1971 (2) TMI 74 - SC - Companies Law

Power of court to assess damages against delinquent, directors, etc. - Held that - In the present case the High Court has found and that finding has not been shown to be wrong or erroneous in any manner that it was the appellant who enabled M to perpetrate the fraud which apparently resulted in loss to the company. The appellant himself also derived a certain benefit from the fraudulent acts of M. He would thus be clearly liable to repay or restore to the bank the amount in respect of which there was misapplication, misfeasance and breach of trust resulting in loss to the company. The appellant cannot escape liability for the entire amount for which an order has been made against him by the High Court. Appeal dismissed.

Summary

Issues: Misfeasance, Misapplication of Monies, Breach of Trust, Liability of Directors, Section 235 of Indian Companies Act

The Supreme Court judgment involved an appeal regarding misfeasance, misapplication of monies, and breach of trust by directors of a bank that was wound up. The official liquidator filed a petition under various sections of the Indian Companies Act seeking to determine the liability of the directors for financial irregularities. The High Court found the directors, including the appellant, guilty of acts of misfeasance and directed them to pay a specified amount to the official liquidator. The appellant appealed this decision. The key issue was whether the appellant was liable for the financial losses incurred due to the fraudulent acts of one of the directors.

The High Court found that the appellant was actively involved in enabling another director to perpetrate fraud, resulting in financial loss to the bank. The appellant benefited from the fraudulent acts and was aware of the illusory nature of the security provided for loans. The court held that the appellant, as a director, had a duty to act in the best interests of the company and was liable for the misapplication of funds and breach of trust. The court emphasized that fraud need not be proven for liability under section 235 of the Indian Companies Act, and the appellant could not escape liability for the financial loss incurred.

The judgment highlighted the provisions of section 235 of the Indian Companies Act, which empower the court to assess damages against delinquent directors for misapplication of company funds or breach of trust. The court can order repayment or restoration of misapplied property with interest or require contributions to the company's assets as compensation. The court clarified that criminal liability is not a prerequisite for holding directors accountable under this section. The court relied on legal principles stating that breach of duty by a director resulting in loss to the company can lead to liability, even without proof of fraud.

In conclusion, the Supreme Court dismissed the appellant's appeal, upholding the High Court's decision holding the appellant liable for the financial losses incurred due to misfeasance, misapplication of monies, and breach of trust. The court affirmed that the appellant, as a director, was responsible for enabling fraudulent activities that harmed the company and must repay the specified amount as directed by the High Court. The judgment underscored the legal principles governing directorial liability in cases of financial irregularities under the Indian Companies Act.