1968 (5) TMI 33 - HC - Companies Law

Summary

Issues Involved:
1. Directors as trustees of their companies' funds.
2. Director's liability based on the knowledge of a third party.
3. Stranger's liability as constructive trustee.
4. Liability of a bank in negligence to its customer.
5. Novation and its effect on liability.
6. Satisfaction of claims through subsequent transactions.
7. Loss suffered by the plaintiff due to the second transaction.
8. Illegality of financial assistance under section 54 of the Companies Act, 1948.
9. Relief under section 448 of the Companies Act, 1948.

Issue-wise Detailed Analysis:

1. Directors as Trustees of Their Companies' Funds:
Directors owe a fiduciary duty to the company to apply its assets only for company purposes. They are liable for breach of that duty. The court held that directors are trustees of the company's funds in the sense that they must apply the property for the company's specified purposes. Misapplication of these funds amounts to a breach of trust.

2. Director's Liability Based on the Knowledge of a Third Party:
A director acting on the direction of a third party is fixed with that third party's knowledge of the transaction. The court cited Gray v. Lewis, stating that if a person acts as a nominee for another, they must be bound by the notice which that other person has of the nature of the transaction.

3. Stranger's Liability as Constructive Trustee:
A stranger to a trust can be liable as a constructive trustee if they assist with knowledge in a dishonest and fraudulent design by the trustee. The court referred to Barnes v. Addy, emphasizing that an agent acting for a trustee is a stranger and not liable unless they assist with knowledge in a dishonest and fraudulent design.

4. Liability of a Bank in Negligence to Its Customer:
The court held that banks owe a duty of care to their customers. This duty includes exercising reasonable care and skill in handling the customer's transactions. The bank must inquire if circumstances suggest that a transaction is out of the ordinary course of business. Failure to make such inquiries can result in liability for negligence.

5. Novation and Its Effect on Liability:
The court found that the novation in this case was limited to the debt owed by Woodstock to the plaintiff and did not affect the liability of Woodstock as a constructive trustee. The novation substituted Cradock and Briggs in place of Woodstock as debtor for the loan amount but did not eliminate the equitable claim against Woodstock.

6. Satisfaction of Claims Through Subsequent Transactions:
The court concluded that payments made as part of a circular movement of cheques, where the payments to the plaintiff were dependent upon corresponding payments out by the plaintiff's directors, did not constitute true satisfaction. The plaintiff did not receive any real benefit from these transactions, thus no satisfaction was achieved.

7. Loss Suffered by the Plaintiff Due to the Second Transaction:
The court held that the plaintiff did not suffer any loss from the second transaction as the payments made were part of a circular movement and did not provide any real benefit to the plaintiff. The substitution of Burden as debtor in place of Cradock did not result in any actual loss to the plaintiff.

8. Illegality of Financial Assistance Under Section 54 of the Companies Act, 1948:
The court held that the plaintiff's claims were not defeated by the illegality of the transactions under section 54. The plaintiff's claim was based on the breach of trust by the directors and constructive trustees, and not on the illegal transaction itself. The court emphasized that it would not aid illegality but would condemn it.

9. Relief Under Section 448 of the Companies Act, 1948:
The court denied relief under section 448 to the directors involved. It concluded that the directors did not act reasonably by disposing of large sums of the plaintiff's assets without any regard for minority shareholders and without consideration, blindly following the majority shareholder's instructions.

Overall Result:
The plaintiff succeeded in its claims based on the first transaction and failed in its claims on the second transaction. The court ordered:
1. Contanglo to repay lb195,000 with interest as a constructive trustee.
2. District Bank to repay lb232,500 with interest as a constructive trustee and for damages for negligence.
3. Woodstock to repay lb232,500 with interest as a constructive trustee.
4. Barlow-Lawson and Jacob to pay lb232,500 with interest as directors and trustees.

The form of the order, costs, and the plaintiff's claim for expenses would be dealt with after the parties had considered the judgment.