TMI Blog1965 (4) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... the expected deficit, leaving out of account the share liability, is in the neighbourhood of ₹ 265 lakhs. 3. Respondents, 1, 2, 3, 4 and 7 were directors of the hank when the provisional liquidator took charge on the 8th August 1960. The 1st respondent was the managing director from the very beginning, i.e., from the 26th January 1927, till the 1st April 1960 when he ceased to be the managing director and continued as an ordinary director. The 2nd respondent was a director from the beginning till the end; and from 1987 to 1951 he was also functioning as the manager of the Madras Branch of the bank, as a paid manager till the 1st January 1955 and thereafter in an honorary capacity. The 3rd respondent was a director from the 23rd December 1938, and the 4th respondent from the 14th January 1985, both till the end. The latter was also a salaried officer of the bank under the designation, Special Attorney, from 1938 to 1955. The 5th respondent was a director of the hank from the 30th March 1940 till the 12th August 1943, and again from the 10th July 1947 till the 29th December 1954. He was, in addition, a salaried officer of the bank from 1933 till the end--he was attached to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the bank. These documents numbering over 2000 have all been marked by consent; in fact, many of them were produced at the instance of the respondents to whom all the books and records of the bank in the hands of the liquidator were made available for inspection; the facts stated in the documents marked are not controverted; and hence there seems to be no necessity for recourse to Section 45-F of the Banking Companies Act. 8. The liquidator, it is said, has no information apart from what he has been able to gather from the books and other documents of the bank, and in any case, he has been unable to find any witness to speak to any facts other than those disclosed by these documents. The respondents have not thought it necessary to get into the box or even to file affidavits in order to explain away or otherwise meet the charges levelled against them. 9. Claim B being in no way dependent on the remaining claims I have taken it up for adjudication first--See my order dated 2-12-1964. I thought that advisable having regard to the magnitude of the case. The hearing in respect of claim B has been completed and I am proceeding to pronounce on it; the hearing in respect of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edly extinguish such a right, though, subject to the qualification already mentioned, leaving the substantive right unaffected of course, the remedy can be revived -- re-created, would perhaps be the better word to use--by a law for the purpose, just as any other right, including a substantive right, can be so created. But, in so far as the particular remedial right to which it applies is concerned, limitation undoubtedly extinguishes the right. Il is, however, important to remember that limitation extinguishes only the particular remedial right which is its victim and that, since it leaves the substantive right unaffected, that right can still be enforced in other ways, if other ways are available, not merely indirectly by the enforcement of lien or by obtaining a fresh promise, or by reason of payment notwithstanding the bar being safe from recall, but also in a positive and direct manner Thus, it might well be that there is more than one legal remedy available for the enforcement of the same substantive right. There must be many examples of this, but the example that occurs to me readily is the right of a purchaser in execution to obtain possession of the property bough by hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n force at the lime the proceeding in question is instituted This, I think, is because limitation is some-thing which fastens on the exercise of the remedy, not on the substantive right or on the cause of action, although the accrual of the latter, in oilier words, of the right to sue is (rather, should be, for that is not always the case, the attempt made in the third column of the schedule to the Limitation Act to apply the general principle, stated against Article 120 for example and specify for each particular case the date when the right to sue accrues, is not always successful) its starting point. It is on this principle that Section 3 of the Limitation Act, which says that, subject to certain qualifications, every proceeding instituted after the period of limitation prescribed therefor shall be dismissed, is based. What attracts the injunction is the institution of the proceeding. If that is after the period of limitation prescribed therefor, the proceeding shall be dismissed, and it necessarily follows that the period of limitation is that prescribed at the time of the institution. What is relevant therefore is the law of limitation in force at the lime the proceeding is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s easy to decide), can he of assistance in deciding whether or not the statute is of retrospective operation. Thus, if a statute says that a decree shall be passed only if a certain condition is satisfied, we are not really giving it retrospective operation if we apply it to a suit pending at the lime the statute came into force, although in relation to the institution of the suit or the accrual of the cause of action, it can be said that the statute is being given retrospective operation. The subject-matter of the statute is the making of the decree, not the accrual of the cause of action or the institution of the suit, and, in relation to that matter, the statute is being given only prospective operation. And, it a statute were to say that a particular transaction can be effected only in a particular way, I should think that the real reason for not applying it to transactions effected before the statute came into force, is not so much that that would affect vested rights as that the subject-matter of the statute being the making of the transaction, it cannot, unless it says so expressly or by necessary implication, apply to a transaction already effected before its enactment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 235 (1) of the 1913 Act (introduced by Act 22 of 1936) which came into force on 15-1-1937: 291 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 properly of the Company, or been guilty of any misfeasance or breach of trust in relation to the company, the Court may on the application of the liquidator, or of any creditor or contributory made within three years from the date of the first appointment of a liquidator in the winding up or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer, examine into the conduct of the promoter, director, manager, liquidator or officer, and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Act (now Section 543 of the Companies Act 1956) came into force, and it remains in force, the words underlined (here into'') by me in sub Section (2) thereof having been added with effect from 1-10 1959 by Act 33 of 1959 45-0. Special period of limitation (1) Notwith standing anything to the contrary contained in the Indian Limitation Act. 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 hanking company shall be excluded. (2) Notwithstanding anything to the contrary contained in the Indian Limitation Act, 1908, or Section 543 of the Companies Act, 1956. or in any other law for the time being in force, there shall be no period of limitation for the recovery of arrears of calls from any director of a banking company which is being wound up or for the enforcement by the banking company against any of its directors of any claim based on a contract, express or implied , and in respect of all other claims by the hanking company against its director, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave seen, the law of limitation to apply is the law in force at the time the proceeding in question is instituted. For this proceeding, instituted on the 4th April 1963, that law, so far as the non-director respondents are, concerned, is to be found in Sub-section (2) of Section 543 of the Companies Act. There, the period of limitation prescribed is five years. But there are three alternative starting points: (1) the date of the order for winding up, (2) the date of the first appointment of the liquidator in the winding up, and (3) the date of the act complained of. It was contended on behalf of the 8th respondent-- to what purpose it is difficult to appreciate since the acts complained of in this case would fall both under Clause (a) and (b) of Sub-section (1) -- that the first and second starling points which in this case are later than the third (though not necessarily in all cases since the section is applicable to a liquidator as well) are applicable only to the acts mentioned in Clause (a) of Sub-section (1) and that the third alone applies to the acts mentioned in Clause (b). Apparently it is assumed, wrongly as I have already indicated, that the acts complained of in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the decisions referred to have said, for, it may be noted, the purpose of excluding the operation of Article 36 of the Limitation Act at a time when, under the old Section 235(2) of the 1913 Act, the period of limitation for an application under that section was the same as that for a suit, was that the claim in such an application was not independent of contract which is an entirely different thing from saying that the claim therein is based on a contract Indeed, in providing for a period of five years from the date of the first appointment of the liquidator, it would appear that the Legislature had Section 543 of the Companies Act in mind and did not consider that such a claim was a claim based on a contract for which there was to be no limitation. I consider that an application under Section 543 comes within the other claims of Section 45-0(2), the second class of claims therein for which the period of limitation prescribed is 12 years from the date of the accrual of such claims or five years from the date of the first appointment of the liquidator whichever is longer. Here also the words, whichever is longer really mean whichever expires later, for, of the two perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se referred to being Re. B. Johnson and Co. Ltd. (1955) 2 AH E.R. 775 at pp 780, 781, 791 and the Indian cases being Narasimha Iyengar v. Official Assignee, Madras AIR 1931 Mad 58, Hukam Chand v. Bank of Multan, Ltd. AIR 1924 Lah 285. AIR 1930 Bom 572 and AIR 1933 All 789 (FB) following these older cases that Section 543 is only a procedural Section creating no new rights or liabilities and merely providing a summary remedy for enforcing, in the liquidation of a company, such liabilities as might have been enforced by the company itself or by its liquidator by means of an ordinary suit. It is true enough that the section creates no new rights if by the word right is meant a substantive right, and I have no doubt that it is in this limited sense, excluding what might be called remedial rights, that the decisions referred to use the word. The substantive right enforced under Section 543 of the Companies Act is the right of the company to recover any toss sustained by it from those responsible for the loss. That is a right which it would ordinarily have to be enforced by suit. But , once it winding up intervenes, a new remedy is given by Section 543 to the liquidator and the cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the company. 23.Great reliance is placed on behalf of the respondents oh the decisions in Hansraj v Dchra Dun M.E.T Co. Ltd AIR 1933 P.C 63 and AIR 1933 All 789 (FB). In the former it was held that an application under Section 186 of the Companies Act, 1913, was barred because a suit for the money claimed was barred, and, in the latter that an application under the old Section 235 of the same Act was barred because a suit for the same relief was barred: But this was not on the principle sought to be deduced from these decisions, namely, that whenever a suit is barred, the entirely different remedy of an application for the same relief must be barred. It was on entirely different grounds. In the former case it was because the words, any money due from him occurring in the section were construed as meaning, any money due and recoverable in a suit by the company and as not including any monies which at the date of the application could not have been so recovered . In the latter case. AIR 1933 All 789 (FB). It was because, under the old Section 235(3) of the 1913 Act, the Limitation Act applied to an application under the section as if such application were a suit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Seshagiri Ayyar J. in Muthu Korakki Chetty v. Nadar Ammal, (1920). ILR 43 Mad 185 :(AIR 1920 Mad 1) (FB), approved by the Supreme Court in S.R. Goel v. Municipal Board. Kanpur, AIR 1958 SC 1036 paragraph 23) that the language of the third column of the Schedule to the Limitation Act is to be so interpreted as to carry out the true intention of the Legislature that is to say, by dating the cause of action from a date when the remedy is available to the party . However that might be, what was held in AIR 1933 All 789 (FB) was that, since both the starting point and the period of limitation for an application under the old Section 235 of the 1913 Act was the same as those for a suit for the same relief, such an application is barred when such a suit is barred. Neither case is therefore authority for the proposition advanced on behalf of the respondents that, when the remedy by way of suit is barred, any other remedy for the same relief in enforcement of the same substantive right, must likewise he barred. Benaras Bank v. Prakasha Bhagwan Das, AIR 1946 All 269 and in the matter of S.S.R.S. Nidhi Ltd. Kumbakonam. AIR 1948 Mad 51 arc authority for the proposition that, under the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act, 1956 is the same remedy as an application under the corresponding provisions of the 1913 Act and the Travancore Acts that preceded if, I do not think that, so far as the present claim is concerned, this remedy was at any time, barred by the previous laws of limitation in force. 26. Up to 11-12-1038, the law in force was Section 237 of the Travancore Companies Act of 1092. When this law was replaced on that date by Section 291(1) of the Travan core Companies Act 1114 no part of the present claim had become barred The earliest act complained of took place in 1937 and even if it be that it was the article of the Travancore Limitation Act corresponding to Article 30 of the Indian Limitation Act. 1908 and not as the majority of the High Courts in India have held and, I think with great respect rightly the article corresponding to Article 120 and even if it be that the starling point for limitation was the point of time when the right to institute a suit accrued and not when the right to make an application accrued, no part of the claim could have been barred by 11-12 1938. 27. After 11-12-1938. the laws in force have been Section 291(1) of the Travancore Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause which speaks of ''the date of accrual of such claims the word, claims' must refer to the substantive rights that are being enforced, for here again, it would be scarcely correct I o speak, of the accrual of a suit or application or other remedy, although it would he quite correct to speak of the accrual of a right to sue or to make an application. If the word, claims in the phrase, such claims moans substantive rights, then it should follow that the claims referred to in the opening words of the second part of the sub-section prescribing a period of limitation and in respect of all other claims , must likewise be substantive rights. And it is only in that sense that a claim in a misfeasance application can be said to be a claim by a banking company so as to attract the section. The application, as we have seen, is. not by the company though for its benefits; but, the substantive right sought to be enforced is a right belonging to the company and may therefore be said to be a claim by the company. The period of limitation prescribed in the Sub-section therefore applies to the exercise of all manner of remedies in respect of the substantive right a covered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . in Seen Kutti v. Kunhi Pathumma (1917) ILR 40 Mad 1040 at p. 1055 : (AIR 1919 Mad 972 at p. 981 FB) such a startling result can be permitted only if the words of the statute are too plain to be evaded. Here, on the contrary, the language of the section, the old Section 45-0(2), clearly shows that the provisions for limitation therein can come into play only after there has been a winding up order and there can be no question of its operating so as to bar a claim before that. 32. It has been contended that both Sub-sections (1) and (2) of the new Section 45-0(2) of the Banking Companies Ad apply to misfeasance applications like the present, that Sub-section (1) is of no avail to revive a claim barred at the commencement of the winding up; with the latter proposition no one can quarrel and that despite all appearances to the contrary Sub-section (2) is really in the nature of a proviso to Sub-section (1) prescribing a period of limitation for claims not barred at the commencement of the winding up and therefore kept alive by Sub-section (1). I have been quite unable to follow this argument or see what it leads to and must therefore he content with stating it as best I can. 33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bare denial that the credits in question were fictitious and will) the bare assertion that the credits were in respect of income actually earned and that the balance sheets and profit and loss accounts were correctly drawn up. Respondents 1, 5 and 6 have stated that the credits, and the corresponding debits to the branches and the interest receivable account, were on account of some of the branches having charged less than the stipulated rates of interest or none at all in the years prior to 1949. This resulted in a fall in the profits for those years, and, to cover this, the shortfall was estimated, and, credit taken thereof in the profit and loss account as interest received, by raising corresponding debits in the branch account and the interest receivable account. (This seems to me perilously close to an admission of manipulation to cover up losses). Respondents 5 and 6 have added that the branch accounts for the several years remained unrecognised. The auditor, the 8th respondent, has taken shelter under the fact that the branch accounts were not reconciled and has added that the reserves would cover the intangible assets. How this, even if true, can be of any assistanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and loss account but only the total of such credits raised by debits to the branch account and the interest receivable ac-count. As we have seen, credits have been raised by debits to other accounts in some years, but the amounts are comparatively small and their addition would not affect the result, since, even without that, there would be no divisible profit or taxable income during the years concerned. They have therefore been ignored. The total loss for the years 1936 to 1949 works out to ₹ 16,52,295/-, ₹ 9,24, 986/- on account of the payment of dividend otherwise than out of profits, and ₹ 7,27, 309 by reason of payment of income-tax not really due. 96. It is said that Article 90 of the articles requires only 16 per cent of the profits of each year to be set apart as reserve and that therefore in working out the divisible profit under column 6 of the table only 15 p.c. of the actual profit shown under column 8 and not the amount shown under column 5 should be deduct ed. But, what the article says is that not less than 15 per cent shall be set apart as reserve; it is open to the board to set apart more; it is not for us to speculate what sum the Board w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... properly and truly prepared. This the respondent Directors have not made the least attempt to do--they devised no system, they constituted no committee for the purpose, they framed no standing instructions, and beyond saying that the bank had competent and qualified staff to attend to these matters they have not chosen to say anything as to how these things were done and how they discharged their responsibility with regard to them--and I think it clear that the misapplication was the result of a breach, I would add a wilful breach, of their duly as directors. 99.The word, misapplication , by itself involves no mens rea. It imports no mental element such as dishonesty or fraud, not even negligence. It only means wrong or incorrect application, not necessarily a wrongful application, and there can be a perfectly innocent misapplication. But it is well settled by decisions both English and Indian that liability under Section 643 of the Companies Act can be imposed only if there has been dishonesty or fraud or at least negligence, not ordinary negligence but gross and culpable negligence. (Eminent judges have criticised the use of phrases such as gross negligence and have said tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 543 of the Companies Act or only to those described in Clause (a) thereof where an order for repayment or restoration of money or property can properly be made, it is not necessary for me to decide, for, as I have already shown, the misfeasance complained of in this case docs fall under Clause (a) ). 100. Now, what have the respondent directors done to show that they had taken reasonable steps, such as businessmen in their position would lake, to ensure that the books of the company were properly and correctly maintained and the balance sheets and profits and loss accounts properly and correctly prepared. As I have already said, nothing whatsoever. They have offered no evidence on the point. In the points of defence (which of course arc not evidence) they have stoutly denied that there was any falsification of the books or any misapplication of the money of the company, a denial which, as we have seen, can scarcely bear scrutiny. Some of them have said that they placed reliance on the 1st respondent, some that they placed reliance on the auditor. The 1st respondent has said that be placed reliance in the conduct of the affairs of the bank on the 4th respondent and anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are at the helm of affairs, and although the rudder might be in the hands of the managing director, it is the duty of the directors to keep an eye on him and see that he steers a proper course Here the directors do not say what control they exercised: it is difficult to imagine that over this long period they were completely ignorant of the systematic fraud that was being carried on from year to year; not one of them has dared to get into the box to assert his ignorance and face a cross-examination regarding his complicity; and the inference seems to me legitimate that they were privy to the fraud 102. Of the very large number of decisions both English and Indian that have been cited at the bar, I think it necessary to make reference only to one, namely. Dovey v Cory 1901 A.C 477, the decision on which the strongest reliance is placed on behalf of the respondents. There Cory. the alleged delinquent director was exonerated, but the only resemblance that that case bears to the present case is that that also was a case where dividend was paid otherwise than out of profits There Cory filed an affidavit and faced a long and searching cross-examination regarding the part played by hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d anybody, a director could not be made liable when the company was wound up to replace the money. In Rance's Case (1870) 6 Ch. A. 104 Lord Romilly laid down the principle which ho thought governed eases of this description thus: When an improper payment has been made, if it be a mere error of judgment it cannot be recovered; if it be fraudulent payment then it can The learned judge explained what he meant by a fraudulent payment: I mean once where the person who makes it or is concerned in making it is at the time aware of the impropriety of making it, but does so in order to obtain a benefit for himself and he adds: The director may be ignorant of [his fact, but if his ignorance arises from his wilfully shutting his eyes to the facts which a re before him he is equally guilty. I think that this statement of the law is very nearly but not quite, accurate In my opinion it is not necessary that the motive of the improper payment should be to obtain a benefit for the director himself I also understand Lord Romilly to include in the expression wilfully shutting his eyes, culpable negligence or reckless indifference by the director in the performance of his duties Lord R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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