1941 (5) TMI 10 - HC - Companies Law

Summary

Issues Involved:
1. Liability of directors for misfeasance under Section 235 of the Indian Companies Act.
2. Responsibility for the payment of Rs. 25,000 to Messrs. Johnson & Co.
3. Individual liability of directors: Rao Sahib V. Subbayya, Rao Sahib V. Dharmalingam Pillai, and R. Narasinga Rao.
4. Assessment of compensation and costs.

Issue-wise Detailed Analysis:

1. Liability of Directors for Misfeasance under Section 235 of the Indian Companies Act:
The appeals arise from an order under Section 235 of the Indian Companies Act in the liquidation of Hospet Sugar Mills Limited. The directors, both past and present, were sought to be held liable for various acts of misfeasance, leading to losses for the company. The Official Liquidator focused on a claim of Rs. 25,000 paid as remuneration to Messrs. Johnson & Co., the Managing Agents, and the associated income tax.

2. Responsibility for the Payment of Rs. 25,000 to Messrs. Johnson & Co.:
The sum of Rs. 25,000 was paid to Messrs. Johnson & Co., a firm controlled by Mehta and his relations. The directors were held accountable for this payment. The court examined the history and operations of the company, revealing a fraudulent scheme orchestrated by Mehta, who controlled the company through various entities and relatives.

3. Individual Liability of Directors:

Rao Sahib V. Subbayya:
Subbayya signed the prospectus without due diligence but resigned on 18th August 1933, before the company commenced business. The court found no evidence of pecuniary loss due to his actions, and payments to Messrs. Johnson & Co. occurred after his resignation. Thus, the court set aside the finding of liability against him but deprived him of costs due to his initial negligence.

Rao Sahib V. Dharmalingam Pillai:
Dharmalingam Pillai became a director under the promise of not paying for his shares, which was deemed a misfeasance. He failed to investigate the antecedents of Mehta and the partners of Messrs. Johnson & Co. Despite the audit report by Batliboi & Co. exposing fraud, Pillai accepted the explanation from Johnson & Co. and continued to support their management. The court found him guilty of gross and wilful negligence, constituting misfeasance under Section 235. He was held liable for Rs. 5,000.

R. Narasinga Rao:
Narasinga Rao was deeply involved in the fraudulent activities from the company's inception. He was a partner in Johnson & Co. and signed false declarations. Despite his claim of being a tool in Mehta's hands, the court found him complicit in the frauds. He was held liable for Rs. 10,000, considering his involvement and the fact that no remuneration was paid to Johnson & Co. until after he severed ties with the company.

4. Assessment of Compensation and Costs:
The court modified the compensation amounts: Subbayya's appeal was allowed, and he was not held liable. Dharmalingam Pillai and Narasinga Rao's liabilities were reduced to Rs. 5,000 and Rs. 10,000, respectively. Costs were not awarded in Subbayya's case, while Narasinga Rao was directed to pay the respondent's costs on the decreed amount. The Official Liquidators were entitled to recover their costs from the estate.

Separate Judgment:
The court also addressed a specific point regarding the decree against Narasinga Rao, modifying it to reflect his liability for half the value of the shares, with a conditional liability for the remaining amount if not recovered from another party.

Conclusion:
In summary, the court found varying degrees of liability among the directors for the misfeasance leading to the company's losses. Subbayya was exonerated, Dharmalingam Pillai was held liable for Rs. 5,000, and Narasinga Rao for Rs. 10,000, with specific directions on costs and adjustments to the decrees.