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TMI Blog1958 (8) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... 28 under the name of Shahazadpur Trading and Banking Corporation Ltd. In 1934 the name of the bank was altered to Central Calcutta Bank Ltd. In July, 1947, it was amalgamated with the Bank of Mymensingh Gouripore Ltd. The authorised capital of the bank is Rs. 5,00,000 divided into Rs. 35,000 ordinary shares of Rs. 10 each and 15,000 five per cent. cumulative preference shares of Rs. 100 each. The bank closed its business on 8th December, 1949, or 12th December, 1949, and it appears that since 12th September, 1949, the bank was working under a moratorium order till it was finally ordered to be wound up on 9th May, 1950. At the date of the winding up order the following persons were directors of the bank: 1.Mr. C.C. Dutt (chairman). 2.Mr. B.K. Roy Chowdhury (vice-chairman). 3.Mr. A.K. Ghosal. 4.Mr. D.C. Roy. 5.Mr. L.N. Hazra. 6.Mr. B.N. Mallick. 7.Mr. B.N. Roy Chowdhury. 8.Mr. K. Dutt, and 9.Mr. Debi Das Roy (managing director). One S.K. Neogy was its secretary. It appears further that L.N. Hazra and A.K. Ghosal, were also directors at the material time of a company known as United India Land Trust Ltd., and Debidas Roy was the director-in-charge of this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts credit. That on 8th December, 1947, the United India Land Trust Ltd. was debited to the extent of Rs. 7,00,000 by one cheque No. 169598 and so the next debit balance stood at Rs. 6,37,190-8-10 on that date. Furthermore, although on 3rd November, 1947, there was an agreement entered into between the United India Land Trust Ltd. and the bank for creating a regular mortgage on all the assets of the company for the advances to be made by the bank to the company no mortgage in fact was created nor was any security taken by the directors of the bank for the actual advances made. So this sum of seven lakhs of rupees was not covered by any security at all. But after the bank went into liquidation, the liquidator with considerable efforts secured deposit of certain title deeds of certain Behala lands from the United India Land Trust Ltd. and the liquidator filed a suit for enforcement of the equitable mortgage and for recovery of Rs. 8,47,237-3-0. It is alleged that the directors are liable to restore Rs. 7,00,000 which have been lost to the bank due to their acts of misfeasance. 4.A sum of Rs. 81,264-8-0 had been advanced to two directors of the bank, Asit Kumar Ghosal and Birendra Ki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and K. Dutt? On behalf of the director Bhupendra Narayan Roy Chowdhury the following issues were raised : 1.Were the transactions between the bank and Pioneer Investment Trust Ltd. and United India Land Trust Ltd. with the knowledge and consent of B. N. Roy Chowdhury? 2.Did the respondent B.N. Chowdhury invest or permit to invest Rs. 1,00,000 for the purchase of the shares of the United India Land Trust Ltd.? 3.Did the respondent B. N. Roy Chowdhury authorise or procure the company to advance Rs. 4,17,367-4-6 to Pioneer Investment Trust Ltd.? 4.Did the said respondent authorise the advance of Rs. 7,00,000 to the United India Land Trust Ltd.? 5.Did the said respondent allow the overdraft as alleged in paragraph 16 of the affidavit of the liquidator ? 6.Is the said respondent guilty of misfeasance and/or breach of trust or breach of duty in relation to the said bank? On behalf of the secretary the following issues were raised : 1.Did the bank purchase any G.P. Notes of the face value of Rs. 50,000 on 30th June, 1945, and was any such G.P. Notes kept with S.K. Neogy as alleged in paragraph 13 of the affidavit of the liquidator? 2.Can the entries in the investment l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 74,049-2-6 was the amount of the debit. Later on, the total debit amounted to Rs. 8,47,237-3-0. The witness has made conflicting statements as to whether security had been taken for the overdraft account or not. It appears that no security was in fact taken although there was an agreement on 3rd of November, 1947, for taking such security. With regard to Pioneer Investment Trust Limited the evidence of this witness is that this company had a paid up capital of Rs. 1,000, but it dealt in sale and purchase of shares to the tune of lakhs and lakhs. S.K. Acharya Chowdhury and A.K. Sen were its two directors. The account of this Pioneer Investment Trust Limited with the bank shows a debit balance of Rs. 4,17,367-4-6 on 7th December, 1949, after giving credit of the sale proceeds of securities of a house and some shares which had been given to the bank by the company. So this debit balance was not covered by any security. The witness has also admitted with reference to the books that on 30th November, 1949, a sum of Rs. 61,146-12-0 was debited in the account of Pioneer Investment Trust Limited and credited to the account of S.K. Acharya Chowdhury and by this process the personal li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions. The witness has further admitted that he did not bring the matter of advances to the United India Land Trust Ltd. or Pioneer Investment Trust Limited before the board meetings, at any time, for discussions. With regard to the entry of Rs. 7,00,000 on December 8, 1947, the evidence is that it was in effect a paper transaction and no money actually passed on this date and the major part of the advances to the United India Land Trust Limited took place before the 2nd of July, 1947 (Q. 858 and 883-888). It is clear that this managing director who was responsible for building up the bank is primarily responsible for its downfall also and he is responsible for all the loss that has been caused to the bank. The evidence of Baidya Nath Mullick may next be considered. He was co-opted as a director of the bank on 18th November, 1943, and continued to act as such till 29th June, 1945, when he resigned. He was again co-opted as director on 12th July, 1947, and continued to function as such till the bank went into liquidation. He is a B.Sc. of the Calcutta University. He has stated in his affidavit affirmed on the 12th February, 1957, that he did not suspect anything as the balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussion between him and the managing director about the general policy about investments, but there was no discussion about any particular investment (Q. 35). He has signed the balance-sheets of 1947 and 1948 and he admits that he went through the balance-sheet of 1947 before he signed it (Q. 49) and he noticed that Rs. 8,00,000 had been advanced to companies which had common directors with the bank but he did not try to find out what those companies were (Q. 50, 51, 54). He did not apply his mind carefully. He found that Debi Das Roy was an expert in banking matters and thought that what Debi Das Roy did was the right thing (Q. 60 and 61). This witness has also admitted that article 99 of the articles of association had been probably contravened but Debi Das was given a power of attorney to make investments and to conduct the day to day business (Q. 71). It appears that the witness affirmed an affidavit on the 29th June, 1953, in which he stated that he knew about the advance to United India Land Trust Limited but such investment was proper (Q. 78-81). Before the court the witness in course of his giving evidence has suggested that the affidavit has not been drafted properly and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the United India Land Trust had any overdraft account with the bank (Q. 167), but later on, said that he knew on April 30, 1947, from the balance-sheet that the United India Land Trust had an overdraft with the bank to the extent of Rs. 17,000 (Q. 169-171). He had discussions with Debi Das Roy about the land development schemes of the United India Land Trust by borrowing money and he was told that if dealings in land could be had, they would be very profitable. Upon this the witness induced his family and his father to invest money to the extent of about one lakh of rupees in the United United India Land Trust Company by way of fixed deposit (Q. 183). The witness admits that he borrowed money from the bank and his liability was to the extent of Rs. 77,281. But it is also his evidence that he had deposited shares as security for such overdraft (Q. 209-212). He has admitted that he made certain purchases and sales of shares and on account of share transactions he became indebted to the bank to the extent of Rs. 76,000 and odd (Q. 249-252). It appears that the bank filed a suit against the witness and the witness ultimately submitted to a decree for about Rs. 66,000 on 4th July, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors at any board meeting and he came to know about the bad debts when he first saw the balance-sheet of the period ending 30th June, 1948, at the meeting held on 12th September, 1949. His evidence further is that he did not know the two companies, the United India Land Trust Ltd. and Pioneer Investment Trust Ltd., nor did he know that large sums had been advanced to these two concerns. He did not have any suspicion in his mind about any bad investment and so he did not at any time make any enquiry about the investments of the bank. All the discussions that took place at the meetings were about the future investments of the bank and there was no discussion at any time about any past investment. But when at the board meeting of September 12, 1949; it appeared from the balance-sheet that there were bad debts the board at once appointed an investigation committee to enquire into the matters. It has been held in some cases both of the English courts and of the courts in India that it is no part of the duty of the directors to scrutinise or examine the entries in the books of account of the company and when there is nothing to raise any suspicion in the mind of the director no ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd at this meeting it was decided to have an investigation committee. Although the witness was appointed a member of this committee no such committee was formed later on and shortly thereafter the bank suspended business. Before this, the witness had no suspicion in his mind of any fraud being committed by Debi Das Roy, the managing director. He said, he had faith and confidence in Debi Das Roy and never got any scent of his wrongful activities. I have no doubt that this director was innocent and like B.K. Roy Chowdhury he had no occasion or ground for entertaining any suspicion that the affairs of the bank were being conducted fraudulently or in an improper manner. The evidence of the secretary Mr. Neogi may now be considered. The charge against the secretary about the G.P. Notes of the face value of Rs. 53,000 has not to my mind been clearly established. It appears from the entries in the investment ledger of the bank and the overdraft account of Debi Das Roy both dated 30th June, 1945, and the entry in the investment ledger dated 30th November, 1949, that it is the managing director who has misappropriated the G.P. Notes in question or the proceeds thereof. The remark that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the secretary had the control of the internal management of the bank and was the custodian of the books of account and it was the secretary who used to supervise the keeping of the books of account (Q. 37-39). With regard to the entry of Rs. 7,00,000 on December 8, 1947, this witness cannot say why there was debit and credit entries made in respect of this amount in the account Nos. 1 and 2 of the United India Land Trust Ltd. on that day. He cannot say whether it is a mere paper transaction or not (Q. 272-293 and 402-412). His evidence with regard to the account of Pioneer Investment Trust Ltd. is to be found in answers to Q. 88-117. He has stated that the entry of Rs. 1,00,000 on November 30, 1949, indicates that 10,000 shares of United India Land Trust Ltd. were purchased by the bank on that day. The entry on November 30, 1949, of Rs. 49,500 was, according to the witness, made under the instruction of the secretary but the witness cannot identify the handwriting of the entry (Q. 103-107). The investment ledger entries with regard to those G.P. Notes at pages 4 and 53 of the investment ledger have been tendered. The witness has stated that the entry (G.P. Notes with the secretar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny evidence to show how and when the 4,000 shares sold to A.K. Ghosal came to be re-acquired by Pioneer Investment Trust Ltd., so that they might be sold again by the Pioneer to the bank on November 30, 1949. So this lot of 10,000 shares sold on November 30, 1949 may be a different lot. But whether it is the same lot or a different lot, the fact remains that the manipulation of accounts took place on November 30, 1949, although money actually might not have passed out of the till of the bank on that date and the transaction might have been a mere paper transaction. There can be no doubt that the managing director along with some officers is responsible for this manipulation. It does not appear that the other directors had any hand in or been aware of this manipulation made on November 30, 1949, or had any means of knowing it or had any opportunity of rectifying it. Now, as I have pointed out, it is possible that this transaction of the purchase of 10,000 shares on November 30, 1949, is an independent transaction and it has nothing to do with the transaction of April 25, 1946. If that is so, there is loss to the bank and Debi Das Roy is directly responsible for it. The other directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may be pointed out that there is no charge laid against the directors with regard to the earlier advances in the misfeasance summons and they have therefore no opportunity of meeting such a charge. If this charge had been specifically mentioned in the affidavit of the liquidator, they might have justified these advances by proper materials placed before the court. It will, therefore, not be proper to allow this new charge to be introduced at this stage. The next item of claim is a sum of Rs. 7,00,000 which is alleged to have been advanced to the United India Land Trust Ltd. on 8th December, 1947. It appears from the evidence of Debidas Roy and also from the partial admission made by Harit Kumar Mazumdar and also upon a comparison and scrutiny of the two accounts of the United India Land Trust Ltd. being account No. 1 and account No. 2, that this entry of Rs. 7,00,000 was a paper transaction and no money actually passed out of the bank on 8th December, 1947. The accounts of the United India Land Trust Ltd. however disclosed the fact that account No. 1 was in credit all along till 8th December, 1947, when a debit of Rs. 7,00,000 converted the balance into a debit balance and thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Roy and his father Dinesh Chandra Roy are liable to pay this amount of Rs. 7,00,000 to the bank. The next item of claim is a sum of Rs. 81,264 which is alleged to have been advanced to the two directors of the bank, A.K. Ghosal and B.K. Roy Chowdhury, without taking security. It appears that suits have been filed and A.K. Ghosal has submitted to a decree for Rs. 66,000 including costs, and B.K. Roy Chowdhury has paid to the liquidator Rs. 4,126 and odd which was due from him. So this item of claim need not be considered further in this application for misfeasance. The claim against the secretary has been dealt with in an earlier part of this judgment and so it need not be dealt with again at this stage. The legal position with regard to the claim which is the subject-matter of this application may now be dealt with. It has been held that section 235 of the Indian Companies Act, 1913, gives a summary remedy only against such directors and officers as have been personally guilty of some act of misfeasance, and it does not confer upon the court the power to make an order against the direction en masse for all acts of misfeasance, without any specific finding against the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds or assets of the company which have come into their hands, but they are not trustees of the loans or debts advanced by the company before their acceptance of the office of directors nor do their failure to take steps for recovery of debts due to the company, amount to misfeasance. In order that misconduct may amount to misfeasance it must be "wilful misconduct or wilful or culpable negligence": In re Forest of Dean Coal Mining Company [1878) 10 Ch. D. 450 , In re Wedgwood Coal Iron Company [1882] 47 LT 612 , In re Faure Electric Accumulator Company [1889] 40 Ch. D. 141 , In re Etic Limited [1928] 1 Ch. 861. The further proposition which is established by authorities is that in order to bring a case within the section it is essential to establish that (1) there has been a breach of trust and (2) that the breach has resulted in pecuniary loss to the company. Reference may be made to In re Canadian Land Reclaiming and Colonizing Co. [1880] 14 Ch. D. 660 and Cavendish Bentinck v. Fenn [1887] 12 App. Cas. 652. It has also been held that an innocent director is not liable for the fraud of his co-director In re Denham Co. [1883] 25 Ch. D. 752 . In the case b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging up this question of individual advances before the board for their consideration, as the operation of article 99 had been put out of action, by the grant of this power of attorney. It also appears that for some reason or other, the directors did not exercise any control over the authority of the managing director in the matter of making advances under the power of attorney which was granted to him. It is improbable that some of the directors did not know that advances were being made by the managing director from time to time, but it appears that they remained absolutely idle and did not exercise any control over the acts of the managing director. I do not think that these directors who had knowledge about these advances were justified in shirking all responsibilities in respect of the affairs of the bank and leaving everything to be done by the managing director at his own sweet will. In support of the proposition that directors cannot shirk their responsibility in this fashion, reference was made to the cases, Leeds Estate Building Investment Co. v. Shepherd [1887] 36 Oh. D. 787 , Drincqbier v. Wood [1899] 1 Ch. 303 , New Fleming Spinning and Weaving Co. Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loth with the rates of the sales per pound, and the general expenditure for the month. The agent also informed the board about the particulars of loans taken, and of the loans repaid (pages 390-391). The directors made no enquiry or investigation whatsoever at any time. They believed everything to be correct and blindly confirmed the acts of the agent. They practically left everything in the hands of the agent. They voted blindly all the loans raised, not caring to enquire as to whether the loans were required or not and not caring to know- whether it was applied to the purposes for which they were raised, nor did they care to find out for themselves what was the best form of raising the loans (page 413). In these circumstances, the learned Judge held that the directors were liable for the losses caused by the unfaithful and fraudulent acts of the agent. In the case Govind v. Ranganath [1993] ILR 54 Bom. 226 , although one of the articles (100) of the articles of association provided that the business of the bank (Sholapur Bank Ltd.) should be managed by the board with the assistance of the directors, the combined effect of the various clauses in the articles was to vest al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1948, were not sound, they passed resolutions appointing an investigation committee. It is true that if they had been more vigilant and had called for monthly statements of account from the managing director or had themselves cared to look into the books, they might have detected the irregularities or the wrongful acts of the managing director and his associates, but I do not think that the failure on their part to observe this standard of care makes them guilty of reckless indifference or wilful misconduct. As pointed out in the case of the City Equitable Fire Insurance Company [1925] 1 Ch. 407 at 429-430, "A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and dismiss the application as against them. The case of Baidya Nath Mullick stands on a slightly different footing. He was a director during 1943-45 and he also became a director again on July 12, 1947, and continued as such till the date of liquidation of the bank. So he had some opportunities of becoming acquainted with the activities of the managing director. There is no evidence however before me to suggest that during 1943 and 29th June, 1945, the managing director had done anything wrongful which would have put Baidya Nath Mullick on his guard or which should have induced Baidya Nath Mullick to entertain feelings of suspicion or distrust about the managing director. This director, however, had signed the balance-sheet for the period ending 30th June, 1947, in March or April 1948, and this balance-sheet disclosed that unsecured loans to the extent of about eight lakhs of rupees had been advanced and there were certain doubtful debts. But all these advances had taken place before he joined as director on 12th July, 1947. It has been held, as I have pointed out already, that a director is not a trustee for the debts recoverable by the company and not taking steps for recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and which has been raised on behalf of the respondents. It is argued that the application is not maintainable because of the non-joinder of the two other directors, Mr. Khandelwal and Mr. S.K. Neogy. It may be pointed out that Mr. Khandelwal has died during the pendency of this proceeding. With regard to Mr. Neogy it is contended that as he has not been made a party to the proceedings the entire application must fail. Reference has been made to Clerk Lindsell on Torts, nth edition, page 257, where it is pointed out that if accord is made with one joint tort-feasor and satisfaction accepted or if he be released, all others are discharged. Attention has also been drawn to the passage in Halsbury, volume 32, pages 188-189, paragraph 282, and to the cases Coke v. Jonnor 80 ER 214 and London Association for Protection of Trade v. Greenlands Ltd. [1916] 2 AC 15. Now, it may be pointed out that the proposition laid down in Clerk Lindsell on Torts and in Halsbury are based on the fact that there is no right of contribution amongst joint tort-feasors and release or discharge of one would be release or discharge of others. But it has been held that an application for mi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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