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TMI Blog1941 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... 577 of 1938 was made liable for Rs. 25,000, Rao Sahib V. Subbayyathe appellant in C.M.A. No. 501 of 1938, for Rs. 5,000 and Rao Sahib V. Dharmalingam Pillai for Rs. 10,000. Before dealing with the question of liability, it will be very necessary to know the history of this Company, its formation and its subsequent working until the date of its liquidation. This Company as appears from the evidence was the creation of one C. M. Mehta, who is a resident of Bombay and claims to be a share broker and whose antecedents are not at all known to anybody. He conceived the idea of starting this sugar mills with the aid of his relations, his own wife Mrs. Mehta, his sister-in-law and her husband, R. Narasinga Rao. This Narasinga Rao was originally a copyist in the Anantapur District Court, later became a Local Fund contractor and absolutely had no connection with any sugar business. He was associated in the formation of the said Company and also in its subsequent working until the date he severed connection with the Company. The constitution of this Company from time to time discloses a deep scheme of fraud laid out by Mehta. On the 27th April, 1933. a consent statement was submitted to the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whom a sum of Rs. 59,000 was advanced for the purpose of erecting a factory. As the learned Judge points out in paragraph 12 of his order "these facts show that the control of this Company was directly or indirectly in the hands of Mehta and his various manifestations as Messrs. Johnson Co., (by his wife, mother and his brother-in-law until 15th July, 1934), as the Eastern Underwriters Syndicate and as Thakore Co., and that the directors of the Company were his relations or other persons completely under his influence with the exception of V. Subbayya, V. Dharmalingam, and later of Sirdar Kanjilala, while V. Subbayya and V. Dharmalingam, were recruited under conditions suggesting that all that was desired was to make use of their titles for the attraction of investors without anticipating that they would interfere in the working of the Company as they lived in Madras." As already stated, the Sugar Mills Company was incorporated on 27th April 1933 and the prospectus was issued on 3rd May 1933 and it was anticipated that the factory for manufacturing sugar would be ready to start work by December, 1934. Although a sum of Rs. 57,000 is shown as spent on factory and equipment, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 to Messrs. Johnson Co. We will first consider the case of Rao Sahib V. Subbayya, the appellant in C.M.A. No. 501 of 1938. It is no doubt true that he signed the prospectus, dated 3rd May 1933, without in the least caring to know what the antecedents of the other directors were or knowing about the way in which the Company was going to be worked and who the partners of Messrs. Johnson Co., were. But on 18th August, 1933, he tendered his resignation, that is, nearly 12 days before the declaration under Section 103 of the Companies Act was sent to the Registrar of the Joint Stock Companies and before the Company commenced business. It cannot be said there fore that he was guilty of any misfeasance by reason of which any pecuniary loss was sustained by the Company and it is in evidence that whatever payments were made to Messrs. Johnson Co., it was after July 1934,1.6., nearly a year after the date of his resignation. "We are therefore of the opinion that the finding of the learned Judge in so fat-as he holds him responsible should be set aside and the appeal allowed. But having regard to his conduct in signing the prospectus, we deprive him of his costs throughout. The case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement was well tried. But there was absolutely no reasonable ground for Dharmalingam Pillai to confide in Mehta whom he could have only met for the first time when a request was made to become a director of the Company and it does not appear from the evidence that either at that time or at any time subsequently Dharmalingam Pillai ever cared to find out what the antecedents of Mehta were and whether it was prudent on his part to continue to confide in him. Whatever may be the justification until 15th July, 1934, we think that after that date his passivity is inexcusable. The audit report of Batliboi Co., which exposed the frauds of the Company should have put Dharmalingam Pillai on enquiry as to the antecedents of Mehta and particularly as to the propriety of Messrs. Johnson Co., continuing to be the Managing Agents of the Sugar Mills or of payment of any remuneration to them. But it is rather surprising that he should have accepted the explanation of Johnson Co., which condemned Batliboi's report on grounds which no man exercising some reasonable care would ever accept. He presided at the meeting and was a party to the resolution which condemned Batliboi's report. He signe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se as we have already stated on the facts of this case it is clear that Dharmalingam Pillai was guilty of gross negligence which would be misfeasance within the Section. He not only did not exercise that amount of reasonable care which was expected of him as a director in ascertaining the true state of affairs of the Company but also wilfully shut his eyes to it until a very late stage. The only question is, what is the amount for which he should be rendered liable? He is only one of the directors and it cannot be said that he was guilty of any fraud or corruption. We therefore make him liable for a sum of Rs. 5,000. In view of our findings it is not possible to give him relief under Section 281 of the Act, but in assessing compensation we did take the matter also into consideration. In regard to the appeals filed by Narasinga Rao, Mr. Bhujanga Rao was not able to convince us that the findings of the learned Judge are wrong. Narasinga Rao was associating in the fraud of Mehta from the very beginning. He is closely related to Mehta having married his wife's sister. He assisted Mehta in the formation of the Company. He was one of the partners of Johnson Co., and in fact the only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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