1937 (8) TMI 8 - HC - Companies Law

Winding up Power of court to assess damages against delinquent directors, etc. and Powers of court to grant relief in certain cases

Summary

Issues Involved:
1. Misappropriation of security deposits by Nair (Rs. 4,988-7-2).
2. Liabilities incurred by the company (Rs. 6,331-9-3).

Issue-wise Detailed Analysis:

1. Misappropriation of Security Deposits by Nair (Rs. 4,988-7-2):

The Official Liquidators sought to hold the directors liable under Section 235 of the Indian Companies Act, 1913, for the misappropriation of Rs. 4,988-7-2 by Nair. The learned trial judge held respondents 1, 2, and 4 liable for this sum, stating they had not used reasonable care in their duties. The judge found that the directors were negligent in allowing Nair, an undischarged insolvent, to handle the security deposits. The judge held that the directors were guilty of gross negligence for not ensuring that a responsible person was attending to the company's finances.

The appellants argued that the trial judge misconceived the law regarding the duties of directors, emphasizing that liability should only arise if the directors had knowledge of the facts and acted wilfully despite this knowledge. They referenced Article 95 of the articles of association, which indemnified directors except in cases of wilful neglect or default. The appellants cited the case of City Equitable Fire Insurance Co. Ltd., where Romer, J., outlined that directors need not exhibit a greater degree of skill than reasonably expected and are justified in trusting officials unless there are grounds for suspicion.

The court found that respondents 1 and 2 had no reason to suspect the integrity of the chairman or Nair, and there was no evidence they knew about Nair's misappropriation of the security deposits. The court concluded that the directors were justified in trusting the chairman and Nair, and therefore, could not be held guilty of wilful negligence. Consequently, the appeal concerning the sum of Rs. 4,988-7-2 was allowed.

2. Liabilities Incurred by the Company (Rs. 6,331-9-3):

The second issue involved the liabilities incurred by the company amounting to Rs. 6,331-9-3. The learned trial judge found respondents 2, 4, and 6 responsible for this amount and held that the first respondent was liable for Rs. 2,833-9-9, and the seventh respondent for Rs. 5,408, based on their resignation dates from the board.

The court referred to Section 103 of the Indian Companies Act, which prohibits a company from commencing business unless certain conditions are met, including the payment of amounts due on shares by directors. The certificate permitting the company to commence business was obtained through a false declaration by Nair. The court found that all respondents knew about the false declaration and that the company had started business on the 7th of September, 1933, despite not meeting the legal requirements.

The court held that the directors were aware that the company had no right to commence business and that deposits made by customers were being used dishonestly. The court agreed with the trial judge that respondents 1, 2, 6, and 7 were guilty of wilful negligence and liable under Section 235 of the Indian Companies Act for the sum of Rs. 6,331-9-3.

The respondents sought relief under Section 281 of the Indian Companies Act, which allows the court to relieve liability if the person acted honestly and reasonably. However, the court found that even if the respondents acted honestly, they did not act reasonably and thus were not entitled to relief under this section. The order against respondents 1, 2, 6, and 7 concerning the second item of the claim was upheld.

Conclusion:

The appeals were partially allowed concerning the misappropriation of Rs. 4,988-7-2, but the liability for the sum of Rs. 6,331-9-3 was upheld. No order as to costs was made, and the liquidators were allowed their costs out of the company's assets.