposite parties  1 and 2 are the Chairman and Managing Director of the chit fund company and the other 5 opposite parties are the Directors.  The complainant submits that they are also promoters of the company and hold important positions right from the inception i.e. 1981-1982.  Opposite party No.8 is the chairman’s son and has taken over the property of his father worth Rs.28,37,000/- under Gift Deed.   The complainant submitted that there are two more Directors i.e. Sri G.Karunakara Rao & Sri Ch.Rama Krishna and submitted that Mr.G.Karunakara Rao retired from the company in the year 1994 and in his period no chit subscriber joined the company and also submitted that the address of Ch.Rama Krishna is not known to the defacto complainants and soon after the address is found, his name shall also be included in the list of the opposite parties.   The complainant submits that the chit subscribers have paid the chit amounts on various dates and details are given as follows:

Complainants 16, 17, 17a & 17b have been added as per I.A.Nos.1426/2005  and 1638/2005.

The complainant submits that some of them are successful bidders of their respective chits, but they did not get the bid amount.  He further submitted that in certain cases as seen from the table, the opposite parties issued cheques without sufficient funds in the bank.  Due to the closure of the said company, a few subscribers have stopped making the monthly instalments.  The defacto complainants have requested many times for refund of their amounts but the opposite parties refused the requests of the subscribers. Gifts and transfers executed either by the Chairman or other Directors are with an intention to escape from the payments to the subscribers.  The complainant submits that the Chairman of the Chit Fund Company has written two gift deeds dated 27-3-2004 for Rs.19,14,000/- and Rs.28,37,000/- in favour of S.Shankar and S.P.R.Sagar.  The complainant submits that the Directors who have retired from the company are also responsible for the transactions when they have worked as Directors and may not be responsible for the transactions taken place after their retirement.  He submits that opposite parties 3 and 4 were responsible for the transactions between 1981-82 to 31-3-2003 and opposite party No.6 from 7-12-2001 to 28-6-2003 and that Mr.G.Karunakara Rao, Director is responsible for the transactions till 1994.  It is further submitted that Mr.Ch.Ramakrishna is also the director from 20-3-2001 to 17-12-2001 for a short period of 8 and half months and he is responsible for that period.    The complainant issued notice on 14-2-2005 calling upon the opposite parties for settlement of the amount due to them but the opposite parties did not opt for the same.  Vexed with the attitude of the opposite parties, the complainant approached this Commission seeking directions to the opposite parties to refund Rs.36,74,508/- together with interest and also compensation of Rs.10,000/- to each complainant and other reliefs.

Opposite party No.1 filed counter denying the allegations made in the complaint and submitted that there is no consumer relationship between opposite party No.1 and the complainant or defacto complainants.  He submitted that he has no liability to pay any amount to the defacto complainants as he joined as a Director in the year 1988 and resigned in March, 2003 and the defacto complainants allegedly paid the monthly subscriptions to Udayatara Finance & Chit Fund Pvt. Ltd. after his resignation and therefore opposite arty No.1 is not aware of any transactions between the complainants and the company. He further submitted that the documents filed by the complainants are fabricated for the purpose of filing the complaint and prayed for dismissal of the complaint.

            Opposite parties 3 and 4 filed their written version and submitted that the complainants failed to make the chit fund company as a party in this C.D.  Opposite parties 3 and 4 contended that the complainants paid the chit subscriptions to the company and not to the individuals as such the non joinder of the company is bad and the C.D. is liable to be dismissed.  Opposite parties 3 and 4 retired from the company on 23-3-2003 and 25-3-2000,  respectively and the same was registered under Section 303(2) of the Companies Act with the Registrar of the Companies and the xerox copy of Form 32 was filed along with the written version.  Since they ceased to be the Directors of the company, they do not represent the company and they are not liable for Payment of any amounts due to the complainants.  Further the company is existing and as such the properties of the company are still there and there is no winding up proceedings, hence the complainant has to file application against the company but not the individuals.  He further relied on the decision of this Commission in F.A.No.878/2005 dated 6-2-2007 in which this Commission held that the Directors are not personally liable and it is open to the complainant to proceed against the assets of the company. 

Opposite party No.6 filed counter denying the allegations made in the complaint and submitted that there is no consumer relationship between opposite party No.6 and the complainant or defacto complainants.  He submitted that he has no liability to pay any amount to the defacto complainants as he joined as a Director in the year 1988 and resigned in December, 2001 and the defacto complainants allegedly paid the monthly subscriptions to Udayatara Finance & Chit Fund Pvt. Ltd. after his resignation and therefore opposite arty No.1 is not aware of any transactions between the complainants and the company.  He further submitted that the documents filed by the complainants are fabricated for the purpose of filing the complaint and prayed for dismissal of the complaint.

            Opposite party No.7 filed counter and denied the allegations made in the complaint.  He submitted that the complainant filed false claim by fabricating the documents and submitted that there is no consumer relationship between opposite party No.7 and the complainant or defacto complainants.  He submitted that the complainant’s organization is not registered one and has no locus standi to file the complaint and that the defacto complainants did not execute any GPA in favour of the complainant and therefore the complainant cannot initiate the proceedings.  He denied the allegation that the defacto complainants joined as subscribers in the chit fund company and remitted Rs.25,21,808/- towards their monthly subscriptions and some of them are successful bidders and did not get the bid amount and some of them have paid all the instalments but did not get their chit balance amounts and that in some cases the opposite party issued cheques without having sufficient funds in their accounts.  He also denied the allegation that the defacto complainants requested many times for refund of their bid amount or completed chit amount or due amounts and that for the last one and half year the company is not functioning regularly and its doors are always closed.  He further submitted that he has no liability to pay the amount to the defacto complainants and submitted that he lent his name as a Director when he was a student, but did not participate in any transactions of Udayatara Finance and Chit Fund company and resigned as Director in June, 2003 and the records were seized  by the police and therefore he is not in a position to file the documentary evidence.

            Opposite party No.8 filed counter contending that he is no way connected with Udayatara Chit Funds Pvt. Ltd. and that there is no consumer relationship between the defacto complainants and that he is no way connected with the transactions between defacto complainants and opposite parties 1 to 7.  He further submitted that A.P.Industrial Infrastructure Corporation allotted land along with building in favour of opposite party No.1 and the said property is his exclusive personal property and opposite party No.1  did not earn this property as a Director of the chit fund company.  He further submitted that opposite party No.1 gifted some part of this land in his favour and the said land was not purchased with the amounts alleged to have been paid by the defacto complainants.  He denied the contention that the gift deed executed by opposite party No.1 in his favour was with an intention to escape from the payments to the subscribers and hence prayed for dismissal of the complaint.

            The complainant filed additional affidavit by way of evidence and Exs. A1 & A2  were marked on their behalf.  Opposite parties 3 and 4 also filed their affidavits by way of evidence and filed Exs.B1 and B2.

            The point for consideration is whether there is any deficiency of service on behalf of the opposite parties and if the complainant is entitled to the relief sought for in the complaint?

            Smt.Koduru Sudha Rani, one of the defacto complainant filed affidavit and additional affidavit stating that opposite party No.1, Mr.Siripurapu Pattabhi Rama Rao, Chairman has resigned in March, 2003 and opposite parties 3 and 4 had been taking salaries from Udayatara Chit Fund company for rendering services to the company and  submitted that thereafter resigned as Directors to the company  but  the transactions like remittances to the chit amount by the consumers were taken before their retirement and hence they are liable.  She further submitted that as per Chit Fund Act, 1982, the founders of the chit Fund Company or Chairman or Foreman of the chit fund company should not leave the company till the winding up and if they want to retire they have to take the permission from the chit subscribers i.e. non bidders who have been remitting the instalments and hence all the  Directors, whether retired or not are jointly and severally responsible for the remittances.  She further submitted that opposite party No.8 has admitted in his counter that opposite party No.1 had gifted some part of the land in favour of opposite party No.8 and she

submitted that this gift is executed to escape the payments to subscribers.

            Ex.A1 is the Registration Certificate of CIPRA and Ex.A2 are the  details of pass books and bounced cheques of the defacto complainants.

            Opposite parties filed their affidavits by reiterating the facts stated in their counter.

            Ex.B1 is Form No.32 stating that  Mr.Kamineni Hanumantha Rao resigned as Company Director and his resignation is accepted in the meeting held on 31-3-2000.  Ex.B2 is also Form No.32 stating that Mr.Kamineni Nagabhushanam and Siripurapu Pattabhi Rama Rao have resigned as Director and Chairman and their resignation is accepted in the meeting held on 24-3-2003.

On perusal of the material on record, we note that the following subscribers have paid the following amounts and the details of the amounts due to them are as follows:

During the pendency of the complaint, the complainant filed C.D.I.A.545/2005 for a direction to the opposite parties not to alienate the properties and this Commission by order dated21-3-2005 gave a direction not to alienate the properties.  Thereafter the complainant filed C.D.I.A.No.654/2005 in C.D.I.A.No.545/2005 for interim attachment of the amounts lying to the credit of opposite party No.2 , Sri S.Vishnu Mohan in Andhra Bank, Zonal office, Vijayawada and Andhra Bank, Patamata Branch, Vijayawada.  Notices were ordered and were served on the opposite parties and this commission ordered interim attachment of the amount lying in Account No.BE/1/200200003 to the credit of Udayatara Finance &Chit Fund Pvt. Ltd., in Andhra Bank Zonal Office, Vijayawada and also interim attachment of the amount lying in Account No.SOD/1/101741 to the credit of opposite party No.2, Sri S.Vishnu Mohan in Andhra Bank, Patamata branch

The learned counsel for the opposite parties 3 and 4 submitted that Ex.B1 shows that the date of resignation of Kamineni Hanumantha Rao i.e. opposite party No.4 is 25-3-2000 and his resignation was accepted by the Board of Directors in the meeting held on 31-3-2000.  Form No.32 shows that opposite party No.3 and opposite party No.1 have applied for change on 22-3-2003 and both their resignations were accepted by the Board of Directors on 24-3-2003. He also relied on the judgement of 1989-ALT-2-649-APLJ-2-196,1989(TLS)413193  reported in C.R.P. 2678 of 1988  of HIGH COURT OF ANDHRA PRADESH IN CHANUMOLU ANIL KUMAR v. VASU COTTON AND GINNING MILLS wherein it was held that:

 ‘Directors are personally liable to person who lend money to the

company only, if they obtained the loan by fraudulent mis-representation,

no personal liability can be attached to the Directors if the monies

are borrowed on behalf of the company and in the absence of any fraud,

 personal decree cannot be passed’

 We also observe that the company was not made a party but all the Directors are liable for the period that they have worked as Directors of the company.  The contention of the learned counsel for the opposite parties 3 and 4 that they have resigned and their resignations have been accepted as on 25-3-2000 and 31-3-2003 respectively is unsustainable on the ground that they were Directors at the time of cause of action i.e. at the time of issuance of commencement of the chits and therefore they are liable.   No doubt no relief can be granted against the company since it is not made a party and hence no order can be passed against a party who is not given an opportunity to defend itself.  Since the company is not made a party, no relief can be granted against the company but at the same time, we hold that Directors are liable as the involvement and responsibility of the Directors cannot be undermined.  It is clear from the records that these Directors are enjoying the designation as directors of the company at the time of cause of action and therefore for any default in payment by the company, these Directors are liable to settle the same.

We rely on the judgement of the Delhi High Court reported in RAVIKANT & ANR. v. NATIONAL CONSUMER DISPUTES REDRESSAL COMMISSION in I (1997) CPJ 271 (DB) where in it was held that:

“Consumer Protection Act, 1986-Section 27-whether the principle of

“Lifting the Veil” is applicable? (Yes).

The division bench held that a penal provision, which as stated above,

is applicable to a ‘Company’ by the Commission in Section 27 must be

treated as applicable to those who are officially responsible for the conduct

of its affairs.  Here, the two petitioners are the directors of each of the two

companies.  We may also point out that in the Supreme Court Judgement i.e.

M.M.IPOH v. I.T. COMMISSIONER (AIR 1968 S.C. 317) though on facts, the

Executive Officer of the Corporation was exonerated, that  was not because

he could not be legally made liable but because he was factually not proved

to be responsible for not obeying the command of the Court.  In our view,

as per the principle laid down in the above ruling of the Supreme Court, the

penal provision in Section 27 of the Act can be applied to the Directors of

the Companies, not withstanding the absence of a specific provision for

action against those in charge of or in control of the affairs of the Company.

            It was also held further: We hold that the State Commission and

the National Commission were right in refusing to permit the two petitioners

the two sole Directors of the two companies being, husband and wife- to

defend themselves under the cloak of corporate-entity and the Commissions

were right in lifting the veil and identifying the petitioners as the persons who

were responsible for committing the statutory offences referred to in

Section 27 of the Act.

It was  held by the Supreme Court in Aligarh Muncipality v. E.T.Mazdoor

Union, (AIR 1970 S.C. 1767) that:

     “ A command to a Corporation is in fact a command to those who

are officially responsible for the conduct of its affairs.  If they, after

 being apprised of the order directed to the Corporation, prevent compliance

 or fail to take appropriate action, within their power, for the performance

of the  duty of obeying those orders, they and the corporate body are both

guilty of disobedience and may be punished for contempt”

In our view, likewise a penal provision , which as  stated above , is

applicable to a ‘Company’ by the Commission  in Section 27 must be

treated as applicable to those who are officially responsible   for the conduct

of  its affairs. Here, the two  petitioners are the directors of each of the two

companies. We may also point out that in the Supreme Court judgment afore

mentioned  though on facts, the Executive Officer of the  Corporation

was exonerated, that was not because he could not be legally made liable but

because  he was factually not proved to be responsible for not obeying

the command of the Court. In our view , as per the principle laid down in the

above ruling of the Supreme Court, the penal provisions in Section 27 of the Act can be applied to the Directors of the Companies, not withstanding the absence of a specific provision  for action against those in charge of or in

control of the affairs of the company.

The same conclusion can be reached by applying the principle of ‘lifting the veil’ explained in the recent judgment of the Supreme Court in Delhi Development Authority v. Skipper Construction Company , (AIR 1996 S.C. 2005=62  (1996) DLT 543 (SC) ( at p. .2013).  If the corporate personality is used as a cloak for fraud or improper conduct, the Court can go behind  the veil. Where the protection of public interest is of paramount importance the Court is entitled to go behind the corporate personality. The principle was laid down by San born, J (see para 24 of Supreme Court judgment) that “when the notion of legal entity is used to... defend crime  the law will regard the Corporation  as an  association of persons

” (1990) (53 Mod. L.Review 338, Prof. S.Ottolenghi , “From Peeping Behind the Corporate Veil, to ignoring it Completely)   The Supreme Court also referred to Prof I Maurice Wormser’s article “ Piercing the veil of Corporate entity)(1912) (12 Columbia Law  Review 496) that “ where the concept of corporate entity is employed to ... protect crime, the  court will draw aside the web of the entity , will regard the corporation or Company as an association  of live, up and doing  men and women shareholders, and will do justice between real persons.

In Byford Leasing Ltd. v. Union of India, 57 (1995) DLT 623  a Division

Bench of  the Court held that under Section 27 of the Act

Chairman and Managing Director of a Company can be proceeded

against, he being in charge of the management and control of the

affairs of the Company”.

  The complainant also filed a memo on behalf of chit subscribers stating that all the Directors are from a single family and the details are as follows:

            As per the details in the counters, the opposite parties except opposite party No.4 were Directors at the time of cause of action.  Form-32 clearly shows that opposite party No.4 resigned on 25-3-2000 and the complainant himself submitted in his complaint only those Directors are liable who worked as Directors at the time of cause of action.  Taking into consideration that opposite party No.4 resigned on 25-3-2000, he is liable jointly and severally to pay the amounts prior to this date only.  From the record, we observe that only item 17 pertaining to chit ULTI-14 has commenced on 30-5-1999 which is prior to the date of resignation of opposite party No.4.  Therefore, opposite party No.4 is liable jointly and severally along with other Directors to pay item No.17 amount only.  Pass books filed by the complainant and issued by the opposite parties clearly  show the name of the subscriber, the reference number, date of commencement of chit, number of months, value of the chit, amount paid by the subscriber including the dividend.  Taking into consideration, the pass books issued by the opposite parties and the details of payments listed in these payments and also the pleadings, we are of the opinion that the opposite parties (except opposite party No.4) are liable for refunding the amounts paid by the complainant  which details are as follows:

together  with interest at 7.5% p.a. from the date of filing of complaint till the date of realization together with costs of Rs.3,000/- to be paid to the complainant within a period of 6 weeks from the date of receipt of this order.  Opposite party No.4 is liable jointly and severally to pay only ULTI-14 which has commenced on 30-5-1999 along with other Directors.

            In the result the appeal is allowed in part directing the opposite parties (except opposite party No.4) to pay the amounts as directed in the table aforementioned in the column “Amount to be refunded” together with interest at 7.5% p.a. from the date of filing of complaint till the date of realization together with costs of Rs.3,000/- to be paid to the defacto complainant within a period of 6 weeks from the date of receipt of this order.  Opposite party No.4 is liable jointly and severally to pay only ULTI-14 which has commenced on 30-5-1999 along with other Directors.

                                                            INCHARGE PRESIDENT.  MALE MEMBER.

JM                                                                               Dated 11-7-2007.

//APPENDIX OF EVIDENCE//

Witnesses examined for

Complainant:                                                                                   Opposite Parties

     -Nil-                                                                                                            -Nil-

Exhibits marked on behalf of the complainant:

Ex.A1-Registration Certificate of CIPRA.

Ex.A2-Details of pass books and bounced cheques of the defacto complainants.

Exhibits marked on behalf of the Opposite Party:

Ex.B1-Form No.32 stating that  Mr.Kamineni Hanumantha Rao resigned as Company

           Director and his resignation is accepted in the meeting held on 31-3-2000. 

Ex.B2-Form No.32 stating that Mr.Kamineni Nagabhushanam and Siripurapu Pattabhi

           Rama Rao have resigned as Director and Chairman and their resignation is

           accepted in the meeting held on 24-3-2003.

INCHARGE PRESIDENT.  MALE MEMBER.

JM                                                                                           Dated 11-7-2007.