Karnataka High Court
In Re: Supreme Bank Of India Ltd. (In ... vs Unknown on 1 January, 1800
JUDGMENT
1. This is an application by the official liquidator under section 235 of the Indian Companies Act of 1913 (Central Act VII of 1913) read with section 45H of the Banking Companies Act of 1949 to examine into the conduct of fourteen persons impleaded as respondents, 7 of whom were directors, one the auditor and the rest employees of the company named above, in relation to the affairs of the company, and to direct them either jointly and severally or in such manner as the court may deem just to repay or restore to the company a sum of Rs. 4,26,000 said to have been misapplied or retained by the respondents or in respect of which they are said to have become liable or accountable on account of misfeasance, breach of trust or fraudulent conduct in relation to the company, or such other sum as the court may fix or adjudge in that regard.
2. Before the Companies (Court) Rules of 1959 came into force, the official liquidator of this court appears to have obtained orders or directions of this court by simply filing into court what are called "report" and sometimes in the form of interlocutory applications as in the case of other civil matters. They were numbered as I. As. serially in each case. This practice appears to have continued even after the Companies (Court) Rules, 1959, came into force until some time towards the end of 1961, where after, the company court insisted on strict compliance with the Rules. This application was field on August 27, 1960, as Liquidators report No. 20 and numbered by the office of this court as I.A. No.1
3. Respondents Nos. 1 to 7 were directors of the company of whom the first five, viz., S.G. Pant Balekundri, S.K. Samant, P.A. Tendolkar, D.R. Angolkar and L.S. Ajasgaonkar, were promoter-directors. Out of board of directors from the commencement, and the second respondent, S.K. Samant, was managing director from July, 1946. The sixth respondent, R.W. Porwal, became a director in 1951. The seventh respondent, R.N. Porwal Kalghatgi, became a director in July, 1953; his elder brother, G.N. Kalghtgi, was a director of the company until he died in 1952. It is stated that the seventh respondent was made a director to fill the vacancy caused by the death of his said brother.
4. The fourteenth respondent, D.B. Kulkarni, was the auditor of the company from its inception.
5. Respondents Nos. 8 to 11, viz., K.V. Savadi, V.K. Nadgouda, S.N. Ajarekar and M.S. Deshpande, were working at the head office of the company at Belgaum. Savadi, Nadgouda and Ajarekar worked as cashiers from time to time, and Nadgouda also as an accountant for some time. Ajarekar was cashier at the time the company closed business and for some length of time immediately prior to that date. Deshpande was for some time assistant accountant and later head accountant or chief accountant.
6. The twelth respondent, H.A. Kulkarni, who was originally working at the head office, was made the branch manager of Kolhapur branch some time in 1945 and continued to hold that position till the company closed its business in November, 1954. It also appears that some time early in 1955, he was made the office superintendent at the head office. The twelfth respondent, R.M. Kekare, was the branch manager at Aronda branch for the company from June 29, 1949, till the company closed business in November, 1954. It is stated that he along with Kulkarni was continued it service of the company even after the closure of business.
7. It will be convenient to refer to the respondents by their names.
8. During the pendancy of this application, four respondents died, and one of the points for consideration in this case arise out of the applications made by the official liquidator to implied their legal representatives and continue the main application (I.A. No.1) against them and the objection raised by the legal representatives that proceedings under section 235 of the Indian Companies Act of 1913 cannot be properly continued against them. I give below a short summary of these proceedings.
9. The eleventh respondent, M.S. Deshpande, died on 2nd October 1960, and a memo to that effect was field by his advocate, Mr. Raikar, on November 7, 1960. I.A. No.III was field by the official liquidator to implied his legal representatives as supplemental respondents in I.A. No. I on 9th December, 1960, together with another application, I.A. No. IV, to appoint one of the proposed legal representatives, viz., the wife of the deceased, as guardian ad litem of her four minor children also proposed to be impleaded as legal representatives. The wife of the deceased, through her advocate, Mr. R.V. Jagirdar, field consent for being appointed as such on February 14, 1961. Among other persons sought to be impleaded as legal representatives were the parents of the deceased. They appeared through Mr. Raikar, and on objection taken by him, the father was removed from the list of legal representatives, but the mother was retained in the list. There after, Mr. R.V. Jagirdar asked for and obtained from the court permission to make a detailed inspection of the relevant records in the possession for the liquidator. On April 13, 1961, the wife filed on behalf of herself and her children an affidavit of objections, in which, among other things, she contended that proceedings in misfeasance under section 235 of the Indian Companies Act of 1913 could be taken only against the persons specifically mentioned in the section, but not against their executors, heirs or legal representatives. She prayed, therefore, that the legal representatives may be deleted from the array of respondents in the main application, so that they may be spared unnecessary expense and hardship. On August 3, 1961, Hombe Gowda J. directed that the said objections of the legal representatives be decided in the first instance and that I.A. No. III be posted for hearing those objections. Arguments on I.A. No. III were heard later by Kalagate J., who made an order on 29th August, 1961, in the following terms :
"The question which has been canvassed before this court is whether the heirs of the deceased accountant are liable for the acts of the deceased. To my mind, at this stage, it may not be necessary to decide the liability of the heirs unless the liability of the deceased himself is decided. If it is held that the deceased respondent No. 11 is not liable, then the question of liability of respondent No. 11 is fixed, the question of the liability of his heirs need not be considered. This application should be considered after the liability of the deceased is fixed."
10. Hence, the legal representatives other than the father continued on record and took part in the trial of the applications through Mr. R.V. Jagirdar in the earlier stages and later through Mr. Mendagi on behalf of Mr. R.V. Jagirdar.
11. On August 29, 1961, Mr. G.D. Shirgurkar, learned counsel for the first respondent, S.G. Pant Balekundri, field a memo into court stating that the said first respondent died about a week prior thereto. Thereupon, on September 12, 1961, the official liquidator took out two applications numbered I.A. Nos. V and VI, the former to implied the wife and children of the deceased as his legal representatives in the main application and the latter to appoint the wife as guardian ad litem of one of the children, Lata, who was a minor. Notices were directed on both these applications on September 18, 1961. Notices, however, could not be served promptly. On February 16, 1962 I ordered fresh notices to the proposed legal representatives fixing March 16, 1962, as the date of return and directing that the main application also be posted for hearing on the same date. Those notices were also not served and, therefore, on the date of return, viz., March 16, 1962, I directed issue of further notices returnable on June 15, 1962. On June 11, 1962, Mr. G.D. Shirgurkar field vakalat executed in his favour by Kusum Tai, wife of the deceased, for herself and as guardian ad litem of her monor daughter, Lata, by Gopal, one of the sons, and by Usha, one of the daughters. Mr. Shirgurkar represented in court that he would proceed with the case on behalf of these legal representatives. There was another legal representative, viz., a daughter, named Tai. She also had been served with notice issued by registered post by the official liquidator who, along with his memko dated June 29, 1962, has filed into court all the postal acknowledgments. The acknowledgment relating to the notice addressed to Tai is signed by her mother, Kusum Tai. As all the legal representatives have thus been served and in view of Mr. Shirgurkar's representation mentioned above, I.A. Nos. V and VI stood closed without need for any further orders thereon.
12. After consulting the convenience of counsel in the matter of getting ready with the case for trial, I made an order on November 9, 1962, fixing December 10, 1962, for commencement of the trial by recording evidence and gave necessary directions regarding summoning of witnesses, documents, etc.
13. In the meanwhile, it would appear the fourth respondent. Angokar, died on October 10, 1962, in consequence whereof the official liquidator took out two applications, viz., Company Applications Nos. 2 and 1 of 1963, the former for impleading his legal representatives and the latter for appointing one of them, viz., the wife of the deceased, as guardian ad litem of such of the legal representatives were served and some not, Mr. H.B. Datar, advocate, field vakalat for all and consented to both the applications being ordered. They were accordingly ordered as prayed for on February 8, 1963.
14. After the trial had progressed to some considerable extent, the fourteenth respondent, D.B. Kulkarni, died on April 1, 1963. The official liquidator on June 28, 1963, field two applications, viz., Company Applications Nos. 42 and 43 of 1963, the former for impleading his legal representatives and the latter for appointment of one of the legal representatives as guardian ad litem of such of the legal representatives as were minors. Mr. N.C. Mahajan, who originally appeared for the deceased fourteenth respondent, field vakalat for most of the proposed legal representatives together with an affidavit of one of them raising, among other things, the objection that there proceedings under section 235 of the Indian Companies Act of 1913 cannot be continued against the legal representatives. As the said objection had already been made the subject-matter of one of the points formulated for consideration in the main application, Company Applications Nos. 42 and 43 have been heard along with the main application without interrupting the trial.
15. Before proceeding to summarise the pleadings and contentions of the parties in this case, it is necessary to state a few preliminary facts leading up to the institution of these proceedings as to which there is no controversy between the parties.
16. The company was incorporated under the Indian Companies Act of 1913, on May 27, 1939, and commenced business on October 6, 1939. On the coming into force of the Banking Companies Act of 1949, it became necessary for the company, by virtue of section 22 of that Act, to apply for issue of license by the Reserve Bank of India to carry on banking business subject to the provisions of the proviso to sub-section (2) thereof, according to which the companies in existence at the commencement of the Act could carry on business until the Reserve bank either grants a license or informs the company by notice in writing that license cannot be granted to it. With a view to examine the question whether or not a license could be properly issued to this company, the Reserve Bank appears to have inspected this company once in 1950 and once in 1952. The communications to the company by the Reserve Bank of their observations at the said two inspections are marked in this case as exhibits A-1 and A-2. Exhibit A-1 is dated 7th March, 1951, and relates to the affairs of the company as on 31st July, 1950. Exhibit A-2 dated 5th March, 1953, relates to the affairs of the company as on 30th November, 1952.
17. Section 35 of the Banking Companies Act empowers the Reserve Bank to conduct inspection of banking companies and their books of accounts. If the Reserve Bank conducts any such inspection, it is required by that section to supply the banking company with a copy of the report of such inspection. The Reserve Bank conducted inspection of this banking company in 1954. Its report of that inspection dated 27th August, 1954, is produced in this case as exhibit A-3(1), dated September 13, 1954, under cover of which the report was communicated to the company.
18. Shortly thereafter the company found itself in considerable difficulty and suspended business or payments on 26th November, 1954, at the head office at Belgaum and on 27th November, 1954, at its branches at Kolhapur and Aronda.
19. On December 1, 1954, the company applied to the High Court of Bombay under section 37 of the Banking Companies Act praying for the grant of moratorium for a period of six months. On the same date, the Bombay High Court made an interim order granting moratorium for a period of six months. On the same date, the Bombay High Court made an interim order granting moratorium for a period of two months and staying all actions against the company for the said period, appointing Mr. V.R. Kotbagi, advocate, Belgaum, as special officer under sub-section (3) of section 37 with powers to file suits on behalf of the company and liberty to obtain further order, if necessary, and also calling for a report from the Reserve Bank under the proviso to subsection (2) of section 37.
20. Mr. Kotbagi, who has been examined as P.W. 4 in this case, took charge of the company as its special officer appointed by the Bombay High Court on 7th December, 1954. He no doubt states in his evidence that he was appointed on 5th December, 1954. Apparently, that might be the date on which he received the warrant of appointment or the order of court forwarded to him by the Assistant Registrar of the Bombay High Court. That order, however, appears to have been made on 1st December, 1954, itself.
21. Pursuant to the directions of the High Court of Bombay, the Reserve Bank deputed one Amritlal Bhatia to inspect the company for the purpose of submitting to that High Court the report called for under the proviso to sub-section (2) of section 37. He has been examined as P.W. 1 in this case. He was at the head office of the company at Belgaum for the purpose from 14th to 17th December, 1954. The report of the Reserve Bank consequent upon P.W. 1's inspection dated 13th January, 1955, is filed as exhibit A-4 in this case.
22. On or about 20th December, 1954, the board of directors with the concurrence of the special officer appointed one Kasinath Yeshwant Wagle, an auditor, to examine the books and papers of the company for two purposes, viz., for ascertaining the frauds, if any, by members of the staff and for exploring the possibilities of reconstructing the company by submitting a scheme of arrangement to the High Court. Wagle has been examined as P.W. 3 and his report dated February 16, 1955, is produced as exhibit A-21.
23. A scheme for reconstruction also appears to have been presented to the High Court of Bombay, the principal feature of which appears to have been for payment of deposits in certain installments spread over a have been for payment of deposits in certain installments spread over a period of years. Though meetings appear to have been called, at which it is stated the scheme received the assent of those present, the High Court did not accept the scheme, obviously in view of the Reserve Bank's report, exhibit A-4, which opined that there were no reasonable chances of the company being able to pay its debts if moratorium was granted even for a maximum period of six months permissible under section 37 of the Banking Companies Act.
24. I should have stated earlier that the initial period of two months of moratorium granted by the High Court of Bombay was extended for a further period of two months by the High Court. The application for sanction of the scheme was dismissed by the Bombay High Court on March 17, 1955. With the dismissal of the application, Mr.Kotbagi's term of office as special officer also came to an end. He states in his evidence that he handed back charge to the chairman of the board of directors on 4th April, 1955.
25. On March 8, 1956, one H.G. Deshpande, a depositor, or creditor of the company, presented a petition to the High Court of Bombay to wind up the company. That application was numbered by the Bombay High Court as Civil Application No. 690 of 1956.
26. According to the averments contained in the winding up petition, after the directors took charge from the special officer, five persons were elected by the depositors to act as advisers to the board and about 12 1/2 per cent. of the amount of deposits as on December 26, 1954, excluding interest for 1954, was paid out to the depositors or some of the depositors. It is also stated in the petition that on 26th February, 1956, the directors called a meeting of the depositors at which it was unanimously decided that the company should be wound up and a committee consisting of the winding up petitioner and three others was appointed to take steps in that direction.
27. The winding up petition was accepted by the High Court of Bombay on March 13, 1956, on which date the court receiver and liquidator was appointed provisional liquidator and the date of hearing of the petition was directed to be advertised. On April 16, 1956, the company was ordered to be wound up and the provisional liquidator was confirmed as the official liquidator.
28. The official liquidator field into court on July 31, 1956, a report under section 45C of the Banking Companies Act annexing thereto a list of suits and execution petitions pending in various courts seeking directions in respect thereto under the said section. The court on August 1, 1956, directed notice under section 45C (3).
29. After Mr. Kotbagi ceased to be the special officer but before the winding up petition was field, when the direct tore were in charge of the company, they appointed in July, 1955, one D.D. Joshi to investigate into the affairs of the company. The said D.D. Joshi has been examined as P.W. 2 in this case. According to his evidence, the object with which he was required to make the said investigation was to see whether the responsibility or liability for the alleged frauds or misappropriation said to have been committed in the company could be clearly fixed on any particular individual or individuals and to identify and collect evidence or material in support of substantiation thereof. By the time he could complete his investigation and make his report, the company was wound up and the liquidator appointed by the Bombay High Court. Although originally he was appointed by the board of directors and expected to report to them, his report having been completed only on May10, 1957, was actually submitted by him to the official liquidator. It is marked exhibit A-9 in this case.
30. Consequent upon the reorganisation of the States pursuant to the States Reorganistion Act (Central Act XXXVII of 1956), the winding up proceedings were transferred from the Bombay High Court to this court, before notices under section 45C(3) ordered by the Bombay High Court could be issued.
31. After receipt of the proceedings in this case, they were renumbered as C.P.(B) No. 28 of 1956. On August 26, 1957, the official liquidator of this court was appointed as the official liquidator of the company.
32. In his report to this court dated 21st July, 1958, filed into court on the following day, the official liquidator brought D.D. Joshi's report to the notice of this court and sought directions for obtaining explanations was extended from time to time, and ultimately after receipt of their explanations the liquidator filed into court his report No. 20 marked I.A. No. 1 and thus initialated these proceedings.
33. The said report No. 20 of the official liquidator, which I shall hereafter refer to as the main application, sets out the case of the liquidator against the respondents. It has three annexures. Annexure "I" is a copy of P.W. 3, Wagle's report, exhibit A-21. Annexure "II" is a copy of P.W. 2, D.D. Joshi's report, exhibit A-9. Annexure "III" contains copies of the explanations elicited from the respondents in respect of Joshi's report pursuant to the order dated July 20, 1958, of this court.
34. It is clear both from the averments made in the course of the main application as well as from paragraph 3 of the verifying affidavit of the liquidator accompanying the main application, that his case is based upon the observations contained in the aforesaid reports of the auditors, exhibits A-21 and A-9, as also the report of the Reserve Bank under section 37(2) of the Banking Companies Act, viz., exhibit A-4. In paragraph 3 of his verifying affidavit, the liquidator states :
"I hereby solemnly affirm and state that the averments made in paragraphs 1 to 18 of the said petition are gathered from the reports and proceedings including those relating to the winding up taken up in the courts and records of the bank whatever inferences are drawn by me from the facts and circumstances averred are so drawn by me bona fide and believe to be true."
35. For making the general allegations contained in paragraph 6 of the main application to the effect : "... the procedure adopted by the bank for the conduct of the business was highly irregular and was such as to afford free scope for the officers of the bank to deal with the amounts belonging to the bank in any manner they pleased", the liquidator states, in the sentences immediately following the above, that he relied upon the statements made in paragraph 6 of exhibit A-21, paragraph 22 of exhibit A-9 and also on exhibit A-4, A-9 and A-21 and that he would produce oral and documentary evidence to substantiate the principal allegations of fact constituting the foundation of the Liquidators case. The basis for the general allegations in paragraph 7 of the main application that the directors of the company had been grossly negligent and failed to exercise due control over the conduct of the company's business and thereby occasioned loss to the company and that the managing director's conduct had been fraudulent resulting in misapplication or misappropriation of company's funds by him or under his instructions or directions is also apparently the same.
36. Regarding the auditor, respondent No. 14, the general allegation in paragraph 9 and 10 of the main application are that in spite of several serious irregularities, the yearly reports of the auditors made no mention of the same, that the balance-sheets and profit and loss accounts certified as correct by the auditors were prima facie false, that when the additional shares issued in 1946 could not be fully subscribed, the auditors advised the allotments to the directors without payment of cash, opening suspense accounts to bear the relative debits and crediting dividends on such shares to interest account, which advice, it is contended, was highly irregular, that they did not at any time prepare or call for reconciliation statements in relation to the accounts of the company with other banks and that in the proceedings commenced by the Institute of Chartered Accountants of India against the fourteenth respondent, this court in Civil Referred Case No. 2 of 1958 recorded a finding that the auditors were grossly negligent. The liquidator adds that though on the material then placed before the court, it could not be said that any dishonesty on the part of auditors had been made out, the material available in this case is sufficient to make one believe that the auditors must have connived at the several irregularities committed by the company's directors and some members of its staff.
37. In view of these circumstances and particularly in view of the fact that several amounts or estimate of amounts in respect of which the respondents are said t o have been guilty of improper conduct making them liable or accountable for the same set out in the main application are taken from one or other of the reports, exhibit A-4, A-9 or A-21, the peculiar position in this case is that the said reports or at any rate certain of the figures or estimate of figures contained in those reports have been in a sense incorporated in the pleadings themselves.
38. Wagle's report, exhibit A-21, was made to the directors themselves in February, 1955, and was available to them. D.D. Joshi's report was, however, made only in 1957, and as already stated sent by him direct to the liquidator. Hence a copy thereof must be taken to have been made available for the first time to the directors and other respondents only when the official liquidator of this court sent them a copy thereof pursuant to the order of this court dated July 29, 1958. Every one of them has had an opportunity to read it and send his explanation. The Reserve Bank's report, exhibit A-4, was made to the High Court of Bombay and was put in evidence in the course of the trial of this application through Amrital Bhatia, examined as P.W.1. Obviously, that was the first time when the respondents had an opportunity to acquaint themselves with the contents thereof. D.D. Joshi states in his report, exhibit A-9, that except as to the deficit in cash in relation to which he looked in the relevant books himself and stated the result of his investigation in his report, he relied on exhibits A-4 and A-21 for making his observations in regard to differences in banker's accounts (i.e., accounts of this company with other banks) and branch adjustments.
39. As already summarised above, the general allegations which, according to the liquidator, constitute the basis of the liability which he proposes to bring home to the respondents, are that the directors have been guilty of gross negligence in the management of t he affairs of the company, that the conduct of the managing director may be said to be even fraudulent, that the manner in which the business of the company was permitted to be conducted by the directors was such that it was possible for the members of the staff to misappropriate or misapply the company's funds and that the auditor may be said to have connived at the several irregularities and deliberately certified as correct balance-sheets and profit and loss accounts which were in fact false.
40. The liquidator in paragraph 19 of the main application claims that the total amount in respect of which the respondents should be held guilty is Rs. 4,26,000.
41. In paragraph 12 to 17, he gives certain details of figures which apparently are those that lead to the total amount mentioned above.
42. In paragraph 12, it is stated that on the date the company closed business, viz., November 26, 1954, the cash book showed a cash balance of Rs. 1,50,471-15-7. He adds that to advertain the real cash position, reference should also be made to a set of what are called rough cash books maintained at the company's head office (to which reference has been made by both WAgle and D.D. Joshi in their respective reports); these books, according to D.D. Joshi's report, showed a deficit of Rs. 8,773-15-8. Hence adding the two figures together and deducting there from Rs. 645-0-4, which was the actual cash found to be available on that date, the liquidator claims that the total cash deficit on the date of closing was Rs. 1,58,600-14-11.
43. In paragraph 13, he refers to the position in regard to two branches at Kolhapur and Aronda. According to the figures stated therein, unexplained differences between the accounts at the branches and at the head office amounted to Rs. 32,500 with reference to Kolhapur branch and Rs. 49,000 with reference to Aronda branch-making a total of Rs. 81,500; he also refers to a draft for Rs. 10,000 issued on Kolhapur branch entering only Rs. 5,000 in the counterfoil and thus showing a difference of Rs. 5,000 and also another draft for Rs. 6,000 without receiving any cash. These figures are apparently taken from Wagle's report. In addition, he refers to a sum of Rs.10,000 said to have been brought in cash by the managing director from Kolhapur branch and another sum of Rs. 42,000 said to have been brought in cash by the managing director from Aronda branch. All these figures make a total of Rs. 1,44,500.
44. In paragraph 15, he refers to the issue of new shares and the allotment of some of them to the directors and their friend without payment of cash. No specific amount said to have been lost to the company in this connection is set out in this paragraph. It may be added that in the course of his evidence, D.D. Joshi, P.W. 2, deposed that the cash, if any, remaining unpaid in respect of these shares is reflected in the total cash deficit as on the date of closing.
45. In paragraph 16 of the main application, the liquidator refers to the practice consistently resorted to by this company of window-dressing its balance-sheets year after year. But is is clear that the statements made in this paragraph are only in the nature of general allegations and not an independent source of a specific liability.
46. In paragraph 17, the liquidator gives a list of amounts said to have been with drawn by the directors and their friends within a week next before the company closed business. The paragraph concludes with the following statement :
"From the above it is clear that the directors have abused and misused their influence and made premature payments and permitted withdrawals to the detriment of the depositors at large and the shareholders and thus are guilty of fraudulent conduct."
47. It is not stated whether the figures stated in this paragraph go to make up the total of Rs. 4,26,000 nor is it clear whether the allegations in this paragraph are not intended merely to emphasise that even in a period of crisis the conduct of the directors has been open to reproach.
48. Although it is difficult from the figures set out in the main application of the liquidator-some of which are taken from Wagle's report, some from Joshi's report, and some from Bhatia's report-to arrive at the exact total of Rs. 4,26,000 set out in paragraph 18, it is clear that the said total amount is taken from Wagle's report, exhibit A-21, in which by way of conclusion he states :
"The total amount involved in the fraud is assessed roughly to be Rs. 4,26,000. So far, an amount of Rs. 3,75,000 has been traced from the various sources. The balance can be traced provided the accounts are reconciled."
49. Now the figures stated by Wagle are the following :
Rs.
Cash deficit 1,73,000 Defalcation through branches 81,500 Defalcation through accounts with other banks. 1,20,725 Total 3,75,225
50. This amount, according to Wagle, is the amount which he has been able to trace. In his report, exhibit A-21, he has not referred to the sum of Rs. 10,000 from Kolhapur branch and the sum of Rs. 42,000 from Aronda branch said to have been brought in cash by the managing director but only to the unexplained differences amounting to a total of Rs. 81,500 which are referred to in paragraph 13 of the main application. If the above sums of Rs. 10,000 and Rs. 42,000 are added, the total goes beyond Rs. 4,27,000.
51. So far as the defence is concerned, there has been from the commencement a clearly noticeable difference between the defence of the managing director, S.K. Samant, on the one hand and that of the other directors on the other. Even in his explanation dated 4th April, 1959, to D.D. Joshi's report submitted pursuant to the order of this court, after stating that in the absence of relevant documents in his possession he was unable to give any specific answers to the points in question, he made the following allegations :
"I understand that other directors of the bank are trying to throw all the burden and responsibility on me. I flatly deny any such allegations, if they have so made. Simply taking advantage of the fact that I was designated managing director, they are trying to evade the responsibility. All the transactions of the bank were made under the supervision and direction of the board of directors. All the directors of the bank, therefore, were naturally responsible for all the dealings of the bank. They cannot evade their responsibility by throwing the burden on somebody else."
52. He then added that because criminal proceedings against him were already pending, it was expedient and advisable that he should not give any detailed statement until the termination of criminal proceedings and requested that be excused for his inability to answer the points. In his written statement or affidavit of objection to the main application, he disputed the correctness of the reports, annexures, "I" and "II", the the main application and denied every material averments made in the application and claimed that he was not guilty of either misfeasance or malfeasance, and that he was not responsible for any claim made by the liquidator. He added that the affairs of the company were carried out according to the policy and directions of the board of directors and that having had the misfortune of being the managing director, he had been a tool in the hands of the directors. He also claimed that the petition was barred by time.
53. Among the other directors, the defence of Pant Balekundri, the chairman, Tendolkar, Angolkar, Ajgaonkar and Kalghatgi is the same. The material allegations in their written statements or affidavits of objections are same or similar.
54. All of them say that the liquidator's applications is vague and does not make out any specific allegations or charges against them and that no prima facie case as required by section 45F of the Banking Companies Act has been made out by the liquidator against them. They do not admit that the reports of either Wagle or Joshi disclose the exact amount in respect of which fraud, if any, had been committed and put the liquidator to strict proof of his claims. All of them allege that in or about the year 1946-47,S.K. Samant was appointed as managing director, since when he had been solely and entirely in charge of the affairs of the company. They also rely upon articles 109 and 112 of the articles of association of the company detailing the duties of the managing director. They contend that the statement said to have been made by Samant to the effect that everything done by him was so done in consultation with the other directors is false. They state that until exhibit A-3 was received, there was no detection of any fraud and that even after the receipt of exhibit A-3 no fraud by the managing director had been discovered and that it was only after the company closed down business that the directors came to know that the managing director had himself been a party to it and had misappropriated large amounts out of the company's funds. They alleged that in December, 1954, the managing director, S.K.Samant, had made certain admissions before P.W. 1, Bhatia, and that he had made similar admissions before the special officer, kotbagi, P.W. 4, and that in consonance with those admissions he had executed promissory notes for Rs. 1,11,500 and also executed sales of his movable and immovable properties in favour of the company in part liquidation of the amount admitted to have been misappropriated by him. They assert that this conduct on the part of Samant is alone sufficient to show that none of the other directors had either participated in or connived at the acts of the managing director in relation to the day-to-day affairs of the company or checking its daily cash balances and that it was the duty of the managing director, cashier and accountants to carry on the business of the company properly and correctly. For the rest, the written statements contain specific denials of almost every statement made in the main application. I shall refer to the other details, if found necessary, at a later stage of this order. They claim that the application is barred by time.
55. The written statement of the sixth respondent, Rikabchand Wardichand Porwal, is slightly different. He states that he has paid in full for the shares taken up by him, that the affairs of the company were exclusively managed by the managing director, that the reports of the auditors never showed any defalcation or misappropriation later detected by Wagle or Joshi, that had he known about any such defalcations or misappropriations or frauds, he would not have become a director at all, that his case cannot be treated on par with the case of other directors, that there is no specific allegation against him individually, that he acted honestly and reasonably as a director, that he being completely innocent and he having trusted the integrity and competence of the managing director and the staff, proceedings against him should be dropped.
56. The seventh respondent, R. N. Kalghtgi, as already stated, follows the lines of the written statements of respondents Nos. 1,3,4 and 5. He, however, adds that the irregularities or frauds or misuse of the company's funds, if any, relate to a period before be joined as director and that, therefore, he should not be made liable for the same.
57. Respondent No. 8, Savadi, in his written statement states that he was a petty clerk acting under the orders of his superiors, that the managing director and the eleventh respondent, Deshpande, were the sole masters of the affairs of the bank whose orders it was impossible for him to disobey, that they were in charge of the keys, cash, etc., and that respondents Nos. 2 to 5 and the deceased eleventh respondent had formed a party among them- selves and utilised the company's money for their own purposes. He states that just before the company closed business, respondents Nos. 1 to 5 threatened him to execute a document for a big sum of Rs. 25,000, that he was taken to the house of the auditor, D.B. Kulkarni, and there threatened to execute a document. He states also that he was not an office of the company and that no specific instances are alleged against him and that therefore no action can be taken against him.
58. The ninth respondent, Nadgauda, states that he resigned from the service of the company of March 2, 1954, when he found that the affairs of the company were not being conducted properly by the persons responsible for the same and that the said persons were bent upon finding scapegoats and foisting the blame on innocent persons like him. He generally denies the allegations, and contends that the main application is absolutely vague and general in character and that the same is barred by time.
59. The tenth respondent, Ajarekar, contends that there is no material to hold him responsible, that nothing specific is alleged against him and that the application against him is barred by time.
60. The eleventh respondent, M.S. Deshpande, died before filing any written statement.
61. Regarding the written statements of H.A. Kulkarni, the twelth respondent, and R.M. Kekare, the thirteenth respondent, it is sufficient at this stage to mention the fact that the former admits having given Rs. 10,000 into the hands of the managing director, S.K. Samant, and the latter admits the fact that Rs. 42,000 were brought at the instance of the managing director from Aronda branch. Both of them admit that they did not make debit entries relating to these amounts in the account books of the respective branches.
62. The fourteenth respondent, D.B. Kulkarni, auditor, claims that the application against him is time-barred. He also relies upon the observation of this court in the judgment in Civil Referred Case No. 2 of 1958 to the effect that no dishonesty on his part has been proved. It is not necessary at this stage to refer to the other allegations contained in his written statement.
63. The petition to wind up this company was, as already stated, field on 13th March, 1956. Hence, under section 441(2) of the Companies Act of 1956, the winding up of the company must be deemed to have commenced on that date. According to section 647 of the same Act, therefore, these proceedings must be taken to be governed by the provisions of the Indian Companies Act of 1913. Hence the provisions of law under which these proceedings are instituted are section 235 of the Companies Act of 1913 and section 45H of the Banking Companies Act of 1949. Under section 235 the burden of proving the entire case is on the liquidator. This burden is, however, to a considerable extent lightened by the latter section, viz., section 45H, and also to some extent by section 45F of the Banking Companies Act of 1949. Under section 45H of that Act, the court is empowered to make an order for repayment or restoration against a person if the applicant (in this case the liquidator) makes out a prima facie case against such person unless the said person proves that he is not liable to make repayment or restoration either wholly or in part. Under section 45F entries in the books of accounts and other documents of a banking company may be proved by the production of account books or other documents in which those entries are contained, and all such entries are as against the directors of a banking company declared to be prima facie evidence of the truth of all matters purported to be recorded in those entries.
64. It will be noticed that every respondent has taken up the stand that the averments in the liquidator's main application are vague and general in character and that no specific allegation is made against any one of them. It is also contended on behalf of the directors that no prima facie case at all is made out in the main application. It has been pointed out in their written statements themselves that making out a prima facie case means establishing a prima facie case by legally admissible evidence. Of course, evidence may be either in the shape of oral evidence or by proof of relevant documents or by production of affidavits. Oral evidence or statements in affidavits can be made only by persons who have personal knowledge of the facts deposed to orally or set out in the affidavits. The application in this case is in the form of a report which reads like a verified petition. There is, however, annexed thereto a short affidavit by the applicant-liquidator. As I have already stated, in that affidavit the liquidator merely stated that the averments in his application or report are taken from reports (meaning apparently exhibits A-1, A-2, A-3, A-4, A-9 and A-21). proceedings of court including those relating to winding up and the records of the company, and that the inferences as stated by him are bona fide drawn from the said material and believed to be true by him. The said reports, therefore, as already stated, must be taken to have been incorporated in the pleadings. I have also pointed out that although the Reserve Bank's reports, exhibits A-1 to A-3, and Wagle's report, exhibit A- 21, were undoubtedly available to the directors and a copy of D.D. Joshi's report was furnished to them under the order of this court with a direction to submit their explanation, the Reserve Bank's report, exhibit A-4, on which considerable reliance is placed by the liquidator had not been made available to them before the filing of this application. In fact, they complained that in the absence of a copy of that report they were unable to plead to some of the statements made in the main application based on that report, exhibit A-4.
65. In the light of these circumstances, and with a view to see that the respondents are in possession of a fairly full picture of the liquidator's case and that the liquidator makes out a prima facie case by legal evidence against the respondents before they are called upon to enter upon their defence, I deferred the formulation of the points for consideration until after exhibit A-4 was produced and the main features thereof spoken to by P.W. 1, Bhatia, on oath, and the specific allegations regarding the main features of the alleged defalcation are spoken to and the report, exhibit A-9, formally proved by examining D.D. Joshi.
66. The examination of P.W. 1 was completed on December 12, 1962.
67. On December 13, 1962, Mr. Srinivasa Iyengar for the liquidator wanted to examine Wagle, but his examination could not be proceeded with for the reason that his original report was then not available having been filed in some other court. Hence D.D. Joshi was examined as P.W. 2 on that date and his examination was completed on December 17, 1962. Further hearing had to be adjourned for enabling the liquidator to get the original report to Wagle. When the trial was taken up again on March 4, 1963, I asked Mr. Srinivasa Iyengar whether, apart from what appears from his client's petition and the evidence of the first two witnesses in proof of exhibits A-4 and A-9 on which he relies, he was in a position to particularise his case against individual respondents. He once again stated that his client's case was principally based on those reports and that in the light of those reports and the evidence he had already led then and was going to lead, it was ultimately for the court to decide whether and if so which of the respondents could be held responsible and to what extent.
68. Taking the view that on the evidence of P.Ws. 1 and 2 on record there was a case for the respondents to meet, of course taking advantage of whatever defects or deficiency there might be in the said case, I heard Mr. Srinivasa Iyengar for the liquidator and Mr. Karanth for the respondents and formulated the following to be the principal points for consideration in the application :
"1. Whether the official liquidator proves that on the date the company closed its business, viz., on November 27, 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 ?
3. Whether and, if so, which of the respondents is or are liable to made 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 ?
4. Whether the application is barred by limitation and, therefore, liable to be dismissed as having been filed beyond the time allowed by law ?
5. Whether the official liquidator has any right of recourse against the legal representatives of the deceased respondents ?
69. Of these, points, Nos. 4 and 5 are in the nature of preliminary points. Point No. 5 raises a pure question of law. I shall, therefore, dispose of these two points first.
70. So far as the fifth point is concerned, the legal position has been considered to be well settled for nearly a century and hardly admits of any doubt.
71. Section 235 of the Indian Companies Act of 1913 (now re-enacted as section 543 of the Companies Act of 1956) is copied from section 165 of the English Companies Act of 1862. The earliest decision interpreting the effect of that section is in In re East of England Bank : Feltom's Executors case Sir Kindersley V.C. in that case held that the language of the section applies only to the person expressly named therein and is inapplicable to the case of executors or administrators. His Lordship placed some reliance upon the expression "compel him to pay" occurring in the section which is different from the expression "order payment of" occurring in other sections, and observed that a company court cannot compel an executor or an administrator to make payment because that was the power of court administering the estate of a deceased person. Dealing with the argument that the construction proposed by him was a narrow one, his Lordship observed :
"That is t rue in this senses, that it is a narrower construction than might have been given to the section if it had been couched in different language : but the court has no right to stretch the powers intended to be conferred by the Legislature."
72. This view of Kindersley V.C. was followed by Selwyn L.J. in In re United English and Scottish Assurance Company : Ex parte Hawkins 2 : and was accepted as settled law in In re British Guardian Life Assurance Company 3.
73. It will be noticed that this interpretation of the section proceeds upon the language of the section. That section empowers the company court to examine into the conduct of the persons named therein viz. promoter, director, manager, liquidator or officer, in relation to the affairs of the company and comply him, i.e. such person to repay or restore the money or property or to contribute such sum to the assets of the company by way of compensation as the court thinks just. the ultimate source of the liability is traceable to the conduct of the particular person in relation to the affairs of the company, to the extent it presents a departure from the standard of care and rectitude expected of him while occupying the position of promoter, director, manager, liquidator or officer of the company. I may also add that the nature of the proof evidence or defence in the proceedings instituted under this section is conditioned to a considerable extent by the fact that the person whose conduct is under investigation may himself be expected to be in the know of material facts or information bearing on the subject of inquiry . It will also be noticed that in the real sense the loss is occasioned to the company as an entity and, in normal circumstances, it will be the company that can be said to have a right of action for the recovery of such loss. But the statute confers the right to institute these proceedings on any creditor or contributory or the liquidator of the company. The ultimate order which the court may pass therein is also an order for repayment or restoration of the money or property misapplied or to contribute a certain sum to the assets of the company by way of compensation. Having regard to all these circumstances, the proceeding under the section commonly described as misfeasance proceedings are of a special nature and are available only against the persons expressly mentioned therein as the persons whose conduct may be investigated into by the court on an application made pursuant to that section.
74. The above view of English courts has been consistently followed in India on the accepted principle that when the India legislature copied almost verbatim a section of the English Act it may be expected to have accepted the interpretation thereof according to the rulings of the English courts. The important case decided by the Indian High courts are Billimoria v. Mary De Souza [19270I L R 8 Lah.549; A I R 1926 Lah.624. Officer Liquidator v. jugal Kishore [1938] 8 Comp. Cas. 300; I L R [1939] All. 6. manilal Brijlal v. Vendravandas [1944] 14 Comp. Cas 147; I L R [1944] Bom 284. Sankara nambiar v. Kottayam Bank I L R [1946] Mad. 507. and In re Peerdan Juharmal Bank [1958] Comps. cas 546.
75. There is in some of these cases a discussion whether the provisions of section 306 of the Indian Succession Act or whether the legal Representatives Suits Act [central act XII of 1855] or Order XXII of the First Schedule to the code of Civil Procedure would make any difference to the principles settled by English decisions. It is pointed out that none of these statutory provisions in Indian can be availed of for continuing misfeasance proceedings against the legal representatives of a deceased promoter, director, manager liquidator or officer of the company. The action thereunder being purely personal as against the said named persons which does not survive their death, it is not possible, the decisions point out, to invoke any of the statutory provisions mentioned above.
76. Mr. Nagaraja Rao, learned counsel who appeared for the liquidator during the later stages of the trial, cited a decision of the Madhya Pradesh High court in Prabhakar v Vikram sugar Mills [i] A I R 1963 M.P..120. In that case the person that died during the pendency of the proceeding was not a respondent whose conduct was being investigated into, but a creditor who had made the application, and the High court held that the legal representatives of the creditor could continue the application. It may be pointed out that if the debt remains unpaid, the legal representatives of creditors could themselves become creditors of the company in the place of deceased creditors having the same rights as deceased creditors had. But the liability to be proceeded against under section 235 of the Indian companies ACt of 1913 is a personal one and does not survive the death of the p[arson proceeded against. There are no doubt general observations in that decision to the effect that in the absence of any special rules made under the companies Act, the proceedings terrain are governed by the provisions of the code of Civil Procedure. But, as already pointed out, the provisions of the code of civil procedure enabling the imploding of legal representatives apply only when the right to sue or the liability to be sued survives the death of the plaintiff or the defendants, as the case may be. The decision of the Madhya pradesh High court therefore o\is of no assistance to the liquidator and does not, in my opinion, militate against the well established principle of law settled by the various decisions mentioned above.
77. My answer therefor to the fifth point formulated for consideration is that the liquidator cannot continue these proceedings in I.A,. No. I. against the legal representatives of the respondents who died during the pendency of the application. Whether he has any other right of recourse against them in regard to any of the matters covered by this application, it is unnecessary for me to decide in this case and I express no opinion on it.
78. Consequently I.A. I has to be and is hereby dismissed against the legal representatives of the deceased first respondent, Pant Balkekundri, fourth respondent, angelica and the eleventh respondent, Deshpande. Company Application Nos. 42 and 43 of 1963 to implied the legal representatives of the deceased fourteenth respondent, D B Kulkarni, and to appoint a guardian and item for the minors amount them are also dismissed.
79. On the question of limitation covered by the fourth point, the relevant dates and facts are not in dispute. As already stated, the petition to wind up the company was presented to the Bombay High court on 13th March 1956, and on the same date the court liquidator was appointed as the provisional liquidator. The company was ordered to be wound up on 16th April 1956, on which date the provisional liquidator was appointed as the officers liquidator of the company. The present application I A No. I, was presented on 27th August, 1960. Whether the date of the first appointment of the liquidator is taken to be 13th of March 1956, or 16th April 1956, the application has been presented more than three years but less than five years from the date of the first appointment of the liquidator. it is also clear from the summary of pleadings already given and the submissions made on behalf of the liquidator that he is not in a position to point to any specific or particular act of misapplication, retainer, misfeasance or breach of trust, but that he relies generally on the alleged gross neglect on the part of the directors and also on the alleged fraudulent conduct on the part of the managing director leading to such mismanagement of the affairs of the company or to the adoption of such irregular methods in the management of its affairs as to enable or render possible misapplication or misappropriation of the funds of the company resulting in loss to the company to the tune of over four lakh of rupees. Hence, the question of limitation has been argued on the footing that the starting point for computation is the date of the first appointment of th liquidator, the controversy between the parties being whether the period of limitation is three years prescribed in section 235 of the Indian companies act [VII of 1913] or five years prescribed in sub section [2] of section 45-0 of the banking companies act.
80. That this application is made under and is governed by section 235 of the Indian companies ACt of 1913 and not be section 543 of the companies Act of 1956 so indisputable for the following reasons.
81. As already stated, the winding up proceedings in this case had already commenced before the coming into force of the companies Act of 1956. All provisions of the 1956 ACT except those mentioned in section 647 of that Act, with reference to winding up contained in the new act do not therefore apply, but the company has to be wound up in the same manner and with the same incidents as if the 1956 Act had not been passed. Section 543 of the 1956 Act, which corresponds to section 235 of the 1913 Act, is not one of the excepted sections. A misfeasance application, for which provision is made in section 235 of the 1913 Act and section 543 of the 1956 Act, is undoubtedly one of the incidents of winding up. Hence it is l\clear that the present application is governed by section 235 of the 1913 Act and not by section 543 of the 1956 Act which prescribes a period of five years for limitation.
82. Section 235 of the 1913 Act reads as follows :
" 235. Power of court to assessee damages against delinquent directors. etc. - [i] 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 nay 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 contributory 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, manage, liquidator or officer , and compel him to repay or restore the money or property or any part there of respectively with interest at such rate as the court tanks just or to contribute such sum to the assets a 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 of fence is one for which the offender may be criminal responsible."
83. The portion in sub section [I] prescribing limitation was inserted by section 109 of the amending Act XXII of 1936. As the wounding up proceeding in this case commenced long after this amendment was give effect to, it is unnecessary to make any reference to the position in law in regard to limitation obtaining prior to the said amendment.
84. This being a banking company, it is governed also by the provisions of the Banking companies Act of 1949. The main provisions of that ACt were first enacted as part X - A of the Indian companies act of 1913, consisting of sections 277F to 277N by the amending Act XXII of 1936. They were later deleted from the companies Act and a new Act called the Banking companies ACt [X of 1949] was enacted. According to section 2 of that Act, the provisions thereof were to be read in addition to, and not, save as expressly provided therein, in derogation of the Companies Act or any other law for the time being in force. The Banking companies Act underwent several amendments. By amending ACt XX of 1950, which came into force on March 18, 1950, part III A was introduced in the act making special provisions for speedy disposal of winding up of banking companies. That part consisted of section 45A to 45H section 45F read as follows:
" 45F Special period of limitation - Notwithstanding anything to the contrary contained in the Indian Limitation ACt, 1908 [I of 1908] or in any other law for the time being in force, in computing the period of limitation prescribed for any suit or application by a banking company the period of one year immediately preceding the date of the order for the winding up of the banking company shall be excluded".
85. In 1953, the act was further amended by Act No. LII of 1953, which came into force on December 30, 1953. That act substituted part III A of the principal Act by a fresh part bearing the same No, IIIA consisting of sections 45A to 45X, The special provisions regarding limitation were enacted in section 45-o which read as follows :
45-O Special period of limitation [I] Notwithstanding anything to the contrary contained in the Indian limitation ACt, 1908 [IX of 1908], Or in any other law for the time being in force, in computing the period of limitation prescribed commencing from the date of the presentation of the petition for the winding up on the banking company shall be excluded.
[2] Notwithstanding anything to the contrary contained in the Indian Limitation Act, 1908 [IX of 1913]], 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 a banking company which is being wound up or for the enforcement by the banking company against any of its director 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.
[3] The provisions of this section, in so far as they relate to banking companies being wound up, shall also apply to a banking company in respect of which a petition for the winding up has been presented before the commencement of the Banking companies [Amendment] Act. 1953."
86. It will be noticed that sub section [I] re enacts the old section 45F with modifications and the other two sub sections are new. Thereafter, by act XXXIII of 1959, which was brought into force on 1St. October, 1959, further amendments were effected of which the amendment relevant to out present purpose is the one which added the following words at the end of subsection [2] of section 45_o.
" 45-O [2] .... or five years from the date of the first appointment of the liquidator, whichever is longer "
87. There can be no doubt that it this matter is governed only by section 235 of the Indian Companies ACt of 1913. the application would be barred by time. The only question, therefore, is to what extent and in what manner the liquidator can avail himself of the provisions of section 45-O of the Banking companies Act.
88. Two alternative positions have been taken up on behalf of the liquidator by his learned counsel, viz.
[1] That the expression " all other claims" appearing in sub section [2] of section 45-O includes a claim for repayment, restoration or compensation under section 235 of the Indian companies ACt., of 1913 or section 543 of the companies act of 1956, and that an application, if within time against directors, must be held to be equally within time against others; and [2] that if an application does not fall within sub section [2] it would necessarily fall under sub section [I] and that, therefore, the entire period commencing from the date of the presentation of the petition to wind up the company should be excluded.
89. I do not find much difficulty in accepting the argument that the expression all other claims occurring in sub section [2] would include a claim for repayment, restoration or compensation made in a misfeasance application. That subsection deals with three categories of claims viz.:
[1] a claim for recovery of calls on shares, [2] a claim based on contract, express or implied; and [3] all other claims.
90. The third category is a residuary category which in the contest must comprise every type of claim which does not fall within the first two categories. A claim etymological means a demand for something as due, a right or title to a thing, a right to make a demand on a person. In a misfeasance application the applicant undoubtedly makes a demand on the person imploded as a respondent that the said person be directed to make repayment or restoration or compensation. It the applicant makes out that the respondent is liable to make repayment, restoration or compensation, the court can compel him to do so. hence a demand made by the applicant in misfeasance application has the essential features of claim as normally understood vis, the right to make demand on the part of a litigant and the power of the court to enforce that demand. The same meaning was attached to the expression in Bank of Meenachil v. chackor and jwala prasad v. official Liquidator .
91. I hold therefore that a misfeasance application comes within the expression all other claims appearing in sub section [2] of section 45-O of the Banking companies ACt.
92. That sub section [2], however, by its very language deals with three categories of claims mentioned therein only so far as they are made against directors of a banking company which is being wound up. With reference to every one of them, the sub section describes the claim to be one by the banking company against any of its directors. In other words, sub section [2] of section 45-O enacts a special rule of limitation governing the claims by a banking company which is being wound up against any of its directors.
93. It the claim falls within the first two categories, it is not governed by any rule of limitation. In regard to the claims falling within the residuary category the period of limitation prescribed in this sub section governed them notwithstanding anything contained in the Limitation act or section 235 of the Indian companies ACt of 1913 [later substituted by section 543 of the companies act of 1956] or any other law for the time being in force. This sub section therefore must be read as an express provision within the meaning of section 2 of the Banking companies ACt. Hence, according to that section, this express provision alone must be read in derogation of the companies act. For the rest, the provisions of the companies act being read only in addition thereto.
94. The position is that the rule of limitation prescribed in section 235 of the Indian Companies act of 1913 stands, except in regard to cases for which express provision is made in sub section [2] of section 45-O of the Banking companies act.
95. The next question is whether the learned counsel for the liquidator is right in his contention that sub section [1] of section 45-O OF THE Banking companies act governs misfeasance applications other than those against directors which are specially governed by sub section [2] thereof.
96. There are two difficulties against exception this view, one stemming from the language of section 2 of the banking companies act and the other from the language of sub section 1 of section 45-O itself.
97. According to section 2, the provisions of the banking companies act may be read in derogation of those of the companies act only when the former expressly provides for a particular thing. Now an express provision in regard to the period of limitation governing a misfeasance application made by banking companies is the one contained in sub section [2] of section 45- O which in its language is limited to applications against directors. That is so not merely because the expression all other claims should be held to include misfeance applications but also because it expressly mentions section 235 of the Indian companies act of 1913 [later substituted by section 543 of the companies act of 1956] as one of the provisions of law, notwithstanding which the provision so sub section [2] of section 45-O will operate.
98. So far as sub section [1] of section 45-O is itself concerned it does not repeal or do away with the period of limitation prescribed by either the limitation act or any other law for the time being in force. On the contrary, it maintains the period of limitation prescribed by the limitation act or any other law for a suit or an application by a banking company which is being wound up,but provides that in computing that period the period commencing form the date of the presentation of the petition for winding up shall be excluded. Secondly, the provision for exclusion of a period of time form the computation of another period of time necessarily assumes that the latter period has commenced, because no question of exclusion can arise unless occasion has arisen for computation and no question of computation can arise unless the period to be computed has commenced. It follows therefore that the period to be computed has commenced. The period to be excluded under sub section [1] of section 45-O is one which commences from the date of the presentation of the winding up petition. Hence the period to be computed must necessarily be one which commenced prior thereto. Therefore, the suit or application mentioned in sub section [1] of section 45-O must necessarily relate to cause, the right to sue or the right to make an application in respect of which accrued before the date of presentation of the winding up petition. It is obvious that the right to make a misfeasance application which could be made only n the course of winding up of a company arises only after a winding up order is made which in necessarily subsequent to the presentation of the winding up petition. it following therefore that an application referred to in sub section [1] of section 45-O can never be a misfeasance application.
99. To the same effect as above are the ruling in Brahmayya and co. V. Mohammed as [1959] 29 Comp. cas. 291. , Sarkar dutta Roy and co, v. shree bank limited [1960] 30 Comp. cas. 416. and Bank of Meenachil v. Chacko [1962]32 Comp. Cas. 953.
100. Before concluding the discussion on this point, I must refer to section 45- O of the Banking companies Act which reads as follows :
" 45A part III-A to override other laws- The provisions of this part and the rules made thereunder shall have effect notwithstanding anything inconsistent therewith contained in the Indian companies act, 1913 [VII of 1913], or the code of civil procedure, 1908 [act V of 1908], or the code of Criminal procedure 1898 [Act v of 1889] or any other law for the time being in force or any instrument having effect by virtue of any such law but the provisions of any such law or instrument in so far as the same are not varied by, or inconsistent with, the provisions of this part or rules made thereunder shall apply to all proceedings under this part."
101. It will be noticed that the overriding effect given to Part III-a by this section over the provisions of the Companies act is only to the extent to which the latter are inconsistent the provisions of Part III-A. To the extent they are not so inconsistent, the provision of the Companies act will continue to apply. The inconsistency between section 235 of the 1913 act and section 45-O of the banking companies act as pointed out by me above, arises only in respect of the period of limitation governing misfeasance applications against the directors.
102. The net realist of this discussion is that his misfeasance application, in so far as t relate to the directors, must be held to be governed by the rule of limitation prescribed in section 45-O [2] of the Banking companies act, and in so far as it relates to others, must be held to be governed by the provisions of section 235 of the Indian companies act of 1913.
103. So far as the directors are concerned one other aspect must now be mentioned. The concluding words of sub section [2] of section 45-O prescribing an alternative period of limitation of five years computed from the date of the first appointment of a liquidator were added in 1959 before this application was made. At the time the application was made, the liquidator therefore had the choice of the longer of the two alternative periods. It therefore the period of 12 years from the date of accrual of the claim should happen to be shorter than the period of five years from the date of the first appointment of the liquidator, then the liquidator would undoubtedly be entitled to the latter period being the longer one.
104. My finding on point No.4 therefore is that this application in barred by time as against respondent Nos 8 to 14 who care not directors but is within time as edgiest the other respondents who are directors.
105. The application therefore as against respondent Nos. 8 to 14 should be and is hereby dismissed as barred by time.
106. In this view, the fortention on behalf of some among respondents nos. 8 to 13 that they are not officers within the meaning of the act and therefore not liable to be proceeded against under section 235 of the companies act of 1913 need not be considered.
107. I must add that the dismissal of this application as against the respondents who are not directors cannot and does not affect the rights or remedies of the liquidator which may be available to him otherwise than by way of misfeasance application in winding up.
108. Consequent upon my findings on points Nos. 4 and 5 resulting in the dismissal of the application against the respondents who are not directors and the legal impossibility or continuance of these proceedings against the legal representatives of deceased persons, the respondent who are interested in the remaining points Nos. 1 to 3 are only directors who are still alive, viz. the second respondent, S K Samant, the managing director, and the other directors, Tendolkar, Ajgaonka, porwal and Kalghatgi, respondents Nos. 3,5,6 and 7 respectively.
109. Points Nos. I and 2 involve only questions of fact while the third point raises a mixed question of law and fact. Although, as I shall later point out, the liability or responsibility of nay individual director must ultimately be traced to the actual fact and circumstances proved by evidence and his conduct in relation thereto, the general principles of liability are a matter of law.
110. Many decisions have been cited both of English and Indian court. it is, however, unnecessary, in my opinion to discuss each one of them in detail because the essential principles of law governing cases of this nature are well known and well established. By way of a general statement of principles I can do no better than refer to certain passages in the judgment of Romer J in In re city Equitable office insurance company limited, [1925] 1 ch. 407. which has been regarded as classical in this branch of company law. His lordship has considered in that judgment several earlier decisions cited and relied upon Mr. karanth for respondents Nos. 3, 5, and 7. The passage which I propose to refer to are at pages 426 to 430 of the report.
111. After pointing out that is not quite accurate to describe a director as a trustee, his lordship proceeds to state as follows at page 426 to 428:
It is indeed impossible to described the duty of directors in general terms, whether by way of analogy or otherwise. The position of a director of a company carrying on shall retail business is very different from that of a director of a railway company. The duties of a bank director may differ widely from those of an insurance director, and the duties of a director of one insurance company may differ from those of a director of another. In one company, for instance, matters may normally be attended to by the manager or other members of the staff that in another company are tended to by the directors themselves. The larger the business carried on by the directors themselves. The larger the business carried on by the company the more numerous. The larger the business carried on by the company the more numerous, and the more important, the matters that must of necessity be left to the managers, the accountants and the rest of the staff. the manner in which the work of the company is to be distributed between the board of directors and the staff is in truth a business matter to be decided on business lines......
112. 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 th articles of association. In discharging the duties of his portion 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 Limited [1911] 1 Ch. 425, 437. one cannot say whether a man has been guilty of negilence, gross or otherwise, unless one can determine what is the extent of th duty which he is alleged to have neglected......The care that he is bound as reasonable care to be measured by the care an ordinary man might be expected to take in the circumstances on his own behalf. In saying this Neville J. was only following what was laid down in overhand and Gurney company v. Gibbs as being the proper test to apply, namely.... whether or not the directors exceeds the powers entrusted to them, or whether if they did not so exceed their powers they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence. acting on their own behalf, would have entered into such a transaction as they entered into ?
113. AT page 428 to 430 his lordship Romer J, laid down certain propositions, flowing from earlier decided cases. They are the following.
[1] A director need not exhibit in the performance of his duties a greater degree of skill than may reasonable be expected from a person of his knowledge and experience.
His Lordship referred to the judgment of lindley M R in Lagunas Nitrate company v. laguans Syndicate , where it was held that directors, actin whithin their powers with care reasonably to be expected from them having regard to their knowledge and experience and acting honestly for the benefit of the company. should be regarded as having discharged their duty. Romer J. points out that the said proposition meant no more than this,viz, that directors are not liable for mere 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 reasonable 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 gounds fro suspicion, justified in trusting that official to perform such duties honestly.
114. Romer J. refer to the judgment of the court of appeal in In re National bank of wales limited affirmed by the house of lords in dovey v. cory. In the jusgment of the court of apeal is is pointed out that business cannot be carried on upon principels of distrust and that care and prudence do not involve distrust. In the House of Lords, lord, Davery observed that the director in that case was entitled to rely upon the judgment, infomation and advice of the chairman and the general manager as to whose integirity, skill and competence he had no reason for suspicion. Romer j. also refers to the judgment of Sir Geroge Jessel in Hallmarks case and to the judgment of Chitty J. In re Denham and Company and agreed with the poinion stated therein to the effect that directors are not bound to examine entries in the company books of accounts.
115. Mr. karanth particularly relied upon the judgment of Chitty J. In Denham case the factw of which were that one Denham who was in supreme control of the company in that case was a man of such extraordinary capaicty and consummat skill that it was almost impossble for ordinary perwsons to discover or even suspect that he was acting fraudulently.
116. The Indian cases cited by Mr. Karanth like doss V. Connel and Lobo's In the matter of Vijai Laxmi ltd. do not add much to the statement of general principles. Mr. karanth relies particularly on the last mentioned case to emphasise the distincton between the position of managing director and that of other directors.
117. On behalf of the liquidator, Mr. nagaraja rao stated generally that in support of his Client's case he could rely on the principles. Mr Karanth reles particularly on the Last mentioned case ot emphasise the distinction between the position of managing director and that of other directors.
118. On behalf of the liquidator, Mr. Nagaraja Rao stated generally that in support of his client's case he could rely on the principles and the propositios formulated by Romer J. and point out how they could apply to the facts of this case. He referred to the ruling of the Bombay High court in New Fleming spinning and Weaving company limited V. Kessowjiniak in which it was hld that the directors are responsible for the management of thier company where, by the articles of association, the business is to be conducted by the board with the assistance of an agent, that they cannot divest themselves of their responsibility by delegation the whole management to the agent and abstaining from all inquiry, and that if he prvoes iunfaithful under such circumstances, the liability is theirs just as much, as if they themselves had been unfaithul, to the judgment of the Kerala High court in Popular bank limited v. Krishna Kamath, where it is pointed out that thoughordinarily directors are entitled to rely upon the skill and integirty of the memebrs of the staff, they wold be guilty of misfeasacne if even after becoming aware of the fact that the staff had been acting in disregard of directons and resolutions of hte directors, they [ the directors] continue to place blind and complete reliance and turst onthe members of the staff and also to the decision of the madras High court in Malayalee bank limited v,. mannadiar, in which some of the acts of misfeasacne consisted in the diverting of large sums of money to accommodate some fo the directors, their relatives and friends or concerns and individuals in which the directors were interested and in making advances to weak and imaginary parties.
119. Mr. nagaraja Rao also referred to the decision reported in Khairul Bashar v. Thannu Lal in which an attempt has been made to define the term misfeasance. As pointed out by sir Raymond Evershed M>R>in in re B johnson and Co. [Builders] Limited facts and circumstance very so largely from case to cse that no judge in any case has made nay attempt at any precise difinition of what does and does not fall within the expression Misfeasance. further, while examining the individual responsibility of different directors with reference to or against the background of distributaion of work and responsiblity in managing the affairs of a company, it is well to remember the following observarion of lord Macnaghten in Dovey v. Cory.
120. I do not think it desirable for any tribunal to do that which parliament has abstanined from doing that is, to formulate precise rules for the guidance or embarrassment of businessmen in the conduct of business affairs. There never has been and I think there will never be, much diffiuclty in ealing with any aprticular case on its own facts and circumstances, and speaking for myslef, I rather doubt the wisdom of attempting to do more."
121. From the above discussion of the principles it follows that while the general principle may brigfly be stated to be that a director should always act honestly and that the standared of care expected of him is to take such care as in the circumstances of the case and having regard to his knowledge and experience and his association with the affairs of th company may be described as reasonable, the nature of the duty resting on him and the extnet of care expected of him must depend upon the facts and circustances of each case. I may here point out that section 281 of the Indian companies act of 1913 and the corresponding section 633 of the companies act of 1956, which empower the court to reliefe a director of any liablilty which he may incur under the law, clearly state that before so relieving him the court should be satisfied not only that he has acted honestly byt also that he has acted reasonably and that having regard to all the circumstances of the case including those connected with his appointment, he ought failry to be excused.
122. While it has always been recognised that having regard to the nature, magnitude or complexity of the business and affairs of the compnay, delegation of powers to and the distribution of responsiblity between the directors and members of the supervisory staff is permissible and while it is further recognised that so longas there is no room for suspicion a director may rely upon the competence, honesty, judgment and adive of other directors like managing director or other specially charged with duties of a particular category, or of any member o fthe supervisory staff, no case had held that it is open to a director totally to divest himself of all his responsibilites or to claim total immunity from the duty to take care which the law imposed upon him , whatever may be the nature and extent of the duty having regard to the circumstances peculair to the company and to his association with the affairs of the company.
123. It is in the light of these principles that the evidence in this case has to be examined. Before proceeding to do so, it is necessary to make a few general observations regardng the nature of the evidence in this case.
124. The official liquidator has naturally no personal knowledge of the details of acts and events which led to the company incurring the loss for hwich he seeks to make the directors liable. His case, as stated by the learned counsel on his behalf rests upon the actual facts of loss having occurred and the inference said to be available from certain circumstances observed and recorded in the reports, exhibits A-1, A-2, A-3, A-4, A-9 and A-21 and other facts including the conduct of the directors proved by other evidence both documentary and oral. The counsel on his behalf has also stated that the material placed on record inlcuding the reports mentioned above recording the result of investigation by the auditrs and mean of experience is not in itself sufficient to particularise separately the responsibility of any indiviudal directior in the sense that such director may be held to have retained or misapplied any specified or ascertainable sum of money. While the counsel for the respondents directos, particularly, Mr. karanth for respondents Nos. 3,5, and 7 have contended that the material itself is too vague and of such a character as to make it diffiuclt for them to put forward a specific defence and for the court to come to any definite conclusions. Mr. nagaraja Rao for the liquidator has argued that the power of the court under section 235 is not limited to making an order for repayment of any specified sum of money or restoration of any specified item of property. but extends also to making an order directing the delinquent directors to contribute to the assets of the company in liquidation by way of compensation such sum as the court considers just in the circumstances of the case and also further to apportion that sum between the several persons held liablein such proportion as may be just.
125. The nature of the evidence in this case is also to some extent influenced by the following circumstances:
A set of books called the rough cash books, as to the existence of which up to the time D D Joshi P W 2 conducted his investigation resulting in his reports, exhibit A-9 there can be little doubt, have since been lost and are not available. The original balance sheets signed by the directors of the company have been missing for a long time, and they have not been proudced. But printed balance sheets have been marked by consent as exhibit A-8 series. The liquidator did not produce the originbal minute books recording the minutes of the meetings of the company or tis directors, bur produced three books, exhibits b-15, and B-17, as the rough minute books, late in thecourse os the trial, tiwas stated by one of the learned counsel that some of the original minute books had been produced in some other proceedings pending in subordinate courts, but the exact position has not been made clear. There is evidence to the effect thatthe liquidator appointed by the Bombay High court or some representationof his had ocne sold were only useless papers, one cannot, be sure in the absence of clear material, whether or not ht epapers sold included some at least of some importance and value Mr. Joshi his report, exhibit A-9 as well as in the course of his evidence has stated that books and papers wer storped in great discorder both at the head office of the company and at the office of the liquidator at Bombay. In the course of the long pendency of this, case, papers have moved form belgaum to Bombay, Bombay to Belgaum and then from belgaum to this court, In this court papers relating to the moratirium applications including the several reports said to have been made by P>E> 4 Kotbagi to the Bombay High court have been missing and have not been traced till now.
126. I have also pointed out alrady that in the matter of defence there has been a clear distinction between the stand taken up by the second respondent, S L Samant, managing director, on the one hand, and Mr. Karanths clients, respondents Nos. 3,5,an d7 onthe other, the latter trying to fix the balme exclusively on the former, and the fromer trying to make out that the latter cannot so escape liability by placing blame on him alone.
127. I have also pointed out that the objections or written statements of Mr. Karanth's cleints as well as that of the deceased fourth respondent, Angolkar, follow closely the lines of that of the first respoondent, pant Balakudri, the chariman who, it may bestated, was himself a lawyer. Mr. Albal has contended, not without force, that the written statements of al lthese diectors were settled by pant Balekudnri himslef.
128. The said written statemnts indicate that the directors subscribing to those written statement proceeded upon the footing that the burden of proof rests entirely on the liquidtor as if these procedding are quasicriminal in nature. Even when they refer to the provisions of section 45H of the Banking companies act which makes an appereciable differnce to the nature of proof and the burden of proof, the contention is that there can be no primea facie case unless the same is estabilshed by legal evidence. Obviously the written statemtns have overlooked the provisions of section 45F fot he Banking companies act and the total effect in law o f the provisions of the tow section. 45H and 45F which is explained by Sarjoo Prosadi C J in the said case, the statute has taken, note of the fact that in ordinary circumstances the liquidator is not likely to have pesonal knowledge of the affairs of a banking company which is being wound up and that its directors may be expected to be in possession of much information relevant to the point under investigation and that therefore it calls upon the liquidtor only to make out a prima ficie case and places upon the directors the burden of proving facts necessary to exonerate them from the libiltity.
129. It is in view of these circumstances and the provisions of law that i deferred the fomulation of the points for consideration till after p.WS. 1 and 2 were examined and also gave the fullest opportunity ot all the respondents to inspect whatever books and papers they would like to in possesion of the liquidator and to have them marked in evidence.
130. I, however, noticed that the directors in the matter of leading evidence were apparently acting on not quite an accurate view of the burden resting upon them. Hence, afte the four withnesses for the liquidator and four on behalf of the respondents had been examined. i considered the advisability of ordering that the remaining directors who had not then give evidence as well as the auditor should appear and give evidence. At the time I made that order, I contented myself with stating that interests of jsutice required the making of that order with a view to ensure as full a clarification of matters in doubt as possible in the circumstences of the case and with a view to see that no party suffers any prejudice by reason of the evidence till then given or not given by the other parties in the subsequent stage of the trial. In making the order. i had in mind three principle circumstances wiz. The necessity, in the interests of doing complete justice between the parties, of all of them placing before court such evidence as would assist me in resolving the controversy between the managing director on then hand and the rest of the directors on the other, the need i felt of protecting the director them selves against their acting on what appeared to me to be a mistaken view as to the burden of proof resting on them, and finally my own duty as company judge of protecting the interest of depositors and other creditors of the company who in the nature of things cannot themselves take any active part in these proceedings.
131. In the course of the argument I heard before making the said order, the one general objection was that the court had no power to make an order of the type that I was proposing to make. In addition, Mr. Karanth for respondents Nos. 3.5. and 7 contended that the order would operate to the prejudice of his clients by permitting the liquideator to fill up the lacuance, if any, in his case and thus deprive his clients of the benefit of a fair trial Mr. Albal for the second respondent stated that his client having been already arrayed as an accused in a criminal trial, relating to some of the facts under investigation in this application he might be running a grave risk by giving evidence in this case. So far as the existence or otherwise of the power is concerned, it is now not necessary for me to discuss the position, because the appellate Bench after examining the relevant provisions and principles of law, has held in favour of the of the existence of such a power. The simple answer to mr. Albals objection is that misfeasance proceedings in the course of winding up of a company are independent of whether or not the person proceeded against may be criminally responsible for any offense disclosed by the facts of the case and that for assessing the civil liability of his client under section 235 of the Indian companies act 1913, it is unnecessary for me to consider or express what is more, a company court, while examin in the case of an alleged misfeasance is not to be deterred by the possibility of the person whose also. Mr. karanth's argument that compelling directors to give evidence is likely to prejudice what he calls a fair trial, proceeds, in my opinion, on the view that misfeasane proceedings are in all respects same as, and not in any respect different from , an ordinary civil trial. In the latter case there are only two contending parties or two sets of contending parties before the court and each party or each set may be expected in its own interest to place before the court such evidence as it considers necessary in support of its case. But in proceedings for misfeasance the interests involved are not merely those of the parties actually present before the court but of many others who are not before the court. The liquideator who is very often an applicant in such cases is not conducting the trial for his personal benefit but is discharging a statutory duty. In the even to the applicant being a creditor or a contributory. he is representing the interests of other creditors or contributories also. the possibility of the personal interests of the parties actually present being in some respects or to some extent adverse to those of the absent parties, or the parties actually present not being in a position to place all material that any be relevant, cannot always be ruled out. Indeed, when it becomes apparent that the parties, present, particularly those whose conduct is under investigation of relevant details, retrain form placing such details before the court, it is, in my opinion the duty of the court to compel them to give evidence so that the ultimate decision may, as far as it is humanly possible, be a fair and just decision open the facts in controversy. Before, however, my last mentioned order which i made on 21st March, 1963, could be given effect to the summer intervened and some of the directors affected by it viz. respondents Nos. 3,5 and 7 took it up on appeal , and I thought it prudent not to proceed with the trial until the appeal was disposed of. It was dismissed by the appellate bench of this court on 28th June, 1963. By then, the fourteenth respondent [ the auditor] had died. It was dismissed by the appellate Bench of this court on 28th June 1963. By then the fourteenth respondent [the auditor] had died it was, therefore not possible to record the evidence of the auditor which I thought would be of considerable value.
132. Subsequently, three director, viz. S K Samant [Managing director], and Tendolkar and kalghatgi [respondents Nos. 3 and 7 ] gave evidence.
133. Thus, every party that is likely to be affected personally by the ultimate order that I may make in these proceedings has had the full opportunity of placing before the court not only by himself giving evidence but also by electing information from every other party by cross examination, such material as he considers necessary in support of his case , and the possibility of any one of them being placed in a position of advantage or disadvantage by either not giving evidence or giving evidence, has been to the extent possible obviated.
[ His Lordship proceeded to consider the evidence].
134. I have therefore no hesitation in holding that there has been such lack of supervision and control by the persons responsible for providing for management of affairs of the company leading to actual dishonest dealings with the company moneys that those responsible for providing for management of the affairs of the company cannot but be held to have have grossly negligent.
135. Prim facie, those responsible for management of the affairs of a company are the board of directors. Although it does not of course mean that every detail of administration should be attended to by the directors themselves, the accepted position is that the ultimate responsibility for making provisions for due administration of the affairs of the company does rest on the directors themselves. That is the normal position in law. That is also the position stated in article 124 of the articles of association of this company, which states that the management of the business of the company shall be vested inthe directors who in addition to the powers and do all such acts and things as may be exercised or done by the company and are not hereby or by statute expressly directed or required to be exercised or done by the company in general meeting Article 125 also enumerates specific powers of the directors without prejudice to the general powers conferred by article 124.
136. The argument on behalf of the directors, to her than the managing director, however, is that so far as the day to day administration of the affairs of the company and all details pertaining thereto are concerned, the primary responsibility is that of the managing director. The rely on articles 108 and 109 [a] of the company articles of association which read as follows:
" 108 The business of the company shall, subject to the control of the board be carried on by the managing director or the assistant managing director in the name of the company and all contracts, matters and things, which shall be entered into executed, taken or done by him, on behalf of the company and all receipts and discharges signed by him as such shall be good and sufficient to all intents and purposes and binding on the company.
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 issue 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 singed,"
137. It is their case that having appointed the second respondent as the managing director with the sanction of the general body of shareholders about whose competence and integrity they were satisfied at the time of appointment and as to whose competence or interirty they had no cause for suspicion till about a week before, the company was obliged to close down business and the auditor of the company the fourteenth respondent, who was the company's auditor from the commencement, having at no time brought to their notice any irregularity in the working of the company. they, the other directors, cannot in law be held responsible for whatever loss the company is now shown to have sustained and that the responsibility, if any, therefore is exclusively that of the managing director. second, respondent, and certain admissions made by him during November December 1954 go to show that he certain admissions made by him during November December 157, go to show that he one is responsible for the loss caused to the company and not the rest of the directors.
138. I do not think that the provision of the articles of association in themselves without regard to the factual position can be taken as decisive of the existence or otherwise of the responsibility of the directors for the loss actually sustained by the company. Primarily the provisions of the article general lines on which and the limitations subject to which the responsibility for proper management of affairs should be distributed or allocated between the director and the officers of the Company. They do not and cannot in my opinion, be read as constituting sufficient basis for either the board of directors as a whole or any one on the director to disclaim responsibility. `The rulings of English and Indian courts which i have already referred to do not, as pointed out, support the view that no duty at all rests upon a director in the matter of administering the affairs of a company. Every case, it will be noticed, has examined the position from the point of view of determining whether on the facts of the as and particularly those peculiar to the position of the directors vis-a- vis the company. the director in question can be said to have discharged his responsibility. In determining that question I am clearly of the opinion that the opinion of the court should be guided and governed by the principles indicated by the the legislature itself in section 281 of the indian companies act 1913 and section 633 of the companies act of 1956.
139. IN the present case, all that can be said on the basis of the articles of association is that they do authorise the board of director. The articles do not, however say that the mere appointment of a managing director discharges the board of directors of its ultimate responsibility for providing for the management of the company which in express terms is vested in them. The managing director is to work under their supervision. Supervision inviting for the the management director is to work under their supervision. supervision involves not only the the initial formulation of duties and responsibilities of a person whose work is to be superviserd but also subsequent scrutiny of the manner n which he performs his duties and discharges his responsibilities by periodical inspection and review of his work with a view to see that the obeys and observes the instruction originally or from time to time issued to him and generally conducts himself n the matter of his work properly, honestly and efficiently.
140. It is no doubt a well established proposition of law that directors are entitled to rely upon the skill and intergirity of a managing director or other principles officers of a company exercising supervisory functions provided of course that before appointing a managing director or officer, they are satisfied about the honesty and general competence of the appointee. it, however, circumstances come to their notice which raise reasonable doubt or suspicion about either the intergirity or the competence of the person placed in charge of the affairs it is their plain duty to examine the position and take such steps as may be reasonable in the circumstances. It these circumstances are of such character so plain, so manifest and so simple of appreciation, that no man with any degree of prudence acting on his own behalf would have omitted to take corrective action is is no longer, in my opinion open to the director to say that they continued to rely on the honesty and integrity of the managing director or other officer or to rely upon any principle of law in support of an argument that they have discharged the duty or responsibility which the law places upon them.
141. The question, therefore, which requires to be investigated in this case is two fold: Whether the board of directors did in the first instance pass or adopt any resolution or resolutions indicating or defining the duties of the managing director and providing for the mode or manner of supervising his work, and, secondly, whether the directors are right in their contention that they never had any notice of any circumstances casting any doubt or suspicion on either the integrity or the competence of the managing director.
142. On the first question the directors in this case have case done nothing, beyond relying upon the provisions of articles 108 and 109 [a] as well as on article 112 which gives a list of powers of the managing director. Mr. Karanth has complained that the liquideator having in spite of notices and requests failed to cause production of the original minutes books, his clients are considerably handicapped in the matter of bringing to the notice of the court the resolutions, if any, relating to the definition or allocation of powers of functions to the managing director. It seems to me that even a negative value which one could attach to this circumstance on behalf of the ordinary directors has been to a considerable extent reduced, if not actually destroyed by the type of evidence give by the ordinary directors and the line of cross examination pursued against the managing directors. Both Tendolkar and Ajgaonkar took up a constant and invariable attitude that having appointed Samant who, having regard to his position in the business, world at that time, was considered to be a competent person as managing director, they relied upon him completely in all respects and that as managing director it was his exclusive responsibility to see that every thing about the working of the company was in proper order. neither of them has at any time during the course of their deposition stated either that there were resolutions adopted by the board touching the duties and responsibilities of the managing director or that there was at any time any system of periodical review of his work unless one could say that the approval by the board of directors of the loans sanctioned by the managing director and the signing of annual balance sheet with the auditors report may be described as such reviews. Even the fact that pant Balekundri and Tendolkar on behalf of the board of directors had executed a power of attorney in favour of Samant was not mention by Tendolkar, until the power of attorney was put to him by Mr. Nagaraja Rao on behalf of the liquideator and marked exhibit A-39. Samant himself made some reference to a discussion amount the directors, though not according to his recollection actually recorded in the form of a resolution, relating to organization of work at the head office and distribution thereof between the members of the staff. On this point, the cross examination by Mr. karanth was directed toward discrediting this evidence of Samant. obviously, the attempt was to make out that the allocation of word among the staff was left entirely to the managing director and that the board of directors gave him no directions or instructions in that regard. Samant also referred to a resolution of the board of directors authorizing four persons, viz., Pant Balekundri, himself, Deshpande and Nadgauda to operate bank accounts of the company, any tow among them signing the cheques. Even in this regard, the cross-examination by Mr. Karanti was to question the accuracy of Samant's recollection of this resolution. Mr. Mandagi on behalf of respondents NOs. 8 to 10 and the legal representatives of the deceased respondent NO. 11, who had with him copies of the relevant resolutions (which being unauthenticated copies could not be marked as exhibits in evidence) put certain dates to Samant as the ones on which the resolutions relating to operation of bank accounts had been passed by the board of directors. So far as the directors, Porwal and Kalghatgi, are concerned, they have not deposed definitely to any fact material to the question now in controversy, taking up the position that on account of their recent appointments as directors and little opportunity they had to acquaint themselves with the details of the company's working, they are no aware of any important details or any other details at all.
143. On the other side of the picture, Mr. Albal on behalf of the second respondent has brought out in evidence that the board of directors used to meet fairly frequently at intervals of a months or less, that at such meetings the board not merely sanctioned loans or approved the loans already sanctioned by the managing director but also concerned itself with smaller details of administration like the appointment and salaries of the members of the staff, sanctioning payment of bills for small amounts like advertisement charges, etc., and also general review of the progress and work of the company.
144. Upon the whole, it seems to me that so far as this matter is concerned, the case of the directors on their own showing is that there never was any formal resolution defining the functions and responsibility of the managing director or indicating the extent to which he can, on his own and independently of the board, exercise powers in relation to the management of the affairs of the company or providing for the manner in which the board should exercise supervision over the work of the managing director. The general effect of the evidence appears to be that to a large extent the directors proceeded on a footing of mutual trust and that many details were settled by informal discussions rather than by formal resolutions.
145. Among the other circumstances which are of relevance to this topic is the extent and nature of the business operations of this company.
146. An examination of the balance-sheets produced and marked exhibit A-6 series discloses that in earlier years the total resources of the company were less that a couple of lakhs. It was only in the year 1942 that they rose to about five lakhs of rupees and in 1943 approached 10 lakhs rupees. In 1946 when the second respondent became the managing director, the total resources were about 17 1/2 lakhs of rupees. Thereafter, for some time they were above 20 lakhs of rupees, but at no time did they exceed 22 lakhs of rupees. The balance-sheets for 1952 and 1953 which are the latest show that the total resources were less than 20 lakhs of rupees.
147. It is also noticed that among the advances, as already pointed out, about 50 per cent, were unsecured and the secured advances were either old loans or goods loans.
148. It appears from the evidence that such of the directors as were businessmen were availing themselves of large limits for what appear to be loans on the security of merchandise or stock-in-trade. It also appears from the evidence that when they first became directors of this company, their trade resources or amounts invested in trade were not large or considerable and that their turnover in trade appeared to increase in later years. It has been suggested to them in the course of their cross-examination on behalf of the liquideator that they prospered mainly because they could, as directors of the company, command large credit limits from the company. They have of course denied these suggestions. It has also been argued on their behalf that availing themselves of the loan facilities from the company may not in itself be a matter for reproach, and that they have repaid their loans.
149. The importance of this circumstance, however, lied not in the bare fact of the directors having obtained loans or advances form the company. What is of importance and relevance to the present discussion is the manner in which these loans were availed of, the influence which their conduct in relation to these loans may be said to have had on the discipline and integrity of the staff and the infereces available there from as to the acquaintance which the directors themselves may be said to have had with the details of the working of the company or, at any rate, with the general features of its working.
150. It should, however, be stated that the allegations of actual dishonesty on the part of the directors are vague and proceed upon suspicion rather than upon any fact proved by the evidence. All that can be said to have been established by the evidence is that businessmen among the directors were availing themselves of large limits for loans and advances, and that in the matter of sanction or scrutiny of those loans no strict or proper procedure was adhered to. 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 mad in the matter of procedure and scrutiny between the loans to 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 the 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, the 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 may opinion, to disentitles 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.
151. I hold therefore that the directors, other than the managing director, are also liable for the loss because they must be held to have filed in their duty of providing for good and efficient management of the 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 supervisory staff.
152. All the directors therefore including the managing director must be held to be jointly and severally responsible to contribute Rs. 2,50,000 to the assets of the company. I must add that this will render unenforceable exhibits A-26 and A-27 against Samant. But exhibits B-49 and B-50 will continue to be enforceable because I have considered them to be prima facie realisable while assessing the los attributable to the discrepancy in bank accounts.
153. It has been argued on behalf of Porwal and kalghatgi, respondents NOs. 6 and 7 respectively, that what is stated above may not apply in all respects in their case as it might be said to apply in the case of directors like Tendolkar and Ajgaonkar. In regard to Kalghatgi it is stated that he became a director only in July, 1953, and that, therefore, it could not be said either that he was in any sense responsible for things which had already taken place before he became a director or that after he became a director he had any particular opportunity of setting things right. In regard to Porwal, it has been stated that though he became a director in 1951, he had attend only about 3 or 4 meetings of the board of directors and that he was not full acquainted with all the defects. He also states that if only he had any idea of the defects, he would not have became a director at all.
154. It is true that neither of these directors as Tendolkar and Ajgaonkar close association with the affairs of the company as Tendolkar and Ajgaonkar may be said to have had. But it is difficult to believe that they were wholly unaware of the situation. Kalghatgi has not only denied even simple facts which he need not have denied but also has made common cause with the directors like Pant Balekundri, Tendolkar, Ajgaonkar and Angolkar, and filed a written statement in all respects same as or similar to the written statements of these directors. Porwal has for a reason which I am unable to guess, omitted to mention that he had along with Tendolkar signed Ajrekar's certification of the actual cash, viz., exhibit A-46, on the closing date. It is therefore not quite possible for me to held that they were wholly unaware of the situation. It is also obvious that, as a matter of law, they, as members of the board of directors, have the ultimate responsibility of providing for proper management of the affairs of the company and have to bear the burden of exonerating themselves from the prima facie case made by the liquideator on the evidence placed on recorded.
155. The question is whether they can be said to have acted honestly and reasonably in the circumstances of the case including their association or nature of association with the affairs of the company and their position on the board of directors.
156. No suggestions of dishonest conduct has been made against them. They are not even borrowers from the company. They say that they dependent upon the senior directors of the company who both by their experience and their longer and more intimate association with the affairs of the company may be expected to be better equipped to take the necessary corrective steps. On the evidence there is no reason totally to discard this defence put forward on their behalf. They cannot be found fault with for placing reliance on these senior directors. It is also not impossible that in their position and with their experience in the affairs of the company they themselves might not have been in a position to make any definite proposals or take any effective steps. In that view it is not possible to reject the argument on their behalf that they may be said to have acted not merely honestly but also reasonably.
157. But there is one circumstance which makes if difficult for me to exonerate them wholly or unconditionally. When Porwal joined the doctorate in 1951, the first inspection by the Reserve Bank had already taken place and he was on the board when the subsequent inspections took place. Nevertheless, according to his own evidence, he took no steps to inform himself about the correct position or to dissociate himself from the management if he thought that it was beyond his capacity or capabilities to do anything useful as a director. Kalghatgi was equally indifferent an d took up the position as a director as if it meant nothing to him. The attitude displayed by these two directors actually comes to this, viz., that taking up the position of director of a banking company is a matter of no consequence. It should be remembered that the confidence which the public response is banking institutions is to not inconsiderable extent dependent on the reputation for integrity and sense of duty which the members of the board of directors may enjoy. Members of the public deposit their moneys with banks out of the confidence in the institution and that confidence is sometimes influenced by the fact that a person whom they know to be honest and conscientious is on the board of directors taking the view that such a person cannot be expected to associate himself with an institution if he thinks that it is not running on honest and correct lines. To excuse, therefore, totally persons who become directors with the attitude of mind which these tow directors have displayed is fraught with dangerous consequences. I am not, therefore, inclined totally to exonerate either of these two directors.
158. In the result, I make an order directing respondent NO. 2, B. K. Samant, respondent No. 3, P A Tendolkar, respondent No. 5, L S Ajgaonkar, respondent No. 6, R W Porwal, and the seventh respondent, R N Kalghatgi, to contribute jointly and severally a sum of Rs. 2,50,000 to the assets of the company in winding up with interest thereon at six per cent per annum from to-day till payment. If R W Porwal contributes a sum of Rs. 15,000 within three months from today with interest at six per cent per annum from today till payment, he will be relieved of further liability under this order. If R N Kalghatgi contributes Rs. 15,000 within three months fro this day with interest thereon at six per cent per annum from today till payment, he will be relived of further liability under this order. If either of them fails to make payment of the said sum of Rs. 15,000 with interest thereon a six percent per annum within three months from today, he will forfeit the relief granted to him.
159. The liquideator is authorised to meet the expenses of these proceedings from out of the estate. Regarding the rest of the parties, the only proper order to pass regarding costs, in the circumstances of the case, is to direct them to bear their own costs. I order accordingly.
160. Order accordingly.