9911796707
TMI Blog1934 (4) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... onfined to the consideration of the liability of the promoters, directors, managing agents and auditors of the company. The defendants whom it is sought to make liable are (1) Rai Bahadur Kunwar Sardar Singh, M.L.C, (2) Capt. Rai Bahadur Lal Bhagwant Singh, (3) Bhaiya Hari Saran Das, (4) B.S. Vidyarthi, (5) Avadh Behari Tandon, (6) Kunwar Gopi Nath Singh, (7) Anand Swarup Bhatnagar, (8) Seth Ahmad Bhai Poonja, (9) Seth Tribhuwan Das, (10) Nawab Mohammad Jamshed Ali Khan, (11) Rai Bahadur Govind Prasad, (12) Khan Saheb Nawab Maksud Ali Khan, M.L.C, (13) Vidyarthi Tandon & Co., through B.S. Vidyarthi and (14) Messrs. A.F. Ferguson & Co., Chartered Accountants. Another director Rao Bahadur Kunwar Bikram Singh, M.L.C, is dead. The case of Dr. Satyapal may be more conveniently disposed of when the case against the officers of the branches comes to be decided. It is contended by the official liquidator that these defendants are jointly and severally liable for the total losses of the company including the losses incurred by the branches. This case is a notable example of the case with which the people of the United Provinces are deprived of their money by a fraudulent use of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded to advertisements in the press. This money was also spent in preliminary expenses and in payment of the salaries of the employees themselves. In the month of March 1930 the company was incorporate ed. The memorandum of association, which was filed with the Registrar of Joint Stock Companies, contained the names of seven signatories each of whom was stated to have taken 50 preference shares of Rs. 100 in the company. It is noteworthy that this document which may be taken to mark the commencement of the company, itself was fraudulent, in that not one of the signatories had the intention of paying for a single share. Through the efforts of Gopi Nath Singh several gentlemen of position had meanwhile consented to become directors of the bank, among them being Rao Bahadur Kunwar Bikram Singh, M.L.C, Capt. Rao Bahadur Lal Bhagwant Singh and Rao Bahadur Kunwar Sardar Singh, M.L.C. Without the names of prominent titled individuals which would inspire confidence it would have been hopeless for these promoters to proceed. In the month of May 1930 the prospectus was printed. The prospectus stated that the capital of the company was one crore of rupees. At the head of this prospectus ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had certainly been made. There is an irregularity also about this prospectus: it was not filed until after the first allotment. The first directors' meeting was held on the 5th June, 1930. The directors attending this meeting were Rao Bahadur Kunwar Sardar Singh, Seth Tribhuwan Das, B.S. Vidyarthi and Seth Ahmad Bhai Poonja. The board proceeded to allot shares, which was the principal business of the meeting. Shares to the value of Rs. 55,000 were alloted including those subscribed for by the signatories to the memorandum of association. As far as the allotment to the signatories and the directors were concerned the allotment was wholly illegal. Section 101 of the Indian Companies Act enacts: "No allotment shall be made, unless the amount (if any) fixed by the memorandum or articles and named in the prospectus as the minimum subscription upon which the directors may proceed to allotment... has been subscribed, and the sum payable on application for the amount so fixed and named or for the whole amount offered for subscription, has been paid to and received in cash by the company." As we have pointed out above, the application money had not been paid by any of the signatories or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him, and for which he was liable to pay in cask a proportion equal to the proportion payable on application and allotment on the shares offered for public subscription. It concluded with the declaration that the foregoing statements were true to the knowledge and belief of Gopi Nath Singh. As appears from the above and from the evidence and the books of the company, this declaration was false and fraudulent. The Registrar issued a certificate for the commencement of business on the 6th of August, 1930. From the evidence it is clear that business had been commenced for some considerable time before this certificate was obtained and even before the incorporation of the company. The opening ceremoney of the bank had been performed on the 29th July, 1930, in Agra. The managing agents and directors thought it important to get some prominent public man, to perform the ceremoney. An effort was made to obtain the Nawab of Chattari, he refused, and eventually the late Home Member, Nawab Muzamil Ullah Khan, was persuaded to officiate. At this ceremony the Commissioner of Agra was also present. It appears to us that persons of standing ought to take more care before allowing themselves to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company or of the directors would have revealed at this early stage the true state of affairs, and the public would have been saved a large sum of money. At this date it is to be noted that the only branch which had been opened was that at Agra and little business had been done there. Subsequently no fewer than 16 branches were opened in this province and in the Punjab, some of which commenced business within a few days of the receipt of this letter by the Registrar. It became necessary at the end of the year to file the statutory accounts. The auditors were called in and on the 26th January/1931 they wrote a letter to Vidyarthi Tandon & Co., the managing agents, raising very properly, serious objections to the accounts. Among other items commented upon by the auditors were : (a) the commission drawn by the managing agents, Vidyarthi Tandon & Co., who had taken commission on all the working funds of the company. The auditors pointed out that the fixed capital expenditure should be deducted before the calculation for commission was made; (b) they said that they could not understand the managing agents' commission account. They failed to see why the managing agents' commission acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry single item the regularity of which had been questioned by the auditors. The auditors on receipt of a copy of these astonishing minutes proceeded to give a clear certificate for the accounts without further objection. The examination of the books of the company must have been very perfunctory. We do not suppose that ever in the history of banking have such accounts been published and submitted to the shareholders for their approval. If the accounts were correct, which they were not, they showed that for a bank with authorised capital of a crore of rupees only some Rs. 74.000 had been subscribed and of this amount at this date there was only a balance of Rs. 12,000. As a matter of fact, as the accounts were false and, as shown above, the directors had not paid anything at all in respect of their shares, the actual position of the finances of this bank was that every penny of the money subscribed had been spent and there was a debit balance of about Rs. 8,000 taken from deposits by the public in the branches. The next business before the managing agents was to prepare and circulate to the shareholders the statutory report. The signatories to this report included Rao Bahadur Kunwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scovered late in January 1931 that it was necessary to have two other directors to sign the accounts, as of the present available directors who were members of the managing agents' firm. It was found that the directors had not passed the accounts for audit. This was required to be done to satisfy the auditors, and it was necessary at the statutory meeting to have shareholders qualified to vote in support of the accounts and the report of the directors. The proceedings of this alleged meeting which purported to deal with all these matters have been therefore inserted in the minute book about the 21st January, 1930. It is unnecessary to go into the evidence which makes this clear but there is no doubt at all that this meeting never did in fact take place. The history of the origin of Rao Bahadur Gobind Prasad connection with this company is illuminating. He had had been the private secretary of an Indian Prince. Since his retirement he had been employed by the Venus Insurance Company as a "Policy signing director" at Rs. 100 a month. In the Venus Company he had met Tandon. In the month of December 1930 the Rao Bahadur was hard up. He urgently needed a small loan of Rs. 185. He heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious branches would enable the company to carry on. It must have been obvious to every one concerned that there could be no hope, in view of the extravagant overhead expenses, of ever repaying these deposits in full to the public. Business was also undertaken in collecting money on hundis and cheques. Money obtained both by deposits or on collection of hundis and cheques was spent by the company without any possible prospect of repayment. It is unnecessary for the purpose of this part of the case to go into the history of the various branches. It is also unnecessary to deal furthur with the chequered history of this bank. It was obvious that disaster could not be long deferred. By the month of September 1931, little more than a year after the bank had obtained the certificate for the commencement of business, the doors of the bank were closed. A resolution for winding-up the company voluntarily was passed on the 21st December, 1931, and an order for compulsory winding-up followed on the 14th November, 1931 and an official liquidator was appointed by the Court. In actual cash the company had received from shareholders and the public by way of deposits and collections on hundis an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that "no director or officer of the company can be liable for the defaults of other directors or the loss or expense to the company through the inefficiency or deficiency of any title to property or inefficiency or deficiency of any security to, in or upon which any money of the company shall be invested, or for loss occasioned by any tortious act of any person with whom any money,……....shall be deposited or for loss occasioned by any error of judgment, omission, default or oversight on the part of a director or for any other loss, damage or misfortune whatever which shall happen in relation to the execution of the duties of his office or in relation thereto, unless the same happens through his own dishonesty." Although this Article seriously limits the liability of a director or officer of a company in relation to the public there is nothing in the Indian Companies Act, to prevent such a clause being inserted in the Articles of Association. Under the Indian Act, therefore, the public does not receive adequate protection. It is for the Government to consider whether the provision of the English Act of 1929, which makes such an article void should not be included in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g this arrangement secret." Kunwar Sardar Singh also arranged that Bikram Singh and Lal Bhagwant Singh should become directors on the same terms, that is, that they should not pay for their shares. This was denied by Kunwar Sardar Singh but Lal Bhagwant Singh in his statement in Court gave evidence to this effect and so did Bikram Singh in his private examination. Bikram Singh is dead and we have taken his statement upon the record. We are satisfied that where Sardar Singh's evidence differs from that of Lal Bhagwant Singh and that of Bikram Singh, it is false. Sardar Singh therefore knew that he himself, Lal Bhagwant Singh and Bikram Singh had not paid for their, shares. This matter becomes of great importance when we come to consider the director's meeting of the 5th June, 1930. It was at this meeting that the directors proceeded to allotment. The allotment as pointed out above was illegal under Section 101 of the Indian Companies Act. No application money had been received in respect of the shares allotted to directors except in the case of Ahmad Bhai Poonja. This matter does not end here. This defendant was a party to the issue of the prospectus in which it was stated that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allotment of shares, and yet he took no action. He was a party to and signatory of the false and misleading signatory report. He signed the balance-sheet which he must have known to be false with regard, at any rate, to the money received for shares. His name appeared in the advertisements in connection with the issue of cash bonds. He received copies of the papers in which the advertisement appeared and he must be held to have known that some of the statements in the advertisements were false. He was instrumental in obtaining Nawab Muzamil Ullah Khan to open the bank at Agra. It may be that he was not fully in the confidence of Vidyarthi, Tandon and Gopi Nath, but we regret that we must hold him to have conspired with them to float this company by fraudulent means. From 1929, when the private prospectus at first appeared until the company went into liquidation this defendant was associated with the activities of the company. He knew of some, at any rate, of the frauds that had been practised and was a willing party thereto. His explanation in Court of his conduct as a director of the company was thoroughly disingenuous. He said he knew nothing about business matters and was guid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or permits or authorizes the contravention of any of the provisions of Section 101 with respect to allotment, he shall be liable to compensate the company and the allottee respectively for any loss, damages or costs which the company or the allottee may have sustained or incurred thereby." Further, as we have pointed out, under Section 103(1)(b ) it was illegal for the company to commence business until every director of the company had paid the application and allotment money for his share. There can be no doubt therefore that acts of misfeasance have been proved against these four defendants. Section 235 enacts as follows : "Where, in the course of winding up a company, it appears that any person who has taken part in the formation or promotion of the company, or any past or present director, manager, or liquidator or any officer of the company has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of trust in relation to the company, the Court may, on the application of the liquidator, or of any creditor or contributory, examine into the conduct of the promoter, director manager, liquidat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude the loss and damages occasioned by the carrying on of the business which never could have been commenced but for the improper allotment. The loss and damages would therefore appear to be the total losses of the company which include amounts due to creditors and shareholders. With regard to Vidyarthy, Tandon and Gopi Nath, they were clearly in the fraud from the very commencement. Theirs were the brains which conceived it; theirs the brains which carried it out with a assistance of Sardar Singh. From the very commencement these three defendants determined to commit fraud. They continued the fradulent conduct of the bank right up to the day when the bank closed its doors. It seems to us therefore, that the only order we can pass is that they must pay by way of compensation the total amount of losses which the bank has sustained. For these losses they will be jointly and severally liable. Further, there will be a decree against them for the. costs of the liquidation and of this application in the same terms. So far as Rao Bahadur Sirdar Singh is concerned we cannot in view of the facts proved hold that he is liable to any lesser degree. It is true that he left the conduct of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions were dealt with. He signed the false statutory report and accounts. He knew the fraudulent nature of the company and was a party to every act of the managing agents from January 1930. Generally he did whatever Vidyarthi, Tandon and Co. wished him to do and was a puppet in their hands. He is liable for the losses of the bank after he took office. Taking into consideration the undoubted fact that he was wax in the hands of much greater scoundrels, and possibly ignorant of much of their fraud, we think he ought to pay as compensation the sum of Rs. 20,000. To this extent he will be liable jointly and severally with the other defendants found guilty of misfeasance. In conclusion we wish to express our admiration of the work of the official liquidator, his assistant and their office staff. The skill and energy displayed by Mr. Bhagwati Shankar and Mr. Jawahar Lal in examining and analysing the books of the company, which did not disclose the true position, is beyond praise. Through their efforts the officers of this fraudulent company have been brought to book, and their victims we hope will recover the losses they have sustained. We accordingly hold that A.B. Tandon, B S. Vidy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 10,000 to the assets of the company. Under the circumstances we think it was a reasonable offer and we granted sanction to the Official Liquidator to accept the same. This money has been paid. Nawab Muhammad Jamshed Ali Khan was a nominated director. He was accordingly not liable to take any shares. He was not a signatory to the memorandum of association, articles of association or the statutory report, nor did he take part in any board meeting. He also contested the Official Liquidator's application both on merits and law. He also without admitting any liability offered to contribute Rs. 2,000 to the assets of the company. This was in our opinion under the circumstances a proper offer and we granted sanction to the Official Liquidator to accept it. This sum has also been paid. Ahmad Bhai Poonja was another defendant. He did not take any part in initiating the company. He did not sign the memorandum of association or articles of association. He applied for shares and actually paid for them. He says, and there may be truth in his assertion, that he was not aware that none of the directors had paid application and allotment moneys due from them. In September 1930 he discovered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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