1968 (10) TMI 79 - HC - Companies Law

Summary

Issues Involved:
1. Retrospective Application of Section 542 of the Companies Act, 1956.
2. Knowledge and Liability of Directors for Misappropriations and Manipulations.
3. Ratification of Fictitious Advances by the Board of Directors.
4. Canvassing for Deposits with Knowledge of Insolvency.
5. Fraudulent Preference in Payments to Creditors.
6. Apportionment of Liability among Directors.
7. Extent of Debts and Liabilities of the Bank.
8. Validity of Observations against the Sales Tax Officer.

Detailed Analysis:

1. Retrospective Application of Section 542 of the Companies Act, 1956:
The court addressed whether Section 542 of the Companies Act, 1956, could be applied retrospectively to actions taken before its enactment on April 1, 1956. The court concluded that Section 542 could be applied retrospectively as long as it "appears" during the winding-up process that the business was carried on with fraudulent intent. This does not amount to giving retrospective operation to the section but rather using past conduct as the basis for action after April 1, 1956.

2. Knowledge and Liability of Directors for Misappropriations and Manipulations:
The court found that the directors had knowledge of the misappropriations and manipulations from at least the last Friday in July 1955. Evidence from various witnesses (P.Ws. Nos. 1 to 3, 13 to 16, and 22) supported that the directors were aware of the fraudulent activities and were parties to covering up the defalcations by making false entries in the bank's books. The court rejected the directors' defense that they were unaware of these activities until much later.

3. Ratification of Fictitious Advances by the Board of Directors:
The court found that the directors ratified a list of fictitious advances (Exhibit P-61) on November 10, 1955, with full knowledge of their fraudulent nature. The ratification was done without proper scrutiny, indicating that it was pre-arranged to cover up the misappropriations. The directors' actions in ratifying these advances were deemed to be part of a fraudulent scheme.

4. Canvassing for Deposits with Knowledge of Insolvency:
The court held that the directors, knowing the bank's insolvent position, issued instructions to canvass for deposits. Evidence from various witnesses (P.Ws. 2, 12, 19, 20, 22, 23, and D.W. 2) and exhibits (P-67 to P-70, P-85, and P-86) showed that some directors actively canvassed deposits. This action was considered fraudulent as it was done with the intent to defraud creditors or for other fraudulent purposes.

5. Fraudulent Preference in Payments to Creditors:
The court found that certain payments made by the bank constituted fraudulent preference. Specifically, the transfer of Rs. 8,500 to the overdraft account of a relative of the 3rd respondent and the withdrawal of Rs. 2,000 from the savings account of the 5th respondent's wife were deemed to be fraudulent preferences. These transactions were made with the knowledge of the bank's insolvent position.

6. Apportionment of Liability among Directors:
The court upheld the trial judge's apportionment of liability among the directors, with the 3rd respondent being held liable for the largest share. The directors' defense that they were not responsible due to the delegation of powers to the executive committee and managers was rejected. The court noted that the directors had failed to exercise proper oversight and were complicit in the fraudulent activities.

7. Extent of Debts and Liabilities of the Bank:
The court found the pleadings and evidence regarding the total debts and liabilities of the bank to be deficient. The liquidator claimed a deficiency of Rs. 6,50,000 but failed to provide sufficient evidence to support this claim. The court remanded the case back to the trial judge to determine the total debts and liabilities of the bank and to decide the extent of the directors' liability.

8. Validity of Observations against the Sales Tax Officer:
The court examined the observations made by the trial judge regarding the writing, signature, and seal of the Sales Tax Officer on two account books (Exhibits D-81 and D-87). The court found the trial judge's observations to be justified and dismissed the appeal by the Joint Commercial Tax Officer, who sought to expunge these observations. The appellant was given the opportunity to explain the circumstances of the writing, signature, and seal in subsequent proceedings.

Conclusion:
The court upheld the trial judge's findings on the fraudulent activities and knowledge of the directors, their liability for misappropriations, and the fraudulent preference in payments. The case was remanded to determine the total debts and liabilities of the bank and the extent of the directors' liability. The appeal by the Joint Commercial Tax Officer was dismissed.