Madras High Court
M.A. Malik vs V.S. Thiruvengadaswami Mudaliar on 23 August, 1949
Equivalent citations: (1949)2MLJ604
JUDGMENT Horwill, J.
1. In misfeasance proceedings taken by the liquidator during the course of a winding up of a company of which the appellant was a Director for a year or so, this Court on the Original Side directed that the appellant do pay the Official Liquidator the sum of Rs. 2,991-14-0 and Rs. 4,866-6-0 being the amounts of loss occasioned in respect of the share brokerage, preliminary expenses and investments in unauthorised banks respectively....
The respondent having taken an assignment of the decree proceeded against the appellant in execution and applied to the Court for his arrest. The question arose whether under Section 51, Civil Procedure Code, the respondent was liable for arrest. He pleaded that he was a pauper and was quite unable to raise the money to discharge the decree. The Court however found that since he was a Director and it was on account of his breach of duty that the loss had been sustained by the company, Clause (c) of the proviso to Section 51 applied, and that the decree is for a sum for which the judgment-debtor was bound in a fiduciary capacity to account.
2. It is not contended by the respondent that a Director is an express trustee of the property of the company; but it has always been held that the relationship between a Director and a member of a company is that of trustee and cestui que trust, and Directors have been described as commercial trustees, quasi trustees, and the like. In Cavendish Bentinck v. Fenn (1887) 12 A.C. 652 at 669, Lord Macnaghten said that the expression " misfeasance " in Section 165 of the Indian Companies Act was not misfeasance in the general sense of the word but as being in the nature of a breach of trust. The learned advocate for the appellant has attempted to draw a distinction between misfeasance, or active wrongdoing, and non-feasance, or mere negligence. One does not find in Section 235 of the Indian Companies Act the word " non-feasance." A Director is under an obligation to assist in the management and supervision of the affairs of the company; and if a breach of his duty to the company results in a loss to the company, he is bound to make compensation to the company in respect of the "misapplication, retainer, misfeasance, or breach of trust". A, failure on the part of a person to do his duty with regard to the property of a company over which he has control by virtue of his being a Director amounts to misfeasance? within the meaning of Section 235 of the Indian Companies Act.
3. Mr. Gopalaswami Iyengar for the appellant has sought to take us through the facts of the case in an attempt to prove to us that the appellant was in no way responsible for the loss that occurred; but we cannot, as the learned District Judge pertinently pointed out, go behind the decree itself. The judgment of this Court also shows that the appellant failed to do his duty.
4. One of the earliest Indian cases that dealt with the duties of a Director towards the members of the company is The New Fleming Spinning and Weaving Co., Ltd. v. Kessowji Naik (1885) I.L.R. 9 Bom. 373 at 394, the learned Judge said:
My conclusion is that, (a) although the directors are not trustees in every sense of the term, they stand in a fiduciary relation towards their shareholders with respect to the funds and the business placed in their charge; (b) It follows that they are liable to be sued for a breach of trust, in case they have not dealt with the property and watched over the business as carefully as a man of ordinary prudence would deal with such property and watch over such business if they were his own.
Again at page 396:
If instead of performing their duty and showing reasonable diligence, the defendants delegated all the control to the agent, and so enabled him to misapply the company's money, they must, on the authority of the rule laid down by Lord Langdale, be held liable for that misapplication.
Ramasami v. Sreeramulu Chetti (1896) I.L.R. 19 Mad. 149 also considered the relationship between a Director and the members of a company. Reference is made therein to certain English cases in which it had been held that the relationship of trustee and cestui que trust subsists between the Directors of Joint Stock Companies and the shareholders, it being held in such cases that misfeasance by a Director was a breach of trust. Even in In re Forest of Dean Coal Mining Co. (1878) 10 Ch. D. 450, relied on by the learned advocate for the appellant, we find at page 453 this passage:
Again, directors are called trustees. They are no doubt trustees of assets which have come into their hands, or which are under their control....
We have not been referred by the learned advocate for the appellant to any case in which it was held that the relationship between a Director and the members of a company is not that of trustee and cestui que trust. Although, as already stated, he is not an express trustee yet he certainly occupies a fiduciary position with regard to the members of the company.
5. It is next argued that even though a Director occupies a fiduciary position in relation to the members of a company, he is not liable to account to them. It seems to us that his liability to account flows from his fiduciary position, which requires him to Hold the property of the company over which he has control for the benefit of the members of the company. If he holds the position of a trustee with regard to the members of the company, it means that the members of the the company can call upon him to account for the property over which he has control on their behalf. This is expressed in the opening sentence of paragraph 533 of Halsbury's Laws of England, Vol. V:
Directors are trustees of the property of the company in their hands or under their control and must account to the company for all such property.
We are therefore satisfied that the learned District Judge was right in holding that an order for arrest could issue against the appellant even if his allegation that he had no money were true.
6. The appeal is dismissed with costs.