1963 (2) TMI 22 - HC - Companies Law

Summary

Issues Involved:
1. Liability of directors under Section 235 of the Indian Companies Act, 1913 for misfeasance and misapplication of funds.
2. Specific charges against the directors regarding unauthorized withdrawals and loans.
3. Evaluation of the directors' actions and the resulting financial losses to the bank.
4. Determination of the extent of liability for each director involved.

Issue-Wise Detailed Analysis:

1. Liability of Directors under Section 235 of the Indian Companies Act, 1913:
The appeal concerns the liability of directors of the Malayalee Bank Ltd. under Section 235 of the Indian Companies Act, 1913, for acts of misfeasance and misapplication of funds. The court clarified that directors occupy a fiduciary position and can be held liable for breach of trust or misfeasance, which does not necessarily have to be criminal to attract liability under Section 235.

2. Specific Charges Against the Directors:
The charges framed against the directors included:
- Unauthorized withdrawal of Rs. 14,623-4-2 by the first director (P.S. Mannadiar) and its sanctioning by the other directors.
- Sanctioning of loans aggregating to Rs. 34,863-6-0 on illusory security.
- Causing a loss of Rs. 49,608-1-3 to the bank through wrongful devices.

3. Evaluation of Directors' Actions and Financial Losses:
The court found that the directors had diverted funds of the bank to accommodate themselves, their relatives, and friends. The managing director, P.S. Mannadiar, had significant unauthorized withdrawals and loans, often manipulating accounts to show repayments that were merely fresh borrowings under different heads. The court highlighted several instances:
- P.S. Mannadiar's business transactions with the Mannadiar Saw and Oil Mills Ltd., which was financially unsound.
- The directors' approval of a fourth mortgage on the mills' property, which was practically worthless, to cover Mannadiar's liabilities.
- The directors' actions were not errors of judgment but deliberate attempts to benefit themselves at the expense of the bank.

4. Determination of Liability for Each Director:
The court assessed the liability of each director as follows:
- P.S. Mannadiar (First Director): Held liable for the entire sum covered by the mortgage and interest due to his significant role in the misapplication of funds.
- T. Eromamunni (Second Director): Partially liable as he sanctioned the mortgage but did not personally profit. His liability was fixed at Rs. 5,000, recoverable only after exhausting remedies against other respondents.
- V.K. Thirumalpad (Third Director): No liability as he was not a party to the resolution sanctioning the mortgage and had resigned before the fraudulent activities were discovered.
- P.K. Nedungadi (Fourth Director): Held liable for the entire amount decreed against Mannadiar due to his active role in the fraud and personal benefit from the fixed deposit.
- V. Venugopal Thampan (Fifth Director): No liability as he ceased to be a director before the fraudulent transactions.

Conclusion:
The court decreed against respondents Nos. 1, 2, and 4, with specific liabilities assigned to each. Respondent No. 2 was liable to pay Rs. 5,000, while respondents Nos. 1 and 4 were held liable for the full extent of the misapplied funds. The official liquidator was entitled to recover costs from respondents Nos. 1 and 4.