Case Law Companies Act Petitioner official Liquidator Supreme Bank Ltd Vs Respondent P A Tendolkar Dead By LRs And Ors

Case Law Companies Act

Petitioner official Liquidator Supreme Bank Ltd

Vs Respondent P A Tendolkar Dead By LRs  And Ors

DATE OF JUDGMENT-19/01/1973

BENCH: BEG, M. HAMEEDULLAH BENCH: BEG, M. HAMEEDULLAH GROVER, A.N. MUKHERJEA, B.K.

CITATION: 1973 AIR 1104 1973 SCR  (3) 364 1973 SCC  (1) 602 CITATOR INFO : E   1983 SC 188  (43)

 

ACT: Companies  Act (7 of 1913), s. 235 and Companies Act  (1  of 1956),  s.  543-Power  of Court to  make  compulsive  orders against   heirs   of  deceased   director   in   misfeasance proceedings-Actio  personalis moritum cum persona-Scope  of- Right of appeal by and against heir. Banking  Companies  Act (10 of 1949), ss. 45(G)  and  45(O)- Official   liquidator,  whether  should  apply  for   public examination  of  directors under s. 45(G) to s. 45  O(2)  as amended  by  Act  33 of 1959-Scope of the  fresh  Period  of limitation-S.  45(O)(2) prevails over s.235  Companies  Act, 1913, in relation to Banking Companies. Principles  determining liability of managing  director  and Board of Directors in misfeasance proceedings.

HEADNOTE: On an application for winding up of a bank  a  provisional liquidator was appointed on 15th March 1956.  The appellant, who   was  thereafter  appointed  as  liquidator  filed   an application  on  the  27th  August,  1960,  for  misfeasance proceedings under s. 45H of the Banking Companies Act. 1949, and s. 235 of the Indian Companies Act, 1913.  Under s. 45 0 (2)  in respect of all other claims by the  Banking  Company against its directors, the period of limitation shall he  12 years  from  the date of the accrual of  such  claims’.   By Amending  Act 33 of 1959 the words ‘or five years  from  the date of the first appointment of the liquidator whichever is longer’,  were  added at the end of the  ,sub-section.   The official liquidator relied upon several reports made by  the Reserve  Bank and by others under orders of the High  Court. The  proceedings were taken against the directors,  managing director and officers of the company.  Two of the  directors died while the proceedings were pending.  The Company  judge dismissed  the  proceedings against the employees  as  time- barred,  and held that the heirs of the deceased  ,directors could  not  be  proceeded against; but, in  respect  of  the managing director and those Directors who were alive when he gave  his  decision it was held that  the  proceedings were within  time, being covered by the special provisions of  s. 450  of the Banking Companies Act.  The directors  contended that   the   whole   responsibility  for   the   fraud and misappropriation  lay  with the managing director.  who  had wide powers under the Articles of Association, and in  whose favour  the directors had executed a power of attorneys  The managing director however contended that he acted ‘according to  the  policy and ill accordance with  directions  of  the directors  in whose hands he was a mere tool’.  The  Company Judge determined the loss to the Company and gave directions as  to  the liabilities of the managing director  and  other directors.  In appeal, the Division Bench reduced the  total liability   of  directors  and  the   individual   remaining liability of the managing director though it placed a larger share  of  the  burden  of  contribution  on  the   managing director.   The  appellant  appealed against  the  order  in relation  of the liability of the managing director and  two other directors.

365 One of these two directors died pending the grant of his own application  for  a  certificate  under  Art.  136  of   the Constitution.   His  heirs  got  themselves  impleaded   and contended  that  the  proceedings  against  them  could  not continue  and also on the merits regarding the liability  of that director.

HELD : (1) The contention that s. 235, Companies Act,  1913, could  apply to these proceedings is erroneous because,  the proceedings  are governed expressly by the, special  law  on the subject contained in s.   45-0 of the Banking  Companies Act. [376F-G]

(2)  The plea that 12 years from the ‘accrual of claims’ had expired  before s. 45-0(2) was amended by the, Amending  Act of  1959,  and  that,  therefore,  the  enlarged  period  of limitation of 5 years from the date of the first appointment of  the  liquidator  was  not  available  to  the   Official Liquidator  in the present case is also  unacceptable.   The facts necessary to determine whether any part of the  claims accrued against any director have not been examined. Such  a point  involving an investigation into fresh  facts  showing when  claims for any particular item of loss to the  company accrued or when they accrued against the board of directors, cannot be taken up for the first time in this Court when the matter was not raised and gone into the High Court. [376A-F]

(3)  In any case, the amendment of s. 45 (O) (2) conferred a new.  right  of counting the period of limitation  from  the first  appointment of the liquidator.  The exercise of  that right  by the liquidator, acting on behalf of  the  company, certainly took place after the commencement of the  Amending Act  of  1959.   There was no question here  of  giving  any retrospective  Operation to any right whether procedural  or substantive. [377A-C]

(4)  The  maxim actio personalis moritur cum  persona  would not  be applicable to actions based on contract or  where  a tort  feasor’s  estate  had benefitted from  a  wrong  done. There  is no reason to extend the maxim to  cases  involving breaches  of fiduciary duties where the personal conduct  of the  deceased director has been fully inquired into and  the only question for determination, on an appeal, is the extent of  the liability incurred by the deceased direction.   Such liability must necessarily be confined to the assets or  the estate  left  by the deceased director in the hands  of  his successors.  In so far as a heir or legal representative has an  interest  in  the assets of the  deceased  director  and represents  the  estate, and the liquidator  represents  the interests  of  the  company,  the  heirs  as  well  as   the liquidator should, in equity, be able to question a decision which affects the interests represented. [380D, E-A] In re.  East of England Bank-Feltem’s Executors case, [1865] 1  Equiry  Cases  219 in re.  United  English  and  Scottish Assurance  Co.-ex parte Hawkins, [1867] 3 Ch.  A.C. 787,  in re.  British Guardian Life Assurance Company, [1880] 14  Ch. D.  3  335, S.B. Billimoria Official Liquidator  v.  Cecilla Mary  DeSouza  and  Ors., A.I.R.  1926  Lah.  624,  Official Liquidators  v. Jugal Kishore and Ors., A.I.R. 1939  All  1. Maniklal  Brijal. v. Vendravandras, C. Jadav & Ors..  A.I.R. 1944 Born. 193, Pattiam Veittil Menokki Senkaram Nambiar  v, Kottayam  Bank  by Official Liquidator, Tellichary  &  Ors., A.I.R.  1946  Mad. 304 and In re. The Peedan  Juharmal  Bank Ltd., A.I.R. 1958 Mad. 583, referred to.

(5)  While s. 235 of the Companies Act 1913 corresponding to s.   543  of the Companies Act, 1956, gives a power  to  the court  to  inquire into the conduct of any past  or  present director, the section,,

366 confine the power of the Court to make orders for  repayment or  restoration of money or property or contribution to  the assets of the company against the individuals occupying  the capacities either in the past or present mentioned  therein; and, the power does not, on the language of the  provisions, extend to making compulsive orders against the heirs of  the delinquent directors or officers.  As the power to take  the special  proceedings is discretionary and does  not  exhaust other  remedies,  although  the court may, as  a  matter  of justice and equity, drop proceedings against the  delinquent directors,  managers  or officers who ate no  longer  alive, leaving  the complainant to his ordinary remedy by  a  civil suit  against  the  assets of the deceased,  yet,  where  no injustice  may  be caused by  continuing  these  proceedings against  the  past  director even though  he  be  dead,  the proceedings could continue, after giving the person who  may be  interested, an opportunity to be heard.  But  even  such proceedings  can  only  result  in  a  declaration  of   the liability  of a deceased director, because, the language  of s.  235  of  the 1913 Act does , not  authorise  passing  of orders  to compel heirs or legal representatives to  do  any thing.  Such compulsive proceedings as may become  necessary against  those upon whom devolve the assets or estate  of  a deceased  delinquent director, who may have  become  liable, could  only  lie outside the section.  The power  under  the section would not extend beyond making a declaration against the deceased director provided he in his life time, or,  his heirs, after his death, have bad due opportunity of  putting forward  the  case  on behalf of  the  allegedly  delinquent director.  if  either  a  liquidator  or  the  heirs  of   a delinquent director against whom a declaration of  liability has  been made, can question the determination of  liability of the deceased delinquent, who was alive at the time of the judgment against him, it is obvious that the appellate court could  give a declaration either reducing or increasing  the liability even though it may not be able to enforce it by an order  under  the  section.   If  the  declaration  can   be questioned by an appeal the liability can be not only  wiped off  or reduced but also increased on an appeal heard  after the death of a director held liable. [381F-H; 382A-B;  383A- D]

In the present case, the director whose representatives were impleaded  had full opportunity of defending himself in  the misfeasance  proceedings, he exercised his right  of  appeal against  the  order of the Company Judge, and  the  DiVision Bench reduced his liability.  His heirs were heard on merits in  the appeal to this Court, and any order passed  by  this Court  could only affect the assets or the estate  of  the deceased director.  In these proceedings an order cannot  be passed  against the heirs of the director so as compel  them to  do  anything  and the official  liquidator  or  the  co- directors may take any other proceeding which may be open to them under the law so as to obtain the contribution of  that director. [383E-G]

Erlanger v. New Sombero Phosphate Co., [1878] 3 App.    cas. 1218  Rams-kill  v. Edwards, [1886] 31 Ch.  D. 100,  In  re. Sharne, [1892] 1 Ch. 154, L.S. Ramaswamy Iyer v. Brahmayya & Co.  Official Liquidators, Hanuman Dan Ltd., (1944)  36  Com Cas  270;  New  Fleming  .Spinning &  Weaving  Co.  Ltd.  v. Kessonji  Naik  and Ors., I.L.R. 9 Dorn. 373,  Gopal  Ganesh Abhyankar  v. Ramachandra Sadashiv Sahasrebudha,  I.L.R.  26 Bom.  597, Sakvahani Ingle Rao Sahib v. Bhavani  Bozi  Sahib and  Ors.,  I.L.R.  27 Mad. 588 and Padarath  v.  Raja  Ram, (1882) 4 AU. 235, referred to. 367

(6)  It  is  a question of fact, to be determined  upon  the evidence  in  each case, whether a Director, alleged  to  be liable  for  misfeasance, had acted reasonably  as  well  as honestly  and  with due diligence, so that he could  not  be held  liable  for conniving at  fraud  and  misappropriation which takes place., A Director may be shown to be so  placed and  to  have  been  so  closely  and  so  long   associated personally  with the management of the Company that he  will be deemed to be not merely cognizant of but liable for fraud in  the conduct of the business of a Company even though  no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to  everyone who examines the affairs of the Company even  superficially. If  he  does so he could be held liable for  dereliction  of duties  undertaken  by him and compelled to  make  good  the losses incurred by the Company due to his neglect even if he is not shown to be guilty of participating in the commission of  fraud.  it  is enough if his negligence  is  of  such  a character  as  to enable frauds to be committed  and  losses thereby incurred by the Company. [386E-H]

On the evidence on record, the promoter or founder Directors who  were  there  since  the inception  of  the  Bank,  were cognizant  of  the nature of the dealings  by  the  Managing Director and the officers of the Bank.  The evidence  showed that  they  had  been discussing  matters  relating  to  the management of the Company at the meetings of the Board where items  of  “policy”, which benefited the  Directors  at  the expense  of the depositors, must have been discussed.   They could  not have been ignorant of the fact that  the  Account Books  contained  fictitious entries  showing  payments  for shares  by  them when they bad not actually paid  for  them. Nor  could they be so innocent as not to know of the  window dressing  and presentation of false balance-sheets so as  to conceal  the_ true state of affairs from the depositors  for years.    Any   director   conscious   of   his   managerial responsibilities.  who had cared to examine the  affairs  of the Bank, could not have failed to find out what was  really happening  in the Bank.  The fact that these practices  were tolerated  for such a long period without any check  by  the Board  of  Directors indicates that the  promoter  Directors must   be  participants  in  the  benefits   of   widespread misappropriation  even though they may have so  operated  as not to leave any traces of actual misappropriation by  them in the records of the Bank, [398E-G; 399C-E]

Upon  the facts examined by the trial judge it is  therefore clear that although the Managing Director was conducting the day to day affairs of the company and must therefore be held responsible  for greater share of the loss incurred  due  to the misappropriation and misuse of managerial power yet  his co-directors could not possibly be ignorant of the nature of such  dealings and the activities of the employees  and  the Managing Director, simply because they had executed a  power of attorney in his favour.  The Company Judge as well as the Division Rench had referred to the difficulties  encountered in determining the actual total loss to the Company  because of want of any reliable statement of account.  This state of the  records  of the Bank was itself evidence of  breach  of their  duties  by  the Managing Director and  the  Board  of Directors to see that the business of the Bank was  honestly and efficiently conducted.  The proved conduct of the  other directors was such that an inference of their complicity  in concealing  the  true  state  of  affairs  from  depositors, presumably  because they were them-,elves  benefitting  from it, could not be avoided. [388B-D E-F; 390E-F] 368

In  re.   City Equitable Life Insurance Co., 1925  Ch.  407, Dovey  V. Cory, [1901] A.C. 477, In re Benham & Co.,  [1883] 25 Ch.D. 752 and Overand & Gurna Co. v. Gibb, (1944) 5  L.R. H.L. 480, referred to. (7)  The   Division  Bench  erred  in  reducing  the   total liability  of the directors and the individual liability  of the  managing director.  On his own admission, the  managing director was liable for a larger amount. [393C-E] (8)  The  Division Bench also erred in holding that  a  good deal  of  evidence was not placed before  the  Court,  which would have been available had the Official Liquidators asked for public examination of the Directors under s. 45G of  the Banking  Companies Act.  The Official Liquidator  could  not possibly have done anything more in his application than  to rely   on  reports  available  to  him  and  to  prove   the correctness  of their contents by producing,  as  witnesses, those  persons  who  conducted the  investigation  and  made reports.   All that s. 45G requires is the submission  of  a report  showing  that loss has been caused  to  the  Banking Company  in the opinion of the  Official  Liquidator,  and thereafter  it  is  for  the Court  to  decide  whether  the Directors should be publicly examined.  In the present case, the  Company Judge did order the public examination  of  the Directors, but they were unwilling to give evidence.  [395B- C; 396D-N; 397E-H]

(9)  The  Division Bench further erred in holding  that  the allegations  of  improper conduct by the  Directors  in  not exercising  proper  supervision, did not form  the  subject- matter  of any separate issue framed by the  Company  Judge. The issues framed in the case were wide enough to cover  the question.   The  Directors had not only  an  opportunity  of meeting the allegations contained in the petition, but  also had knowledge of the material brought on record later.   The Directors  were  in  no  way  handicapped  by  the   alleged vagueness of charges or a failure to frame issue more fully. The  Company  Judge was therefore right in  considering  the evidence adduced in the case. [396E-G; 399D-E: 398E-G] Nagubai Ammal and Ors. v. B.Sama Rao & Ors., [1956] S.C.  R. 45 1, followed.

[Applying the above principles the liability of the managing director  and  the other directors. including  that  of  the deceased directorwere fixed and the case was remitted  to the trial Judge for passingorders  against  the  managing directors and the director who was alivewhen   Judgment in proceedings under s. 235 of the Companies Act,1913.  was given.   As  regards  the  liabilities  of  other   deceased directors  it  was open to the official liquidator  and  the director  who is alive, to take any other proceedings  which may be available under the law against his estate or  assets in the hands of his heirs.]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 195-  197, 234 and 300 of 1967. Appeals  by a certificate from the judgment and order  dated January  7,  1966 of the Mysore High Court at  Bangalore  in Company Appeals Nos. 9 and 10 of 1967. S.C. Sundraswamy, Rameshwar Nath and K. Suryanarayana  It Rao,  for  the  appellants (in C.  As.   Nos.  195-197  ‘and Respondent No. 1 (in C. As.  Nos. 234 and 300). 369 C.K.   Daphtary,  S.  K.  Mehta,  K.  R.   Nagaraja   and Qamuruddin, for appellant (in C.A. No. 234) respondent No. 1 (in C.A. No. 195). V.S. Desai and P. C. Bhartari, respondent No. 2 (in C.As. 196 and 197) and respondents Nos. 3-6 (in C.A. No. 300). R. B. Datar, for respondent No. 4. The Judgment of the Court was delivered by

BEG,  J.-These  are five appeals by  grant  of  certificates under Article 133 (1) (a) of the Constitution by the  Mysore High Court where the orders of the learned Company Judge, in misfeasance  proceedings. under Section 45H of  the  Banking Companies Act, 1949, (hereinafter referred to as ‘the Act’), read  with  Section 235 of the Indian Companies  Act,  1913, (hereinafter  referred  to as ‘the Act of  1913’)  had  been modified  by  a  Division  Bench.   These  proceedings  were instituted   by

the  Official  Liquidator   against   seven Directors, including the Chairman of the Board of  Directors and   the   Managing  Director,  and the   Cashiers,   the Accountant,  too  Branch Managers, another officer,  and  an auditor  of  the  Supreme  Bank  of  India  Ltd.,   Balgaum, (hereinafter referred to as ‘the .Bank’) under  liquidation. The  Bank, incorporated on 27-5-1939, commenced business  on 6th October, 1939.  It suspended business on 27-11-1954 as a result  of gross mismanagement which enabled large  sums  of money to be misappropriated and false and fictitious entries to be made in its account books. Out  of the seven Directors mentioned above,  five,  namely. S.  G. Pant, the Chairman of the Board of Directors,  S.  K. Sawant,  the  Managing  Director from  July,  1946.   P.  A. Tendolkar,  D.  R.  Angolkar,  and  L.  S.  Ajgaonkar,  were promoter  or founder Directors.  The sixth Director,  R.  W. Forwal, joined the Board in 1961.  The seventh Director,  R. N.  Kalghatgi, took charge of his office in July,  1953,  on the death of his elder brother G. N. Kalghatgi.  Before  the Company  Judge could give his decision, on 8-11-1963, S.  G. Pant, the Chairman of the Board of Directors, had expired on 29-8-1961, and D. R. Angolkar, Director, had died on  10-10- 1962.   During the pendency of the applications  for  certi- fication, under Article 133 of the Constitution, for appeals to  this  Court, another founder Director, P.  A.  Tendolkar died,  10-8-1966,  so that his  legal  representatives  were substituted for subsequent proceedings. The Official Liquidator had alleged, in the application  for misfeasance   proceedings,   dated  27-8-1960.   that   “the Directors and the employees of the Bank had  misappropriated or  ‘become  liable or accountable for a total  sum  of  Rs. 26,000/-” due to the Com- 370

pany, and were guilty of “Misfeasance,, breach of trust, and fraudulant  conduct  in  relation  to  the  Company”.    The Official Liquidator had prayed that the Court may be pleased to   take   cognizance  of  the  application   against   the Respondents  and examine their conduct and “direct them  all or  such  of  them as may be hold  liable,  particularly  or generally,  severally or jointly, and, in such manner as  it may  deem  just, fit, and proper, to repay and  restore  the money   of  the  Bank,  together  with  interest,   or,   to contribution  such amounts to the assets of the  Company  by way of compensation in respect of misapplication,  retainer, misfeasance or breach of trust” as the Court may deem  just. Thus, the prayer for relief covered every type of order  the learned Company Judge could consider fit and proper to  meet the needs of the case.

 

We  may now glance at the background of  investigations  and reports  made which led up to the  misfeasance  proceedings, before  we consider the issue raised and decision  given  on these by the learned Company Judge and then by the  Division Bench. On  7-3-195  1,

 

after the coming into force of  the  Banking Companies Act 1949, on 16-3-1949, the Reserve Bank of  India had  given its short inspection report (A-1) on the  affairs of the Bank under Section 22 of the Act.  This report showed that  even necessary formalities with regard to  opening  of deposit  accounts were not complied with,  over-drafts  were allowed in ‘savings’ Bank accounts, unsecured advances  were disproportionately  large,  rates  offered  on  some   fixed deposits  were  abnormally  high, the  Bank  was  constantly borrowing from other Banks by pledging its investments,  16% of  the  advances were irregular, records  to  indicate  the correct  value of goods pledged or hypothaticated  were  not maintained,  effective  steps  against  those  who  obtained proved   irregular  advances  were  not  taken,   sufficient information  was not available about the means and  standing of  the borrowers, neither periodical returns,  particularly of  advances  by  the  Branches, were  made,  nor  were  the Branches  inspected  periodically,  the  usual  practice  of Balancing the ledger at frequent intervals was not observed, and  account  books and records of the Bank were  not’  duly maintained.   The  Reserve Bank, therefore,  suspended  its’ decision  about issue of a licence to the Bank to  carry  on banking   business   until  the  Bank  had   removed   these shortcomings.

 

On 5-3-1953, a second report (A-2), under Section 22 of  the Act,  was  given  by  the Reserve  Bank,  in  which  it  was observed,  inter-alia, that the Bank had not  rectified  the defects pointed out in the previous inspection report,  that the Board, of Directors did not show sufficient interest  in the  working  of  the Bank, and that  there  was  no  proper supervision and control over the activities of 371 the  Managing Director.  The question whether the  Bank  was eligible or not for a licence was still left undecided after listing irregularities found under fourteen heads. On 13-9-1954, a very detailed inspection report (A-3), under Section  35, sub.s(1) of the Act, carried out on  26-3-1954, was  sent by the Reserve Bank to the Bank, with  a  covering letter, in which the following conclusion was recorded :- “On the basis of the above report, it  appears that  the        banking company is  conducting  its affairs in  a  manner  detrimental  to   the interests of its depositors.  The Reserve Bank of  India,  therefore, proposes to give  it  a notice  in  writing  in  terms  of  the  first proviso to subsection (2) of Section 22 of the Act  that        a  licence  to  carry  on   banking business in India cannot be granted to it”. The  Bank was given an opportunity to make a  representation against the report.

 

After  suspension of payments by the Bank on 26th  November, 1954, the Bank had applied, on 1-12-1954, to the High  Court of  Bombay,  under Section 37 of the Act,  praying  for  the grant  of a moratorium and for opportunity to tic  given  to reconstruct  the  Banking Company as a  going  concern.   An interim  order was passed by the Bombay High Court  granting moratorium  for  a  period of two  months  and  staying  all actions  against  the Company for this period.  Shri  V.  R. Kothagi,  an Advocate of Belgaum, was appointed  as  Special Officer  of  the Bank under Section 37(3) of the  Act,  with powers to file suits. Under  the directions of the Bombay High Court  the  Reserve Bank  deputed Shri Amrit Lal Bhatia to inspect  the  records and the workingof the Bank and to submit a report under the proviso to sub.s

(2)of  Section  37 of the  Act.   This report, submitted on 13-1-1955     (A-4),    disclosed     a deplorable  state  of accounts which contained a  number  of false and fraudulent entries, want, of supervision by either the officials or the Directors, unauthenticated erasures and alterations  in the accounts, and a shortage of cash to  the extent of 2.01 lakhs.  It showed that the total liability of the Bank, excluding its share capital, amounted to Rs. 14.83 lakhs. On  20-12-1954, the Directors of the Bank, with the  concur- rence of the Special Officer, had appointed Shri K. Y. Wagle as Officer to examine the records of the Company with a view to 372 explore  the  possibilities  of  its  reconstruction.   This report, dated 16-2-1955 (A-21) said : “On going through the books of accounts, it is observed that the misappropriation  penetrates into the books from 1948 and still earlier and the   amounts  misappropriated   are   through entries from (a) Cash, (b) Bank accounts        with other Bankers, (c) Branch accounts”. A  list  of cash deficits and fictitious  entries  who  also given  here.   The  report  mentions  that  the  assets  and liabilities of the Bank could not be verified as no  regular audit  had  been carried out and that the records  had  been maintained in “a most deceptive manner” so that the  amounts involved  could  not be ascertained correctly.   The  total. amount  “involved in the fraud” was assessed roughly at  Rs. 4.26  lakhs.  It said : “So far an amount of Rs. 3.75

lakhs has  been traced from various sources.  The balance  can  be traced  provided the accounts are reconciled”.   After  this report,  the Bombay High Court rejected the application  for further moratorium and for a reconstruction of the Company. On  8-3-1956, a depositor of the Bank applied to the  Bombay High  Court for the winding up of the Banking  Company.   On 13-3-1956,  a provisional liquidator was appointed, and,  on 16-4-1956, the Bank was ordered to be wound up.  As a result of  reorganisation  of States, ‘the winding  up  proceedings were  transferred  to  the High Court of  Mysore,  and,  the Official  Liquidator at the Mysore High Court was  appointed as the Liquidator of the Bank. On 22-7-1958, the Official Liquidator brought to the  notice of the Company Judge an elaborate report (A-9), dated  10-5- 1957,  made by M/s.  D. D. Joshi & Co., Auditors,  appointed by  the  Direction of the Bank themselves.   Here,  after  a survey  of the Bank’s history and conduct of its affairs  by its  Directors and officers we find, among the  conclusions, recorded : “(1)    The   Directors,         by   accepting    a responsibility  which they never        intended  to accept,  laid  the foundation for

the  fraud. They  have  misled the share holders  and        the depositors by presenting false Balance  Sheets and  Profit ‘and Loss Accounts, at least        from 1946 onwards. knowing them to be false. (2)The   Managing        Director  Shri  S.   ‘K. Samant.  the Accountant Shri R.  S.  Deshpande and  the three Cashiers.

K. V. Saudi.  V.  K. Nadgouda, S. N. Ajrekar took full advantage of the weakness of the Directors, the  negligence of    the          Auditors,    and     fraudulently misappropriated  the monies  individually        and collectively”. 373 The Chartered Accountants were unable to ascertain the exact amounts  misappropriated.  They gave the  following  reasons for  coming to the conclusion that the “Balance  Sheets  and the  Profit and Loss Accounts for the years  from  31-3-1946 onwards are false and incorrect”: (a)   The        staff and the Directors  know  that the Bank had not received the share amount for the majority of the shares allotted which        was made  up        of  the  fictitious  credits   given against  these share applications,  and  which did not represent the actual physical cash  on hand on that day. (b)   The amount of unclaimed dividends  taken to  interest account was illegal        and  against the provisions of the Articles of        Association of the Bank. (c)   The Auditors, when they counted the cash on 24th March, 1954, could have known that the actual  cash on hand verified by them was        far short  of        the cash balance shown by  the  Day Book  of that day bad they tallied       the cash counted by them with the Day Book. (d)The  Bankers’ Balances as shown  in  the Balance  Sheets  did  not        show  the   correct balances inasmuch as false debits were made to these  Banks by misappropriating        the  amounts shown as sent to the Bank for credit- (e)   The remission of Rs. 1,000 shown in        the Profit and Loss Account of 1947 is a  misnomer and  the wording seems to have been  purposely used  to        mislead  all  concerned. Moreover,        there is no sanction also for  this remission. (f)   Due to suppression of overdrafts in        the Savings Bank Accounts, the figures of deposits and  consequently        of loans, as shown  in  the Balance Sheets were incorrect, etc. etc. In D. D. Joshi Co’s report it is also stated “On the event of the commencement of our work, the Directors had resolved to repay a part (10% ) of’ the deposit  amounts to  the depositors.  This was the best opportunity to  bring forth  passbooks and other records in the possession of  the depositors  for  getting  the  deposits  verified  for   our purposes.  The matter was discussed 374 with  the Chairman and some of  the  Directors and  we  handed  them  a        specific  form   for obtaining letters of confirmation of  balances from-the        depositors.   The Chairman  and  the Directors assured us to give due publicity  to the  matter before disbursing the        amount  and upon insisting on the production of pass-books and   other   records   available         from   the depositors at the time of making the payments. However, it was later on discovered that        this proposal of ours had not been carried out        and that the deposit amounts were being  disbursed without  insisting upon the production of        the pass-books.    When  the        matter   was   again referred to the Chairman we were surprised  to learn  that the Directors had not approved  of our proposal on the ground that it would        have caused  unnecessary    inconvenience     and harassment to the depositors (Annexure No. 4). By  this failure on the part of  the  Chairman and  the        Directors a  vary  good  opportunity available         to  us  and  the  management   for verifying        the  accounts  of  the  Bank   from sources independent of records at the Bank was denied  and  lost to us. Thus,  the  Directors themselves  who had appointed us and  promised us  all  facilities and co-operation  did        not extend the same as and when it was  essential. From  the        facts  that  came  to  our   notice subsequently   during   the  course   of         our investigation.  it  seems        that  this  act  of theirs might even have been deliberate”. After  giving  the, Directors and Officers of the  Bank  due opportunity  to  reply  to

 

D. D.  Joshi  Co’s  report,  the Official Liquidator had filedthe application of  27-8-1960, under Section 45H of the Act readwith  Section 235 of  the Indian Companies Act. on the strengthof  all  the   above mentioned reports, copious extracts from which were  annexed to  a  duly sworn affidavit supporting the  application  for misfeasance proceedings. In  reply  to the application, the Directors  complained  of vagueness  and lack of particulars of the  alleged  wrongful acts  and omissions.  They also relied strongly on  Articles 109  and 1,12 of the ‘Articles of Association’  relating  to the  powers and duties of Managing Director in whose  favour they  are said to have executed a power of  attorney.   They tried to put the whole responsibility for the alleged  fraud and misappropriations and loss on the Managing Director.  S. K. Samanth. appointed in 1946 and some officers of the Bank. denied  that  the Managing Director  consulted  them  before taking  any  action in the day to day  transactions  of  the Bank.  On the other hand. the Managing Director, S.    K. Samanth pleaded that the whole business of the Bank was 375 conducted  “according to the policy and in  accordance  with the  instructions of the Board of Directors” in whose  hands he  was  “a  mere tool.” All the  opposite  parties  to  the application  pleaded  that the proceedings  were  barred  by limitation. The  learned Company Judge had dismissed  the    proceedings against  employees of the Bank as time barred on the  ground that  their cases were governed by the  limitation  provided for  in

 

Section  235  of the Companies  Act  of  1913,  the application  of  Section 543 of the Companies  Act  of  1956 having been expressly excluded by Section 647 sub. s (2)  of that  Act, in a case in which the winding up of the  Company had  begun,  as  it  did in the  instant  cage,  before  the commencement  of the 1956 Act on 1-4-1956.  But, in  respect of the Managing Director and those Directors who were  alive when  the learned Company Judge gave his decision  on  8-11- 1963,  it was held that the proceedings were covered by  the special  provisions  of  Section  45  (O)  of  the   Banking Companies Act applicable to them.  The first two clauses  of Section 45(O) read as follows : “45(O).  Special Period of limitation (1)   Notwithstanding anything to the contrary contained        in the Indian Limitation Act,  1908 (IX of 1908) or if any other law for the        time being  in before,, in computing the period  of limitation   prescribed for   a   suit    or application  by  a banking  company  which  is being wound up, the period commencing from the date  of the presentation of the petition        for the winding up of the banking Company shall be excluded. (2)   Notwithstanding anything to the contrary contained        in the Indian Limitation Act,  1908 (IX  of  1908) or Section 235  of        the  Indian Companies        Act, 1913 (VII of 1913), or in  any other  law for the time being in force,  there shall  be        no  period of  limitation  for  the recovery of arrears of calls from any Director of Banking Company which is being wound up  or for  the        enforcement by the  Banking  Company against  any  of its directors  of  any  claim based  on a contract, express or implied;        and in respect of all other claims by the  Banking Company  against its Directors, the period  of limitation  shall        be twelve years  from,  the date of the accrual of such claims”. By the Act XXXIIII of 1959 the following words were added at the  end  of Section 45 (O)

 

(ii) : “or five years  from  the date  of  first appointment of the liquidator  whichever  is longer”. 376 The Company Judge had held that the nature of the claims  in the  misfeasance  proceedings against the Directors  in  the instant case fell under the category of “all other  claims”, mentioned  ill Section 45 (O) (ii), for which the period  of limitation  was  either  twelve  years  from  the  dates  of “accrual of claims” or five year from the date of the  first appointment  of the Liquidator “whichever is  longer”.   The learned Company Judge held that the first clause of  Section 45(O) of the Banking Companies Act, 1913, did not apply to a case in which the period of limitation had not begun to  run ‘before the filing of the winding up petition, and that  the misfeasance  proceedings against Directors, having  started, on 27-8-1960, within five years of the first appointment  of the  liquidator  on  13-3-1956, were  clearly  within  time. Incidentally,  the  finding that limitation  did  not  begin running  before filing the misfeasance  application  implied that  this  was not a case in which I  claim  had  “accrued” before the filling of- the application.  The ,Objection that Section  45(O) of the Act would apply to claims made by

the Company itself and not to those by a liquidator was  rightly over-ruled  on the ground that the Liquidator really  repre- sented  the Company and that a claim made by the  liquidator was therefore, a claim “by the Banking Company”, as was held in  Jawala  Prasad Vs.  Official Liquidator,(1)  within  the meaning of this expression used in Section 45(O) of the Act. The  Division Bench, in five appeals by the  Directors,  had concurred  with the ,Company Judge’s views on the  issue  of limitation. It  has,  however, been urged before us, on  behalf  of  the Directors,  that,  the period of three  years,  provided  by

 

Section  235  of the Companies Act of 1913, as  well  as  12 years  from ”  accruel of claims”, prescribed by Section  45 (O) (ii) of the Act. having expired before the Act XXXIII of 1959, by which Section 45 (O) (ii) was amended on 1-10-1959, time barred claims could not be revived whether the case was governed  by the limitation laid down in Section 235 of  the Act of 1913, or that in Section 45 (O) of the Act. The contention that Section 235 of the 1913 Act could  apply to these proceedings, governed expressly by the special  law on  the subject contained in Section 45 (O) of the  Act,  is plainly  erroneous.   The plea that twelve  years  from  the “accrual  of claims” had ,expired before  Section  45(O)(ii) was amended on 1-10-1959 is also unacceptable.  It does  not seem to have been specifically advanced in the High Court so that  the facts may be examined there to determine when  any part  of the claims “accrued” against any Director.  Such  a point, it is obvious, involving an investigation into  fresh facts, showing when claims for any particular terms of  loss to the Company accrued, or when they accrued 377 against  its’ Board of Directors itself cannot be  taken  up for  the first time in this Court.

It was not taken,  and, therefore, not gone into in the High Court. In any case, the amendment of Section 45 (O) (ii) of the Act had  conferred  a  new  right  of  counting  the  period  of limitation  from  the first appointment of  the  liquidator. The  exercise  of that. right by the liquidator,  acting  on behalf  of  the  Company, certainly  took  place  after  the commencement  of Act XXXIII of 1959.  There was no  question here  of  giving any retrospective operation  to  any  right whether procedural or substantive.  We, therefore think that the  claims  against the Directors, which were  prima  facie made  within  time, were not shown to have  been  barred  by limitation. We will now consider another question of preliminary  nature with  regard to the liabilities of legal representatives  of the  deceased respondents.  The Company Judge had held  that misfeasance  proceedings were of a special nature  involving an  enquiry into the, alleged wrongful conduct of  Directors personally.   The  liability of a Director  for  such  wrong doing  was held to be of personal character  which  vanished with the death of a Director.  Reliance had been placed,  by the Company Judge, on : In Re, East of England Bank-Feltom’s Executors  Case,(1)  which had been followed in  Re:  United English and Scottish Assurance Company ex-parte  Hawkins,(2) and  in Re: British Guardian Life Assurance Company.(3)  The learned Judge observed that the principle laid down in these English cases had been followed by Indian High Courts in the cases mentioned by him which were : (1) S.   B. Billimnpria, Official Liquidator Vs.  Cenilla Mary Devsouiza & Ors.,  (4) (2) Official Liquidators Vs.  Jugal Kishore & Ors., (5)  (3) Manilal Brij lal Vs.  Venadravandas C. Jadev & Ors.,(6)  (4) Pattiain Veettil Menokki Senkaram Nambiar Vs.  Kottayam Bank by  Official Liquidator, Tellichery & Ors., (7) (5) In Re  : The Peerdan Juhaymal Bank Ltd.

(8). The  learned Judge, therefore, held that  proceedings  could not continue against the heirs of either the Chairman of the Board,  S. G. Pant, or the Director Angolkar, who had  died before  the  Company Judge gave his decision  on  8-11-1963. The  correctness  of the decision of the  Company  Judge  to exempt heirs and legal representatives of the Chairman  Pant and the Director Angolkar was not questioned by any party in the five appeals before the Division Bench.  Their  possible liabilities, as persons upon whom the assets and  properties of Pant and Angolkar may (1) 1865 (1) Equity Cases 219.(2)  1867 (3) ch.  Appeal Cases 787 @ 791. (3)  1880 (14) ch. Division 335.(4) A.I.R 1926 Lahore 624. (5) A.I.R. 1939 All. I.(6) A.I.R. 1944 Bom. 193. (7)  A.I.R. 1946 Mad. 304.(8) A.I.R. 1958 Mad. 583. 378 have  devolved, do not, therefore, call for a decision  from us.   But  the general question of liability  of  heirs  and legal  representatives  of delinquent Directors  has  arisen before us in respect of the liability, if any, of the  heirs and legal representatives of Director Tendolkar who died  on 10-8-1966   pending  the  grant  of  his   application   for certification  of fitness of the case under Article  133  of the  Constitution for an appeal to this Court.

Tendolkar’s heirs  got  themselves  impleaded so  as  to  prosecute  the application  for  certification of fitness of the  case  for appeal, and, after obtaining it, they filed their appeal  in this  Court against the order of the Division Bench  holding Tendolkar  liable.   Learned Counsel representing  them  was heard  in support of objection that the proceedings  against them  could  not continue and also on merits  of  the  order determining the liability of Tendolkar.  Learned Counsel for the  Official  Liquidator, on the other  hand,  pressed  his appeal against the order of the Division Bench reducing  the liability of Tendolkar. In Re : East of England Bank-Feltoms Executors Case (Supra), the  question was left undecided whether the remedy  against the estate of a delinquent Director was by way of a suit. or in winding up proceedings.  It was certainly not held  there that  there  was no remedy.  In Re : British  Guardian  Life Assurance   Company  (Supra),  it  was  observed  that   the Directors  were liable for breaches of trust for moneys  not rightly  invested,  although,  it  was  held  that,  on  the language of Section 165 of the English Companies Act,  which was  very similar to Section 235 of the Act of  1913,  these summary proceedings were not available against the heirs  of a  delinquent Director.  English Courts have, however,  held that equitable relief against the deceased Directors estate, which  may  have benefitted from breach of  trust.  was  not barred.  (See: Erlanger Vs.  New Sombrero Phosphate  Co.;(1) Ramskill Vs.  Edwards;(2 ) Re : Sharne (3) In  W.  S.  Ramaswamy Iyer & Anr.   Vs.   Brahmavya  &  Co., Official  Liquidators.  Hanuman Bank Ltd., (4) , a  Division Bench of the Madras High Court held that, as the position of a  Director of a Company was analogous to that of a  trustee with regard to powers over the funds of the Company, and, as his office was of a fiduciary character, he would be  liable for breaches of trust if he misused his powers.  It was held that  the liability incurred by Directors by such misuse  of power  was neither exhausted by proceedings against them  in the course of a Company’s liquidation nor did it vanish with the death of a Director. (1) (1878) 3 App.  Cas. 1218.(2) (1886) 31 Ch.  Dvn. 100. (3) (1892) 1 Ch. 154.     (4) Company Cases Vol. 36, p. 270. 379 In the New Flemirg Spinning & Weaving Co. Ltd.  Vs. Kessorji Nalik & Ors.,(1) it was held that misfeasance by a  Director was  a breach of trust and not merely a personal default  so that the estate of the deceased Director would be liable  to make good the loss caused to a Company by the misfeasance of the deceased.  But, this was a case in which a regular  suit had been filed. In Official liquidators Vs.  Jugal Kishore & Ors.,  (Supra), it  was  pointed out that Section 235 of the  Companies  Act 1913  contemplates  proceedings against  Directors  and  not against  their  heirs or legal  representatives,  and  that, although,  Section 306 of the Indian Succession Act gives  a right to continue even special proceedings against executors or administrators of the estate of the deceased, yet, it did not  extend to mere heirs and legal representatives. it  was also observed here that the provisions of Section 235 of the Companies  Act  of  1913 do not bar suits  by  the  Official Liquidator,  in  suitable cases, against the  heirs  of  the deceased.

Similar views were adopted in: S. B.  Billimoria. Official  Liquidator  Vs.   Cecilla  Mary  De’Souza  &  Ors. (Supra);  Manilal Brijlal Vs.  Vendravandas C. Jadev &  Ors. (Supra); and in Re : The Peerdan Juharmal Bank Ltd. (Supra). Two  cases, Gopal Ganesh Abhyankar Vs.  Ramchandra  Sadashiv Sahasrabudhe (2 ) and, Sakyahani Ingle Rao Sahib Vs. Bhavani Bozi  Sahib & Ors.,(3) were cited on the application of  the maxim   “actio   personalis  moritur  cum   personal”.    In Abhyankar’s  case (Supra) the Defendant against whom a  suit for damages for defamation had been decreed had died  during the  pendency of the appeal against the decree  passed.   At the  hearing of the appeal, the plaintiff had objected  that the appeal had abated.  The Bombay High Court held that  the Defendant’s  legal representatives had a right  to  continue the proceedings and to question the decree.  The High  Court referred  to several cases, including a Full Bench  decision of  the Allahabad High Court in Padarath Vs.   Raja  Ram,(4) where Edge, C.J. had said : “I have always understood the law to be  that, in  those case in which an action would  abate upon   the  death        of  the  plaintiff   before judgment, the action would not abate if  final judgment had been obtained before the death of the plaintiff”. Then the Court held “The result of these authorities would clearly seem  ‘to        be that, where the claim  has  been perfected        by  a judgment, the nature  of  the relief claimed on appeal (1) I.L.R. IX Bom. 373.

(2) I.L.R. 26 Bombay 597. (3) I.L.R. 27, Mad. 588.         (4) (1882) 4 All. 235. 9-L798Sup.C.I./73 380 stands  on a different tooting and there will be  no  abate- ment”. We  think, that the ratio decidendi of this case  helps  the Official  Liquidator appellant.  In S. I. Rao  Sahib’s  case (Supra)   it  wag  held  that  a  reversioner’s  right   was “personal”  which vanished with the death of the  plaintiff. Hence,  the appeal of the plaintiff, in which the heirs  had been  substituted, was held to have abated.  We fail to  see how this case helps the heirs of Tendolkar. The decisions of our High Courts, while keeping in view  the consideration that a misfeasance proceeding, contemplated by Section  235 of the Act of 1913, involving an  inquiry  into the  personal  conduct  of  persons  acting  in   capacities mentioned therein, may attract the application of the  maxim “actio personalis moriture cumpersona”, have proceeded, very rightly,  more  on an interpretation-of  the  provisions  of Section 235 than on the application of that maxim. The  maxim Actio personalis moritur cum persona, as  pointed in Winfield’s “Law of Tort (Eighth Edn. p. 603-605), was  an invention  of  English Common Lawyers.

It  seemed  to  have resulted  from  the strong quasi-criminal character  of  the action for trespass.  Just like a prosecution for a criminal offence,  the action for trespass, which was “the parent  of much of our modern law of tort”, was held, by applying  this maxim,  to  be  incapable  of surviving  the  death  of  the wrongdoer,  and, in some cases, even of the  party  injured. The  maxim, with its extensions, was criticised by  Winfield and  found  to be “pregnant with a good deal  more  mischief than  was ever born of it”.  Whatever view one may  take  of the justice of the principle, it was clear that it would not be  applicable to actions based on contract or where a  tort feasor’s  estate  had benefitted from a  ‘wrong  done.   Its application  was generally confined to actions  for  damages for defamation, seduction, inducing a spouse to remain apart from the other, and adultery. We  see  no  reason  to  extend  the  maxim,  as  a  general principle,  even  to cases involving breaches  of  fiduciary duties  or  where  the  personal  conduct  of  the  deceased Director has been fully enquired into, and the only question for  determination,  on  an appeal, is  the  extent  of  the liability incurred by the deceased Director.  Such liability must necessarily be confined to the assets or estate left by the  deceased in the hands of the successors.  In so far  as an  heir  or  legal representative has an  interest  in  the assets  of ‘the deceased and represents the estate, and  the liquidator  represents  the interests of  the  Company,  the heirs  as well as the liquidator should, in equity, be  able to question a the interests represented. 381 We may now consider the meaning and effect of Section 235 of the Act of 1913 which reads as follows : “235.   Power  of        Court  to  assess   damages against  delinquent directors, etc.(1)  Where, in  the  course of winding up  a   company,  it appears that any person who has taken part  in the formation or promotion of the company,  or any  past        or  present  Director,  Manager  or liquidator, or any officer of the company        has misapplied  or  retained or become  liable  or accountable  for any money or property of        the company, or been guilty of any misfeasance  or breach  of trust in relation to  the  company, the  Court  may,        on the  application  of  the liquidator,    or         of   any    creditor    or contr ibutory made within three years from the date of the first appointment of a  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        promoter,  director, manager, liquidator or officer, and compel him to  repay or restore the money or property  or any part thereof respectively 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 the  misapplication, retainer, misfeasance  or breach of trust as the Court thinks just. (2)   This section shall apply notwithstanding that the offence is one for which the offender may be criminally responsible.” It will be seen that, while Section 235 of the Act of  1913, like  Section 543 of the Companies Act of 1956, to which  it corresponds,  gives the power to the Court to  enquire  into the  conduct  of “any past or present Director”,  yet,  both Section  235  of  the Act of 1913 and  Section  543  of  the Companies Act of 1956 confine the power of the Court to make orders for repayment or restoration of money or property  or contribution  to  the  assets of  the  Company  against  the individuals occupying the capacities, either in the past  or present,  mentioned  therein.  This power does not,  on  the language  of these provisions, extend to  making  compulsive orders  against heirs of delinquents.  As the power to  take these  special  proceedings is discretionary  and  does  not exhaust other remedies, although, the Court may, as a matter of  justice and equity, drop proceedings against  delinquent Directors,  Managers, or Officers who are no  longer  alive, leaving  the complainant to his ordinary remedy by  a  civil suit  against  the  assets of the deceased,  yet,  where  no injustice  may  be caused by  continuing  these  proceedings against a past Director, even though he 382 be dead, the proceedings could continue after giving persons who may be interested opportunities to be heard.  But,  even such  proceedings  can only result in a declaration  of  the liability,  of a deceased director, because the language  of Section 235 of the Act of 1913, as already noticed, does not authorise  passing  of  orders  to  compel  heirs  or  legal representatives to do anything.  Such compulsive proceedings as may become necessary against those upon whom devolve  the assets or the estate of a deceased delinquent Director,  who may  have become liable, could only lie outside Section  235 of the Act of 1913. There  was nothing in the Act of 1913 which corresponded  to Section 542 of the Companies Act of 1956, the relevant  part of which lays down: “542.   Liability        for fraudulent  conduct  of business (1)   If 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 any other persons,        or for any fraudulent  purpose,  the Court,  on  the application  of  the  Official Liquidator, or the liquidator or any  creditor or  contributory        of the Company, may,  if  it thinks  it proper so to do, declare  that        any persons  who  were knowingly  parties  to        the carrying        on  of the business  in  the  manner aforesaid        shall  be  personally  responsible, without  any limitation of liability, for        all or  any of the debats or other liabilities  of the company as the Court may direct. On  the hearing of an application under  this subsection  the  Official  Liquidator  or  the liquidator,  as the case may be,  may  himself give evidence or call witnesses.

(2)   (a) Where  the  Court  makes  any  such declaration,   it         may  give   such   further directions as it thinks proper for the purpose of giving effect to that declaration. (b) (c)   The Court may, from time to time,  make such further order as may be necessary for the purpose of enforcing any charged imposed under this sub-section, (d)  (4) 383 It may be possible (though we need express no final  opinion on  the  matter)  where a proceeding under  Section  543  is covered  also by the terms of Section 542 of  the  Companies Act of 1956, to give directions to persons other than  those whose  conduct  is enquired into,  including  directions  to heirs   and  legal  representatives,  for  the  purpose   of enforcing a declaration.  But, we think that the power under Section 235 of the Act of 1935, which corresponds to Section 543  of  the Act of 1956, would not extend beyond  making  a declaration against a deceased Director provided he, in  his life  time,  or  his heirs, after his death,  have  had  due opportunity  of  putting forward the case on behalf  of  the allegedly  delinquent Director.  If either a  Liquidator  or the   heirs  of  a  delinquent  Director,  against  whom   a declaration  of  liability has been made, can  question  the determination  of liability of the deceased delinquent,  who was  alive  at the time of the Judgment against him,  it  is obvious  that the Appellate Court could give  a  declaration either  reducing or increasing the liability even though  it may not be able to enforce it by an order under Section  235 of  the  Act.  If the declaration can be  questioned  by  an appeal,  as we think that it can, the liability can  be  not only  wiped off or reduced but also increased on  an  appeal heard after the death of a Director held liable.

Applying  the principles laid down above to the case  before us,  we  find  that  Tendolkar had  a  full  opportunity  of defending himself against the misfeasance proceedings  taken by  the liquidator.  He also exercised his right  of  appeal against the order of the Company Judge.  The Division Bench, as already observed, reduced his liability.  His heirs were, heard  on merits in the appeal before us.  Any order  passed by  us  could only affect the assets or the  estate  of  the deceased  Tendolkar.   But, as already indicated by  us,  we cannot,  in  these proceedings, pass an  order  against  the ,heirs  of  Tendolkar so as to compel them to  do  anything. The  Official Liquidator or the co-Directors  may,  however, take,  any other proceeding which may be open to them  under the law so ,as to obtain the contribution of Tendolkar. Before  we consider the manner in which the  liabilities  of the Directors were determined, on the evidence on record, by the  Company Judge and then by the Division Bench,  we  will refer  to the principal authorities, cited before  the  High Court  and also before us, with regard to the principles  on which liabilities of Managing Directors and other  Directors may be determined in such cases. In  Re  :  City Equitable Life Insurance  Co.,(1)  which  is regard  as  the locus classicus on the subject,  was  relied upon by (1)  [1925] Ch. 407 at 427. 384

both  sides.   Here, Romer, J.,  after  considering  earlier authorities, said : “In order, therefore, to ascertain the  duties that  a  person appointed to the board  of  an established company undertakes to perform,  it is  necessary to consider not only the  nature of the company’s business, but also the manner in  which the work of the company is  in        fact distributed  between  the        Directors  and  the other  officials        of  the  Company,   provided always that this distribution is a  reasonable one   in         the  circumstances,  and   is   not inconsistent  with any express  provisions  of the  articles of association.  In        discharging the duties of his position thus ascertained  a Director must, of course, act honestly, but he must  also exercise some degree of both  skill and diligence.  To the question of what is the particular  degree  of  skill  and   diligence required        of  him, the authorities do  not,  I think,  give  any very clear answer.   It        has been laid down that so long as a Director acts honestly        he  cannot be  made  responsible  in damages  unless  guilty of gross        or  culpable negligence  in  a        business  sense.   But,  as pointed  out  by Neville J. in  Re.  Brazilian Rubber  Plantations and Estates Ltd.,  (1911)1 Ch.  425),  one cannot say whether a  man        has been   guilty   of   ‘negligence,         gross   or otherwise,  unless one can determine  what  is the extent of the duty which he is alleged  to have  neglected.         For myself,  I  confess  to feeling  some difficulty in understanding        the difference   between  negligence         and   gross negligence,   except   in        so   far   as   the expressions are used for the purpose of  draw- ing  a  distinction between the duty  that  is owed  in        one  case and the duty  is  owed  in another …. ”

There  are,  in addition, one  or  two  other general propositions that seem to be warranted by  the reported cases : (1) A  director        need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected        from a person of his  knowledge  and experience.   A director of a  Life  Insurance Company for instance, does not guarantee        that he  has  the  skill  of an  actuary  or  of  a physician.  In the words of Lindley M.R.;        ‘If Directors act within their powers, if they act with such care as is reasonably to be expected from  them, having regard to  their  knowledge and  experience, and if they act honestly        for the  benefit  of the Company  they  represent, they discharge both their equitable as well as their  legal  duty to  the  Company’  (Lagunas Nitrate Co.  Vs.        Lagunas Syndicate(1899)2 Ch. 392, 435).  It is perhaps only another 385 way      of stating the same proposition  to say  that        Directors are not liable  for  more errors  of  judgment. (2) A  Director  is        not bound  to        give continuous  attention  to  the affairs of his Company.  His duties are of  an intermittent   nature  to        be   performed   at periodical board meetings; and at meetings  of any committee of the    board upon which  he happens  to  be placed.  He is  not,  however, bound  to attend all such meetings, though  he ought    to    attend   whenever,          in    the circumstances, he is reasonably able to do so. (3)  In  respect of all  duties  that,  having regard to the exigencies of business, and        the articles of association, may properly be        left to some  other  official, a director is,  in the   absence   of  grounds   for         suspicion, justified in trusting that official to perform such duties honestly”.

It must, however, be remembered that these remarks were made in  the  context  of a case in which  the  honestly  of  the conduct of the Directors had not been questioned at all. In  Dovey Vs.  Cory,(1) which was, also cited, the  question considered  by the, House of Lords was whether  a  Director, though,  in  fact innocent of any complicity in  fraud,  was liable   to  the  Company  for  negligence  in  not   having discovered  the  fraud  perpetrated  by  others.   In   that context, Lord Halsbury L.C.   bad observed as follows: “It  is  obvious if there is such a  duty  of detecting frauds it must render anything        like an    intelligent         devolution’   of    labour impossible..  . . . I cannot think it  can  be expected        of  a  Director that  he  should  be watching        either the inferior officers of  the bank or verifying the   calculations of  the auditor  himself. The business of        life  could not go on if people could not trust those        who are  put        into  a position of  trust  for  the express  purpose        of attending to  details  of management”. In this very case, Lord Davey said : “I  think the respondent (Cory) was  bound  to give  h  is  attention to        and  exercise,  his judgment        as a man of business on the  matters which  were  brought before the board  at        the meetings        which  he attended, and  it  is  not proved  that he did not do so. But I think  he was  entitled  to        rely  upon  the   judgment, information,  and advice of the  Chairman        and general  manager,        as  to   whose   integrity, skill, and competence he had no reason      for suspicion”. (1)  [1901] A.C. 477. 386

In Re : Danham & Co.,(1) a Director was held not liable  for the   fraud  of  his  Co-Directors  in  issuing  false   and fraudulent  reports and balance sheets.  But, even  in  this case, it was found that the books of accounts of the Company had been properly kept and duly audited so that the Director concerned had no reason for suspecting fraud and was  misled “by  reason  of the extraordinary powers  conferred  by  the Articles upon the Chairman”. In  Palmer’s “Company Law” (21st Edn. 1968 p. 575), after  a citation  of  the three cases mentioned above, we  find  the comment “It  is  doubtful whether, if   similar  facts arose  today,  the court would decide  in        the same  manner,  because now a days        the  courts take  a  stricter        view of  the  duties  of  a director than they took some twenty-five years ago”. It  is certainly a question of fact, to be  determined  upon the evidence in each case, whether a Director, alleged to be liable  for  misfeasance, had acted reasonably  as  well  as honestly  and  with due diligence, so that he could  not  be held  liable  for conniving at  fraud  and  misappropriation which  takes place. A Director may be shown to be so  placed and  to  have  been  so  closely  and  so  long   associated personally  with the management of the Company that he  will be deemed to be not merely cognizant of but liable for fraud in  the conduct of the business of a Company even though  no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to  everyone whoexamines the affairs of the Company even superficially. If  he  does so he could be held liable for  dereliction  of duties  undertaken  by him and compelled to  make  good  the losses incurred by the Company due to his neglect even if he is not shown to be guilty of participating in the commission of  fraud.  It  is enough if his negligence  is  of  such  a character as to enable frauds to be committed     and losses thereby incurred by the Company.

 

In  the case before us, strong reliance has been placed,  on behalf  of  the Directors, on articles 109 and  118  of  the Articles of Association which read as follows : “Duties of the Managing Director. (1)  [1883] 25 Ch.  Divn. 752. 387 109  (a) The Managing Director, shall  out  of the  money  received by the Company  make        all necessary         and   proper   disbursements,   in carrying        on the business of the Company,  and shall cause proper accounts to be kept of        all transactions of the Company and shall once  in every  year, settle and adjust  such  accounts with the Board and Auditors and shall make out the Balance Sheet and Profit and loss  account and  all the returns, and statements  required by the Acts. to be audited and signed. Appointment of Managing Director. (b)   The        Directors  may from  time  to  time appoint  any  one

from  their  body  to   the Managing Director of the Company, either for a fixed period, or without any limitation as  to the  period  for        which he  is  to  hold  such office, on  such  terms,   provisions,   and conditions  as to remuneration, management  of the   Company’s  business        and   affairs   and removal.        which  may be mutually  agreed  upon between the  Directors.  and  the   Managing Director.” “Power to appoint Committee and to delegate. 118.  The Directors may delegate any of  their powers to committees consisting of such member or  members of their body as they        think  fit. Any committee so formed shall, in the exercise of  the  powers so delegated, conform  to        any regulations  that        may from time to  time,  be imposed upon it by the Directors”.

 

But,  despite  these  articles and the,  power  of  attorney executed  in  favour of the Managing Director,  article  125 gave the Directors atleast supervisory powers of management. The  Managing Director S. K. Semant, who had tried to  prove that it was the Board of Directors which really and actually conducted the affairs of the Company and that he was  merely a tool, had relied on this article which reads as follows : “Powers of Directors. 124.  The        Management of the business  of  the Company shall be vested in the Directors,        who in  addition to the powers and authorities  by these   presents         or   otherwise    expressly conferred        upon  them, may exercise  all  such powers  and do all such acts, and,  things  as may  be exercised or done by the        Company  and are not here- 388 by   or  by  statute  expressly  directed         or required        to  be  exercised  or  done  by  the Company in  general  meeting,  but   subject nevertheless   to         the  provisions   of   the statutes,        and  of the presents, and  to  such regulations  being not inconsistent  with        the aforesaid provisions as may from time to        time be  made        by the Company in  General  Meeting; Provided        that  no regulation  so  made  shall invalidate  any  prior act  of  the  Directors which would have been valid if such regulation had not been made”.

 

Upon  the facts examined by the learned Company  Judge  very fully and less fully by the Division Bench and the  findings recorded  thereon,  it is clear to us  :that,  although  the Managing  Director was conducting the day to day affairs  of the  Company and must, therefore, be held responsible for  a greater  share of losses incurred due to  misappropriations, dishonesty,  and misuse of managerial powers, yet,  his  Co- Directors  could not possibly be ignorant of the  nature  of such  dealings  and  activities of  the  employees  and  the Managing  Director simply because they had executed a  power of attorney in favour of the Managing Director.  The Company Judge, relying upon observations in Overend & Gurney Co.  v. Gibb(1) had held that : “The Directors were cognizant of circumstances of such a character, so plain and so manifest, that  no        men  with  any  ordinary  degree  of prudence,        acting on their own  behalf,  would have  conducted themselves in the        manner  the Directors of this Company have done”. The proved conduct of the founder

Directors was such that an inference  of their complicity in concealing the true  state of  affairs  from depositors, presumably because  they  were themselves benefitting from it, could not be avoided. The  learned  Company  Judge had rejected the  plea  of  the Directors  that they had acted both honestly and  reasonably in the performance of their duties. The learned Company Judge had observed: “It   has        been  argued  on  behalf   of   the Liquidator,  and        suggestions have  also  been made  to the Directors when they were  in        the witness box, that they did not take  immediate steps to remove dishonest members of the staff from  service and to set right things  because they  were  afraid  of  their  own   dishonest conduct being exposed by the staff members  if they persisted in taking action against  them. Two  circumstances relied upon in        support  of this argument are that in spite of promises (1)   L.R. 5 H..L. 480. 389 made  to the Reserve Bank,  no  reconciliation statements were got prepared for fear that any such reconciliation would bring to light false entries in  account  books.   Secondly,

it appears that one R. P. Joshi was appointed  as Manager  or Chief Officer but  unceremoniously removed from  service  shortly   after   his appointment  because with a view to set  right matters  he started taking steps        which  might have  brought to light several  irregularities in   the        loan  accounts  of   the   Directors themselves. So  far  as reconciliation is  concerned.        the position         appears  to  have  been  that   the discrepancy   in        bank  accounts   could   not possibly        be, explained by cheques,  bills  or other   instruments     instransit.      The discrepancy, as it turned out, was a result of making  false entries and making        unauthorised advances        out  of the  cash.   The  subsequent taking of loan documents was the only type  of reconciliation that was possible. That  R.        P. Joshi was  removed  from  service shortly  after  his appointment  is  admitted. The reason given is that his behaviour towards the customers was found to be not quite  good. But  it has been established by evidence        that the  supervision        of his  conduct  during  the initial period of probation was entrusted to a committee        of Directors of whom Tendolkar  was one.  Tendolkar denied that he was a member of that committee.  But Kalghatgi in his evidence stated  that  Tendolkar was one  of  them        but declined        to admit that he also was  a  member thereof.         It  has  been  possible  for  these Directors        to give these answers  because  the record in the rough minutes books relating  to the  appointment        of  this  Committee  is  not signed  by  any of the Directors.

 

But  I  am satisfied on the evidence that there was        such a        committee.  The disinclination on the  part of  these        Directors to admit that  they  were members  of  the said committee leads  to        the conclusion  that they do not wish directly  to be  associated with the decision to  terminate R.  P.  Joshi’s  service,        which  lands   some support  to  the suggestion on behalf  of        the Liquidator  that        the principal  or  operative reason  for  the        said decision  was  that  he started  looking        into  loan  account  of  the Directors        and pointing out irregularities  in them”. He went on to observe “As I have already stated, the making of loans and’  advances  to the Directors        may  not  in itself  be  irregular or        dishonest,  provided that  no difference is made in the  matter  of procedure and scrutiny between the loans to 390 Directors        and  loans to  other  persons.   If (certain        preferences or concessions are  made in  favour  of  the  Directors  including        the omission         to  adopt  proper   procedure   and scrutiny, it is a legitimate criticism to make that the Directors have taken undue  advantage of   their   position   as   Directors   which undoubtedly  is a departure from the  standard of care and rectitude expected of them.  As  I have  already observed, if men at the top        are guilty of departure from proper conduct,        they place themselves in a position which makes  it difficult,  if  not impossible,  for  them  to correct their   subordinates.    There   is, therefore,  force        in the argument  that  this particular situation  in which, the Directors found  themselves might be one of the  reasons for not taking stern action against  dishonest members  of the staff.  This  circumstance  is enough,  in  my  opinion,        to  disentitle  the Directors        from saying that their  only  fault was honest error of judgment or that they have acted reasonably in ;the circumstances of this case. I        hold  therefore that the  Directors,  other than  the Managing Director, are        also  liable for the loss because they must be held to have failed in their duty of providing for good and efficient management of affairs of the Company and  because they cannot in the  circumstances claim  that  they were entitled to  rely        upon either The Managing Director or any members of the supervisor staff”. The learned Company judge as well as the Division Bench  had referred to the difficulties encountered in determining  the actual  total,  loss to the Company because of want  of  any reliable statement of account.  This state of the records of the  Bank was itself evidence of breach of their  duties  by the Managing Director and the Board of Directors to see that the  business  of  the Bank  was  honestly  and  efficiently conducted. The  learned Company Judge, after considering all the  items of  proved  loss  to  the  Company  and  making  appropriate deductions  for  assets which could be  considered  even  of doubtful  value,  had  found that at least  a  loss  of  Rs. 2,50,000  was  caused by the mismanagement of  the  Managing Director  and the Co-Directors.  The learned  Company  Judge had  ordered the Managing Director as well as the  Directors Tendolkar   and  Ajgaonkar  and  Porwal  and  Kalghatgi   to contribute jointly and severally a sum of Rs. 2,50,000  with interest at 6 per cent per annum from the date of his  order ,on  8-11-1963 until payment, to the assets of the  Company, but .the learned Judge limited the liabilities of Porwal and Kalghatgi  to Rs. 15,000 each, provided they paid  this  sum within three months of his order. 391

The  Division Bench found the estimate of the Company  Judge about  the  total loss due to mismanagement to be  not  only reasonable,  but record findings showing that loss  incurred under  the two heads of loss for the whole period was  more. Speaking about the loss shown by proved shortage of cash and manipulation of balances with the other banks and the extent of the liability of the Managing Director for these it  said : “Though  the total loss to the Bank under        the aforesaid        two  heads (shortage  of  cash  and manipulation  of’ balances with  other  Banks) may be estimated at Rs. 2,65,000, he is liable for  only that portion of the said loss  which occurred after he became the Managing Director in  July, 1946.  Unfortunately,  neither        the, Official Liquidator nor the witnesses focussed the  inattention to apportionment of the        loss between the period, prior to July 1946 and the period subsequent to July 1946″. It  rejected the plea of the Managing Director that  he  had executed’ promissory notes in favour of the Bank for Rs’   5 3,000   and  Rs.  58,500,  on  19-11-1954,   and   3-12-1954 respectively, under some pressure, threat, or coercion.   It relied upon a statement in writing of the Managing  Director (A.  25)  addressed to the Special Officer on  8-12-1954  in which  the  amounts of the two pronotes totalling  upto  Rs. 1,11,500   to   the  Bank  constituted  an   admission   and undertaking  to repay atleast this amount to the  Bank.   It observed  that even on 8-12-1954 the Managing  Director  did not deny his liability to pay this amount.  It then held.: ”        Hence,  this  can safely be  taken  as  his liability        for  his negligence and  breach  of duty.   Rs. 14,000 has been realised from        him by  the sale of his car and truck and  another sum  of  Rs. 24,000 has been realised  by        the sale-deed        executed  by him in favour  of  the Bank conveying his house.        Deducting these two sums,  he        is still liable for a  sum  of  Rs. 73,500.  Thus, his liability to contribute  to the assets of the Company can safely be  fixed at  Rs.  73,500 though it is likely  that        the extent  of loss resulting from his  negligence and  breach of duty as Managing  Director,  is much  larger.   He  is  also  liable  to         pay interest        on this sum of Rs. 73,500 at  6  per cent  per annum from the order of the  learned Company Judge till payment”. The Division Bench, after

holding that the Managing Director S.  K.  Samant was liable to contribute atleast  Rs.  73,500 more with interest, actually reduced the liability of S.  K. Samant individually to Rs. 58,500 and of Directors Tendolkar and Ajgaonker 392 jointly  and severally to Rs. 50,000 only.  After  that,  it added that, out of the sum of Rs. 5 8′ 500 payable initially ‘by  S.  K.  Samant, the  liabilities  of  the  Co-Directors Tendolkar and Ajgaonkar would be, joint and several with the Managing  Director S. K. Samant to the extent of Rs.  50,000 only.  This meant that the joint and several liabilities  of Ajgaonkar with the Managing Director S. K. Samant would only come into play if S. K. Samant failed to discharge his,  own liability  to the extent of Rs. 58,500.  The result  of  the orders  ,of  the Division Bench was that the  amount  to  be repaid  to  the Bank by the Managing Director and  the  four Directors totalled up to Rs. 1,23,500.  This total liability was  determined after deducting Rs. 24,000 already  realised from the sale of the house and Rs. 14,000 from the sale of a car and truck of S. K. Samant. It was contended before us that the Division Bench had erred in  reducing the total liability of the Board  of  Directors from  Rs. 2,50,000 to Rs. 1,61,500 (i.e. Rs.  1,23,500  plus Rs.  38,000)  ,on a rather arbitrary view that this  is  all that could be definitely proved to be the total loss to  the Company  due to the misfeasance ,of the Board, as, a  whole, after all the Directors had clear and definite notice of the irregularities committed in the management of the Bank  from the Reserve Bank’s first report, although the Division Bench had  itself  held that the total loss covered ‘by  the  ,two heads  of  ‘shortage of cash and ‘manipulation  of  balances with other banks’ over the whole period of management by the Board  was Rs. 2,6-5,000.  The, Division Bench confined  the liabilities  of  the whole Board of  Directors,  apart  from those  of  the Managing Director individually, to  only  Rs. 65,000  “proved to have taken place subsequent to March  195 1, when they became aware of Ex.  A1 the first report of the Reserve Bank”‘.

The  learned  Company Judge had  separately  considered  the cases  of Porwal, who joined as Director in 1951  after  the first Inspection Report by the Reserve Bank had already been given, and of R. N. Kalghatgi, who became a Director only in July  1953,  on  the  death of  his  elder  brother  G.   N. Kalghatgi.  They had pleaded that they were ignorant of  the malpractices  and  misappropriations which had  taken  place before  they joined the, Board ,of Directors.   The  Company Judge had noted that no suggestion of dishonest conduct  had been  made against them and that they had not  borrowed  any money  from the Company.  Nevertheless, as they  were  fixed with the knowledge of the contents of the several reports of the Reserve Bank, mentioned above, they were held liable  to contribute  Rs. 15,000 each, as mentioned above,  for  their negligence  and breach of duty to provide and ensure  honest and  efficient management of the affairs of the  Bank.   The Division’  Bench had, in view of the short period for  which they  had functioned on the delinquent Board  of  Directors, reduced the contributions to be made by R. W. Porwal and  H. N. Kalghatgi to 393 Rs. 10,000 and Rs. 5,000 respectively with interest at 6 per cent per annum from 8-11-1963, the date of the order of  the Company Judge, until the date of payment.  Having regard  to the   mitigating  circumstances,  and,   particularly,   the shortness of the period for which these two Directors served on  the  delinquent Board of Directors, with the  nature  of activities  of  which  they could  not  possibly  have  been ignorant after the reports of the Reserve, Bank, we consider the orders of the Division Bench reducing the liabilities of these two Directors to be just and reasonable.  It may  also be  mentioned here that Porwal and Kalghatgi appear to  have accepted  the justice of assessment of their liabilities  as they  had  not appealed against the order  of  the  Division Bench so that no question of any further reduction of  their liabilities arise before us.

While  we  think that the Division Bench  was  justified  in placing a larger share of the burden of contribution on  the Managing Director, upon the facts and circumstances of  this case, it had manifestly erred in passing an order which  not only reduced the total liability of the Directors, but  had, without   giving  any  good  reason  for  it,  reduced   the individual remaining liability of S. K. Samant to Rs. 5  8,5 00  only.  It had itself held, that, even according  to  the admission  of  the Managing Director, he was liable  to  the extent  of  Rs. 1, 1 1, 5 00 and that, as this  was  a  fair measure  of  the extent of the loss caused by  the  Managing Director,  the  amount still payable by him was  Rs.  73,500 (i.e.  after  deducting Rs. 38,000 for the  amounts  already realised from Samant). We  may here indicate the nature of the evidence,  discussed at  length by

the learned Company Judge, on  which  findings relating  to  mismanagement by the Board of  Directors  were based.   Shri A. L. Bhatia (P.W. 1), Banking Officer of  the Reserve  Bank of India, had duly proved facts  disclosed  in the reports, dated 7-3-1951(Al), dated 5-3-1953 (A2),  dated 13-9-1954  (A3), and dated 13-1-1955 (A4), which  were  made after carrying out inspections of the records disclosing the manner in which the business of the Bank was conducted.   He had  been  fully  cross-examined  on  the  contents  of  the reports.   Shri B. D. Joshi, Chartered Accountant  (PW.  2), who  stated that he had been appointed to examine and  audit the  accounts of the Company by the Board of  Directors,  at the  instance of the CID, for the period from 1948  onwards, had proved the contents of his report (A9) dated  10-5-1957. He  was  also  thoroughly cross-examined on  behalf  of  the Directors.  Shri K. Y. Wagle (PW. 3), Auditor, was  examined by the Official Liquidator to prove and support the contents of his report (A. 21) dated 16-2-1955.  Shri V. R.  Kotbagi. Advocate (PW. 4) who, as indicated above, had been appointed as the Special Officer, under Section 37 of the Act, and who func- 394 tioned from 7-12-1954 to 4-4-1955 in that capacity, had duly proved  and  was fully cross-examined about  the  admissions made in writing (Ex.  A. 25) by S. K. Samant.  No  objection had   been  taken  on  behalf  of  the  Directors   to   the admissibility  of  any of the reports  or  other  documents, exhibited on behalf of the Official Liquidator. In  addition  to  the considerable  evidence  given  by  the witnesses  mentioned  above, the learned Company  Judge,  in order  to  give  the fullest  possible  opportunity  to  the Directors  to meet the prima-facia case of  misfeasance,  by misconducting  the  affairs of the Bank in  a  manner  which could  not  be honest and which caused heavy losses  to  the Bank, had ordered the Directors, who had produced no witness in   defence,  to  appear  and  give  evidence   in   court, particularly ‘because the defence of the Directors seemed to the  learned Judge to be proceeding on the wrong  assumption that  the whole burden of proof rested upon the  liquidator. The  learned  Judge,  in this connection,  referred  to  the provisions of Section 45H of the Act which laid down: “45H.    Special  provisions   for   assessing damages against delinquent directors, etc.- (1).  Where an application is made to the High Court   under

 

Section  235  of the   Indian Companies        Act, 1913 (7 of 1913), against  any promoter, director,  manager,  liquidator  or officer of a banking company for repayment  or restoration  of any money or property and    the applicant makes out a prima facie case against such person to repay and restore the money  or property    unless  he  proves that  he  is  not liable  to, make the repayment or        restoration either wholly or in part : Provided    that  where such an  order  is  made jointly against two or more such persons, they shall be jointly and severally liable to   make the  repayment or restoration of the money  or property. (2)   Where an application is made to the High Court   under

Section  235  of the   Indian Companies Act, 1913 (7 of 1913), and the        High Court  has reason to believe that        a  property belongs  ;to any promotor, Director,  Manager, liquidator or officer of the banking  Company, person  as an ostensible owner, then the        High Court  may, at any time, whether the  property stands  in  the name of such  person,  or        any other whether before or after making an  order under sub-section (1) direct the attachment of such property, or such portion thereof, as  it thinks fit and the property so attached  shall remain   subject        to  attachment  unless   the ostensible owner can prove to the satisfaction of the High Court that he is the 395

real  owner and the provisions of the Code  of Civil   Procedure,  1908  (Act  5  of   1908), relating        to attachment of property shall,  as far as may be, apply to such attachment”. The  Directors, apparently unwilling to appear in  evidence, had  questioned  the power of the learned Company  Judge  to order them to appear and give evidence in open Court.  Their appeal  against  the  order  for  the  examination  of   the Directors  had been dismissed.  There was no further  appeal against that order which became binding on the parties.  The Division  Bench,  however,  to support  its  view  that  the Directors other than the Managing Director could not be made liable  before  the  Reserve  Bank  report  came  to   their knowledge  in  March  195 1, observed that a  good  deal  of evidence,  which  may have been available  if  the  official Liquidator  had  asked  for the public  examination  of  the Directors under Section 45G of the Act, could not be  placed before the Court.  The Division Bench had also held that the allegations  of improper conduct by the Directors,  in  not- exercising  proper  supervision, did not  form  the  subject matter  of  any separate issue or point  formulated  by  the Company  Judge.  Furthermore, the Division Bench  held  that allegations of improper conduct on the part of Directors, in obtaining   excessive  loans  for  themselves’,  which   the Directors were not called upon to meet, should be ignored in determining  the liability of the Directors for making  good loss  due  to  shortage of cash and  manipulation  of  ‘bank balances.   It had, nevertheless, held the Directors  liable inasmuch  as they could not “totally abdicate  their  powers and  functions and divest themselves of  responsibility  for proper  management of the Company”.  The Division Bench  had also commented upon the vagueness of allegations against the Directors individually.

We  find, as the judgment of the learned Company Judge  also shows,  that each allegation in the misfeasance  application was  supported by sufficient particulars and  evidence.   In paragraph  12  of  the  application,  it  was  stated  that, although the books of the Bank showed a cash balance of  Rs. 1,50,471-15-7, yet, the actual cash found on 26-11-1954 when the Bank closed business was Rs. 645.04. In addition,  there was a cash deficit of Rs. 8773-15-8 revealed in the  earlier report, so that the total deficit of cash was Rs.  1,58,600- 14-1 1. In paragraph 13, the unexplained difference  between the  accounts at the Branches, with particulars given,  was shown  to  be Rs. 1,44,500.  In paragraph  14,  ‘details  of unreconciled  differences  in  accounts  with  other  Banks, referred  to in the Reserve Bank report of  13-9-1954,  were given.   Paragraph 15 gave the details of allotment  of  new shares to the Directors and their friends without payment of any  cash  whatsoever for these shares,  in  1946,  although fictitious entries were made to show payments -L796Sup. C.I./73 396

by the Chairman by G. N. Kalghatgi, and by L. S.  Ajgaonkar. It  was stated here that the Directors were fully  aware  of the  fictitious  nature of these entries.  To  explain  them away, debits were made to a suspense account for the purpose of preparing the balance sheet ending on 31-12-1947.  It was not only alleged but shown that the Directors were  debarred by   Article  147  of  the  Articles  of  Association   from transferring  unclaimed  dividends  to any  funds  or  other accounts before the expiry of a year and that this had  been done  to cover up the fictitious entries.  It  was  asserted there that the Auditor’s report had also concealed the true, facts  and that this was a deliberately fraudulent  conduct. Paragraph 17 of the application gave a list of amounts shown to  have been withdrawn by the Directors and  their  friends within  a  week before the closing of its  business  by  the Bank.   In  earlier paragraphs of the petition,  details  of reports  of Shri K. Y. Wagle, dated 16-2-1955, and of B.  D. Joshi, given on 10-5-1957, and the explanations given by the Directors, were mentioned.  The reports of the Reserve  Bank of India were also mentioned in the application. The  Official  Liquidator  could  not  possibly  have   done anything  more  in his application than to rely  on  reports available  to  him  and to prove the  correctness  of  their contents  by producing, as witnesses, those individuals  who had  conducted the investigations and made the reports.   He was  not personally aware of the affairs of the Bank  before he was appointed to wind up the Company.  We think that,  in the  circumstances of the case, sufficient  particulars  had been   furnished  in  the  misfeasance   application.    The Directors  not  only  had  an  opportunity  of  meeting  the allegations  contained  in the petition, but they  also  had knowledge of the material brought on record afterwards. It is true that there was no separate issue on the extent of the liability of the Managing Director and the Directors due to neglect in exercising proper control and supervision over officers  of the Bank.  But, we think that the  gravemen  of the  charges  against the Directors was  more  serious  than that.   The  learned Company Judge had framed  three  issues apart from two on the preliminary  questions disposed of  by us already.  These three issues were framed as follows: “1  Whether  the Official  Liquidator  proves that  on        the  date  the  Company  closed  its business, viz., on  27-11-1954 there was shortage in cash        and if so, in what sum? 2, Whether the  Liquidator proves that loss was occasioned to the Company by  misapplication of cash  or funds shown  to have  been  credited to the  accounts  of        the Company  with  the  other        Banks  but  not  so actually credited? 397 3.

 

Whether   and  if  so,  which   of  the respondents is or are liable to make good  the shortage        in cash and loss occasioned to.  the Company; if found liable, are the respondents so   liable  jointly  and severally  and   if severally, to what extent in the case of        each of them ?”. The third issue involved determination of liabilities  under the  various heads on which evidence was led by both  sides. The  observations  of the learned Company  Judge  about  the failure of the Board of Directors to exercise proper control over  the  activities  of the employees and  the  effect  of setting  bad examples before the employees were made  as  an answer  to the attempts made by the Directors themselves  to shift  responsibility  for  the  losses  incurred,  due   to dishonest  dealings  which  were not  questioned,  upon  the shoulders of the employees of the Bank.  The want of  proper supervision was not, as is clear from the issues, a separate or   easily  separable  head  of  liability.   No   separate liability   for  it  was  determined.   The  two  heads   of liability, covered by the first two issues, were wide enough to cover the. various causes of shortage and  misapplication of  funds and modes of falsification of accounts  and  other documents  to  conceal the true state of  affairs  left  for elucidation  by  evidence.  The remainder  was,  apparently, meant to be covered by the third issue.

We may point out that the report-cum-application made by the Official Liquidator for proceedings’ against the  delinquent Directors did record the Liquidator’s opinion that loss  had been caused to the Company, since its formation, by the acts and omission of the Directors, so that the High Court  could order  the production of the Directors for such  examination as the High Court considered fit and proper.  The High Court did  make  an  order for their examination  in  Court.   The Directors  had not only had an opportunity of showing  cause why  they should not be so examined but had  questioned  the order  for their examination by an appeal which failed.   It is  immaterial  that  the  particular  examination  of   the Directors  was not described in the orders made  as  “public examination” within the meaning of Section 45 G of the Act. We  think that the Division Bench had erred inasmuch  as  it proceeded on the assumption that the Liquidator has to  make “a  specific or separate application for public  examination of  Directors.  All that Section 45G of the Act requires  is the.  submission  of  a report showing that  loss  has  been caused to the Banking Company in the opinion of the Official Liquidator.  After that, it is the opinion of the Court,  on the  question  whether  the  Director  concerned  should  be publicly examined, that matters.  In the case before us, the Company Judge was certainly of opinion that the interests of justice required the examination of the Directors which  had been  ordered.  We think that the Division, Bench had  erred in 398 holding  that the Directors had not had due  opportunity  of meeting allegations made against them. It  is true that the issues were rather broadly  framed  and could  have been fuller.  But, after considering the  nature of  charges and their particulars, the cases set up  by  the Directors  in defence, the evidence led, and the  very  full and  fair opportunities given by the learned Company  Judges to  the  Directors to defend themselves, we  are  unable  to agree with the Division Bench that the Directors were in any way handicapped by alleged vagueness of charges or a failure to  frame issues more only or that a good deal  of  evidence led could be ignored for these reasons.  It was pointed  out by  this  Court, in Negubai Ammal & Ors. v. B. Shama  Rao  & Ors.,(1) with regard to the rule that evidence should not be looked  into at’ all on matters neither pleaded nor  put  in issue :

 

“The true scope of this rule is that  evidence let in on issues on which the parties actually went   to        trial  should  not  be   made   the foundation   for        decision  of   another   and different issue, which was not present to        the minds of the parties and on which they had  no opportunity  of adducing evidence;  But,        that rule  has        no  application  to  a  case  where parties  go  to trial with  knowledge  that  a particular  question  is in issue,  though  no specific        issue  has been framed  thereon  and adduce evidence relating thereto.” We think that the learned Company Judge was right in  coming to the conclusion, on the evidence on record, that the  pro- moter  or  founder  Directors  who  were  there  since   the inception  of the Bank, were cognizant of the nature of  the dealings  by the Managing Director and the officers  of  the Bank.   The  evidence showed that they had  been  discussing matters  relating  to the management of the Company  at  the meetings  of  the  Board  where  items  of  “policy”,  which benefited  the Directors at the expense of  the  depositors, must have been discussed.  They could not have been ignorant of  the  fact that the Account  Books  contained  fictitious entries  showing payments for shares by them when they’  had not  actually paid for them.  Nor could they be so  innocent as’ ,not to know of the window dressing and presentation  of false  balance  sheets so as to conceal the  true  state  of affairs from the depositors for years. Considerable  importance  was ‘attached, on  behalf  of  the Directors,  to  the following statement  in  the  Inspection report (Ex.  A3) dated 27-8-1954 under Section 35(1) of  the Act  ;’The cash in hand at the Head office was  verified  on 17th  May  1954, and it was found that it was short  to  the extent of Rs. 53-15-9″.  Apparently, this statement was made on the strength of entries (1)  [1956] S.C.R. 451 at 461. 399

 

in  the  account  which were not really  reliable.   If  the statement  could  be  correct,  it  would  only  mean   that practically  whole of the total deficit in cash at the  bank shown  as  Rs.  1,73,000 in the report of  Shri  Wagle  (Ex. A.21)  dated 26-11-1954 represented  misappropriation  which took  place between May and November, 1954.  The  report  of Shri  Wagle (Ex.  A.21) also showed that when the  Auditor’s clerk counted the cash on 24-3-1954, it was Rs.  15,712-13-2 whereas  the  Day Book written thereafter showed  a  closing ‘balance  of Rs. 3,07,555-2-10.  It appears that cooking  up of  accounts and presentation of false balance  sheets  were the usual practice of the Bank. Any  Director conscious of his managerial  responsibilities, who had cared to examine the affairs of the Bank, could  not have  failed  to find out what was really happening  in  the Bank.  The fact that these practices were tolerated for such a  long period without any check by the Board  of  Directors indicates  that the promoter Directors must be  participants in the, benefits of widespread misappropriation even  though they  may  have so operated as not to leave  any  traces  of actual misappropriation by them in the records of the  Bank. The  circumstantial evidence against them is  too  damaging, considerable, and unanswered.

 

The  result is that we think that the learned Company  Judge was  correct  in  assessing’ the total  liability  of  those members  of  the  Board of Directors  who  were  founder  or promoter  Directors.  We also think that the Division  Bench correctly  came  to  the conclusion that it  was  _just  and proper  to  place  a greater share  of  liability  upon  the Managing  Director.   We, however, think that  the  Division Bench  erred  in  reducing the  liability  of  the  Managing Director  and the Directors as a whole.  We think  that  the remaining  liability  of the Managing Director  to  pay  Rs. 73,500 with interest at six per cent per annum from the date of the order of the Company Judge until payment is a correct measure  of the initial separate liability of  the  Managing Director S. K. Samant as held by the Division Bench.  But in case  this amount cannot be realised from.  S. K. Samant  in the  first instance, the remainder should become  the  joint and several liability of the remaining two Directors  before the  Company  Judge,  namely,  P. A.  Tendolkar  and  L.  S. Ajgaonkar. As  we concur with the assessment of the total liability  of the  delinquent  Board of Directors at Rs. 2,50,000  by  the learned Company Judge, with which the Division Bench had not differed.  we  think that this should be  the  total  amount which  the Directors, who were alive when the Company  Judge passed his order, are liable to contribute to the assets  of the Company. 400 The  result  is  that we ‘allow the  three  appeals  of  the Liquidator bearing Civil Appeal Nos. 195-197 of 1967 and set aside  the  orders  of the Division  Bench  determining  the liabilities  of  S. K. Samant and P.A. Tendolkar and  L.  S. Ajgaonkar.   We  substitute the following  determination  of their respective liabilities and directions : (1)   The        total remaining liabilities of  the Managing        Director S. K. Samant and  Directors P.  A.  Tendolkar and L. S. Ajgaonkar,  R.  K. Porwal and R. N. Kalghatgi are held to be        Rs. 2,50,000        minus Rs. 38,000 which  has  already been  realised  by the sale of a house  and  a truck  and car of S. K. Samant that is to        say Rs. 2,12,000. (2)   We        hold that as, out of this  remaining sum of Rs. 2,12,000 the liabilities of  Porwal and  Kalghatgi have been correctly  determined and  restricted  to Rs. 10,000 and  Rs.  5,000 respectively,  and discharged,  these  amounts will  be        deducted  from  the  amount  to   be contributed  by the remaining three  Directors S. K. Samant, P. A. Tendolkar, and  Ajgaonkar, and  no further contribution will be  demanded from  Porwal  and Kalkhatgi who  have  already paid  these  amounts.   Thus,  the   remaining further  liability of S. K. Samant and  P.  A. Tendolkar        and  Ajgaonkar is  reduced  to  Rs. 1,97,000. (3)  Out        of this remaining liability  of  Rs. 1,97,000        the initially separate liability  of Managing   Director S. K. Samant is Rs.  73,500 together        with  interest at six per  cent  per annum  from  the        date of  the  order  of  the learned Company Judge until payment. (4)   The        still remaining liability  ;to  the extent  of Rs. 1,23,500 with interest  at   six per cent per annum from the date of the  order of  the  Company        Judge, up  to  the  date  of payment will  be  the  joint   and   several liability        of  the  Managing  Director  S.  K. Samant   and  the        Directors   Tendolkar   and Ajgaonkar. (5)   The        Directors Tendolkar  and  Ajgaonkar are held jointly and severally liable in        case the   amount,  if        any,  which,  out  of   the initially        separate liability of the  Managing Director        S.  K. Samant, that is  to  say  Rs. 73,500, cannot be recovered from S. K.  Samant only. (6)   The        case  is remanded  to  the  learned Company Judge for passing such orders  against the  Managing  Director  Samant  and  Director Ajgaonkar, under

 

401 Section  235  of the Act of 1913, as  may  be needed   for   discharging   the liabilities determined above, but no, such orders will  be passed  against the heirs and legal  represen- tatives  of deceased Director P. A.  Tendolkar under Section 235 of the Act of 1913, although their liabilities are declared.  The  Official Liquidator  and L. S. Ajgaonkar are,  however, left  free  to seek such        other  remedies,  if necessary,  by appropriate  proceedings  under the law, against the estate or assets of P. A. Tendolkar, as may be open to them.

The separate appeal (Civil Appeal) No. 300 of 1967 by L.   S. Ajgaonkar is hereby dismissed. The separate appeal (Civil Appeal) No. 234 of 1967 of P.   A. Tendolkar, now represented by his heirs, is allowed only. to the  extent that the order passed under Section 235  of  the Act  of   1913 for compelling P. A. Tendolkar to  contribute his share is   withdrawn  ‘as it has become infructuous  and it is dismissed as regards the rest of the claim. Costs  of the appeals in this Court shall be payable by  all the   Respondents   with   the  exception   of   the   legal representatives of P. A. Tendolkar.  There will be no  order as  to  costs in civil Appeal No. 234 of 1967.  One  set  of hearing fee. V.P.S. 402

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