The Commercial High Court in Colombo recently issued notice on Directors of Nisol Corrugated Cartons Ltd on an application made by Sampath Bank (a creditor of the company) for a declaration that Nisol directors are personally responsible for a sum of Rs. 108 million owed to the bank on financial facilities, and that they are liable to settle this amount.
This is the third application under provisions in the Companies Act which enable creditors to proceed against the directors personally for the liabilities of a company. If the court finds in favour of Sampath Bank, the directors will have to pay the liabilities of thecompany with their personal assets and property. Earlier cases are Golden Key and Kings Supermarket which are pending.
Directors on whom notices have been issued include Sohli Captain, Nigel Austin and Russi Captain. The directors have subsequently appeared and moved for time to file their objections to the application.
The order was issued in an application filed by Nisol Corrugated itself to wind up the company on the basis that it was insolvent and not in a position to pay its debts.
Section 375(2) of the Companies Act provides that where in the course of the winding up of a company; it appears that the business of the company has been carried on with the intent to defraud creditors of the company the court may declare that any persons who were knowingly parties to the carrying on of the business in that manner shall be liable to make such contribution to the company’s assets; or personally responsible for such debts or other liabilities of the company.
Section 376 (1) of the same Act says that where in the course of the winding up of a company it appears that a past or present director of the company has misapplied money or property of the company; or been guilty of negligence, default or breach of duty of trust in relation to the company; the court may order that director to pay or transfer the money or property with interest to the creditor.
In its application, Sampath Bank said following the winding up application it found serious irregularities in the manner in which the business of the company was carried out in the winding up process.
The bank says notwithstanding the losses, the company paid dividends to its shareholders totaling a sum of Rs. 195.7 million. The petitioner-bank said these large dividend payouts has effectively been financed through borrowings, which increased the debt of the company to immense proportions and led to the company being unable to pay its debts as they fell due.
The bank also claimed that the directors during the year ended March 2004 have purportedly advanced to the company a long term loan of Rs. 108.6 million and that these funds, if actually advanced, has been immediately returned to the directors in the form of dividends where a dividend of Rs. 118.9 million has been paid to the directors during that financial year.
The bank said the directors have received salaries and emoluments amounting to Rs. 92 million, totalling a staggering Rs. 299.6 million.
Sampath also said the company has consistently highlighted that the accounts of the subsidiaries of the company have not been available and moreover that the accounts of the subsidiaries have not been consolidated with the accounts of the company as required by the Companies Act and the Sri Lanka Accounting Standards. “By non-consolidation of accounts the company has concealed from the creditors the true financial position of the Company,” the petitioner said. Chandaka Jayasundere with Srivante Gunawardena instructed by A.M.K Herath appeared for the bank.