TMI Blog1950 (12) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... an Companies Act and that they may be proceeded against for misfeasance under section 235 of the Act. There is also a further prayer that the applicants' claim for payment of the deposit amount may be treated as preferential claim. The applicants entered into an agreement on 7th September, 1946, with the company and they were appointed distributors for the company's production for certain territory and a sum of Rs. 50,000 was paid as deposit as follows: Rs. 15,000 on 7th September, 1946, Rs 10,000 against delivery of copies of "Kumaraguru" and the balance of Rs. 25,000 was to be paid on or before 27th October, 1946. The grievance of the applicants is that in spite of demand the company has not refunded the deposit of Rs. 50,000 or such other amount as would be found actually due out of the deposit, that in contravention of the terms of the agreement these monies were utilised by the company and that the directors should be made liable to pay for breach of trust or misfeasance caused by them and that they should also submit for public examination regarding their dealings and other matters concerning the company. Apart from the merits, a preliminary objection was taken as to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's Private International Law at page 100 which is as follows: "The general doctrine of English law is that the exercise of civil jurisdiction, in the absence of an Act of Parliament, must in all cases be founded upon one or other of two principles, namely, the principle of effectiveness or the principle of submission. The principle of effectiveness means that a judge has no right to pronounce a judgment if he cannot enforce it within his own territory. The elementary fact several times stated by Holmes, J., that 'the foundation of jurisdiction is physical power', is worthy of attention, although, as we shall see, there are certain exceptional cases in which jurisdiction may be assumed by virtue of statute over persons who are abroad and thus not within the power of the court. Power in this connexion means that physical power which becomes exercisable because the property which is the subject matter of the suit is in England or because the defendant is present at the time of service of the writ in England, and, broadly speaking it is true to say that an English court does not consider itself competent to adjudicate upon a claim if neither of these elements is present. In such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside the Indian Union shall comply with certain requisitions of the Registrar to file certified copies of the Charter or articles of the company, the full address of the registered or principal office of the company, a list of directors and managers of the company, the names and particulars of persons resident within India authorised to accept on behalf of the company process and any notices required to be served on the company etc. This company has complied with the provisions of section 277 and it is therefore argued that there has been a submission to jurisdiction of the courts of this State and that therefore even if initially this court had no jurisdiction they have acquired jurisdiction by virtue of the foreign company submitting itself to the jurisdiction of the Indian courts. Jurisdiction over persons and property, apart from principles of international law where foreign subjects are involved, is governed by legislation passed in the country where it is sought to be exercised. In so far as suits are concerned the Civil Procedure Code and the Letters Patent apply. Section 20 of the Civil Procedure Code provides the forum in which suits can be instituted. Section 19 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vertheless valid, when authorised by special local legislation, in the country of the forum by which that decree was pronounced." The learned Judge later on observes as follows: "This distinction is very clearly brought out in the judgment of Sterling, J., in Girdhar Damodar v. Kassigar Hiragar. The learned Judge observes that it would be the duty of the courts acting in the execution of a statutory enactment, to give effect to it, it being immaterial whether the judgment rendered would in the circumstances be recognised by foreign tribunals as being consistent with international law and the general principles of justice, and in support of this view he cites the observations of James, L.J., and Cotton, L.J., in Ex parte Blain, In re Sawers. " It is therefore not necessary to consider what would be the effect of an order or decree which is passed by this court provided it is authorised by local legislation empowering the court to entertain a proceeding for the purpose and pass an order or decree as is provided, and whether that order or decree would be treated as a nullity, whether the person against whom the order or decree is passed would comply with it or whether it could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is they are liable to account and bring back certain sums of money and for that purpose the court is asked to examine into the conduct of those directors and compel them to pay the amount in respect of which they have committed breach of trust. The proceeding is in the nature of a suit for recovery of monies wrongfully converted by a person who happens to be a non-resident foreigner. If this proceeding is- instituted by way of a suit, the provisions of Sections 19 and 20 of the Civil Procedure Code would be applicable and since the cause of action arose within the local limits of the jurisdiction of this court, though the defendants the persons who are liable to account reside in a foreign territory, a suit can very well be laid and summons served in the manner provided by the rules and a decree could be passed. How and in what manner the decree would be treated by the foreign court is immaterial, for the decree is nevertheless valid though it may be treated as a nullity by the foreign court. It is also equally unnecessary to consider whether such a decree could be enforced against him. The court is competent to pass such a decree by virtue of the local or municipal law governing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintainable and the court has jurisdiction to entertain such application and consider the same on its merits. In the view I am taking it is unnecessary to consider whether there is jurisdiction conferred on this court by reason of the foreign company having complied with the requisitions in the Companies Act under Part X, section 277. The claim for preferential payment is made on the ground that the sum deposited was trust money since a trust was created in respect of this amount in favour of the applicants. In order to arrive at a decision whether a particular deposit constituted a trust or not, it is necessary to consider the particular terms under which the monies were deposited. Exhibit P. is the agreement which is in the form of a letter written by the company to the applicants. It is as follows: "Dear Sirs, We have pleasure in confirming you us our distributors for all our productions, commencing from Sri Kumara Guru for a period of five years, for the territory comprising Mysore State, Coorg, South Canara and Bombay Presidency, excluding Bombay City proper, on the following terms: 1. You shall deposit with us a sum of Rs. 50,000 (Rs. fifty ' thousand) in the mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osit amount of Rs. 50,000, it was observed as follows:" You requested my clients to exploit 'Thai Nadu' and adjust the collections against the deposit, which could not be done for the obvious reason that the said picture was not passed by the censors here and you never moved in the matter to have it censored, here." The applicants filed a petition for winding up on the 30th December, 1948, and in the petition the applicants stated that they are entitled to the repayment of Rs. 50,000 paid to the company as preferential payment and a further sum of Rs. 30,000 as damages for non-fulfilment of the agreement dated 7th September, 1946, amounting in all to Rs. 80,000 less Rs. 7,698-5-3 by realisations leaving a balance of Rs. 72,301-11-3 due by the company to the applicants. It may be stated here that in the balance-sheet of the company for the year ending 31st December, 1946, Ex. P. 3, a sum of Rs. 68,932.29 cents is shown as "Distributors' deposits" under the column "Sundry creditors." There are also entries relating to deposits called "representatives' deposits" and "producers' deposits." Relying on the decisions, In re Travancore Quilon Bank Ltd. and Kshetra Mohan Dass v. Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on there was about the nature of a deposit made by a selling agent of the company's goods. The contract of agency provided for a security deposit of Rs. 10,500 carrying interest at the rate of 3% per annum. There was a provision in the agreement that the company would be entitled to appropriate any damage or any amounts for which the selling agent did not account for from and out of the security deposit. It was held that the security deposit of the agent in the hands of the company must be regarded as impressed with a trust or held in a fiduciary capacity by such company and that the agent is entitled to get back the whole of the security deposit even after such company goes to liquidation. Both in In re Travancore Quilon Bank Ltd. and in Kshetra Mohan Dass v. Basu, there was in particular a stipulation as to provision for payment of interest by the company which implied that the company could utilise the monies. It was argued that it could not therefore have been intended that the deposit should be kept separate or must be deemed to be paid into the hands of the company to be held by them in a fiduciary capacity. In the present case, there is no provision as to payment of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, that the company never intended that the amount should be a fund entrusted to them for a specific purpose and should not be utilised by them and will be returnable to the applicants in specie subject to such deductions as may arise in case the applicants did not fulfil their obligations and that therefore the applicants would only be entitled to rank as any other creditor. Further, that the intention to treat this amount as not a trust is also shown by the circumstance that this deposit was not kept as a separate fund but was mixed with the funds of the company and subsequently utilised by the company for its own purposes and the fact that such utilisation was made by the company shows that the intention must have been otherwise. In support of his contentions the learned counsel relied on the Full Bench decision in Maheshwari Bros. v. Official Liquidators, Indra Sugar Works Ltd. In that case the managing agents of the company under liquidation entered into an agreement of agency whereby they deposited a sum of Rs. 50,000 with the company as security for the fulfilment of their obligations. The company being ordered to be wound up, the agents claimed a preferential pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company and was utilised by them for their general purposes is a strong indication that the amount was not deposited as a trust, is a correct one. The intention to create the trust should primarily be that of the author of the trust first which must be accepted by the person in whose favour the confidence is reposed as a trustee. If the company, who should be in the position of a trustee, without reference to the consent of the person who deposited, utilised the funds for general purposes and failed to carry out the intention of the trust by mixing the fund with the funds of the company or using the same for purposes other than for which it was deposited that could not be taken as a test to find out whether a trust has been created. It may be that the intention on the part of the author of the trust is not expressed. The subsequent conduct of the company in utilising the fund might throw a light on whether the intention of the parties was to create a trust. But that cannot be a conclusive or a safe test in such cases, since even in a case where a deposit has been made for a specific purpose, as in the present case, if the person who has received the deposit applies it for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e properties have been mortgaged. The applicants claim priority over that of the decree in favour of the Madura Bank on the ground that the amount deposited by them is a trust amount which could not be subjected by the company to any charge, or in any event be held liable to any charge or mortgage created by the company and that the bank had notice that this amount of Rs. 50,000 was a deposit amount and not the assets of the company, as could be seen from the balance sheet Ex. P. 3. An ex-director of productions of the company was examined on behalf of the applicants to establish that the agent of the Madura Bank and an accountant came to the company's premises, looked into the statement of affairs of the company and the balance sheet, and they questioned the management as to where this deposit was kept, checked the securities and it was only thereafter that the loan was granted. But, a witness on behalf of the Madura Bank denies that either the Bank's agent or anyone went and inspected the accounts and other papers of the company. He states that they did not look into the balance sheet and they were not aware that there was such a balance sheet and that they came to know of it o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondents 3 to 11, the directors of the company, or any of them, are liable for misfeasance in respect of the deposit amount and whether they should be personally directed to pay the amount to the applicants. The allegations in the affidavit regarding this prayer is very vague and except stating that the directors of the respondent company should also be made to pay for breach of trust or misfeasance, there is nothing alleged as to what the misfeasance or breach of trust that the directors had committed and in what manner they had become responsible and what is the failure of their duty which would make them liable to the applicants. The joint Official Liquidator has filed an affidavit wherein he states that from the records available there are not sufficient materials to come to the conclusion that there has been any act of fraud or misfeasance by the directors. The directors while denying their liability state through their Chairman that the deposit money of the petitioners has been made use of in the running of the company and the money has been properly accounted for. The contention on behalf of the applicants is that the directors misapplied the amount and committed a wron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be shown to have been guilty of some misconduct by which the company has suffered loss; and the application must therefore be dismissed. In that case the Master of the Rolls was of opinion that the directors by acting as such without the necessary qualification had been guilty of misfeasance; but on appeal the judgment was set aside. James, L.J., states as follows at page 670: "In order to enable the court to apply that section, the liquidator, as it seems to me, must show something which would have been the ground of an action by the company if it had not been wound up. I am of opinion also that the word 'misfeasance' in that section means misfeasance in the nature of a breach of trust, that is to say, it refers to something which the officer of such company has done wrongly by misapplying or retaining in his own hands any monies of the company, or by which the company's property has been wasted, or the company's credit improperly pledged. It must be some act resulting in actual loss to the company". Bramwell, L.J., at page 673 observes: "It seems to me that the sole- object of the clause is to give a summary remedy for that for which there would be a remedy without that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er specified, but as regards the investment a clearer clause than this I never saw, and I see no difficulty in construing the words, viz., that 50 per cent. of the premiums on the whole life policies shall be invested in Government securities. The addition of the words 'for the better security of the policy holders' does not create an ambiguity which reduces the clause to a nullity. As to any question that may have to be decided between the policy holders and the whole life policy holders, because the amount to be invested is 50 per cent. of the premiums paid on the latter, I abstain from expressing any opinion. Should there be any question as to the application of the funds, there can be none either as to the amount to be set apart and invested, or that the clause created an obligation on the part of those who had the management of the company to see that effect was given to it. It was submitted that the funds had been properly applied for purposes of the company. As to that, there is no ambiguity or vagueness in the clause, and I have not the least doubt that it was meant as a protection to those entitled under the trust as policy holders, and that there would have been no diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slature that any portion of the capital should be returned to the shareholders without the statutory conditions being complied with. A limited company cannot in any other way make a return of capital, the sanction of a general meeting can give no validity to such a proceeding, and even the sanction of every shareholder cannot bring within the powers of the company an act which is not within its powers. If, therefore, the shareholders had all been present at the meetings, and had all known the facts, and had all concurred in declaring the dividends, the payment of the dividends would not be effectually sanctioned." The reasoning of the decision is that the capital of the company was utilised for purposes not authorised by the memorandum and articles of association, that the directors were quasi trustees for the company and not for the individual shareholders in respect of this capital and therefore the acts of the directors amounted to a breach of trust, and accordingly they would be liable. Lord Macnaghten in Cavendish Bentinck v. Fenn summarises the scope of section 165 of the Companies Act of 1862. At page 669 he observes as follows: "The 165th section of the Act of 1862 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the business which he has undertaken. Directors are liable for losses occasioned through acts done by them as directors in matters which are ultra vires the company, and this liability is not dependent upon any question of honesty of intention." The Indian decisions that are cited are: Gopalaswami v. Krishna-swami; National Bank of Upper India, Lucknow v. Dina Nath Sapru; Connel v. The Himalaya Bank Ltd. and Bhim Singh v. Liquidator, Union Bank of India. The Indian Courts uniformly hold that misfeasance must be such as would amount to breach of trust in relation to the company and must result in loss to the company. It is necessary that in all cases, loss to the company must be established and as observed by Edge, C.J., and Banerji, J., being in the nature of damages, it is necessary that the loss to the company in respect of which compensation is asked for should be the direct, and not a remote and more or less speculative, consequence of the misfeasance or neglect of duty on the part of the director or other officer of the company from whom such compensation is sought. In the present case, the amount which was paid by the applicants was received as a deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the monies for the business of the company by the directors would not also amount to an act said to be ultra vires. In In re British Guardian and Life Assurance Co., and In re Exchange Banking Co., the acts of the directors were held to be ultra vires and acts done in contravention of the memorandum and articles of association. I am therefore unable to hold that the directors in this case have misapplied the applicants' amounts and that therefore they are liable to account. There is no case as to any breach of trust. The breach of trust that is contemplated under section 235 is a breach of trust in relation to the company and it is not suggested that any monies of the company have been misappropriated by the directors or that any duty was imposed on the directors by the company in respect of which the directors have committed a breach. In order to make the directors personally liable under section 235 for misfeasance, it is necessary to show that the directors have dishonestly acted, or abstained from acting, in conflict with their plain duty and that by reason of the act of the directors, the company has incurred a loss. But this dishonest intention need not be shown in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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