TMI Blog1928 (2) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ny has preferred Appeal No. 215 of 1923 against the preliminary decree and Appeal No. 457 of 1924 against the final decree. 2. Various matters fall to be dealt with in these appeals, the decision in which, as in the original trial, has not been assisted, but considerably hampered by the action of the plaintiffs in not clearly realising before they came into Court and not clearly setting out in their pleadings what their causes of action were and what remedies at law were open to them on these causes of action. It will be convenient to follow the order taken by the lower Court in dealing with the several matters in issue in this litigation and has deal with both appeals against the preliminary decree at the same time. 3. The first and most important matter relates to a mortgage of ₹ 1,23,354 over the mill property in favour of the wife of the 2nd defendant. This was taken on 2nd January, 1918, in continuation of, and by way of security for, various loans taken at various times by the Company from her. The lower Court has held on this matter that, though the 2nd defendant had an interest in this mortgage which conflicted with his duty to the Company and, therefore, an int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interests of the Company but fraudulently by the defendants to advance the interest of the 2nd defendant's wife. The District Judge does not, as I have said, consider these loans by themselves. He merely argues back from the mortgage to the loans, and because he finds the former fraudulent he holds the latter must have been part of the same fraud. But that is by no means a legitimate conclusion or a proper method of arriving at a conclusion, particularly as the Judge himself holds that at first the defendants were genuinely prosecuting the interests of the Company, that loans were necessary, and that the full money obtained on those was spent in the interests of the Company who got the full value for their money. At the time of argument I tried to ascertain whether at any time the shareholders had at any of the numerous annual general meetings ever challenged the loans. It is difficult in the mass of evidence there is in this case to be absolutely certain of any point; but we have not been pointed to any evidence going to indicate that the share-holders ever challenged these loans. The plaintiffs do not assert that the loans were unnecessary or at any unduly high rate of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to hold that the mortgage must have been tainted by fraud simply because the mortgagee was the 2nd defendant's wife. All the circumstances to my mind point to the fact that if the creditor had been any one else, an outsider, the result would have been the same, namely, the mortgage over the mill property. There was in the circumstances no other alternative. This conclusion is strengthened by the conduct of the share holders in the matter. On 26th. November, 1927, some of them sent a notice to the Directors which was read at their meeting on 28th November, 1917, see page 579 of the printed papers protesting against the giving of the mortgage. The Directors nevertheless by a vote of 5 to 2 resolved on the mortgage. The protesting share-holders and the dissenting Directors had until 2nd January, 1918, when the mortgage was actually executed, time to take effective steps to prevent it and did exactly nothing at all. It is quite clear that they did not consider that their interests were being put in any real jeopardy by the transaction. The validity and binding character of the mortgage is now in issue in a separate suit by the mortgagee to enforce it and will be judicially decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey thought it advisable. It was not, therefore, necessary that this mortgage should go before the Directors at all, but this fact of itself, would not absolve the 2nd defendant. If the defendants thought it advisable to have the direct sanction of the Directors then it was incumbent on them to place candidly all the facts before the Directors, and if the 2nd defendant had an interest in the mortgage which was such an interest as he ought in law to disclose and which he did not disclose, he cannot take shelter in the fact that he could himself have sanctioned the mortgage without going to the Directors at all, 8. I shall very briefly discuss the legal question argued at length on both sides, namely, whether in the present case, non-disclosure of interest in a contract or voting on a contract in which he is interested will render the offending Director liable in any loss to the Company which it may have suffered in consequence, or will render the contract void or voidable. The principles which this Company required its Directors to follow in the matter of contracts in which they might themselves have an interest are laid down in Article 99 of the Articles of Association. This arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract illegal or voidable. Unless, therefore, the contract would not have been accepted if the vote had not been given, the contract remains unaffected. A pertinent case on this point is Transvaal Co. v. New Belgium, (Transvaal) Land and Development Co (1914) 2 Ch. 488 : 59 S.J. 27 : 31 T.L.R. 1 in which a contract was held to be voidable, not because the vote was given, but because, if it had not been counted, there would not have been a quorum qualified to contract. The matter has to be looked at from a business point of view, and if without the vote the Company would still have carried through the contract the Company has no claim to have the contract nullified. For example, in Imperial Mercantile Credit Association v. Coleman (1871) 6 Ch. A. 558 : 40 L.J. Ch. 262 : 24 L.T. 290 : 19 W.R. 481, Hatherly, L.C., says I take it that even voting would not exclude the agreement voting, that is, after disclosure, or when the Board is fully aware of the interest of the interested Director. As to whether voting would make an interested Director liable to account for secret profits, in Costa Rica Ry. Co. Ltd. v. Forwood (1901) 1 Ch. 746 : 70 L.J. Ch. 385 : 49 W.R. 337 : 84 L.T. 279 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bonnard v. Dott (1906) 1 Ch. 740 : 75 L.J. Ch. 446 : 94 L.T. 656 : 22 T.L.R. 399 and Barnacle v. Clark (1900) 1 Q.B. 279 : 69 L.J.Q.B. 15 : 64 J.P. 87 : 48 W.R. 336 : 81 L.T.484. These cases, however, are clearly cases in which the contracting party is the party liable to the penalty imposed by the section, and the design of the section, therefore, is to forbid the contract. I am not able, for reasons already given, to spell out the existence of any such design from the wording of Section 91(a) or (b). 12. We have, therefore, to come back to the Articles of Association, and the law then applicable to this Company or to Companies which have an Article of Association such as Article 99, would seem to me to be this. Non-disclosure of an interest will not per se render the contract void or voidable at the option of the Company. Voting by an interested Director will not per se render the contract either void or voidable. But non-disclosure, or voting, where, but for the vote, the contract would not have been sanctioned, will in all cases render the interested Director liable to account for 'secret profits.' 13. What then is the nature of the interest of which the law will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Co. Ltd. v. Forwood (1901) 1 Ch. 746 : 70 L.J. Ch. 385 : 49 W.R. 337 : 84 L.T. 279 : 17 T.L.R. 297 : 8 Manson 374 where Vaughan Williams, L.J., remarks: It seems to me that... the Company, through its Directors, was perfectly well aware that Sir A. Forwood was beneficially interested in a contract.... That being the state of knowledge of the Company... and its Directors, I am clearly of opinion that... there was nothing in this case to render Sir A. Forwood subject to any liability, as a Director of that Company, to account in respect of what I will shortly call 'secret profits . 14. I have here no doubt that the 2nd defendant was, as agent of his wife, bound in duty to get as favourable terms for her as possible. As Director of the Company, he was bound to get as favourable terms for it as possible. The two duties are incompatible and cannot be exercised together. It cannot be doubted that the 2nd defendant's duty to the Company was to disclose his agency for his wife, if not already known to the Directors, and to refrain from voting on the mortgage, and that he would have committed a clear breach of his legal duties as Director if his interest was not known to the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out, have never in their pleadings asserted that the Directors were not aware of the 2nd defendant's agency and have not examined any Director to state that he was not aware of it. When there is no evidence that the Directors were not aware of the agency and that, therefore, formal disclosure at the meeting was necessary, it is not open to the plaintiffs to contend that there was such an absence of disclosure as will amount to a breach of the law. As regards the 2nd defendant's voting on the contract, what is really prohibited, when the Board was aware of the interest of the 2nd defendant is the counting of the vote, but even if the 2nd defendant's vote on this mortgage be not counted, the result would have been the same, since the voting on the mortgage was by a majority of 5 against 2. 16. I must here deal with an attempt in this Court by C.M.P. No. 649 of 1927 to put in fresh evidence of an undisclosed interest by the 2nd defendant, namely, that it has been discovered by the plaintiffs after the termination of the trial in the lower Court that he was at the time of his vote on this contract the universal legatee of his wife. I cannot see how this strengthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the competence of the share-holders to hold it, and indeed their own resolution contemplated their holding it if the secretaries or Directors refuse to call it. The share-holders, therefore, took no steps to appoint officers to take over charge from and succeed the defendants in their office and it is quite clear from subsequent proceedings of the shareholders that they continued the defendants as de facto secretaries and treasurers until finally at a meeting in December, 1918, the new secretaries and treasurers were appointed (see page 879). The minutes of the meetings of 21st July, 1918, (page 811) of 2nd October, 2918, (page 885), at which a lease for 1919 on which the plaintiffs rely as valid and authorised was entrusted to these secretaries and treasurers and of 19th December, 1918, (page 879) demonstrate this. In fact the resolution at the last named meeting is that so and so be joint secretaries and treasurers from this date forward in place of the two defendants and that so and so are authorised to take possession of the mill, etc., from the former secretaries. The plaintiffs cannot isolate one act of those de facto secretaries and treasurers and say it is unaut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Court below. The District Judge has on grounds not alleged in the plaint found the defendants liable for damages. He finds that, while the defendants were not proved to have had a share in the lease, they had, such an interest in it as they were bound to disclose and which they did not disclose. He finds farther by a process of reasoning difficult to follow that though there is no evidence that the defendants themselves made any secret profits over the lease the lease was owing to their fraud, on very unfavourable terms to the Company and that the Company by that fraud lost a sum of ₹ 18,000 and he, therefore, finds the defendants liable in that sum. The first point to be dealt with in connection with this lease is to settle if there really is any proof that the lease is tainted by fraud. That it was publicly advertised, even widely advertised , according to P.W. No. 1 himself: see page 19 of the evidence and that tenders were openly invited is clear from the evidence, and that no tender higher than that of Nalam Subramaniam was received is found by the District Judge. I agree with him on the evidence for the reasons given by him that this was so. There is no prima fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r not. Unless the plaintiffs are able to establish and prove that the mill could have obtained the lease from some one else at a figure above ₹ 22, or that Nalam Subramaniam could have been forced up to the higher figure--and there is no attempt by the plaintiffs to do this--there is, in my opinion, absolutely no ground for holding that the lease ought to have been for a higher figure and that the failure to get a higher figure was due to some mala fides or fraud on the part of the defendants. This conclusion becomes stronger when we remember that such a case of mala fides or fraud was never put forward in the plaint at all. I am unable to agree with the lower Court that this lease has been shown to have been in any way tainted by fraud. In any case the measure of damages is wrong. The Judge fixes it at 4000 (that is the number of putties) multiplied by ₹ 4-8-0 the so called secret profits; but on his own showing, para. 48, only 2749 putties were worked so that the proper figure ought to have been 2749 multiplied by ₹ 4-8-0. 20. The next point is whether the defendants had in this lease such an interest as they ought in law to have disclosed. Such an interest i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied funds for the contract: see Ex. TTT, and who is examined on behalf of the plaintiffs, makes no such suggestion. Plaintiffs in the plaint definitely charged that the defendants owned a share in and realised profits from this lease, but the lower Court in para. 47 definitely states there is no evidence in the case that the defendants actually gained personally any particular amount. It is also not established that they made personally a pecuniary gain themselves , and in para. 49, it says that... the defendants themselves owned a share... is not established by reliable evidence. 21. In this Court the plaintiffs have put in a petition to admit certain Bank accounts filed in that lease suit, which accounts were filed as Ex. W-1 in that suit, in order to prove that the 1st and 2nd defendants financed this lease. Even if we admitted these at this stage, three years after they were filed in that suit and no sound reason is advanced why they could not have been put in earlier. I do not consider that they even show a prima facie case that the defendants advanced the moneys. I cannot support the District Judge's judgment and decree against the 2nd defendant on this lease eith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aradaraghaviah, the brother of the 1st defendant. The plaint case was that the auction was not fairly held and that the Company thereby sustained a loss, and that the defendants had shares in the contract and must make good to the Company all profits which the lessee made. That the auction was unfairly held has not been proved. It was, as a matter of fact, held under the auspices of the District Munsif's Court itself and was confirmed by the Court. At the time of confirmation the Company had the opportunity of putting forward any objection they had to the confirmation. None appears to have been put forward. I agree with the lower Court that this allegation of an unfair auction is unfounded. As to the allegation that defendants had shares in the contract, the matter was fought out in O.S. No. 4 of 1921on the file of the District Court. The lower Court relies on the decree in that suit, but there is obviously some confusion in that decree. The judgment in that suit (Ex. CLXIX) exonerates both the present defendants with costs as they were unnecessarily made parties, and held that the present 2nd defendant was sub-partner of one of the sharers. That this was the decision is clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower Court has gone entirely outside the plaint. The only claim in the plaint regarding withholding of commission is in para. 10(h) in which it is claimed that the defendants cannot claim commission after 31st March, 1918, because their terms of office then came to an end. There is no claim whatever for the return of the commission earned in the years prior to 31st March, 1918. I do not see how the decision of the lower Court on this matter can be supported. Apart from this technical ground I have not found that the defendants have been proved to have been guilty of any misconduct in 1915 to 1917 as charged, and, therefore, there is no ground for the withholding of the their commission. 28. The next point is the removal of the defendants from their office as secretaries. The defendants do not object to this provision in the decree, and it will, therefore, stand, with an alteration of the date, hereinafter to be considered. The provision to deliver up all Company registers and papers follows: 29. Some argument was put forward relative to the Judge's having disallowed the plaintiffs' claim that the defendants made secret profits on an oil contract. It is sufficient to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defendants were never put to the proof of non-disclosure and the plaintiffs cannot turn round and say that they have not proved what they were not called upon to prove. I am of opinion that this surcharge cannot be sustained. It is obvious in any case that the actual figure of interest could not be determined by the lower Court at that stage. If the mortgage is found binding on the Company in the suit upon the mortgage, the interest on it would be payable by the Company, and, therefore, the figure of ₹ 46.011 would have to be reduced by the mortgage interest. All that the lower Court could have done was to have given, as regards the mortgage interest, a declaratory decree that the defendants should be surcharged for so much interest as may eventually be found binding on the Company. 32. The only other item is the matter of time-barred debts, which are said to have become irrecoverable owing to the negligence of the defendants. The District Judge goes through the list furnished by the Commissioner, and finally surcharges the defendants with an amount of ₹ 4,430 on this head. Here again, it is to be noted that the plaint case on this matter was not one of negligence a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g profitably, other persons endeavour to capture it by the manipulations of shares and votes and when the danger of such endeavours comes to be realised by the original promoters, they in their turn become unscrupulous and resort even to questionable methods of securing into their own hands the power, management, and assets of the Company. It is, therefore, clear that, unless there is a decided improvement in the morale of all those connected with such institutions, the prospect of such Companies, at any rate, in this country, is necessarily gloomy. 37. I have had the advantage of perusing before hand the judgment just now delivered by my learned brother in these appeals. As I have generally agreed with him with regard to most of the matters, I regard it unnecessary to write a separate judgment of my own regarding all the matters in controversy. In this view I propose to deal specially only with two questions, firstly, as regards the mortgage and secondly, as regards the first lease in favour of Subramaniam. 38. As regards the mortgage, the first point to be observed is that the mortgagee was not made a party to the suit and the entire question has therefore, to be discussed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that that suit has not yet been disposed of, it is impossible now to say whether the defence of the Company in that suit would or would not be successful. If it should be successful, then assuming malfeasance and breach of trust on the part of the defendants, it is difficult to see how they could be sought to be made liable for any amounts the liability in respect of which the Company is able successfully to resist. 40. In this view it, no doubt, becomes unnecessary to say anything further regarding the claim based on the mortgage; but as the question has been raised and debated before us at considerable length, it seems to me that I might as well set out briefly my view with regard to the contentions On the findings of the lower Court which have been accepted by us there was no fraud, misfeasance or breach of trust in respect of the loans taken for the Company from Satyaraju. The whole amount has been credited in the Company's books and found to have been utilised for the purposes of the Company. The only question thus remaining with regard to these amounts is as to the rate of interest credited in favour of Satyaraju in the account books of the Company. It is impo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies for her, even by way of promissory notes so long as it was clear that defendants Nos. 1 and 2 were in entire or exclusive management of the Company's concerns. And it is also not surprising that when it was found that all of a sudden when the Company was promising to begin work and other people came forward to interfere in such management, she should have regarded it as essential to safeguard her own interest to stipulate for and obtain securities. 42. I, therefore, agree with my learned brother that the decree passed against the 2nd defendant in the final decree with regard to this amount of interest was erroneous and should be deleted. 43. As regards the actual mortgage itself, I have also difficulties in understanding the actual case of the plaintiffs. It in not the case that by reason of giving of the securities in the way of mortgage any particular less has been sustained by the Company. If so, I do not gee how the question of the binding nature of the mortgage which is in issue in the mortgage suit can at all be regarded as being relevant for the purposes of the present case. Any declaration as against defendants Nos. 1 and 2 as secretaries that the mortgage is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fine on any Director who contravenes the provision. I feel no doubt in my mind that the passing of this amending provision must have been really overlooked by the parties; because, it is to be noticed that even in the plaint BO charge based on this provision has been laid with regard to any of the matters. It may perhaps be explained on the ground that this provision came to be passed some ten years or so after the Company itself was registered and probably the attention of the Directors was not specifically drawn to it and the obligations imposed thereby. But at the same time there is in the Articles of Association of the Company, Article 99: 99. No Director shall be disqualified by his office from contracting with the Company, either as vendor, purchaser, or otherwise, nor shall any such contract or arrangement, or any contract or arrangement entered into, by or en behalf of the Company with any Company or partnership, of or in which any Director shall be a member or otherwise interested, be avoided nor shall any Director so contracting, or being such member or so interested, be liable to account to the Company for any profit realised by any such contract or arrangement by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the expression interest in the section. If the mischief to be provided against by such a rule be that no Director who is in a fiduciary position with regard to the Company should, by reason of his interest, not be in a position to bring to bear on a decision with regard to a question that comes up before the Board a free and fair mind without any bias or prejudice, then it seems to me, with all respect to the eminent Judges, that even relationship such as that of father and son or husband and wife or any similar bond should be regarded as comprehend by the expressions. It may be that, having regard to the English conditions, the interpretation of the expression by English Courts may be right; but I, for my part, having regard to the general language employed in the Statute and the obvious mischief it is intended to Provide against have very little hesitation in concluding that a relationship as that of a husband and wife must be regarded as interest if the circumstances were such that it may reasonably be regarded as capable of affecting the Directors' decision. I, for my part, am unable to regard the interest a man has in the financial prosperity of his son or wife as les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t stands to common sense and it has been held in the case of Costa Rica Ry. Co., Ltd. v. Forwood (1901) 1 Ch. 746 : 70 L.J. Ch. 385 : 49 W.R. 337 : 84 L.T. 279 : 17 T.L.R. 297 : 8 Manson 374 : 569 that where the real nature of the interest is known to all the Directors, there is no necessity to make a formal disclosure. Having regard to the circumstances, I feel no doubt that all the Directors present at the meeting regarded the situation as being in no sense different from a contract by the 2nd defendant himself. Not only was Satyaraju his wife but whether the power-of-attorney was known or not, it was clear that he was acting as her agent in respect of the matter. I feel no doubt in my mind that the Directors must have regarded the contract in the same light as if it were a contract by the 2nd defendant himself. 52. Article 99 allows Directors themselves to enter into contracts with the Company and, therefore, there is no question of the validity of such contracts provided the proviso is carried out and the disclosure is made. The non-disclosure is not charged and even though as I consider, the burden of proof of the disclosure of such circumstances would be on the Director co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the mortgage or the debts which became merged into it there is no liability to the Company on the part of the defendants. 55. I now pass on to the consideration of the charge with respect to the first lease. It was in favour of one Nalam Subramaniam. I have great difficulty in understanding the exact findings of the lower Court with regard to this matter and also the conclusion ultimately arrived at. The lower Court has made defendants Nos. 1 and 2 liable in respect of this lease for a total sum of. 18,000. The ground on which it so made liable would appear to be as follows: The learned District Judge finds that the 2nd defendant had no pecuniary interest in the transaction and yet comes to the conclusion that he had such interest as he was bound to disclose, that he did not do so, that he should, therefore, make good the loss sustained by the Company and that such loss should be measured by the rate of ₹ 26-8 which was arranged by the 2nd defendant himself with regard to the partnership that took over the lease as being the reasonable rate per putti of cotton. I am unable to agree with the conclusion arrived at by the learned District Judge in the Court below that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the section or the article and that, though under an obligation to disclose the same he did not do so. I, therefore, agree that, though on grounds different to those that appealed to the learned District Judge in the Court below, the 2nd defendant was properly made liable to the Company. 57. But as regards the amount it can only be for the sum made up by calculating at ₹ 4-8-0 per putti in respect of the 2749 putties actually worked in the mill, i.e., only for ₹ 12,370-8-0. The decree of the lower Court should, therefore, be modified by substituting ₹ 12,370 8 0 for ₹ 18,000. 58. With regard to all the other matters in all the appeals I agree entirely with the conclusions of my learned brother. 59. Owing to the difference of opinion between us on the lease of 1914-15 the decree of the lower Court on that matter will prevail, except that the amount of ₹ 18.000 will be reduced to ₹ 12,170-8-0. Although 1st defendant has not appealed, it is clear that the decrees of the lower Court against him in the matter of the interest on loans ₹ 46,011-10-0 and in the matters of the disallowance of commission and the surcharging of the time-barre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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