1973 (1) TMI 53 - SC - Companies Law

Winding up Power of court to assess damages against delinquent, directors, etc. and Power of court to assess damages against delinquent directors, etc.

Summary

Issues Involved:
1. Misfeasance and breach of trust by directors and employees.
2. Limitation period for filing claims.
3. Liability of legal representatives of deceased directors.
4. Determination of directors' liability for losses incurred.

Issue-wise Detailed Analysis:

1. Misfeasance and Breach of Trust by Directors and Employees:
The official liquidator alleged that the directors and employees of the bank misappropriated Rs. 4,26,000, engaging in "misfeasance, breach of trust and fraudulent conduct." The misfeasance proceedings were initiated based on various inspection reports by the Reserve Bank of India, which highlighted significant mismanagement, including non-compliance with deposit account formalities, unsecured advances, irregular advances, and false entries in account books. The reports from 1951, 1953, and 1954 indicated continuous mismanagement and fraudulent activities. The liquidator's application sought to hold the directors and employees accountable for these losses and to restore the misappropriated money to the bank.

2. Limitation Period for Filing Claims:
The company judge dismissed the proceedings against employees as time-barred under section 235 of the Indian Companies Act, 1913, but held that the proceedings against the managing director and directors were covered by section 45-O of the Banking Companies Act, 1949. Section 45-O(2) provides a special limitation period of twelve years from the date of accrual of claims or five years from the first appointment of the liquidator, whichever is longer. The misfeasance proceedings were initiated within five years of the liquidator's appointment, making them timely. The Division Bench concurred with the company judge's view on the issue of limitation.

3. Liability of Legal Representatives of Deceased Directors:
The company judge held that misfeasance proceedings were of a personal character and could not continue against the heirs of deceased directors. The liability for wrongful conduct was deemed personal and extinguished upon the director's death. This principle was supported by various Indian and English cases. However, the heirs of director Tendolkar, who died during the proceedings, were allowed to continue the appeal. The court held that while a declaration of liability could be made against a deceased director, compulsive orders could not be passed against their heirs under section 235 of the Act of 1913. The liquidator and co-directors could seek other legal remedies against the estate of the deceased director.

4. Determination of Directors' Liability for Losses Incurred:
The company judge found that the directors, including the managing director, were liable for the losses due to gross mismanagement and fraudulent activities. The managing director was held responsible for a greater share of the losses. The total loss was estimated at Rs. 2,50,000, and the directors were ordered to contribute jointly and severally. The Division Bench reduced the total liability to Rs. 1,61,500, with the managing director's individual liability set at Rs. 58,500 and the directors' joint and several liability at Rs. 50,000. The court found that the directors could not claim ignorance of the fraudulent activities and were complicit in concealing the true state of affairs from depositors.

The Supreme Court concurred with the company judge's assessment of the total liability at Rs. 2,50,000 and held that the managing director's initial liability was Rs. 73,500. The remaining liability of Rs. 1,23,500 was to be shared jointly and severally by the managing director and the directors, Tendolkar and Ajgaonkar. The liabilities of directors Porwal and Kalghatgi were reduced to Rs. 10,000 and Rs. 5,000, respectively, and were considered discharged.

Conclusion:
The appeals of the liquidator were allowed, and the total liability of the directors was reaffirmed at Rs. 2,50,000. The managing director's individual liability was set at Rs. 73,500, with the remaining liability shared jointly and severally by the managing director and the directors, Tendolkar and Ajgaonkar. The appeal by Ajgaonkar was dismissed, and the appeal by Tendolkar's heirs was allowed only to the extent of withdrawing the compulsive order under section 235. Costs of the appeals were payable by all respondents except Tendolkar's legal representatives.