TMI Blog1963 (11) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... epay 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. 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 "reports" 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, whereafter, the company court insisted on strict compliance with the Rules. This application was filed on August 27, 1960, as liquidator's report No. 20 and numbered by the office of this court as I.A. No. I. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he eleventh respondent, M.S. Deshpande, died on 2nd October, 1960, and a memo to that effect was filed by his advocate, Mr. Raikar, on November 7, 1960. I.A. No. III was filed by the official liquidator to implead 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, filed 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. Thereafter, Mr. R. V. Jagirdar asked for and obtained from the court permission to make a detailed inspection of the relevant records in the possession of the liquidator. On April 13, 1961, the wife filed on behalf of herself and her children an affidavi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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, there fore, 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 filed vakalat executed in his favour by Kusum Tai, wife of the deceased, for herself and as guardian ad litem of her minor 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 memo dated June 29, 1961, 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a licence 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 licence or informs the company by notice in writing that licence cannot be granted to it. With a view to examine the question whether or not a licence 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-I 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. Section 35 of the Banking Companies Act empowers the Reserve Bank to conduct inspection of banking companies and their books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibit A-4 in this case. 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. 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 instalments 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined 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 May 10, 1957, was actually submitted by him to the official liquidator. It is marked exhibit A-9 in this case. Consequent upon the reorganisation of the States pursuant to the States Reorganisation 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. After receipt of the proceedings in this case, they were renumbered as C.P.(B) No. 28 of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nging 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. Mr. Srinivasa Iyengar, learned counsel for the official liquidator, in his opening address also told me that his client's case rests principally on exhibits 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 liquidator's 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. Regarding the auditor, respondent No. 14, the general allegations in paragraphs 9 and 10 of the main application are that in spite of several serious irreg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Amritlal 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. 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 the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nection 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. 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 it 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. In paragraph 17, the liquidator gives a list of amounts said to have been withdrawn 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." 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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." 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", to the main application and denied every material averment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he day-to-day affairs of the company. They also contend that as mere directors they were not responsible for looking into 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. 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 bad 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 a par with the case of other directors, that there is no specific allegation agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nth 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. 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. The petition to wind up this company was, as already stated, filed 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 formulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? " 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. 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. 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 East of England Bank : Feltom's Executors case In re [1865] 1 Eq. Cas. 219, 224. Sir Kindersley V.C. in that case held that the language of the section applies only to the persons expressly named therein and is inapplicable to the case of executors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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 proceedings 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. The above view of English courts has been consistently followed in India on the accepted principle that when the Indian 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 cases decided by the Indian High Courts are Biilimorid v. Mary De Sottza [1927] I.L.R. 8 Lah. 549 ; AIR 1926 Lah. 624; Official Liquidators v. Jugal Kiskore [1938] 8 Comp. Cas. 300 I.L.R. [1939] All. 6; Manila! Brij ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pradesh High Court therefore 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. My answer therefore to the fifth point formulated for consideration is that the liquidator cannot continue these proceedings in I.A. No. 1 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. Consequently, I.A. No. I has to be and is hereby dismissed against the legal representatives of the deceased first respondent, Pant Balekundri, fourth respondent, Angolkar, and the eleventh respondent, Deshpande. Company Applications Nos. 42 and 43 of 1963 to implead the legal representatives of the deceased fourteenth respondent, D.B. Kulkarni, and to appoint a guardian ad litem for the minors among them are also dismissed. On the question of limitation covered by the fourth point, the relevant dates and facts are not in dispute. As already stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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. Section 235 of the 1913 Act reads as follows : "235. Power of Court to assess damages against delinquent directors, etc. (1) Where, in the course of winding up a company, it appears that any person who has taken part in the formation or promotion of the company, or any past or present director, manager or liquidator, or any officer of the company has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of trust in relation to the company, the court may, on the application of the liquidator, or of any creditor or contributory made within three years from the date of the first appointment of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded 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. III-A 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. (1) 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 for a suit or application by a banking company which is being wound up, the period commencing from the date of the presentation of the petition for the winding up of the banking company shall be excluded. (2) Notwithstanding anything to the contrary contained in the Indian, 'Limitation Act, 1908 (IX of 1908), or section 235 of the Indian Companies Act, 1913 (VII of 1913), or in any other law for the time being in force, there shall be no period of limitation for the recovery of arrears of calls from any director of a banking company which is being wound up or for the enforcement by the banking company against any of its directors of any claim b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m based on a contract, express or implied ; and (3)all other claims. The third category is a residuary category which in the context must comprise every type of claim which does not fall within the first two categories. A "claim" etymologically 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 impleaded as a respondent that the said person be directed to make repayment or restoration or compensation. If 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 a misfeasance application has the essential features of a claim as normally understood, viz. , the right to make a demand on the part of a litigant and the power of the court to enforce that demand. The same meaning was attached to that expression in Bank of Meenachil v. Chacko [1962] 32 Comp. Cas. 953 ; AIR 1962 Ker. 333, 334 and Jwala Prasad v. Official Liquidator AIR 1962 All. 486, 496 . I hold therefore that a misfeasance application comes within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard 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 misfeasance 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 provisions of sub-section (2) of section .45-O will operate. 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 from the date of the presentation of the petition for winding up shall be excluded. Secondly, the provision for exclusion of a period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection over the provisions of the Companies Act is only to the extent to which the latter are inconsistent with the provisions of Part III-A. To the extent they are not so inconsistent, the provisions 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. The net result of this discussion is that this misfeasance application, in so far as it relates to the directors, must be held to be governed by the rule of limitation prescribed in section 45-0(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. 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nown 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 City Equitable Fire Insurance Company Limited In re [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 by 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. After pointing out that it is not quite accurate to describe a director as a trustee, his Lordship proceeds to state as follows at pages 426 to 428; "It is indeed impossible to describe the duty of directors in general terms, whether by way of analogy or otherwise. The position of a director of a company carrying on a small 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 othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, 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 ? " At pages 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 reasonably 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. Lagunas Syndicate [1899] 2 Ch. 392 , where it was held that directors, acting within 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ruling of the Bombay High Court in New Fleming Spinning and Weaving Company Limited v. Kessowjinaik [1885] I.L.R. 9 Bom. 373 in which it was held that the directors are responsible for the management of their 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 delegating the whole management to the agent and abstaining from all inquiry, and that if he proves unfaithful under such circumstances, the liability is theirs, just as much as if they themselves had been unfaithful, to the judgment of the Kerala High Court in Popular Bank Limited v. Krishna Karnath [1963] 1 Comp. L.J. 169, where it is pointed out that though ordinarily directors are entitled to rely upon the skill and integrity of the members of the staff, they would be guilty of misfeasance if even after becoming aware of the fact that the staff had been acting in disregard of directions and resolutions of the directors, they (the directors) continue to place blind and complete reliance and trust on the members of the staff, and also to the decision of the Madras High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cur under the law, clearly state that before so relieving him the court should be satisfied not only that he has acted honestly but 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 fairly to be excused. While it has always been recognised that having regard to the nature, magnitude or complexity of the business and affairs of the company, delegation of powers to and the distribution of responsibility between the directors and members of the supervisory staff is permissible and while it is further recognised that so long as there is no room for suspicion, a director may rely upon the competence, honesty, judgment and advice of other directors like managing director or others specially charged with duties of a particular category, or of any member of the supervisory staff, no case had held that it is open to a director totally to divest himself of all his responsibilities 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 peculiar to the company and to his associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 produced. But printed balance-sheets have been marked by consent as exhibit A-8 series. The liquidator did not produce the original minute books recording the minutes of the meetings of the company or its directors, but produced three books, exhibits B-15, B-16 and B-17, as the rough minute books. Late in the course of the trial, it was 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 that the liquidator appointed by the Bombay High Court or some representative of his had once sold by auction at Belgaum some of the papers belonging to the company. Though Tendolkar, one of the directors, stated in his evidence that the papers sold were only useless papers, one cannot be sure, in the absence of clear material, whether or not the papers sold included some at least of some importance and value. Mr. Joshi in his report, exhibit A-9, as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 points under investigation and that therefore it calls upon the liquidator only to make out a prima facie case and places upon the directors the burden of proving facts necessary to exonerate them from the liability. It is in view of these circumstances and the provisions of law that I deferred the formulation of the points for consideration till after P.Ws. 1 and 2 were examined and also gave the fullest opportunity to all the respondents to inspect whatever books and papers they would like to in possession of the liquidator and to have them marked in evidence. 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, after the four witnesses 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 given evidence as well as the auditor should appear and give evidence. At the time I made that order, I contented mysel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e civil liability of his client under section 235 of the Indian Companies Act, 1913, it is unnecessary for me to consider or express any opinion on the question whether he may also be criminally liable. And what is more, a company court, while examining the case of an alleged misfeasance is not to be deterred by the possibility of the person whose conduct it is investigating rendering himself liable for criminal prosecution 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 misfeasance 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 liquidator who is very often an applicant in suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of the company leading to actual dishonest dealings with the company's moneys that those responsible for providing for management of the affairs of the company cannot but be held to have been grossly negligent. Prima 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 provision 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 in the directors who in addition to the powers and authorities by these presents or otherwise expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the company and are not hereby or by statute expressly directed or required to be exercised or done by the company in general meeting." Article 125 also enu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he loss caused to the company, and not the rest of the directors. I do not think that the provisions 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 articles relating to the management of affairs of a company are intended to indicate the general lines on which and the limitations subject to which the responsibility for proper management of affairs should be distributed or allocated between the directors 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 of the directors to disclaim all 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 case and particularly tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. 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 circumstance casting any doubt or suspicion on either the integrity or the competence of the managing director. On the first question, the directors in this case have 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 liquidator 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 resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, any two among them signing the cheques. Even in this regard, the cross-examination by Mr. Karanth 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 not aware of any important details or any details at all. 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 month or less, that at such meetings the board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 liquidator 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. The importance of this circumstance, however, lies not in the bare fact of the directors having obtained loans or advances from 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 inferences available therefrom 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. **** It should, however, be stated tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prima facie realisable while assessing the loss attributable to the discrepancy in bank accounts. It has been argued on behalf of Porwal and Kalghatgi, respondents Nos. 6 and 7 respectively, that wha-t 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 attended only about 3 or 4 meetings of the board of directors and that he was not fully 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. It is true that neither of these directors can be said to have had such close association with the affairs of the company as Tendolkar and Ajgaonkar may be said to have had. But it is difficult to believ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace. 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 and 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 reposes in 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 confidence in the institutions 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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