Madras High Court
Subbammal Alias Rajammal And Ors. vs The President, The Tenkasi ... on 30 April, 1976
Equivalent citations: AIR 1977 MADRAS 92, (1977) 13 CO-OP LJ 61, (1976) 2 MADLJ460, 1989 MADLW 641
ORDER G. Ramanujam, J.
1. As both the above cases arise out of the same proceedings and involve identical issues, they are dealt with together.
2. An enquiry into the constitution, working and financingc ondition of the Tenkasi Co-operative Urban Bank Limited, hereinafter referred to as the bank, was ordered under Section 65 of the Madras Co-operative Societies Act, 1961 by the Deputy Registrar, Tirunel-veli in his proceedings, dated 22nd November, 1965. A preliminary report of the enquiry officer was submitted on 19th July, 1966 and it showed that there had been misappropriation of the bank's funds. As a follow-up of the said report the Deputy Registrar issued surcharge notices, dated 6th August, 1966, under Section 71 of the Act to one M. Chocka-lingam Pillai the ex-President, and N.T. Pannayar, the ex-Vice-President, and 8 others who were ex-directors of the bank. A surcharge notice was also issued to one R. Ulaganathan, ex-clerk of the bank who was alleged to have misappropriated the funds of the bank. At that stage the bank was superseded and a Special Officer was appointed under Section 72 of the Act by an order of the Joint Registrar, dated 10th September, 1966 In answer to the above surcharge notices issued to them, the ex-directors represented that the enquiry officer had sent only a preliminary report, and that surcharge proceedings could be initiated only after a complete and full report of the enquiry is received. In view of this objection, a revised surcharge notice was issued on 12th December, 1966, after receipt of a complete and full report of enquiry on 29th October, 196% in modification of the earlier surcharge notice, dated 6th August, 1966. In the surcharge proceedings following the said revised notice, dated 12th December, I966, it was found that an amount of Rs. 27,519-13 has been misappropriated during the period from 15th January, I948 to 23rd August, 1966, out of which a sum of Rs. 1,000 was made good by the said Ulaganathan, ex-clerk. However, in view of Section 1(1) which bars recovery of any amount by way of surcharge after a period of six years from the date of any act or omission, the amount misappropriated within six years prior to the notice of surcharge was alone taken into account. The result was the second surcharge notice related only to a sum of Rs. 12,718 referable to the period covering six years preceding the surcharge notice. By his final order dated 19th August, I967 a surcharge order has been passed against the ex-clerk as well as the ex-President, ex-Vice-Presi-dent and the ex-directors holding them jointly, and severally liable for the said sum of Rs. 12,7)8 found to have been misappropriated from the bank's funds.
3. Chockalingam Pillai, the ex-President of the Bank and NT. Pannayar, the ex-Vice-President of the bank, having died pending the surcharge proceedings, their legal representatives filed appeals before the Co-operative Tribunal, Tirunelvcli (District Judge, Tirunelveli). The said appeals have been dismissed on 13th December, 1971. The legal representatives of Chockalingam Pillai, ex-President of the bank have challenged the said decision of the Co-operative Tribunal in the civil revision petition. The legal representatives of the ex-Vice-President, N.T. Pannayar has filed the writ petition questioning the order of the Co-operative Tribunal.
4. The findings of the enquiry officer on the basis of which the surcharge order has been passed against the ex-clerk and ex-directors is that the entire amount covering items 25 to 4O, had been misappropriated by the ex-clerk, that he had also been convicted in a criminal Court for misappropriation of the bank's funds, and that the President and Vice-President and ex-Directors are liable to be surcharged for their carelessness and negligence. The Go-operative Tribunal refers to the evidence of Ulaganathan, ex-clerk who had deposed that he was the only clerk of the bank from 6th June, 1939 to 17th December, 1965, that he was in sole charge of the accounts relating to the surcharged items 26 to 40, that the amounts involved in items 25 to 40 were in (act misappropriated by him and the former Presidents, Somasundaram Pillai and Chockalingam Pillai and the ex-Vice President N.T. Pannayar, that he took only a sum of Rs. 7,000 for his family expenses and that the balance was taken by the Presidents and Vice-Presidents. As against this, Chockalingam Pillai and NT. Pannayar, had denied that they had anything to do with the amount covered by the surcharged items 25 to 40 and had stated that the entire amount had been misappropriated by the clerk, that they had complete faith in the secretary and the clerk Ulaganathan, that the secretary is expected to exercise control over the work of the clerk and that, therefore, they were not in a position to detect the various defalcations made by the clerk till the enquiry initiated under Section 65 revealed the various methods through which he has misappropriated the bank's funds. After going through the evidence and the connected records the Tribunal has specifically found that the entire amount involved has been misappropriated by the ex-clerk, that the ex-President, ex Vice-President and ex-secretary and ex-Directors on account of their negligence have failed to exercise proper control over the clerk Ulaganathan by checking the cash books and the statement of receipts and disbursements-submitted by the clerk at the Board meetings periodically and that, therefore, all of them should be held responsible for the amounts misappropriated by the clerk. Thus ex-Presidents, ex-Vice-President and ex-Directors have been held liable for the surcharge on the ground that they were guilty of negligence in the performance of their duties, particularly their failure to check effectively and properly the cash book daily and the statement of receipts and disbursements submitted by the clerk periodically in the Board meetings for their scrutiny and approval.
5. The learned Counsel for the petitioners, on the facts found by the Cooperative Tribunal, contends as follows: The surcharged order so far as it is against the ex-President and ex-Vice-President cannot be sustained under Section 71 of the Act Under Section 71 a surcharged order could be passed against a person who is entrusted with the organisation and management of the society or an officer or servant of the society if he bas (1) misappropriated or fraudulently retained any money or other property of the society, or (2) has been guilty of breach of trust in relation to the society, or (3) has caused any deficiency in the assets of the society by breach of trust or wilful negligence, or (4) has made any payment contrary to the Act, rules, bye-laws, etc. That Tribunal having found that the ex-President, ex-Vice-President and the ex-Directors have not misappropriated or fraudulently retained the monies belonging to the bank or been guilty of any breach of trust, the only ground of liability for surcharging them is wilful negligence and, therefore, unless wilful negligence is proved they cannot be held liable for the surcharge.
6. There can be no dispute that Section 71 authorises the surcharge order being passed against persons in management of the society (1) if they had misappropriated or fraudulently retained the funds of the society, (2) if they are guilty of breach of trust in relation to the society, or (3) if they had been wilfully negligent or had caused any deficiency in the assets of the society, and (4) if they had made any payment, contrary to the Act, rules and bye-laws, etc. In this case the ex-President and ex-Vice-Presi-dent have been held liable only under the third head, i.e, wilful negligence and not under any of the other heads of liability. The learned Counsel for the petitioners points out that the circumstances pointed out by the Go-operative Tribunal that the ex-President and the ex-Vice-President did not scrutinise the statement of accounts produced before them by the clerk then and there, and such negligence enabled the clerk to misappropriate such large amounts from the bank cannot indicate that their negligence, if any, is wilful, that there is no material or finding by the Tribunal that the negligence attributed to them is wilful, and that unless wilful negligence is established, Section 71 cannot be invoked against them. The learned Counsel points oat that the Go-operative Tribunal has overlooked the significance of the of the word "wilful" occurring in Section 7I and has proceeded on the basis-that a mere negligence on the part of the persons in management will bring them under the mischief of Section 71.
7. In my view, the petitioner's learned Counsel appears to be right when he says that the Tribunal has completely overlooked the significance of the expression 'wilful negligence" occurring in Section 71, for, after finding that the ex-President and the ex-Directors were negligent] in not scrutinising the accounts properly then and there, it straightway proceeds to say that they have rendered themselvesj liable for an order of surcharge under I Section 71 for such negligence. Whether their negligence was wilful or not has not' been specifically considered.
8. The scope of the expression "wilful negligence" occurring in various statutes had come up for consideration before Courts. In R. v. Downes (1875) 1 Q.B.D. 25 it was held that the statutory words ''wilfully neglects such child" are not satisfied by proof of some omission to provide medical aid. In Reg v. Senior (1899) 1 Q.B. 283 while dealing with the same expression ''wilfully neglects" occurring in Section 1 of the Prevention of Cruelty to Children Act, 1894, Lord Russel, C.J., expressed that whether the words are taken together or separately, the meaning is very clear, that "wilfully" means an act done deliberately and intentionally, not by accident or inadvertence so that the mind of the person who does the act can be said to go with it and that 'neglect' is the want of reasonable care, that is, the omission of such steps as a reasonable person would take. While dealing with the scope of the expression "wilful neglect" occurring in Section 2 of the Married Women's Protection Act, 1922, the High Court of Australia in Cooper v. Cooper 65 C.L.R. 162 stated that the phrase connotes a deliberate and intentional act of a culpable nature and that it imports an intention to act or omit to act in a way which the person charged knows, or ought if he is not recklessly careless to have known, will amount to a breach of duty, P.R. Ramanatha Iyer in his "Law Lexicon" has collected the various decisions interpreting the expressions "wilful neglect" and "wilful negligence." According to the author the expression'' wilful neglect" means an act done deliberately and intentionally and not by accident or inadvertence so that it can be said that the mind of the person who does the act goes with it, that it implies an intentional and purposeful omission" to do a certain act, and that it is an even more extreme term than gross and culpable negligence. The expression "wilful negligence" according to the author means a conscious acting or failing to act in a reprehensible manner.
9. In Ardeshir Bhicaji Tamboli v. The Agent, G.I.P. Ry. Company, Bombay (1928) 54 M.L.J. 167 : 27 L.W. 667 (P.C.) 55 I.A. 67 A.I.R. 1928 P.C. 24 the Privy Council dealing with the scope of the phrase "wilful neglect" occurring in a railway risk note issued under Section 72 of the Indian Railways Act, 1890, referred to the decisions in R. v. Downes (1875) 1 Q.B.D. 25 and Reg. v. Senior (1899) 1 Q.B. 283 above cited and held on the facts of that case that though there was ample evidence of neglect, there was no evidence or finding of wilful neglect and that therefore there was no wilful neglect within the meaning of the risk note. The Supreme Court in R.C.N. Kulkarni v. State (1954) A.L.J. 822 while interpreting the words "wilfully detains" occurring in Section 58 of the Post Office Act, 1898, observed that the word ''wilful" has been used by the Legislature to mean only sueh detention which was deliberate and for some purpose.
10. The above decisions clearly indicate that the use of the phrase 'wilful negligence'in Section 71 of the Act is for the purpose of holding a person in management liable if he has caused loss to the society by his intentional and purposeful omission. Therefore, the learned Counsel for the petitioners is right in his submission that mere regligence, however gross it may be, may not be sufficient to attract the section.
11. The question is wether the conduct of the ex-President and ex-Vice-President in not checking the amounts properly then and there when presented by the clerk will amount to wilful negligence. It has not been established in this case, nor is there any finding by the Co-operative Tribunal that the negligence attributed to the ex-President and ex-Vice President was wilful in the sense that the omission to check the accounts was intentional and purposeful. It is true, loss has been caused to the society by misappropriation of its funds by the clerk. But the question here is whether the ex-President and the ex-Vice-President are guilty of wilful negligence as contemplated by Section 71. A loss can be said to be due to wilful neglect if the cause for loss has been materially contributed by it. In this case the ex President and the ex-Vice-President have deposed that as there was a secretary supervising the work of the clerk they were of the view that the work of the clerk has been properly supervised by the secretary, and they merely affixed their signatures to the various statements and books of accounts brought before them in view of their confidence in the secretary. It is true, if they had wilfully shut their eyes to fact which were before them and which were sufficient to throw suspicion on the conduct of the clerk or the secretary, they can be held to be guilty of wilful negligence. In this case, however, the methods adopted by the clerk in the process of misappropriation are such that it cannot be detected easily. The methods adopted are to make payments on forged vouchers, to give wrong totals in the account books, to make credits to persons not entitled to credit receipts actually received. The fact that the clerk has been adopting such methods practically from the year la.48 up to Ia65 is clear from the enquiry report. The accounts of the bank have been subjected to departmental audit annually and persons who are specially trained for such audit purposes did not detect the misappropriation made by the clerk all these years, and it is only when a special enquiry was ordered under Section 65 in relation to the bank's affairs, the modus operandi adopted by the clerk for misappropriating the amounts was known. In these circumstances, the ex-President and the ex-Vice-President cannot be expected to be able to detect the misappropriations made by the clerk on occasions when the account books are produced for their scrutiny and signature. Even if normal care has been taken by them before signing the accounts, that would not have brought to light the various acts of misappropriation made by the clerk, for each entry in the account book is supported by a voucher even though forged and false. It is not as if there was any material which could lead to some suspicion against the clerk and such material was overlooked by the ex-President and ex-Vice-President.
12. It has been observed by the Court of Appeal in In re, National Bank of Wales Ltd. (1899) 2 Ch. 629.
Business cannot be carried on upon principles of distrust. Men in responsible positions must be trusted by those above them as well as by those below them until there is reason to distrust them. We agree that care and prudence dc not involve distrust, but for a director honest himself, to be held legally liable for negligence in trusting the officers under him not to conceal from him what they ought to report to him, appears to us to be laying too heavy a burden on honest businessmen.
The Earl of Halsbury, speaking for the House of Lords in Davey v. Cory 1901 A.C. 477 said:
The charge of neglect appears to rest on the assertion that Mr. Cory like the other directors did not attend to any details of business not brought before them by the General Manager or the Chairman and the argument raises a serious question as to the responsibility of all persons holding positions like that of directors, how far they are called upon to distrust and be on their guard against the possibility of fraud being committed by their subordinates of every degree. It is obvious, if there is such a duty, it must render anything like an intelligent devolution of labour impossible. Was Mr. Cory to turn himself into an auditor, Managing Director, a Chairman and find out whether auditors, Managing Directors and Chairman were alike deceiving them?
It is not in dispute in this case that there was a secretary functioning in the bank and it is his duty to supervise the work of the clerk, and it is a c se of negligence, if at all, on the part of the secretary to properly supervise the work of the clerk. On the facts of this case, the failure to check the accounts or to detect the misappropriations made by the clerk cannot be said to be due to the wilful negligence of the ex-President and ex-Vice-President. I have to, therefore, hold on the facts of this case that no wilful negligence has been established on their part.
13 The learned Counsel for the bank would bring to my notice two decisions of this Court in Sundaram v. Deputy Registrar of Co-operative Societies and Kuppuswami v. Deputy Registrar of Co-operative Societies in support of a contention that mere negligence can be brought under the head 'breach of duty' occurring in Section 71. In the first case, a Division Bench of this Court held that negligence to perform their duties by persons occupying fiduciary relationship to the society can be brought under the expression "breach of trust" occurring in Section 49(I) of the Madras Co-operative Societies Act of 1932. The same view has also been taken by Kailasam, J. (as he then was) in the second decision where it was held that the negligence on the part of the President of a Co-operative, Society which has contributed to a heavy loss incurred by the society as a result of the fraudulent acts of the manager, and the accountant can be brought under the phrase 'breach of trust' occurring in Section 49(1), and therefore action should have been initiated under that section instead of under Section 51 of that Act. Section 4g of the Co-operative Societies Act, 1932, refers to only three initances for which a person taking part in the management the society or an officer or a servant can be proceeded against for levy of surcharge, and they are: (1) Misappropriation; or (2) fraudulent retention of any money or property; and (3) guilty of breach of trust in relation to the society. Negligence was not a separate head of liability under that section. Therefore, in the above two decisions, negligence which amounts to breach of a duty was brought under the head "breach of trust." However, Section 71 of the Act of I96I has set out wilful negligence as a new and separate head of liability. When there is a separate head of liability relating to wilful negligence in Section 71, it is not possible to bring the same under the head breach of trust. Otherwise, it will defeat the legislative intention to treat negligence as a separate head of liability.
14. On a due consideration of the matter, I am of the view that the petitions have to succeed and the surcharge order so far as it relates to the ex-President and ex-Vice-President will have to be set aside and it is accordingly let aside. Both the petitions are allowed. There will, however, be no order as to costs.