TMI Blog1968 (10) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... als arise, was under section 542(1) of the Companies Act, 1956, read with rules 260 to 262 of the Companies (Court) Rules, 1959. Application No. 2 of 1959, from which the connected appeals heard along with these arise, was under section 543 of the Companies Act, read with section 45H of the Banking Companies Act, 1949. These were disposed of by our learned brother, Raghavan J. Except where expressly indicated, reference hereinafter would be to the ranks of the parties as in Application No. 1 of 1959 which appears to have been treated as the main application by the learned judge, and a copy of the judgment in which was ordered to be appended to the judgment in Application No. 2 of 1959. Respondents Nos. 1 to 8 and the deceased Damodara Pai were the directors of the Popular Bank Ltd. Of these, respondents Nos. 1 and 8 were in Trivandrum and the rest were in Alleppey. The 1st respondent was the chairman of the board of directors. The 9th respondent was appointed general manager of the bank on November 21, 1955, in pursuance of a resolution dated November 10, 1955. The 10th respondent was the manager of the bank from its inception till the appointment of the 9th respondent, after whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on No. 1 of 1959, but who feels aggrieved by certain directions made by the learned judge, and who has filed the appeal with the leave of the court. A.S. No. 426 of 1964 is dealt with separately at the end of this judgment, and all the other appeals by the directors are treated together. No appeals were preferred by respondents Nos. 10 and 11. The 10th respondent did not file any defence and was examined as P.W. 22, on the side of the liquidator. The whereabouts of the 11th respondent were unknown and substituted service was ordered and effected on him. The official liquidator has accepted the order of the learned judge and has not filed any appeal, nor any memorandum of cross-objections. In each of the appeals preferred by the various respondents, the official liquidator alone has been made a party. In A.S. No. 426 of 1964, in addition to the official liquidator, the 3rd respondent is also a party. The 1st respondent and the 6th respondent died subsequent to the order of the learned judge and after the filing of the appeal their legal representatives have been impleaded. After arguments in these appeals and the connected appeals against Application No. 2 of 1959 were closed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due from the company to him, or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on his behalf. ( c ) The court may, from time to time, make such further order as may be necessary for the purpose of enforcing any charge imposed under this sub-section. ( d ) For the purpose of this sub-section, the expression assignee includes any person to whom or in whose favour, by the directions of the person liable, the debt, obligation, mortgage or charge was created, issued or transferred or the interest was created, but does not include an assignee for valuable consideration (not including consideration by way of marriage) given in good faith and without notice of any of the matters on the ground of which the declaration is made. (3) Where any business of a company is carried on with such intent or for such purpose as is mentioned in sub-section (1), every person who was knowingly a party to the carrying on of the business in the manner afore said, shall be punishable with imprisonment for a ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian decision Dixon C.J. more explicitly stated the position thus : "To me it seems difficult to suppose that it was intended that the court should, in exercising this power of direction go outside the debts and liabilities, the existence of which was in some way attributable to the carrying on of the business with the requisite intent to defraud". According to the above view the section seems to postulate some nexus between the fraudulent trading or purpose and the extent of the liability of the directors or other persons. In the English case, In re William C. Leitch Brothers Ltd., [1933] 3 Comp. Cas. 97; [1932] 2 Ch. 71 Maugham J. laid down the dictum that : "....If a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the company is carrying on business with intent to defraud". It was argued before us that the proposition in the above terms has been stated too widely, and that it has been dissented from in the Australian case. Neither of these submissions is justified. The propositio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... la in his 13th edition of the Civil Procedure Code (see volume 2, page 1231). Besides, the death of the 3rd respondent occurred on July 10, 1968, after the hearing was concluded and judgment was reserved on July 4, 1968. Such a situation is provided for in Order 22, rule 6, of the Civil Procedure Code, which reads as follows : "Notwithstanding anything contained in the foregoing rules, whether the cause of action survives or not, there shall be no abatement by reason of the death of either party between the conclusion of the hearing and the pronouncing of the judgment, but judgment may in such case be pronounced notwithstanding the death and shall have the same force and effect as if it had been pronounced before the death took place". We entertain no doubt that the above provision is applicable to these proceedings by reason of section 488 of the Companies Act read with rule 8 of the Companies (Court) Rules, 1959, and rule 44 of the Rules framed by the Travancore-Cochin High Court under the Banking Regulation Act, 1949. The result is that our judgment in the appeal preferred by the 3rd respondent would have the same force and effect as if it had been pronounced before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the powers of the board of directors had been delegated to the committee. In 1951, there was an intimation or advice by the Reserve Bank that the advances of the bank showed an over-extended position. The directors of the bank would disclaim knowledge of this directive or advice from the Reserve Bank (except after seeing the later inspection report of the Reserve Bank in 1954), and there is no clear evidence that they had been apprised of it, although it is highly probable that they were. On September 6, 1953, the executive committee was reconstituted with respondents Nos. 4, 5 and 7 as its members. By proceedings of the board of directors of the same date, the manager was directed to call a meeting of the committee at least once a month and act only on its orders in all matters of advances and credits (vide exhibit P-58). Some time in January, 1954, there was an inspection of the bank by the Reserve Bank and the inspection report (exhibit P-62) was received in the bank in May, 1954, and placed before the executive committee in July of the same year. One of the points made in the inspection report was that; the board of directors did not appear to have sufficiently interested it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere allowed by a Division Bench [1960] 30 Comp. Cas. 501; AIR 1961 Ker. 14. of this court, on the ground that the order for public examination was, in the circumstances, violative of article 20( 3 ) of the Constitution. Further appeals C.As. Nos. 603 to 608 of 1961 Offi. Ltd., Popular Bank Ltd. v. Madhava Naik [1965] 35 Comp. Cas. 174 (SC) were preferred by the liquidator and these were allowed by the Supreme Court by its judgment dated August 17, 1964, restoring the order of Raman Nayar J. By that time, applications Nos. 1 and 2 of 1959 had been heard and disposed of on the merits by the learned trial judge. The liquidator then filed statements in these applications that the order for public examination restored by the Supreme Court would be availed of, if necessary, in the event of any possible remand by any order passed in the appeals preferred. With the background thus sketched, we may proceed to examine the various heads of claim made by the official liquidator against the respondents. After formulating the points for determination, the learned judge set down nine heads under which counsel for the liquidator had arranged and presented his case. We shall refer to these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and negotiated accounts and profit and loss accounts of the bank ; (2) concealment of those misappropriations by false and fictitious entries made in the books of the bank by respondents Nos. 10 and 11 with the knowledge and approval of respondents Nos. 1 to 8, showing the amounts involved as advances to different customers; and (3) the ratification of the fictitious advances by the board of directors at their meeting held on 10th November, 1955. The misappropriations and manipulations complained of are admitted. The defence to these heads of claim is also identical with that noticed under the first head, viz ., that the directors had no knowledge about the misappropriations or manipulations or about the fictitious nature of the advances, and, in any event, such knowledge cannot be predicated throughout the entire gamut of the claim. A list of bills entered in the bills negotiated accounts of the company and in respect of which no bills appear to have been actually negotiated was furnished in schedule II attached to the points of claim. The period covered by these bills ranges from August 17, 1954, to November 19, 1955, and the total amount covered is Rs. 2,64,700. A list of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries in schedule 1..........".. However, on page 24 of the same judgment the learned judge recorded: "I place respondents Nos. 1, 4, 5 and 7 who were the chairmen of the board of directors and members of the executive committtee respectively, and who were also present when some of the hundi forms and promissory notes were taken to manipulate the accounts of the bank, on a par and direct them to pay Rs. 75,000 each" These observations of the learned judge seem to us to indicate that the learned judge was accepting the evidence of P. Ws. Nos. 13 to 16 who spoke to the presence of the directors at the time of the execution of the hundi forms and promissory notes, taken to manipulate the accounts of the bank. The learned judge in more than one place freely referred to the evidence of P. Ws. Nos. 1 to 3, and notwithstanding his awareness which we also share that P. W. No. 22's evidence had to be viewed with caution, he did not reject it. Besides, we have carefully scanned the evidence of these witnesses. We find no cross-examination worth the name on the side of the directors to discredit the testimony of P. Ws. Nos. 1 to 3 regarding the information conveyed in July, 1955, to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by these witnesses and not merely on the report made on August 20, 1955, about the stringency. Exhibit P-59 was submitted to the board of directors on November 10, 1955, with an explanation of the same date appended to it by the 11th respondent, in which the 11th respondent admitted the charge against him. On the same day, the 10th respondent submitted a detailed report (exhibit P-60) to the board as to the cause for the stringency of funds in the bank and the steps to be taken to ease the situation. The report referred to the unauthorised advances. The explanation of the 11th respondent appended at the foot of exhibit P-59, and the report of the 10th respondent were nothing but unabashed confessions of their culpability. The board of directors in its resolution dated November 10, 1955, fretted and fumed at the conduct of respondents Nos. 10 and 11, demoted the 10th respondent, cancelled the powers of attorney of the 10th and 11th respondents, and docked the emoluments of both. Even before the board's resolution of August 31, 1955, calling for a report on the stringency, we find from the minutes of the proceedings of the executive committee (exhibit P-63), that the matter of some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . No. 1. The learned judge appears to have been inclined to accept this part of the liquidator's case, for, he observed : "But the circumstances already discussed by me inevitably make me feel that the directors knew about the situation and probably the suggestion of the liquidator that the whole thing was pre-arranged, is also justified". We have no hesitation in more firmly and clearly endorsing these observations of the learned judge and in finding that exhibits P-59 and P-60, and the ratification of exhibit P-61 list not to go further were prearranged as claimed by the liquidator and spoken to by P. W. No. 22. We also find that the directors had knowledge of the defalcations and falsifications and of the fictitious nature of the advances and entries in the bank accounts, when they ratified exhibit P-61. In the absence of even elementary scrutiny of exhibit P-61 list, their contention that they only knew that the advances were unauthorised, but not that they were fictitious, is hardly acceptable. We cannot accept also the argument that the defalcations and misappropriations having been already effected, the subsequent manipulation of entries as to fictitious advances, cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouse on the last Friday of July, 1955. P.Ws. Nos. 13 to 16 do not implicate the 3rd respondent. But in spite of these infirmities, we feel from the conduct of the 3rd respondent, to which we shall refer, and from the attendant circumstances that the 3rd respondent must have had the requisite knowledge of the affairs of the bank at the same time as the other directors, if not earlier. His place of business in Alleppy was only 200ft. away from the bank, and it is inconceivable that he would not have known, and would not have been informed, about the information conveyed by P.Ws. No. 1 and 3 regarding the defalcations in the bank and the meeting subsequently in the 4th respondent's house. P. W. No. 3 deposed that in 1954-55 the 3rd respondent and his sons used to come to the bank and ask P.W. No. 22 for money. As D. W. No. 3, the 3rd respondent was cross-examined about these aspects, he merely stated that he does not "remember'' the 4th respondent telling him regarding the complaint about the misappropriations of large amounts from the bank by the 10th and 11th respondents and that he further does not know and does not remember a discussion having taken place in the house of the 4th r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomers of the bank to secure such advances of the 3rd respondent's money by the 10th respondent. These cheques had not been presented for encashment and were recovered from the 10th respondent's table. The 10th respondent as P.W. No. 22 deposed that the amounts covered by some of these cheques are still outstanding. P.W. No. 22 was having satta transactions which landed him in a loss of about five or six thousand rupees in 1954, and another ten thousand rupees in 1955. According to the witness the 3rd respondent must have known about his financial position and that of the parties to whom the monies were lent, all of whom were in Alleppy, and none of whom was in a position to repay the monies in 1954 and 1955. The 3rd respondent pressed for repayment and the witness's only source was to draw amounts from the Popular Bank and pay the 3rd respondent, which he did. In spite of this, he stated in one place that the 3rd respondent did not know that the witness drew money from the bank, in the sense that the 3rd respondent did not enquire, and the witness did not volunteer the information. From the evidence and the circumstances to which we shall refer, it seems to us that neither enquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Rs. 13,000 was made. P.W. No. 22 deposed that when on a complaint by some of the employees in July, 1955, he was called by the directors, he told them that a part of the amounts drawn from the bank and not brought to account, was used to pay off the 3rd respondent, a good portion to finance the speculative transaction of the 11th respondent, and some to meet his own losses in the satta transaction. The 3rd respondent's case was one of complete denial of the transactions attributed to him. As D.W. No. 5, he denied the possession of any ''black-market money" or its entrustment to P.W. No. 22, for being lent on interest. He denied his account having been credited with cheques issued by the 10th respondent. He relied on the entries in exhibits D-80 and D-82, his Ledger and Day Book, to show that the payments of Rs. 500 each evidenced by exhibit P-90 series, etc., and the payment of Rs. 7,000 on February 13, 1956, were all payments in cash. Regarding exhibit P-64 he stated in chief examination that he signed the same without knowing that it was a loan application. In cross-examination he was obliged to admit that his accountant (D.W. No. 6) told him that exhibit P-64 was a loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... falcated funds of the bank was utilised to pay off the 3rd respondent was untrue, and that there was no mention of it on two earlier occasions when it could have been disclosed, viz ., the exhibit P-60 report and the public examination evidenced by exhibit P-55. We do not feel persuaded by any of these alleged infirmities. If, as stated, the genesis of the transaction between the 3rd respondent and P.W. No. 22 was unholy, and related to "unaccounted money "or" black-market money ", the absence of any document relating to it, the secrecy or clandestine character of the dealings, and the non-mention of it in exhibit P-60 are all understandable. From the cross-examination of P.W. No. 22 by the 3rd respondent it was brought to light that certain enquiries were started against the 3rd respondent and P.W. No, 22 was examined before the Income-tax Officer. Exhibit D-38 is a certified copy of the deposition of the 3rd respondent before the said officer. P.W. No. 22 explained his omission to refer in public examination about the use of the bank's funds 1o pay off the 3rd respondent, on the ground that he was never asked about the same. In the circumstances, we are not inclined to attach an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity to explain why the minutes of the meeting after 11th June, 1955, were not recorded in exhibit P-63. Counsel for the various appellants attacked this circumstance relied on by the learned judge and pointed out to the evidence of P.W. 22 and D.W. 3 himself in re-examination. P.W. 22's evidence is unhelpful and is only to the effect that the proceedings of the last meeting of the executive committee held on June 11, 1955, appear at page 14 of exhibit P-63. Likewise, the statement of D.W. 3 in re-examination relied on for the purpose is also inconclusive. There is intrinsic evidence, that the executive committee did transact some business after June 11, 1955. In its proceedings dated August 31, 1955, the board of directors recorded that an office note for sanction of a loan of Rs. 47,000 was placed before the executive committee. There is also evidence that after stringency in the bank was reported by P.W. 22 in August, 1955, the executive committee sanctioned the raising of a loan of Rs. 47,000 by repledge of jewels. In the circumstances, we do not think that the reliance placed by the learned trial judge on the absence of record of the proceedings of the executive committee subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1955, the 9th respondent was coming to the bank and he kept him informed of the regularisation of the defalcations. We have found it not easy to square these aspects with the exoneration of the 9th respondent and the finding of his absence of knowledge of the affairs of the bank. Before us the liquidator attempted the unenviable task of supporting the decree against the respondents-directors even by showing under Order 41, r. 22, of the Civil Procedure Code, that the finding recorded against the 9th respondent was unsustainable, without asking for a reversal of this part of the learned judge's order. Neither the objectivity and dispassionateness expected of the liquidator as an officer of court, nor the high standards expected of him in not pursuing a vindictive or frivolous appeal which were the explanations attempted on his behalf appear to us to be sufficient to justify the liquidator's omission to file an appeal against this part of the judgment, which is inextricably bound up with certain other parts of the claim. In view of the obvious limitations, at a loss, was an act ultra vires the directors. On the materials that all the respondents-directors except the 7th respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 23, 1955, to the 9th respondent asking him to canvass deposits, and he replied " I do not remember" (the date of exhibit P-85 is March 24, 1956, and not March 23, 1956, if the suggestion was about the said letter). In these circumstances, we find no reason to reject the evidence afforded by exhibits P-85 and P-86. There is no reason also to disbelieve the evidence of D.W. 2 that the circulars, exhibits P-67 to P-70, were issued under the instructions of the directors and that the directors requested him to canvass deposits and were doing so to his knowledge. There is no effective cross-examination on these aspects. No reasons have been made out to discredit the evidence of P. Ws. 19 and 23. We hold that, in pursuance of the circulars, exhibits P-67 to P-70, issued at the instance of the directors, there was canvassing for deposits ; that, some at least of the director, namely, respondents 1, 4 and 5 are shown to have canvassed deposits ; and that the directors requested D.W. 2 to do so; all at a time when they knew that the affairs of the bank did not justify the canvassing for or the making of deposits in it. The action of the directors here summarized amounts to carrying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by others also. It is enough to notice that, as far as this part of the official liquidator's claim is concerned, the Division Bench confirmed the finding that the transaction relating to the payment of Rs. 8,500 by transfer to the overdraft account of Ramanatha Reddiar amounted to a fraudulent preference. A.S. No. 620 of 1961, in so far as the same had been preferred by the 1st respondent in CM.P. No. 144 of 1958, was dismissed with costs. The liquidator filed CM.P. No. 6106 of 1968 to receive the appellate judgment as additional evidence. The said judgment was delivered only on 6th December, J 965, long after the judgment now under appeal. We have allowed C.M.P. No. 6106 of 1958. The additional document will be marked as exhibit P-96. In view of this judgment, we have no hesitation in holding that the transfer of Rs. 8,500 referred to above amounted to a fraudulent preference. The second excepted item is item 15 of schedule VI relating to the withdrawal of a sum of Rs. 2,000 from the savings bank account of Smt. Premalatha Bai, wife of the 5th respondent. The withdrawal was on August 11, 1956, and there is the evidence of P.Ws. 3 and 22 that the cash position on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responsibility. In the present case, we have noticed that as early as 1954 the Reserve Bank in exhibit P-62 report commented on the laxity of supervision of the board of directors and of the committees constituted for the purpose of sanctioning and reviewing the advances, and the impropriety of leaving these matters to the uncanalised discretion of the manager. The resolution of the board of directors on September 6, 1953, by which the manager was directed to call a meeting of the committee at least once in a month and to act only on its orders in all matters of advances and credits was hardly adhered to especially after 1954. The laxity of supervision and the uncanalised powers of the manager were allowed to continue. Even after their knowledge on the last Friday in July, 1955, that the affairs of the bank had been brought to a sad impasse by reason of the defalcations and malpractices of respondents Nos. 10 and 11 the directors still continued them in the service of the bank. They connived at, and were parties to, covering up the misappropriations by manipulation of entries in the accounts of the bank. Even after the confession of guilt by respondents Nos. 10 and 11 in exhibits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... misappropriations when they were made. On the second head of the claim, we find that the directors cannot be held liable for the fixed deposit amount of Rs. 10,000 by Sri Narayanaswamy, received on 19th June, 1955, and not brought into account in the books of the bank till September 2, 1955. On the third and fourth heads we find that misappropriations were covered up by manipulating the bills purchased and negotiated accounts and by false and fictitious entries in the books of the bank as advances to different customers, and that these fictitious entries were made by respondents Nos. 10 and 11 with the knowledge and approval of respondents Nos. 1 to 8. On the fifth head we find that the directors ratified exhibit P 61 list with knowledge of the fictitious nature of the advances in schedule I of the points of claim. The entries in schedule I range from August 30, 1955, to September 3, '955, and total Rs. 1,99,000. The entire period covered is subsequent to the knowledge of the directors and they are responsible for the entire claim. On the sixth head of the claim, we hold all the directors, except the 7th respondent, responsible- for passing the balance-sheet of 1955, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors of the company in full after realising the available assets of the company. (3) If necessary, an account of the debts of the company be taken. (4) Payment by the respondents to the official liquidator of the company the said sum of Rs. 6,50,000 or such other sum for which the respondents may be found liable on the taking of accounts. (5) An order that the respondents do pay to the applicant costs of and incidental to the application. (6) Such other order in the premises as the court shall think fit to make". In traversing this, in paragraph 33 of the 1st respondent's defence, he stated : "It is not even known how and why a declaration of liability to the extent of Rs. 13,97,300 has Deen claimed which has later been limited to Rs. 6,50,000". In paragraph 21 of the defence this was repeated, and the liquidator was put to strict proof of establishing the deficiency and its quantum. The points of defence of many of the other respondents followed on the same lines. There is not even formal evidence on the side of the liquidator, either as to how the deficiency was estimated at Rs. 6,50,000 or as to the totality of the debts or liabilities of the company. Nothing was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for what portion of the same. The parties are at liberty to adduce additional evidence limited to these points. As the appellants-directors have substantially failed in their contentions, we direct that they pay one-half of the costs of the liquidator in Appeals Nos. 137, 139, 140, 105, 124, 125, 133 and 134 of 1963, and bear their own. Costs before the learned trial judge both before and subsequent to this remand will be provided for in the final order to be passed by the learned judge. A. S. No. 426 of 1964. This is an appeal by the present Joint Commercial Tax Officer, Tirunelvely, who was the Sales Tax Officer, 1st Circle, Alleppey, till July 2, 1955. He was not a party to Application No. 1 of 1959, but feels aggrieved by certain observations made by the learned judge about some writing, signature and seal made and affixed by him as Sales Tax Officer in two of the account books produced by the 3rd respondent, namely, exhibits D-81 and D-87. In effect, he seeks to expunge the observations made by the learned judge. Discussing the case of the liquidator and of the 3rd respondent regarding the alleged entrustment of the latter's '' unaccounted money " to the 10th responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he S.T.O. and dated ' 13-10-55 ' under a magnifying glass. It is very clear that the word " Examined" overlapping the seal of the Deputy Commercial Tax Officer, Madras, bearing the date 30th January, 1957, is on or above the seal. From my examination under the magnifying glass, it is clear to me that the seal of the Deputy Commercial Tax Officer with the date 30th January, 1957, was affixed earlier and the word " Examined " was written above it after the seal was affixed and the date ' 13-10-55 ' and the signature of the S.T.O. were also put subsequently. It appears to be clear that this alleged examination by the S.T.O. is a subsequent invention, subsequent to 30th January, 1957, with an earlier date put thereon. Therefore, I have no hesitation in holding that exhibit D-81 is an account subsequently written up and the seal and the signature of the S.T.O. with an earlier date produced for the purpose of this case. The same seal and signature, etc., of the same S.T.O. have been procured on page 739 of exhibit D-87 also. (This is a matter for the Government to take up and it is for the Government to decide what action they should take against the Sales Tax Officer responsible for t ..... 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