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TMI Blog1944 (2) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1937, T.S P.L.S. Thinnappa Cheitiar joined the Board. Charges of misfeasance were preferred against Kasi Viawaaattiau, S Subbaraya Mudaiiar, Palaniappa, Ramanathan and Thinnappa. It was claimed that as the result of their misconduct they were liable jointly and severally in the sum of Rs. 2,77,531-5-9. The learned Judge (Bell, J.) considered that S. Subbaraya Mudaliar had not acted unreasonably and was entitled to the benefit of Section 281 of the Indian Companies Act. He found that the Official Liquidator had established a charge of misfeasance against the other respondent and that the loss was to be apportioned as follows: Kasi Viswanathan and Ramanathan were to be jointly and severally liable for Rs,. 1,11,909-10-0. Palaniappa for Rs 18,651-9-8 and Thinnappa for Rs. 18,651-9-8. Appeal No. 44 and 1942 has been preferred by Thinnappa, Appeal No. 47 of 1942 by the legal representatives of Kasi Viswanathan and Appeal No. 52 by Palaniappa. Ramanathan has not appealed. He obsconded on the 22nd June, 1939, after it has been discovered that he had misappropriated large sums belonging to the company. The principal promoters of the company were Kasi Viswanathan and Ramanathan who we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the moneys which he borrowed from the V.K.R.S.T. Firm on behalf of the company. He succeeded in deceiving his brother directors, the auditors of the company and the partners of the firm until the month of March, 1939, when he debited to his personal account with the company the moneys which he had borrowed for the company from the firm. On the 13th June, 1939, the auditors prepared a balance sheet which showed that Ramanathan had taken altogether Rs. 1,42,632-6-3. The Board very complacently agreed to treat this amount as representing loans from the company to Ramanathan. This was done because he said that he possessed securities in Bombay which were sufficient to meet his liability and he undertook to hand them over to the company. Kasi Viswanathan sent his representative with Ramanathan to Bombay to take delivery of the alleged securities, but when they arrived in Bombay Ramanathan absconded. Criminal proceedings were instituted against him and a warrant was issued for his arrest, but this has never been executed. The amount which the Official Liquidator sought to recover in the misfeasance proceedings represented what the company had lost by reason of these gambling transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was prepared on the 10th April, 1937, it was disclosed that the company had received in payment of differences Rs. 11,904-14-8 and had paid out in similar transactions the sum of Rs. 41,671-11-6. While directors are not trustees in the technical sense they hold a fiduciary position with regard to the assets of the company and the appellants were guilty of a grave breach of duty in allowing the company's funds to be dissipated in this way. It has been pointed out that all the balance sheets, except the last one, which was drawn up as on the 31st March, 1939, were approved of by the company in general meeting. But this makes no difference to the position. There can be no ratification of an illegal contract so far as the company is concerned. See Ashbury Railway Carriage and Iron Co. v. Riche [1875] 7 HL 653 and Flitcrojt's case [1882] 21 Ch.D 519 . In the former case, Lord Cairns said: "Now I am clearly of opinion that this contract was entirely, as I have said beyond the objects in the memorandum of association. If so, it was thereby placed beyond the powers of the company to make the contract. If so, my lords, it is not a question whether the contract ever was ratif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, J., pointed out that no one was bound to presume a fraud and that the directors were not bound to examine entries in the company's books. The opinion that directors are not bound to examine entries in the company's books had previously been expressed by Jessel, M.R., in Halmark's case [1878] 9 Ch.D 372 and Lord Davey in Dovey v. Cory [1901] AC 477 agreed with what was said in these cases. In the present case, it cannot be said that, either Thinnappa or Palaniappa had any ground for suspecting that Ramanathan was acting fraudulently. The company had appointed a firm of qualified auditors and until Ramanathan had completed his misappropriations the auditors them-, selves were entirely in the dark. The balance sheets of the 3ist May, 1937, and 31st October, 1937, which were the last to be drawn up until the fraud had been discovered, had been passed by the auditors. When the statutory report was drawn up on the 3rd April, 1937, there was owing by the company to the firm Rs. 1,06,100. The balance sheet of the 31st May, 1937, showed that the amount owing to the creditors had been reduced to Rs. 54,967-0-4, and that of the 3lst October, 1937, showed that there was only due t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon to give evidence. He was present in the Court at trial and was assisting the Official Liquidator in instructing counsel. Had there been any ground for suspecting Ramanathan surely the company's accountant would have known it. The result is that the appellants together with Ramanathan must be held liable for the loss sustained by the company as the result of the gambling in differences, but not for the loss caused by Ramanathan's misappropriations. Kasi Viswanathan's legal representative says that the learned Judge erred in differentiating between the appellants, as they are jointly and severally liable to the company for the loss incurred. We consider that this argument is sound, except that Thinnappa cannot be made liable for any loss suffered before he joined the board. This is not a case in which the appellants can invoke Section 281, Indian Companies Act. It is common ground that the losses up to the date when Thinnappa joined the Board amounted to Rs. 31,111-7-6. The total loss on transactions in differences was Rs. 1,36,092-3-6, and Kasi Viswanathan, Ramanathan and Palaniappa must be held jointly and severally liable in this sum. The liability of Thinnappa will be Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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