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TMI Blog1973 (1) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... ntant, two branch managers, another officer, and an auditor of the Supreme Bank of India Ltd., Belgaum (hereinafter referred to as "the Bank"), under liquidation. The bank, incorporated on May 27, 1939, commenced business on October 6 1939. It suspended business on November 27, 1954, as a result of gross mismanagement which enabled large sums of money to be misappropriated and false and fictitious entries to be made in its account books. Out of the seven directors mentioned above, five, namely, S. G. Pant, the chairman of the board of directors, S. K. Samant, the managing director from July, 1946, P. A. Tendolkar, D. R. Angolkar, and L. S. Ajgaonkar, were promoters or founder directors. The sixth director, B. W. Porwal, joined the board in 1951. The seventh director, R. N. Kalghatgi, took charge of his office in July, 1953, on the death of his elder brother, G.N. Kalghatgi. Before the company judge could give his decision, on November 8, 1963, S. G. Pant, the chairman of the board of directors, had expired on August 29, 1961, and D. R. Angolkar, director, had died on October 10, 1962. During the pendency of the applications for certification, under article 133 of the Constitution, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... returns, particularly of advances by the branches, were made, nor were the branches inspected periodically, the usual practice of balancing the ledger at frequent intervals was not observed, and account books and records of the bank were not duly maintained. The Reserve Bank, therefore, suspended its decision about issue of a licence to the bank to carry on banking business until the bank had removed these shortcomings. On March 5, 1953, a second report (A-2), under section 22 of the Act, was given by the Reserve Bank, in which it was observed, inter alia, that the bank had not rectified the defects pointed out in the previous inspection report, that the board of directors did not show sufficient interest in the working of the bank, and that there was no proper supervision and control over the activities of the managing director. The question whether the bank was eligible or not for a licence was still left undecided after listing irregularities found under fourteen heads. On September 13, 1954, a very detailed inspection report (A-3), under section 35, sub-section (1) of the Act, carried out on March 26, 1954, was sent by the Reserve Bank to the bank, with a covering letter, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The report mentions that the assets and liabilities of the bank could not be verified as no regular audit had been carried out and that the records had been maintained in "a most deceptive manner" so that the amounts involved could not be ascertained correctly. The total amount " involved in the fraud" was assessed roughly at Rs. 4.26 lakhs. It said " So far an amount of Rs. 3.75 lakhs has been traced from various sources. The balance can be traced provided the accounts are reconciled". After this report, the Bombay High Court rejected the application for further moratorium and for a reconstruction of the company. On March 8, 1956, a depositor of the bank applied to the Bombay High Court for the winding up of the banking company. On March 13, 1956, a provisional liquidator was appointed, and, on April 16, 1956, the bank was ordered to be wound up. As a result of reorganisation of States, the winding up proceedings were transferred to the High Court of Mysore, and the official liquidator at the Mysore High Court was appointed as the liquidator of the bank. On July 22, 1958, the official liquidator brought to the notice of the company judge an elaborate report (A-9), dated May 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heets, were incorrect, etc., etc. In D. D. Joshi & Co's report it is also stated : "On the event of the commencement of our work, the directors had resolved to repay a part (10%) of the deposit amounts to the depositors. This was the best opportunity to bring forth pass-books and other records in the possession of the depositors for getting the deposits verified for our purposes. The matter was discussed with the chairman and some of the directors and we handed them a specific form for obtaining letters of confirmation of balances from the depositors. The chairman and the directors assured us to give due publicity to the matter before disbursing the amount and upon insisting on the production of pass books and other records available from the depositors at the time of making the payments. However, it was later on discovered that this proposal of ours had not been carried out and that the deposit amounts were being disbursed without insisting upon the production of the pass-books. When the matter was again referred to the chairman we were surprised to learn that the directors had not approved of our proposal on the ground that it would have caused unnecessary inconvenience and har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing-up of the company had begun, as it did in the instant case, before the commencement of the 1956 Act on April 1, 1956. But, in respect of the managing director and those directors who were alive when the learned company judge gave his decision on November 8, 1963, it was held that the proceedings were covered by the special provisions of section 45-O of the Banking Companies Act applicable to them. The first two clauses of section 45-O 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expired before the Act XXXIII of 1959, by which section 45-O(2) was amended on October, 1959, time-barred claims could not be revived whether the case was governed by the limitation laid down in section 235 of the Act of 1913 or that in section 45-O of the Act. The contention that section 235 of the 1913 Act could apply to these proceedings, governed expressly by the special law on the subject contained in section 45-O of the Act, is plainly erroneous. The plea that twelve years from the "accrual of claims" had expired before section 45-O(2) was amended on October 1, 1959, is also unacceptable. It does not seem to have been specifically advanced in the High Court so that the facts may be examined there to determine when any part of the claims "accrued" against any director. Such a point, it is obvious, involving an investigation into fresh facts, showing when claims for any particular items of loss to the company accrued, or when they accrued against its board of directors itself cannot be taken up for the first time in this court. It was not taken, and, therefore, not gone into in the High Court. In any case, the amendment of section 45-O(2) of the Act had conferred a new right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons upon whom the assets and properties of Pant and Angolkar may have devolved, do not, therefore, call for a decision from us. But the general question of liability of heirs and legal representatives of delinquent directors has arisen before us in respect of the liability, if any, of the heirs and legal representatives of director, Tendolkar, who died on August 10, 1966, pending the grant of his application for certification of fitness of the case under article 133 of the Constitution for an appeal to this court. Tendolkar's heirs got themselves impleaded so as to prosecute the application for certification of fitness of the case for appeal, and, after obtaining it, they filed their appeal in this court against the order of the Division Bench holding Tendolkar liable. Learned counsel representing them was heard in support of the objection that the proceedings against them could not continue and also on merits of the order determining the liability of Tendolkar. Learned counsel for the official liquidator, on the other hand, pressed his appeal against the order of the Division Bench reducing the liability of Tendolkar. In In re East of England Bank : Feltom's Executors case 2, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here that the provisions of section 235 of the Companies Act of 1913 do not bar suits by the official liquidator, in suitable cases, against the heirs of the deceased. Similar views were adopted in : Cecilia Mary de Souza's case (supra), Manilal Brijlal's case (supra ) and in In re: Peerdan Juharmal Bank Ltd.'s case (supra) . Two cases, Gopal Ganesh Abhyankar v. Ramachadra Sadashiv Sahasra-budhe [1902] I.L.R. 26 Bom. 597 and Sakyahani Ingle Rao Sahib v. Bhavani Bozi Sahib [1904] I.L.R. 27 Mad. 588 were cited on the application of the maxim " actio personalis moritur cum persona". In Abhyankar's case (supra), the defendant against whom a suit for damages for defamation had been decreed had died during the pendency of the appeal against the decree passed. At the hearing of the appeal, the plaintiff had objected that the appeal had abated. The Bombay High Court held that the defendant's legal representatives had a right to continue the proceedings and to question the decree. The High Court referred to several cases, including a Full Bench decision of the Allahabad High Court in Padarath Singh v. Raja Ram [1882] I.L.R. 4 All. 235, where Edge C.J. had said : "I have always understood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to cases involving breaches of fiduciary duties or where the personal conduct of the deceased director has been fully enquired into, and the only question for determination, on an appeal, is the extent of the liability incurred by the deceased director. Such liability must necessarily be confined to the assets or estate left by the deceased in the hands of the successors. In so far as an heir or legal representative has an interest in the assets of the deceased and represents the estate, and the liquidator represents the interests of the company, the heirs as well as the liquidator should, in equity, be able to question a decision which affects the interests represented. We may now consider the meaning and effect of section 235 of the Act of 1913, which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to do anything. Such compulsive proceedings as may become necessary against those upon whom devolve the assets or the estate of a deceased delinquent director, who may have become liable, could only lie outside section 235 of the Act of 1913. There was nothing in the Act of 1913 which corresponded to section 542 of the Companies Act of 1956, the relevant part of which lays down: "542. Liability for fraudulent conduct of business.-(1) If in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company, or any other persons, or for any fraudulent purpose, the court, on the application of the official liquidator, or the liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct. On the hearing of an application under this sub-section, the official liquidator or the liquidator, as the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ator or the co-directors may, however, take any other proceeding which may be open to them under the law so as to obtain the contribution of Tendolkar. Before we consider the manner in which the liabilities of the directors were determined, on the evidence on record, by the company judge and then by the Division Bench, we will refer to the principal authorities, cited before the High Court and also before us, with regard to the principles on which liabilities of managing directors and other directors may be determined in such cases. In re City Equitable Life Insurance Co. [1925] Ch. 407, 427 (C.A.) , which is regarded as the locus classicus on the subject, was relied upon by both sides. Here, Romer J., after considering earlier authorities, said : "In order, therefore, to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company's business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one in the circumstances, and is not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. (3) In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly (1) be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly". It must, however, be remembered that these remarks were made in the context of a case in which the honesty of the conduct of the directors had not been questioned at all. In Dovey v. Cory [1901] A.C. 477 (H.L.) , which was also cited, the question considered by the House of Lords was whether a director, though, in fact, innocent of any complicity in fraud, was liable to the company for negligence in not having discovered the fraud perpetrated by others. In that context, Lord Halsbury L.C. had observed as follows : "It is obvious if there is such a duty of detecting frauds it must render anything like an intelligent devolution of labour impossible .... I cannot think it can be expected of a director that he should be watching either the inferior officers of the bank or verifying the calculations of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neglect even if he is not shown to be guilty of participating in the commission of fraud. It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the company. In the case before us, strong reliance has been placed, on behalf of the directors, on articles 109 and 118 of the articles of association which read as follows : "109. Duties of the managing director.-(a) The managing director, shall out of the money received by the company make all necessary and proper disbursements, in carrying on the business of the company, and shall cause proper accounts to be kept of all transactions of the company and shall once in every year, settle and adjust such accounts with the board and auditors and shall make out the balance sheet and profit and loss account and all the returns, and statements required by the Acts, to be audited and signed. (b) Appointment of managing director.-The directors may from time to time appoint any one from their body to be the managing director of the company, either for a fixed period, or without any limitation as to the period for which he is to hold such office, on such terms, provisions, and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, relying upon the observations in Overend & Gurney Co. v. Gibb [1872] L.R. 5 H.L. Cas. 480 (H.L.), had held that: "The directors were cognizant of circumstances of such a character, so plain and so manifest, that no men with any ordinary degree of prudence, acting on their own behalf, would have conducted themselves in the manner the directors of this company have done". The proved conduct of the founder directors was such that an inference of their complicity in concealing the true state of affairs from depositors, presumbly because they were themselves benefiting from it, could not be avoided. The learned company judge had rejected the plea of the directors that they had acted both honestly and reasonably in the performance of their duties. The learned company judge had observed : "It has been argued on behalf of the liquidator, and suggestions have also been made to the directors when they were in the witness box, that they did not take immediate steps to remove dishonest members of the staff from service and to set right things because they were afraid of their own dishonest conduct being exposed by the staff members if they persisted in taking action against them. Two c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or dishonest, provided that no difference is made in the matter of procedure and scrutiny between the loans to directors and loans to other persons. If certain preferences or concessions are made in favour of the directors including the omission to adopt proper procedure and scrutiny, it is a legitimate criticism to make that the directors have taken undue advantage of their position as directors which undoubtedly is a departure from the standard of care and rectitude expected of them. As I have already observed, if men at the top are guilty of departure from proper conduct, they place themselves in a position which makes it difficult, if not impossible, for them to correct their subordinates. There is, therefore, force in the argument that this particular situation in which the directors found themselves might be one of the reasons for not taking stern action against dishonest members of the staff. This circumstance is enough, in my opinion, to disentitle the directors from saying that their only fault was honest error of judgment or that they have acted reasonably in the circumstances of this case. I hold, therefore, that the directors, other than the managing director, are als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d subsequent to July, 1946". It rejected the plea of the managing director that he had executed promissory notes in favour of the bank for Rs. 53,000 and Rs. 58,500, on November 19, 1954, and December 3, 1954, respectively, under some pressure, threat or coercion. It relied upon a statement in writing of the managing director (A-25) addressed to the special officer on December 8, 1954, in which the amounts of the two pronotes totalling up to Rs. 1,11,500 to the bank constituted an admission and undertaking to repay at least this amount to the bank. It observed that even on December 8, 1954, the managing director did not deny his liability to pay this amount. It then held: "Hence, this can safely be taken as his liability for his negligence and breach of duty. Rs. 14,000 has been realised from him by the sale of his car and truck and another sum of Rs. 24,000 has been realised by the sale deed executed by him in favour of the bank conveying his house. Deducting these two sums, he is still liable for a sum of Rs. 73,500. Thus, his liability to contribute to the assets of the company can safely be fixed at Rs. 73,500, though it is likely that the extent of loss resulting from his ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Porwal, who joined as director in 1951, after the first inspection report by the Reserve Bank had already been given, and of R. N. Kalghatgi, who became a director only in July, 1953, on the death of his elder brother, G. N. Kalghatgi. They had pleaded that they were ignorant of the malpractices and misappropriations which had taken place before they joined the board of directors. The company judge had noted that no suggestion of dishonest conduct had been made against them and that they had not borrowed any money from the company. Nevertheless, as they were fixed with the knowledge of the contents of the several reports of the Reserve Bank, mentioned above, they were held liable to contribute Rs. 15,000 each, as mentioned above, for their negligence and breach of duty to provide and ensure honest and efficient management of the affairs of the bank. The Division Bench had, in view of the short period for which they had functioned on the delinquent board of directors, reduced the contributions to be made by R. W. Porwal and R. N. Kalghatgi to Rs. 10,000 and Rs. 5,000, respectively, with interest at 6 per cent, per annum from November 8, 1963, the date of the order of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oughly cross-examined on behalf of the directors. Shri K Y Wade (P.W. 3), auditor, was examined by the official liquidator to prove and support the contents of his report (A-21) dated February 16, 1955 Shri V. R. Kotbagi, advocate (P.W. 4) who, as indicated above, had been appointed as the special officer, under section 37 of the Act, and who functioned December 7, 1954, to April 4, 1955, in that capacity, had duly was fully cross-examined about the admissions made in writing (Exhibit A-25) by S. K. Samant. No objection had been taken on behalf of the directors to the admissibility of any of the reports or other document exhibited behalf of the official liquidator exhibited on behalf of the official liquidator. In addition to the considerable evidence given by the witnesses mentioned above, the learned company judge, in order to give the fullest possible opportunity to the directors to meet the prima facie case of misfeasance by misconducting the affairs of the bank in a manner which could not be honest and which caused heavy losses to the bank, had ordered the directors, who had produced no witness in defence, to appear and give evidence in court, particularly because the defence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been available if the official liquidator had asked for the public examination of the directors under section 45G of the Act, could not be placed before the court. The Division Bench had also held that the allegations of improper conduct by the directors, in not exercising proper supervision, did not form the subject-matter of any separate issue or point formulated by the company judge. Furthermore, the Division Bench held that allegations of improper conduct on the part of directors, in obtaining excessive loans for themselves, which the directors were not called upon to meet, should be ignored in determining the liability of the directors for making good loss due to shortage of cash and manipulation of bank balances. It had, nevertheless, held the directors liable inasmuch as they could not "totally abdicate their powers and functions and divest themselves of responsibility for proper management of the company". The Division Bench had also commented upon the vagueness of allegations against the directors individually. We find, as the judgment of the learned company judge also shows, that each allegation in the misfeasance application was supported by sufficient particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before he was appointed to wind up the company. We think that, in the circumstances of the case, sufficient particulars had been furnished in the misfeasance application. The directors not only had an opportunity of meeting the allegations contained in the petition, but they also had knowledge of the material brought on record afterwards. It is true that there was no separate issue on the extent of the liability of the managing director and the directors due to neglect in exercising proper control and supervision over officers of the bank. But, we think that the gravamen of the charges against the directors was more serious than that. The learned company judge had framed three issues apart from two on the preliminary questions disposed of by us already. These three issues were framed as follows : "1. Whether the official liquidator proves that on the date the company closed its business, viz., on November 27, 1954, there was shortage in cash and, if so, in what sum ? 2. Whether, the liquidator proves that loss was occasioned to the company by misapplication of cash or funds shown to have been credited to the accounts of the company with the other banks but not so actually credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission of a report showing that loss has been caused to the banking company in the opinion of the official liquidator. After that, it is the opinion of the court, on the question whether the director concerned should be publicly examined, that matters. In the case before us, the company judge was certainly of opinion that the interests of justice required the examination of the directors which had been ordered. We think that the Division Bench had erred in holding that the directors had not had due opportunity of meeting allegations made against them. It is true that the issues were rather broadly framed and could have been fuller. But, after considering the nature of charges and their particulars, the cases set up by the directors in defence, the evidence led, and the very full and fair opportunities given by the learned company judge to the directors to defend themselves, we are unable to agree with the Division Bench that the directors were in any way handicapped by alleged vagueness of charges or a failure to frame issues more fully or that a good deal of evidence led could be ignored for these reasons. It was pointed out by this court in Nagubai Ammal v. B, Shama Rao [195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 712-13-2 whereas the day book written thereafter showed a closing balance of Rs. 3,07,555-2-10. It appears that cooking up of accounts and presentation of false balance-sheets were the usual practice of the bank. Any director conscious of his managerial responsibilities, who had cared to examine the affairs of the bank, could not have failed to find out what was really happening in the bank. The fact that these practices were tolerated for such a long period without any check by the board of directors indicates that the promoter-directors must be participants in the benefits of widespread misappropriation even though they may have so operated as not to leave any traces of actual misappropriation by them in the records of the bank. The circumstantial evidence against them is too damaging, considerable and unanswered. The result is that we think that the learned company judge was correct in assessing the total liability of those members of the board of directors who were founder or promoter-directors. We also think that the Division Bench correctly came to the conclusion that it was just and proper to place a greater share of liability upon the managing director. We, however, think ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 73,500 together with interest at six per cent, per annum from the date of the order of the learned company judge until payment. 4.The still remaining liability to the extent of Rs. 1,23,500 with interest at six per cent, per annum from the date of the order of the company judge up to the date of payment will be the joint and several liability of the managing director, S. K. Samant, and the directors, Tendolkar and Ajgaonkar. 5.The directors, Tendolkar and Ajgaonkar, are held jointly and severally liable in case the amount, if any, which, out of the initially separate liability of the managing director, S. K. Samant, that is to say, Rs. 73,500, cannot be recovered from S. K. Samant only. 6.The case is remanded to the learned company judge for passing such orders against the managing director, Samant, and director, Ajgaonkar, under section 235 of the Act of 1913, as may be needed for discharging the liabilities determined above, but no such orders will be passed against the heirs and legal representatives of the deceased director, P. A. Tendolkar, under section 235 of the Act of 1913, although their liabilities are declared. The official liquidator and L. S. Ajgaonkar are, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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