1950 (12) TMI 18 - HC - Companies Law

Winding up Power to summon persons suspected of having property of company, etc., Overriding preferential payments and Power of court to assess damages against delinquent, directors, etc.

Issues Involved:
1. Jurisdiction of the High Court to summon foreign directors under Sections 195 and 235 of the Indian Companies Act.
2. Nature of the deposit made by the applicants and whether it constitutes trust money.
3. Priority of the applicants' claim over the mortgage decree held by Madura Bank Ltd.
4. Liability of the directors for misfeasance under Section 235 of the Indian Companies Act.

Detailed Analysis:

1. Jurisdiction of the High Court to Summon Foreign Directors:
The court addressed a preliminary objection regarding its jurisdiction to consider applications under Sections 195 and 235 of the Indian Companies Act against directors who are permanent residents of Ceylon. The court cited international law principles that restrict serving processes on persons outside its jurisdiction. It referred to the case of Bishadendu Gupta v. H. Langham Reed, which held that the High Court had no jurisdiction over persons residing outside British India. The court concluded that while it had the power under Section 195 to summon the directors, it would be ineffective and inadvisable to issue such an order due to enforcement challenges. However, the application under Section 235 was considered maintainable as it sought a summary remedy for recovery of monies wrongfully converted, which could be treated similarly to a suit under Sections 19 and 20 of the Civil Procedure Code.

2. Nature of the Deposit:
The applicants claimed that the deposit of Rs. 50,000 made under an agreement with the company was trust money and should be treated as a preferential claim. The court examined the terms of the agreement and concluded that the deposit was indeed impressed with a trust. It relied on the decisions in In re Travancore Quilon Bank Ltd. and Kshetra Mohan Dass v. Basu, which held that similar deposits constituted trust money. The court rejected the argument that the absence of a separate account for the deposit negated the trust, emphasizing the intention to create a trust as evidenced by the terms of the agreement.

3. Priority of the Applicants' Claim:
The court considered the rights of the applicants vis-`a-vis the Madura Bank Ltd., which held a mortgage decree against the company's properties. It was argued that the bank had notice of the deposit as trust money from the company's balance sheet. The court found that the bank's security was specific movable and immovable properties, and the applicants' claim could not affect the bank's rights as a secured creditor. The applicants were entitled to proceed against the other assets of the company but not against the properties mortgaged to the bank.

4. Liability of the Directors for Misfeasance:
The court examined whether the directors were liable for misfeasance under Section 235 for utilizing the deposit amount. It noted that the applicants' allegations were vague and lacked specific details of misfeasance or breach of trust. The court referred to several English and Indian decisions, emphasizing that misfeasance must result in actual loss to the company and involve dishonest acts or acts ultra vires the company's powers. The court found no evidence that the directors had misapplied the funds for personal use or unauthorized purposes. The directors had acted bona fide in utilizing the funds for the company's business, and there was no loss to the company directly attributable to their actions. Consequently, the directors were not held liable for misfeasance.

Conclusion:
The court rejected the applicants' prayers (a) and (b) for public examination of the directors and for holding them liable for misfeasance. However, the court granted prayer (c), recognizing the applicants as preferential creditors but not in preference to the claim of the Madura Bank Ltd. No orders were made as to costs.

← Previous Next →