TMI Blog1962 (2) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... er referred to as the Act). Sri Hari Das Mundhra was elected chairman of the board of directors of the Corporation in April, 1956. At the same time his brother, Sri Tulsi Das Mundhra, was elected a director of the Corporation. That was the starting point of mismanagement. In view of his conviction, Sri Hari Das Mundhra is not capable of being appointed a director of a company (section 274 of the Act). But Sri Tulsi Das Mundhra does not suffer from any such dis-qualification. ualificktieB^ If Sri Tulsi Das Mundhra is permitted to function as a director, he is likely to be under the influence of his brother, Sri Hari Das Mundhra. There is good reason for believing that the affairs of the Corporation would be conducted in a manner prejudicial to the interests of the Corporation, unless the court takes suitable action to prevent mismanagement. The situation attracts clause ( b ) of sub-section (I) of section 398 of the Act. The appellant having succeeded in establishing a case under sub-section (1) of section 398 of the Act, the learned company judge was justified in taking action under sub-section (2) of section 398. It has been pressed for the appellant that the court should order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 543 of the Act. At the appellant's instance, an inquiry has been made into the affairs of the Corporation and into the affairs of Messrs. Begg Sutherland and Company (Private) Limited (hereafter referred to as the company). The question arises whether it was permissible to make an investigation into the affairs of the company in dealing with an application as regards , management of the Corporation. It has been pointed out on behalf of the appellant that the company was a subsidiary of the Corporation. The question, therefore, arises whether in dealing with the affairs of a company under sections 397 and 398 of the Act, it is permissible to investigate the affairs of a subsidiary. A holding company and a subsidiary company are separate legal entities. Broadly speaking, their affairs are separate. But the very expressions "holding company" and "subsidiary company" denote close connection between the affairs of two such companies. For certain purposes, affairs of a subsidiary have been treated as affairs of the corresponding holding company (see section 214(2), section 318(3)( e ) and section 338 of the Act). It is not necessary to decide the larger question whether in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares held by the Corporation and the company had to be sold later at a low price. It is true that the letter (exhibit D-154) written by Jamuna Das Kayan on Mach 2, 1957, was addressed to the company. But that letter covered the shares held by the Corporation also. It was, therefore, possible to enforce that deal as regards Samastipur shares held by the Corporation and by the company. It was due to the misconduct of Sri Hari Das Mundhra that the Corporation and the company incurred loss in the sale of Samastipur shares. In In re Central Calcutta Bank Ltd. [1959] 29 Comp. Cas. 437; AIR 1959 Cal. 625 it was pointed out on page 633 that wilful misconduct may amount to misfeasance. In Palmer's Company Law, 20th edition, it is stated on page 564 that any fraud or underhand dealing by a director will render him liable to the company for any loss suffered by the company as a result. In the present case, Sri Hari Das Mundhra as chairman of the board of directors of the Corporation put up a show of safeguarding the interests of the Corporation and the company. But what he actually did was to safeguard the interests of the group of purchasers. He held 50% interest in the group o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of directors. I see no good reason for departing from this practice. Mr. Narendrajit Singh was a director on the old board. The old board was negligent in managing the affairs of the Corporation between 1956 and 1958. It is true that we are not ordering him to pay any compensation to the Corporation under section 543 of the Act. But the fact remains that Mr. Narendrajit Singh was negligent in the conduct of the affairs of the Corporation between 1956 and 1958. It was not, therefore, proper to appoint him on the interim committee of management. Mr. Kanhaiya Lal Misra, Advocate-General, stated before us that he was not prepared to serve on the committee of management. He cannot be compelled to serve as a member. I understand that Dr. S.K. Rau is away in Japan, and is not likely to return to India for at least another year. It is no use keeping him on the committee of management. Mr. K.L. Misra and Dr. S.K. Rau may be discharged. It is desirable to have some experienced lawyer on the committee of management. The name of Mr. Jagdish Swarup, advocate, was suggested during the course of arguments before us. None of the parties raised any objection against the suggestion. Mr. Jagdis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of Rs. 100 each. It had been authorised by the Central Government under section 399(4) of the Act to petition the court under sections 397 and 398. By the petition it asked for these principal reliefs: ( a )Removal of Directors, Haridas Mundhra, Tulsidas Mundhra, Narendrajit Singh, Rai Bahadur Ram Narain, K.B. Daga, Hyder Hussain and H. Hill, respondents Nos. 1 to 7 in the petition, from the Corporation's board of directors; ( b )An interim injunction restraining the said respondents from acting as directors during the pendency of the petition; ( c )Taking of steps to call a meeting of the shareholders of the Corporation for the purpose of appointing another board of directors; or ( d )Appointment of a special officer; ( e )Investigation of the affairs of the Corporation and the doings of the said respondents for the purpose of finding out losses caused by them to the Corporation; ( f )Consequent upon such investigation and tracing out of losses an order to the said directors to contribute to the assets of the Corporation as compensation for losses caused by their acts of misfeasance ; and ( g )Any other necessary order. It may be stated here that before the movi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the best interests of the Corporation and its shareholders. Having regard to all the facts and circumstances it was necessary that the court should settle a scheme for its management under section 398 of the Act. ( b )No relief could be granted under section 543 of the Act for: ( i ) the appellant did not file a separate application for taking action under section 543, ( ii ) the evidence on record was not sufficient to prove misfeasance of the directors and to enable the court to assess damages, if any, sustained by the Corporation, ( iii ) the appellant had failed to implead Christie and Powell, the managing director and the deputy managing director, as respondents to its petition, ( iv )the directors could not be fastened with any liability for losses, if any, caused to the Corporation's subsidiary, Messrs. Begg Sutherland Company (P.) Ltd., Kanpur, and ( v ) there were at the time pending in various civil courts several suits by the Corporation against various respondents-directors in respect of the transactions involved in the proceeding. While the appellant feels aggrieved by the second finding, the appellants in the other appeal feel equally aggrieved by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um to the assets of 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 matter is one for which the person concerned may be criminally liable." With respect to the learned judge I have not been able to discern any thing in the section, in particular in the phrase "On the application of any creditor or member " as enacting a ban against the combining of reliefs under sections 397 and 398 with reliefs under section 543 in an application of the members of a company under sections 397 and 398, as has been done by the appellant in its petition. The section is designed to bestow an additional important right on a single member or members to seek certain reliefs for the benefit of the company, and it would be scarcely fair and proper to read in it an unrelenting ritualistic prescription of the mode and hour of prayer to the court. If members can make a prayer during the proceedings, they may also make a prayer at the inception of proceedings especially when, as here, no prejudice to any party results." I do not think that Christie and Powell, mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 30,23,938 in 1955 and of Rs. 13,22,181 in 1957. The nef value of its fixed capital rose from Rs. 41,04,564 in 1950 to Rs. 1,08,37,894 in 1957. During the material period, namely, September, 1955, to April, 1958, the Corporation owned and operated (1) The Cawnpore Woollen Mills, Kanpur (popularly known as Lal Imli), (2) The Cawnpore Cotton Mills (known as Kakomi), (3) North-West Tannery, Kanpur (popularly known as Flex), (4) Cooper Allen, Kanpur, and (5) The New Egerton Woollen Mills, Dhariwal, in the Punjab (popularly known as the Dhariwal). The Corporation owns 100 per cent, share capital of Begg Sutherland Co. (P.) Ltd., Kanpur (hereinbelow referred to as the company). Its issued share capital is Rs. 30,00,000. The net value of its fixed capital rose from Rs. 87,800 in 1950 to Rs. 1,11,060 in 1957. In the same period its reserves rose from Rs. 1,00,000 to Rs. 2,00,000. Until 1957 the Corporation controlled, through the managing agency of the company, the following companies : (1)Cawnpore Sugar Works Ltd., (2)Champaran Sugar Co. Ltd., (3)Purtabpore Co. Ltd., (4)Saran Engineering Co. Ltd., (5)Brushware Limited. (6)The Elgin Mills Co. Ltd., (7)The Cawnpore Text ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59,597, the debts and investments rose abruptly to Rs. 57,20,637 and Rs. 43,26,282 ; in October, 1956, the cash was Rs. 1,18,250, while debts and investments again rose to Rs. 89,32,512 and Rs. 85,20,855; in October, 1957, debts and investments receded to Rs. 60,35,551 and Rs. 74,51,001. The company obviously could not go in for heavy investments on its own resources; the Corporation was galvanised into action by an assurance of H.D. Mundhra, given presumably in September or October, 1955, to finance the staggering investment scheme. In the beginning he did feed the company with considerable loans, and in October, 1956, the company was indebted to him to the tune of Rs. 70,48,170-7-0. But then started heavy withdrawings by him so that on March 1, 1957 his loan was reduced to Rs. 24,74 ,132-9-6. On May 21, 1957 it fell down to a tiny figure of Rs. 2,53,382.60 nP., and o n October 31,1957, it tapered off to Rs. 2,42,11189 nP. (see exhibit 3). This financial haemoptysis made exigent commensurable transfusion of finance by the Corporation to the company. From Rs. 19,49,000 on March 9, 1956 (exhibit 250), the Corporation loan to the company went on registering successive ascent to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company are being conducted in a manner prejudicial to the interests of the company; or ( b ) that a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors or of its managing agent or secretaries and treasurers, or manager, or in the constitution or control of the firm or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company; may apply to the court for an order under this section, provided such members have a right so to apply in virtue of section 399. (2) If, on an application under sub-section (1), the court is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiary and a holding company. Section 77(1) provides that no company limited by shares shall purchase its own shares. Section 42(1) prohibits a subsidiary from becoming a member of the holding company, and any allotment or transfer of shares in the latter to the former is made void. This provision is apparently designed to prevent trafficking by, the holding company in its own shares in the cloak of its subsidiary. It shows, I think, that Parliament, piercing the corporate fiction, has seen through the reality of a unique group-unity of the parent and subsidiary company. Sub-sections (1) and (2) of section 295 point to a similar inference. While sub-section (1) prohibits loan by a company to another company whose directors or managing agents, etc., are accustomed to act in accordance with the directions or instructions of its own directors, sub-section (2) excludes from the purview of that provision loans by the holding company to its subsidiary and vice versa. Next we pass on to a group of provisions deal ing with what has been called the "brain" of the company. Section 307(4) requires the maintenance of a register of shareholdings of directors of a company in that company as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lay before the company a balance-sheet and a profit and Joss account for the year ending. Sub-section (1) of section 211 prescribes that a balance-sheet shall give "a true and fair view of the state of affairs of the company". Sub-section (2) similarly prescribes that a profit and loss account shall also give "a true and fair view of the profit and loss of the company." In this very section and in some other sections Parliament has attempted to illustrate the general content of "a true and fair view of the affairs of the company". The documents are required by section 211 to specify certain particulars. With that very end in view, section 212(1) lays down that there shall be annexed to the balance-sheet of a holding company a copy of the balance-sheet of its subsidiary, a copy of its profit and loss account, a copy of the report of its board of directors and a copy of the report of its auditors and a statement of the interest of the holding company in the subsidiary. Sub-section (3) thereof provides that the statement of the holding company's interest shall specify also the net aggregate profit or loss of the subsidiary not dealt with and dealt with in the company's accounts. Sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are perhaps all the salient provisions shedding light on the meaning of section 398. They show that the Act treats the holding company and its subsidiary as a unified group rather than as separate personified institutions for purposes of ownership of capital, control of the subsidiary by the parent's directors and managing agents, their inter-corporate finance and accountancy and disclosure of the subsidiary's affairs to members of the holding company. Further, at least for one purpose it looks upon the members of the holding company as members of the subsidiary. Learned counsel for H.D. Mundhra and T.D. Mundhra has pressed in service of his arguments certain cases which are not applicable to the law and facts of the case before us (see Gramophone and Typewriter Limited v. Stanley [1908] 2 KB 89, William Cory Son Ltd. v. Dorman Long Co. Limited, Odhams Press Ltd. v. Co ok [1936] 2 All. ER 386 and Odhams Press Ltd. v. Cook [1940] 3 All. 15). Three of them were in relation to tax law, and one was a case of tort. Considerations in the sphere of taxation and tort may not necessarily be germane in the sphere of company law. In the construction of a statute regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry companies, and, in the unlikely event of there being any difficulty, it was only necessary to go through formal procedure in order to make the decision of the appellants' board fully effective." In re Darby : Ex parte Brougham [1911] 1 KB 95, a company floated by two persons for fraudulent self-aggrandisement was held to be "merely an alias" for them. In Gilford Motor Co. Ltd. v. Home [1933] Ch. 935,956, disregarding the mask of corporate personality of a company formed and fully controlled by Home for the fraudulent purpose of circumventing an agreement, Lord Hanworth M. R. said: "I am quite satisfied that this company was formed as a device, a stratagem, in order to mask the effective carrying on of a business of Mr. E. B. Home. The purpose of it was to try to enable him, under what is a cloak or a sham, to engage in business which... was a business in respect of which he had a fear that the plaintiffs might intervene and object." Smith Stone and Knight Ltd. v. Lord Mayor Aldermen and Citizens of the City of Birmingham [1939] 4 All. ER 116 is a rather significant case. The factory, land and cottages where a subsidiary was operating were compulsorily acquired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man, though nominally independent, is in truth the instrument of another; or it may be a case in which a man has simply put his vehicles in the name of his wife. Whenever a licensing authority is satisfied that that sort of relationship exists and that the dominant party is using it to obtain contrary to the intent of the Act an advantage which he would not otherwise get, he is entitled if not bound, to exercise his discretion so as to ensure that the scheme of the Act is complied with in the spirit as well as in the letter." Of similar nature is Chicago, Milwaukee St. Paul Railway Company v. Minneapolis Civic Commerce Association 62 L.Ed. 1229 . There, as the holding company controlled the composition and will of the directors of the subsidiary and its accounts and made the latter financially dependent on it, it was said: "In such a case the courts will not permit themselves to be blinded or deceived by mere forms of law, but regardless of fictions, will deal with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require. " In United States of America v. Reading Company, Philadelphia 64 L.Ed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartments or branches. If section 398 is construed as suggested on behalf of H.D. Mundhra, then fraud, ultra vires actions and misfeasance of the board of directors of a holding company in the management of its wholly owned subsidiary would pass unexposed and uncensured, for enjoying sightless support of the majority shareholders of the holding company, they would hardly allow the holding company or the subsidiary to resort to court to hasten their doom. It is for this reason that several jurisdictions in the United States of America permit, even without a statute, shareholders of a holding company to maintain a "double derivative" suit to enforce a cause of action in favour of a subsidiary company, if the directors of both the companies have refused to institute an action in the name of either company. (Ballantine, ibid., page 350). Incidentally it looks somewhat cynical that directors of the Corporation should seek insulate their wrongs behind the company's corporate bracket which they themselves had rubbed out beyond recognition. Before dealing with the facts I have to dispose of a technical argument as to the admissibility of counter-affidavits filed by H.D. Mundhra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onment in jail. It seems to us that this was a tenuous excuse for scrimshanking cross-examination. However that be, in view of the court's order, dated January 31, 1961, the counter-affidavit of H.D. Mundhra cannot be treated as evidence and, as I have already said, it may be treated only as a sort of written statement in the case. Some time in September, 1955, Haridas Mundhra acquired 48 per cent, shareholding in the Corporation. At that time Sir Robert Menzies and W.H.J . Christie were chairman and deputy managing director of the Corporation. Amongst others, Narendrajit Singh, Hyder Husain, R.L. Powell and Rai Bahadur Ram Narain, deceased, were then directors, it appears from the report of the directors of the Corporation to the shareholders (exhibits 201 and 202) that an application had been made at least before March 13, 1956 the date on which the report was signed by the Chairman to the Central Government for sanction to the proposal to increase the maximum number of directors of the Corporation from 10 to 12 for the purpose of electing H.D. Mundhra and T.D. Mundhra as directors of the Corporation and that that application was not pressed later when Sir Robert Menzies retire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... December, 1955. It is alleged that the shares were purchased ostensibly to secure to the company and the Corporation a 50 per cent, voting power in Samastipur, although only 30,000 shares were sufficient for that purpose. Between October and December, 1955, the company purchased through H.D. Mundhra and on his insistence 1,03,418 shares of Balrampur at an average price of Rs. 14.40 nP. per share when the market price of the share was round about Rs. 11.50 nP. per share, and it is complained that he had made wrongful gain of about Rs. 3,00,000 at the cost of the company. It is further alleged that he also made a wrongful gain when Balrampur shares were sold through him. The case of H.D. Mundhra is that he did not induce the board of directors of the Corporation to purchase the shares. The board of directors itself decided to purchase the shares for securing a controlling interest in Samastipur and Balrampur and agreed to pay a fancy price for that reason. It is alleged that in or about October, 1955, Sir Robert Menzies, chairman, and W.H.J. Christie, managing director, had both asked him to assist them in securing controlling interest in the two companies. He denies that he had gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant and machinery of the manufacturing units. According to him, the initial programme would cost Rs. 125 crores. He then stated that he would undertake to provide necessary finance. The board of directors resolved to accept in principle his proposals and his offer of a loan of Rs. 80,000,00 at 4 per cent, per annum interest in order to cover the cost of initial investment on the assurance that he would not demand payment of the loan until the Corporation had ample liquid resources (see exhibit 123.). Exhibit 173 is a note, dated October 18, 1955, from the treasurer of the Corporation to H.D. Mundhra regarding purchases of shares made by him. It appeals from that note that diverse shares were purchased by H.D Mundhra to the extent of Rs. 39,00,000. The note further shows that a sum of Rs. 15,33,000 was paid on his behalf to the Corporation for the said purchases. It further appears from the note that on October 6, 1955, share scrips of the value of Rs. 25,04,2S2.50 were transferred by him to the company. Those share scrips included Samastipur shares, 51,000 at the rate of Rs. 36 per share and 1,650 at the rate of Rs. 16 per share. The note also shows that he had purchased a bloc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach, 3,015 Balrampur shares at Rs. 11-12-0 each and, 1,00,003 Balrampur shares at Rs. 14-8-0 each. It appears from a letter of Place Siddons and Gough Ltd., share-brokers in the Calcutta Stock Exchange, dated November 24,1959 (exhibits 1 and 2), that between October 13 and 27,1955, market rates of Samastipnr shares gyrated round about Rs. 16, the minimum rate being Rs. 15.75. We have not been referred to any evidence about the market rate of Samastipur shares on or about October 6, 1955, but it may fairly be assumed that on or about that date the market price would have been similar. We are, therefore, inclined to take the view that the company had to pay a rather high price for the block of 51,000 Samastipur shares. It is to be remembered that H.D. Mundhra had purchased those shares for the company and naturally he alone had special knowledge about the exact price paid and the person from whom they were purchased. It was not possible for the Corporation and the company to discover the seller and the exact price of the shares without assistance from H.D. Mundhra. It is, therefore, rather surprising that H.D. Mundhra has made no effort to prove either by the seller's evidence or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, Kanpur, for credit to the account of the company. On the same date that amount was credited by the company to the personal account of H.D. Mundhra. Exhibit 9 shows that on the same date the company issued a cheque voucher on the National Bank of India Ltd., Kanpur, for payment of Rs. 25,00,000 to the account of H.D. Mundhra with the National Bank of India Ltd., Calcutta. Exhibit 10 shows that H.D. Mundhra paid back the said sum to the company by cheque No. 7,79, 051 dated February 14, 1956, on the Eastern Bank Ltd., Calcutta. Exhibit 11 shows that the company paid back the said amount to the Corporation by a cheque voucher dated March 1, 1956. Coming back to exhibit 3, it appears that on October 31, 1956, the credit balance of H.D. Mundhra with the company was Rs. 70,48,170-7-0. This was the biggest credit amount, and thereafter H.D. Mundhra started withdrawing heavy amounts. Consequently, on March 1, 1957, his credit balance with the company was reduced to Rs. 24,74,132-9-6. On May 21, 1957, it was reduced to a tiny figure of Rs. 2,53,38260 nP. On October 31, 1957, it tapered off to Rs. 2,42,111.89 nP. These figures suggest two inferences. Firstly, H.D. Mundhra had uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2). On February 4, 1957, the debit balance fell down to Rs. 374-98 lakhs but on March 20, it again rose to 436.74 lakhs. The above figures would show that the drain of the Corporation's liquid funds to the company and its overdrafts from the State Bank of India were rising in inverse proportion to the shrinking of H.D. Mundhra loans to the company. It is indeed surprising that the attention of the directors of the Corporation was never pointedly drawn to this tragic situation by the management of the Corporation. We are constrained to hold that the troubles of the Corporation were aggravated by H.D. Mundhra's failure to fulfil his mellifluous assurance of financing the company. I shall now deal with the agreement of sale in respect of Samastipur and Balrampur shares with Jamunadas Kayan and others and subsequent breach of that agreement by them. The case of the appellant is On March 2, 1957, the board of directors of the Corporation, at the instance of H. D. Mundhra, accepted the offer for sale of 70,000 ordinary shares of Samastipur at Rs. 26 per share and of 14,837 ordinary shares of Samastipur at Rs. 15 per share and of Balrampur share to a group of purchasers consisting of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 957. Narendrajit Singh was present in this meeting. Sri Christie, managing director, informed the board that H.D. Mundhra had been negotiating for the sale of Samastipur shares. He also told the directors that one condition of sale would be the relinquishment of managing agency without compensation to the prospective purchaser. The board took no exception to this condition and resolved that 70,000 or more Samastipur shares should be sold at Rs. 30 per share subject to the purchaser paying to the company Rs. 13,00,000, which were due to it by Samastipur. The board also authorised negotiations for sale of 1,43,000 Balrampur shares at Rs. 10 each (see exhibit 130). On February 28, 1957, the board of directors the company met and approved the negotiations for sale on the following-^ conditions: (1)Sale of 64,825 Samastipur shares of the company at Rs. 30 pershare. (2)Payment by the purchaser to the company of its short loan of Rs. 10,00,000 due by Samastipur along with the price of shares sold. (3)Relinquishment by the company of managing agency of Samastipnr without compensation to the purchaser (see exhibit 164). The company also authorised sale of 1,03,418 Balrampur shares at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 2, 1957. The board adopted a resolution on the lines of the Corporation's resolution on the same date (see exhibit 165). On the same date the company received an epistolary offer from Jumnadas Kayan to buy Balrampur and Samastipur shares on the aforesaid terms (see exhibit 190). On the letter there is an endorsement of acceptance of the offer by Sri Powell. Thus on March 2, 1957, there was a concluded contract between the Corporation and the group. On March 4, 1957, H.D. Mundhra sent a letter to the company authorising it to debit his account by Rs. 23,00,000 as part payment of the price payable by the group in terms of the agreement dated March 2, 1957 (see exhibit 191). In its meeting on March 23, 1957, the Corporation's board of directors H.D. Mundhra, Narendrajit Singh and Hyder Hussain being present discussed "the present very serious financial position" of the Corporation. H.D. Mundhra then informed the board that Jumnadas Kayan could not take up shares within the stipulated time and that he hoped that the transaction would be completed by the end of March (see exhibit 132). The board again met on April 27, 1957. H.D. Mundhra, T.D. Mundhra, Narendrajit Singh and Hyder H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a member of the group as jointly and severally liable for breach of contract. Outside the board he was collectively destroying the contract; inside the board he was putting up a pretence of enforcing the contract. He could not serve both himself and the Corporation. There was clear conflict between two adversary loyalties -loyalty to his self and loyalty to the Corporation. Instead of retreating with honour from discussions inside the board, he was there casuistically making his peace with the warring loyalties. We now pass on to the eventual sale of Samastipur and Balrampur shares. The case of the appellant is : A block of Samastipur shares was sold to H.D. Mundhra himself at Rs. 9 per share and another block of shares was sold to Ram Narain Kayan Co. at Rs. 19 per share. It is alleged that on the basis of the book value of the shares there was a loss of about Rs. 10,26,559. The case of H.D. Mundhra is: He admits sale of a block of shares to himself, but he alleges that he had no interest in Ram Narain Kayan Co. It is also alleged that shares, which were sold to him, were taken back by the Corporation without paying interest on the purchase price as agreed. It is asserted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. to purchase 60,000 Samastipur shares at Rs. 19 per share provided the company agreed to relinquish without compensation its managing agency of the Samastipur company. The committee felt, it seems, that the price offered was not satisfactory but decided to sell 60,000 Samastipur shares at Rs. 19 per share and 6,873 Samastipur shares at Rs. 11 per share along with relinquishment of the managing agency of the company on account of "urgent need for realisation of Corporation's investments". A meeting of the Corporation's board of directors was then held on November 30, 1957. H.D, Mundhra, Narendrajit Singh and Hyder Hussain were present. The board confirmed the aforesaid decision of the assets committee (see exhibit 144). Then on December 3, 1957, there was a meeting of the board of directors of the company. It appears that before December 3, 1957, 20,048 Samastipur shares of the Corporation had been sold at Rs. 19 per share and the company's holding of 39,952 and 6,873 Samastipur shares had been sold at Rs. 19 and Rs. 11 per share respectively, along with the promise to relinquish managing agency without compensation. The company's board of directors in its meeting on December 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Balrampur company. It appears from the balance-sheet of the Balrampur Co. for 1956, that the company received Rs. 31,885 as remuneration for the managing agency. Exhibit 258 is a chart of the investments of the Corporation. It shows that the Corporation purchased 38,604 shares for Rs. 3,92,527.81 nP.; it sold them for Rs. 6,27,315. There was thus a profit of Rs. 2,34,787.19 nP. I would now take up the case of the Kanpur Cotton Mills. The appellant alleges that the mill had been operating at a loss for some time past, that Sri Christie and Sri Powell negotiated some time in 1957 for its sale for Rs. 52,00,000 approximately to Roop Narain Ram Chandra (P.) Ltd. H.D. Mundhra persuaded the Corporation not to accept that offer for it was against its interest. Thus a certain buyer was lost and the Corporation suffered great loss in operating the mill. It is further alleged that no better offer could have been obtained and that although H.D. Mundhra was initially in favour of accepting the offer, he subsequently persuaded the Corporation's board of directors to drop the idea of selling the mill by making wrong statements. The case of H.D. Mundhra is that Roop Narain Ram Chandra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drajit Singh were present in the meeting. R.B. Ram Narain expressed himself in favour of selling the mills. H.D. Mundhra agreed with him but drew attention of the board to some bright features and the need of securing the goodwill and co-operation of the Central and the State Governments. Eventually he, however, expressed the view that "the best course would be to sell the branch forthwith if that proved possible ". The management then informed the board that the mills had sufficient stock of cotton to last for approximately six weeks. The board then resolved that no further purchase of cotton should be made for the present and that they should meet again some time in early June to reconsider the entire position (see exhibit 134). The board again met on June 5, 1957. T.D. Mundhra and Narendrajit Singh were present in the meeting. The board considered the offer of Roop Narain Ram Chandra (P.) Ltd. for buying the mills. It also considered the financial condition of the mills. It appears from discussion in the meetingthat it was not feasible to close the mills and that, therefore, there were only two courses open to the board, either to operate the mills or to sell it. It appears furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and cotton held by the mills, that the balance of 25 percent, value would be paid within two months of the date of the sale deed, and that thereupon the buyer would be entitled to get possession of the mills. H.D. Mundhra expressed the view that the buyer would obtain the mills "at too cheap a price". He believed that he could without any difficulty make arrangements for another similar or even better offer from another party "almost immediately" . He drew attention of the board to the fact that Roop Narain Ram Chandra (P.) Ltd. had not reduced their outstandings. He also mentioned that in his high level discussions with the Government of India he had indicated that the Corporation would be able to continue to operate the mills if financial assistance were received. Sri Christie placed the other side of the picture. According to him, although the offer was not in all respects satisfactory, it was the only offer till then received. He said that, if the offer were accepted, it would benefit the Corporation which was then in difficult financial position. He reminded the board of the loss suffered by the mills for the last six years and said that cotton stocks of the mills were very l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is discussion with the Loan Advisory Committee of the National Industrial Development Corporation in Bombay on July 18, 1957. He said that his impression was that if the board decided to continue to operate the mills, the committee might be able to give a loan of Rs. 65 to Rs. 75 lakhs. The board then resolved to drop negotiations for the sale of the mills with Roop Narain Ram Chandra (P.) Limited (see exhibit 139). The foregoing review shows that the management and the board of directors of the Corporation had reposed great trust in Hari Das Mundhra, Events have proved that that much trust was unwarranted. Hari Das Mundhra possessed a restive mind and a winsome voice; he was clever and ambitious. His qualities confounded the directors and his foibles trapped the Corporation into a terrible depression. Through him it bought high and sold low its shareholdings. For him it starved its business by diverting enormous sums to the company to cushion up unwieldy investments. In the end, in panic it unloaded large shareholdings at forced prices and relinquished without compensation the managing agency of the company in Samastipur and Balrampur to tide over the deepening monetary crisis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rougher still. Some cases require a lower degree of care; others exact a higher standard. The test of a reasonable and prudent businessman affords a safer guide when applied to the circumstances of each particular case. One should however make due allowance for the knowledge and experience of a director. It may not be unpardonable for him occasionally to rely on the proven honesty, judgment and experience of his colleagues, for team-work postulates mutual trust and confidence. The somewhat speculative nature of all enterprise warrants due freedom to take risks and a bold discretion in a trying emergency. No business can be carried on with success by timid and over-cautious businessmen. A director would therefore not be liable for mere errors of judgment or imprudent action. A director would not be liable for the misconduct of another director unless he has joined with him in the perpetration of the wrong or has omitted to thwart the wrong due to his negligence. The test of negligence is not the post-event detached mind but the mind of the reasonable businessman in the heat of the moment. In the light of considerations already discussed, I shall now examine whether the four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erwise. Equity and good conscience dictated an attitude of complete aloof ness and non-intervention. But his attitude was diametrically opposite. In the meeting of the board of directors on April 27, 1957, (exhibit 143) he acted as chairman and reported that "he had caused a notice to be issued to the proposed purchasers" to purchase the shares within fifteen days of the issue of the notice failing which any legal obligation of the Corporation to sell the shares to them would be extinguished. He suggested that if shares were not purchased within the said period, " the Corporation would be free to dispose of the investments" to other parties. It may be observed that he did not cause to be written in the notice that Jamunadas Kayan and his associates would be liable for any loss arising to the Corporation on subsequent sale to others, nor did he suggest that idea to his colleagues, obviously because he was interested in the affair. In the next meeting on May 18, 1957 (exhibit 134) he again presided and reported that Jamunadas Kayan and his associates had not replied to the notice and suggested that "the Corporation was, therefore, free to dispose of the shares" to other parties. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 18, 1957, the board finally resolved to find a new buyer, and on May 21, the balance in the account of Hari Das Mundhra with the company was a little less than Rs. 3 lakhs. The directors could not expect to be compensated from that account. For the reasons already stated, I am not satisfied that the appellant has discharged the burden of showing that they were not as careful as a reasonable businessman would have been. I would not, therefore, hold them guilty of breach of trust or misfeasance. It may be recalled here that Sri Christie and Sri Powell, who behaved no better than they, are not pursued in the proceeding. In the matter of the sale of Kanpur Cotton Mills, I am of opinion that none of the directors is liable for any loss. They were called upon to make a choice between sale and retention of the mills. Sale meant permanently cutting off a limb from the body of the Corporation; retention meant loss. The choice was obviously of the nature of a dilemma. On the report of Hill that the National Industrial Development Corporation might give a loan of Rs. 65 lakhs to Rs. 75 lakhs if the mills were operated, they took the risk of retaining the mills. They may be accused o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly because their term is now to last till January, 1963. By the court. The two connected special appeals are partly allowed as indicated below. The order of the learned company judge appointing an interim committee of management (or interim board of directors) is approved, subject to the following modifications: ( i ) Mr. Narendrajit Singh shall not be a member of the interim committee of management. Mr. Kanhaiya Lal Misra and Dr. S.K. Rau are discharged. ( ii ) We appoint Mr. Jagdish Swarup, advocate, as a member of the interim committee of management. He should take charge as soon as possible. ( iii )The interim committee of management shall remain in office up to January 31, 1963. ( iv ) The direction "if for any reason, except for insolvency or conviction for an offence involving moral turpitude, their services are terminated before the 30th April, 1965, they will be entitled to claim from the British India Corporation Limited their salaries for the remaining unexpired period" is cancelled. In other respects, the directions given by the learned judge as regards duties and remuneration of the directors of the interim board will stand. The interim committee of manag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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