1944 (2) TMI 12 - HC - Companies Law

General provisions with respect to memorandum and articles - Effect of memorandum and articles

Summary

Issues Involved:
1. Validity of the firm's claim as a creditor.
2. Authority of Ramanathan to borrow money on behalf of the company.
3. Reliability of the firm's and the company's books of accounts.
4. Knowledge and involvement of the directors in the fraudulent activities.
5. Liability of the company for the borrowed amounts.

Detailed Analysis:

1. Validity of the Firm's Claim as a Creditor:
The firm claimed to rank as a creditor for Rs. 1,36,274-1-2, which the Official Liquidator disputed except for Rs. 6,310-7-0. The Court found that the firm's claim was valid and directed the Official Liquidator to include the firm in the list of creditors for the full amount. The Court noted that the firm's books were reliable and that the money was borrowed by Ramanathan under the authority given by the company.

2. Authority of Ramanathan to Borrow Money on Behalf of the Company:
The Articles of Association and formal agreements authorized Ramanathan to manage the company's business and borrow money. The resolutions passed by the board of directors on 10th April 1937 confirmed this authority. The Court found that Ramanathan had the authority to borrow from the firm, and the transactions were within the scope of his authority.

3. Reliability of the Firm's and the Company's Books of Accounts:
The Court disagreed with the lower court's view that both sets of books were unreliable. The firm's books were found to be reliable despite being written under Ramanathan's direction. The Court noted that the entries in the firm's books were made on Ramanathan's instructions, but this did not mean the moneys were not loans to the company.

4. Knowledge and Involvement of the Directors in the Fraudulent Activities:
The Court found no evidence that Kasi Viswanathan or other directors knew about Ramanathan's misconduct until March 1939. The directors believed that Ramanathan was acting within his authority and trusted him based on his reputation. The Court cited legal precedents to support the view that the knowledge of a fraudulent agent cannot be imputed to the company if the agent was acting outside his authority.

5. Liability of the Company for the Borrowed Amounts:
The Court held that the company was liable for the amounts borrowed by Ramanathan under the authority given to him. The Court noted that the money was recorded as loans in both the firm's and the company's books. The company's liability was affirmed unless it could be shown that the firm knew Ramanathan was abusing his authority, which was not the case.

Conclusion:
The Court directed the Official Liquidator to include the firm in the list of creditors for the full amount of Rs. 1,36,274-1-2. The firm was entitled to costs, to be paid out of the company's assets, and the Official Liquidator was also entitled to costs from the same assets. The judgment emphasized the authority given to Ramanathan, the reliability of the firm's books, and the lack of knowledge of the directors regarding the fraudulent activities.