1949 (8) TMI 13 - HC - Companies Law

Form and contents of balance sheet and profit and loss account and Director Disclosure of interest by

Summary

Issues Involved:
1. Nature of the transaction (loan vs. deposit)
2. Authority to borrow money
3. Borrowing from a director
4. Limitation and acknowledgment of debt
5. Estoppel
6. Application of Section 14 of the Limitation Act

Issue-wise Detailed Analysis:

1. Nature of the Transaction (Loan vs. Deposit):
The plaintiff's appeal concerns the recovery of Rs. 1,03,988, including principal and interest, on a deposit made with the defendant, a ginning and pressing factory. The plaintiff claimed to have acted as the company's banker, lending money from time to time, which was placed in a current account and later transferred to a fixed deposit account. The latest deposit, evidenced by Exhibit P-1, was made on January 15, 1940. The court found it difficult to see the relationship of banker and customer as claimed by the plaintiff. The court noted that the plaintiff might be described as the defendant's financier but not as its banker. The court also highlighted that the transaction could still be considered a deposit within the meaning of Article 60 of the Limitation Act if it was genuinely intended as such by the parties.

2. Authority to Borrow Money:
The defendant company admitted that advances were made by the plaintiff but contended that these had been repaid and that the borrowing was ultra vires. The court examined the Memorandum and Articles of Association, which authorized the company to borrow money for the purpose of advancing it to traders. The court held that the company was authorized to borrow money for this purpose.

3. Borrowing from a Director:
The plaintiff was the managing director at the time of the deposit. The court referred to Ghosh's Indian Company Law, which states that a director is precluded from dealing on behalf of the company with himself unless the contract is for the company's benefit and the director discloses his interest to fellow directors. The court noted that Section 91-A(1) of the Companies Act allows directors to be interested in contracts made with the company, provided there is full and frank disclosure of their interest. The court held that a company is entitled to borrow money from one of its own directors, subject to the condition that the director does not take undue advantage of his position.

4. Limitation and Acknowledgment of Debt:
The court addressed the question of limitation, noting that the transaction must be a deposit payable on demand for Article 60 to apply. Exhibit P-1 indicated that the deposit was payable on a fixed date, not on demand, thus Article 60 did not apply. The limitation period was three years from July 31, 1940, making the suit filed on June 16, 1944, prima facie barred by time. The plaintiff relied on several grounds to save limitation:
- Exhibit P-42, a resolution of the Board of Directors dated May 20, 1941, was not an acknowledgment of liability as it merely asked the plaintiff to determine his attitude for the matter to be placed before the shareholders.
- The company's balance sheets for 1940-41, 1941-42, and 1942-43 did not save limitation as the mere signing of a balance sheet by a director does not acknowledge liability. The balance sheets were also rejected as they were not validly passed by the shareholders.
- The court held that the claim was barred by limitation.

5. Estoppel:
The court dismissed the argument of estoppel, stating that the plaintiff knew all the facts and brought about most of the transactions by being present at the meetings and acting as Chairman.

6. Application of Section 14 of the Limitation Act:
The plaintiff contended that an application for liquidation made under Section 162 of the Indian Companies Act should save limitation under Section 14 of the Limitation Act. The court disagreed, noting that the liquidation proceedings were not filed, and there was no admission that the cause of action was the same. The court held that the cause of action in winding-up proceedings is the inability of the company to pay its debts, not the recovery of the debt. Therefore, Section 14 was not attracted.

Conclusion:
The appeal was dismissed with costs, and the cross-objection was also dismissed with costs. The court held that the claim was barred by limitation and that the plaintiff's arguments to save limitation were not valid.