1968 (10) TMI 76 - HC - Companies Law

Issues Involved:
1. Adequate control in the matter of advances.
2. Withdrawal and misappropriation of funds.
3. Preparation and publication of false balance-sheets.
4. Manipulations in the bills negotiated account.
5. Unsecured loan and misappropriation of fixed deposit.
6. Manipulations in the profit and loss account.

Detailed Analysis:

1. Adequate Control in the Matter of Advances:
The directors (respondents Nos. 1 to 8) did not exercise adequate control over the advances of the company's funds. Consequently, respondents Nos. 9 and 10 advanced large amounts without adequate securities, leading to unrecoverable advances. The directors failed to take effective steps to recover these advances, which were ratified on November 10, 1955. The learned trial judge found that the directors' lack of supervision amounted to misfeasance under section 543 of the Companies Act. However, the liquidator failed to prove the precise loss caused to the bank by these irrecoverable advances, leading to the dismissal of this head of claim.

2. Withdrawal and Misappropriation of Funds:
Amounts were withdrawn by respondents Nos. 9 and 10 from other banks and misappropriated. The directors did not take steps to recover these amounts and instead covered up the misappropriations with fictitious entries, ratified on November 10, 1955. The court found the directors liable for these actions, holding them jointly responsible for Rs. 1,99,000, with each director severally liable for Rs. 40,000.

3. Preparation and Publication of False Balance-Sheets:
False balance-sheets for 1954 and 1955 were published, showing profits when the bank was incurring losses. The 1955 balance-sheet was knowingly false to the directors, leading to wrongful dividend declarations. The court held that all directors except the 7th respondent were liable for the loss of Rs. 6,155-12-5 incurred by the bank due to the wrongful dividend declarations.

4. Manipulations in the Bills Negotiated Account:
There were manipulations and falsifications in the bills negotiated account, resulting in a loss of Rs. 61,800. However, the court found no evidence to hold the directors responsible for these manipulations, as many entries predated their knowledge of the bank's state of affairs.

5. Unsecured Loan and Misappropriation of Fixed Deposit:
Respondents Nos. 3 and 5 sanctioned a loan of Rs. 7,500 to the 9th respondent without security, knowing he could not repay. The court found the 3rd respondent liable for Rs. 7,250 and the 5th respondent for Rs. 250. The misappropriation of Rs. 10,000 from Sri Narayanaswami's fixed deposit was noted, but the directors were not held responsible due to lack of evidence.

6. Manipulations in the Profit and Loss Account:
The liquidator failed to establish any manipulations in the profit and loss account, and this head of claim was dismissed.

Judgment:
1. Second Head of Claim: Respondents Nos. 1 to 8 jointly liable for Rs. 1,99,000, with each severally liable for Rs. 40,000. The liquidator cannot recover more than Rs. 1,99,000 under this head.
2. Third Head of Claim: Respondents Nos. 1 to 6 and 8 jointly and severally liable for Rs. 6,155-12-5 for wrongful dividend declarations.
3. Fifth Head of Claim: The 3rd respondent liable for Rs. 7,250 and the 5th respondent for Rs. 250.
4. Other Claims: The decree of the trial judge against respondents Nos. 1 to 8 vacated in other respects.
5. Costs: Each party to bear their respective costs.

The court's decision was based on the provisions of section 543 of the Companies Act and section 45H of the Banking Regulation Act, focusing on the directors' liability for misapplication and misfeasance of the bank's funds.

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