1960 (4) TMI 37 - HC - Companies Law

Summary

Issues Involved:
1. Financial condition of the company.
2. False representations and deceit.
3. Liability of the directors and agents.
4. Measure of damages.
5. Limitation period.
6. Applicability of Section 171 of the Indian Companies Act, 1913.

Detailed Analysis:

1. Financial Condition of the Company:
The trial court found that the financial condition of the company was very unsound in October 1948, and the directors were aware of it. The company had stopped declaring dividends from March 1945 and had mortgaged its assets for Rs. 15,000 in January 1948. The evidence showed that the company's financial condition had progressively deteriorated since 1943, and it ultimately went into liquidation in 1951.

2. False Representations and Deceit:
The agent, defendant No. 11, made false representations to the plaintiffs about the company's financial health and dividends, supported by a misleading booklet. The trial court held that these representations were knowingly false, made with the intent to deceive, and induced the plaintiffs to purchase shares. The principle of deceit, as stated in Derry v. Peek, was applied, requiring proof of fraud, which was established by showing that false representations were made knowingly or recklessly.

3. Liability of the Directors and Agents:
The directors, aware of the company's poor financial state, conspired to defraud the public by publishing a misleading booklet and sending agents to sell shares. The agent, defendant No. 11, acted on behalf of the directors and made false representations. The court held that both the directors and the agent were liable as joint tortfeasors. The directors were also liable under the principle of vicarious liability for the torts of their agent.

4. Measure of Damages:
The trial court awarded damages based on the actual loss suffered by the plaintiffs, which was the difference between the price paid for the shares and their actual value. Given the company's poor financial condition, the shares were deemed worthless. The court also awarded interest at 6% per annum from May 15, 1950, to the date of the suit. The measure of damages was affirmed as the price paid for the worthless shares due to the fraud.

5. Limitation Period:
The suit was filed within the limitation period prescribed for fraud under Article 95 of the Indian Limitation Act, which is three years from the date the fraud becomes known. The plaintiffs discovered the fraud on May 15, 1950, and filed the suit on June 15, 1953, making it within the time limit.

6. Applicability of Section 171 of the Indian Companies Act, 1913:
The court held that Section 171 did not bar the suit as the plaintiffs were not seeking relief against the company but against the directors and the agent for the fraud practiced on them. The suit was maintainable as it was based on the tort of deceit, not on any contract with the company.

Conclusion:
The appeal was dismissed with costs, affirming the trial court's findings on all issues. The plaintiffs were entitled to damages for the fraud practiced on them by the directors and the agent of the company.