Commercial High Court holds Directors of former Kings Supermarket personally liable for liabilities

By S.S. Selvanayagam

The Colombo Commercial High Court in its order ruled that the Directors of the Lanka Supermarkets Company (Pvt) Ltd. (formerly Kings Lanka Supermarkets Company (Pvt) Ltd.) shall, are jointly and severally, be personally liable for the liabilities of the said company.

High Court Judge Mahinda Samayawardhena in his order held them liable for the liabilities of the company as for a sum of Rs. 132,302,475/68.

It was a case winding up of a company filed by Kings Lanka Super Market Company Pvt. Ltd. themselves (now known as Lanka Super Market Pvt. Ltd.) in terms of Section 270 of the Companies Act asking Court to wind up the company on the basis it had been running at a loss and cannot continue with the normal business and had no prospect of business being continued.

Originally the creditors including Bairaha Farms, Bairaha Foods and Lanka Bell filed objections to the application and alleged that the supermarket had been sold to a company called KHL Distributors, a subsidiary of Kshathriya Holdings Ltd.

The creditors made several allegations in relation to this transaction and stated that monies obtained had not been transferred to the company.

The Court noted that the intention of the Directors was to defraud the creditors and deprive the availability of sufficient assets to meet the debts to be settled in the course of impending winding up application in accordance with the provisions of the Companies Act.

The Court also noted that the Directors has blatantly flouted the company law of this country and abused the process of Court to achieve their ulterior motives.

The Court further held as follows:

In the last report dated 23 October 2009, the liquidator inter alia informed court that the total claims of the creditors is Rs. 132,302,475.68, and all the assets of the company have been disposed of before liquidation commenced, and according to the Form 25 (appearing in Gazette No.1493/20 of 20 April 2007) filed in court signed by Diresh Hettiarachchi, former Director, verified by an affidavit, the company is not in possession of any realisable assets, and “since there is no further role that the liquidator can perform with regard to the realisation of assets of the company and payment of creditors, the liquidator seeks court end the liquidation process of the company”.

All these things have happened nearly within two months. All the assets of the company have been sold for Rs. 120 million by Agreement No.192 on 3 July 2007. Soon thereafter, all the proceeds of the sale have been disbursed in the manner which they wanted.

By the time all the assets were sold, the name of the company had been “Kings Lanka Super Markets Co (Pvt) Ltd”, and soon after the sale, apparently, on 9 August 2007, the name of the company has been changed to “Lanka Supermarkets Co. (Pvt) Ltd”.

Thereupon, the resolution to wind up has been passed on 16 August 2007, and then this application to wind up the company has been presented to court on 10 September 2007.

The company in the application tendered to court seeking winding up, did not disclose to court that all the assets have been sold and all the proceeds of the sale were disbursed, and there were no more assets to sell and no more proceeds of the sale to disburse, but given a different picture to court that continuance with the business is impossible due to constant losses and heavy liabilities.

When a decision is taken by the Board of Directors to wind up a company and an application is made to a competent court in that regard, the court appoints a liquidator who alone then discharges the function of collecting all the assets of the company, procuring the sale thereof and using the sale proceeds to satisfy all the creditors in the manner as expressly provided in the Act.

But in the instant case the directors have completed everything just before the application was filed in court a liquidator appointed to mislead everybody including court knowing very well that he has no function to perform, but only to inform court through him that since there is no iota of realisable assets to make payments for the creditors for a tune of over Rs. 132 million, liquidation process can be terminated.

At the inquiry into this application, the four representatives of the banks and financial institutions (Hatton National Bank, Seylan Merchant Bank, Merchant Credit of Sri Lanka, Sampath Bank PLC) who gave evidence stated to court that the facilities by the company consisted of mortgages over properties, and personal guarantees of all five Directors.

When the sale proceeds recovered from the purported sale of the assets were first utilised arbitrarily to settle all the financial institutions, the said Directors had obtained a collateral benefit at the expense of all the other creditors in having their personal guarantees released with no further liability to them thereafter, and getting the lands and other properties appear to be directly and indirectly owned by them released from encumbrances of mortgages that had previously been created.

According to the Directors, around Rs. 45 million has been paid to some creditors to whom the company had issued cheques in respect of payments due to them and which cheques had got dishonoured.

Undoubtedly, the Commercial High Court has been given wide powers by a number of provisions in the Act to deal with malpractices committed by errant company directors.

The High Court judge further observed that without delving into all those sections contained in the Act, keeping in mind the orders which he contemplate to make, he only draw his attention, to sections 375 and 376 of the Companies Act for the present purposes.

Section 375:

(1) Where any business of a company that has been wound up has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, every person who was knowingly a party to the carrying on of the business in that manner, shall be deemed to have committed an offence and shall be liable on conviction to a fine not exceeding one million rupees or to imprisonment for a term not exceeding five years or to both such fine and imprisonment.

(2) Where in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court may, on the application of the liquidator or any creditor of the company, declare that any persons who were knowingly parties to the carrying on of the business in that manner, shall be –

(a) liable to make such contribution to the company’s assets; or

(b) personally responsible for such debts or other liabilities of the company,

as the court may think fit.”

Accordingly Court held, “taking all the matters cumulatively, yet still, not being too harsh on the 1st-4th Respondents who are the former directors of the petitioner company (without passing jail sentences, imposing heavy fines, referring the matter to the Attorney General for criminal liabilities under section 382 etc), I only make the following orders against them:

1) They, shall, jointly and severally be personally responsible and liable for the liabilities of the company, as indicated by the liquidator in his report dated 23 October 2009 under “Summary of Liabilities” for a tune of Rs. 132,302,475.68 with legal interest from the date (i.e., 3 July 2007) the directors have sold all the assets of the company until all the payments are made.

2) Out of this, they shall, within one month from today, pay the two creditors – Keells Food Products PLC and Ceylon Grain Elevators PLC – who made this application under Section 375 and 376 of the Act, their payments, i.e., Rs. 2,256,710.07 and Rs. 423,988.30 respectively with the legal interest calculated as above. They shall also pay the costs of this inquiry to those two creditors.

3) Thereafter, they shall, within two months from today, pay the three creditors – Bairaha Farms Limited, Bairaha Foods Limited and Lanka Bell Limited – Rs. 1,400,024.00, Rs. 797,089.00 and Rs. 2,262,808.57 respectively with the legal interest calculated as above, who, at the very outset vehemently objected to the winding up application on the same basis of fraud (vide early proceedings and papers filed on their behalf).

4) They shall also pay within two months from the dues to the E.T.F. Board amounting to Rs. 180,130.0 legal interest calculated as above.

5) In respect of the claims of other creditors indicated by the liquidator in his report dated 23 October 2009 under “Summary of Liabilities,” Section 317 of the Companies Act shall apply. That section enacts that: “Any order made by a court under this Act may be enforced in the same manner in which a decree of such court made in any suit pending therein may be enforced.”

Nihal Fernando PC with Kushan de Alwis instructed by Pieris and Pieris originally appeared for the Petitioner Kings Lanka Super Markets. Hiran de Alwis with C Jayamaha instructed by Srimal Weerakkody and Vishwa Law Office appeared for Bairaha Foods (Pvt) Ltd. Bairaha Farms Pvt. Ltd. and Lanka Bell Ltd., the Creditors originally opposing the application.

Lasantha Hettiarachchi instructed by Ms. Medavini Thilakaratene appeared for Keells Foods PLC and Ceylon Grain Elevators Ltd. Dr. Harsha Cabraal P.C. with Kushan Ilangathilake instructed by Ayesha Kuruppu Arachchi appeared for the 1st to 4th Respondent Directors of the company.