9911796707
TMI Blog1963 (2) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets of the bank in a sum of Rs. 2,11,998-0-4. Although various allegations of misfeasance and breach of trust had been made against the directors, no specific charge was laid against them. This defect was noticed when the matter came up before Balakrishna Aiyar J. on November 6, 1956. The learned judge thereupon framed two charges, the first of which alone forms the subject-matter of controversy in this appeal. The material portion of that charge is as follows: "In contravention of the resolution of the board of directors dated October 27, 1946, No. 1 (P. S. Mannadiar) amongst you took away and Nos. 2 to 5 (T. Eromamunni, V.K. Thirumalpad, P.K. Nedungadi and V. Venugopala Thampan) permitted No. 1 to take away a sum of Rs. 14,623-4-2 from the bank under the guise of an overdraft. That No. 1 amongst you obtained and Nos. 2 to 5 amongst you sanctioned to No. 1 loan aggregating to Rs. 34,863-6-0 (wherein the aforesaid sum of Rs. 14,623-4-2 was merged) on the supposed security of the Mannadiar Saw and Oil Mills Ltd., Palghat ; That at the time the transaction was put through, you knew or could with reasonable diligence have known that the security was wholly illusory and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Indian Companies Act, 1913, with its registered office at Palghat. It had also five branches at various places in South Malabar district. Due largely to the mismanagement of its affairs by its directors, it was directed to be wound up by an order of this court dated October 10, 1950, the application therefor having been filed about a month earlier. At the relevant period the following persons were its directors: (1) P.S. Mannadiar, a former employee of the Indo-Mercantile Bank, was a director from February 25, and managing director from March 4, 1945, till June 14, 1950, when he resigned. (2) T. Eromamunni was a director from November 25, 1943, till the date of liquidation. (3) V.K. Thirumalpad was a director from 1942 till March 13, 1949, when he resigned. (4) P.K. Nedungadi, a former agent of the Indo-Mercantile Bank at Palghat, was a director of the Malayalee Bank Ltd. from October 8, 1948, till the date of its liquidation. (5) V. Venugopal Thampan was a director from June 2, to October 8, 1948. The application which has given rise to this appeal was directed against all the aforesaid five persons. There can be little doubt on the evidence, and indeed this is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmovable properties referred to for a consideration of Rs. 1,70,000. The machinery and movables were separately valued and their price taken in cash. Of the consideration of Rs. 1,70,000 which formed the price for the immovable properties, Rs. 75,000 was given credit to as representing the value of the shares allotted to the first respondent. The balance of Rs. 95,000 was rrserved with the company. The property which was conveyed to the company was then subject to a number of encumbrances. Rs. 25,000 was due to one Krishnan Unni and his brother. Rupees 20,000 was reserved with the company for buying the jenmi right in the properties. After reserving these amounts with the company, a sum of Rs. 10,158-10-0 was acknowledged as having been received by the vendor earlier. After making certain other adjustments the balance outstanding was found to be Rs. 34,841-6-0. The company is said to have commenced business on March 1, 1948. But its work had to be stopped for want of funds within a few months thereafter. There were five directors in the company of whom were: (1) P. S. Mannadiar (first respondent), who was also the managing director of the mills, (2) P. K. Nedungadi (4th respondent) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation cannot be true is proved by the evidence of P. K. Nedungadi, who has stated that adjustment was made in the overdraft account of the first respondent with the Indo-Mercantile Bank Ltd. on the very day when payment was stopped, that is, February 10,1948. Admittedly, that bank was reconstructed and began to function from September, 1948. Even then the first respondent did not make any entry in his accounts with the Malayalee Bank Ltd. for his having taken away the sum of Rs. 13,000 by means of a cheque on the Indo-Mercantile Bank. On October 8, 1948, P. K. Nedungadi, the fourth respondent, who was formerly the agent of the Palghat branch of the Indo-Mercantile Bank, was appointed as a director of the Malayalee Bank Ltd. On taking charge, he found that the first respondent had not brought to account the sum of Rs. 13,000, which he had taken away from the bank in the manner stated above. The directors then got busy. The first respondent, who perhaps had very little funds with him to discharge the loan, assisted by P.K. Nedungadi, thought of a scheme by which his obligations to the Malayalee Bank were to be consolidated with certain other sums, and for the total indebtedness a mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank in the name of Rukmani Kovail ammal. The consideration for the deposit was an undertaking by the first respondent to pay the bank, and that liability was included in the liability under the mortgage executed by Mannadiar Saw and Oil Mills. Subsequently, the fixed deposit amount of Rs. 6,000 was drawn by the depositor. There can be kittle doubt on the evidence that the amount was taken for the benefit of the fourth respondent or his relatives. There were two other amounts due from the first respondent which are included. Substantially, the three items of consideration for the mortgage are (1) the wiping out of liability of the managing director, the first respondent, to the extent of Rs. 14,623-4-2, (2) wiping out of liability of Ravi Varma, a solvent debtor of the bank, to the extent of Rs. 12,083-9-7 and (3) the creation of a fixed deposit for the benefit of the fourth respondent for a sum of Rs. 6,000. Thus it will be seen that Ravi Varma got a benefit for joining in the execution of the mortgage on behalf of Mannadiar Saw and Oil Mills Ltd., P. K. Nedungadi, the fourth respondent, got benefit for bringing about the transaction ; and the first respondent, Mannadiar, obtained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om there being any error of judgment on the part of the directors, the mortgage transaction was a designed and calculated arrangement made with a view to benefit, at the expense of the bank, the first respondent, the fourth respondent and one Ravi Varma. There was hardly any necessity for an arrangement of that kind. If the first respondent was due to the bank in a sum of Rs. 14,000, it was the duty of the directors to obtain sufficient security for that indebtedness or file a suit against him to recover the monies. It was certainly not necessary to assign to him the liability of Ravi Varma and take the mortgage for that amount as well. Nor was it necessary to create a fixed deposit in favour of Rukmani Kovailammal, the sister-in-law of the 4th respondent, by adding to the liability of the first respondent. The strange feature of the transaction is that even the personal, liability of the first respondent was given up, and the 4th mortgage liability of the Mannadiar Saw and Oil Mills Ltd., which was in its last days, taken. There can be no doubt that there has been an abuse of the fiduciary position of the directors in sanctioning the transaction. The directors must have been aware ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors they were doing a prudent act. But the valuation of the properties of the mills at Rs. 3.45 lakhs was a self-serving statement given by the first respondent with a view to support the transaction entered into by him. The subsequent events have demonstrated beyond doubt that the entirety of the properties could not have been worth more than Rs. 10,000. But Mr. Viswanatha Aiyar contends that the low price obtained for the buildings and the machinery was the result of the neglect on the part of the official liquidator of the Mannadiar Saw and Oil Mills Ltd. as, according to him, the official liquidator did not take proper care of the materials. We are unable to find anything in the records to support that suggestion. In exhibit P-26, which is an application filed by the mortgagee for winding up the Mannadiar Saw and Oil Mills Ltd., he has detailed the difficulties which he felt in working the mills. He complained that several of the parts were missing even then and that in spite of advancing further capital he could not work the same. Even assuming that the property was worth something substantial, one can say that in the circumstances of the case the directors were not justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ator in the summons. The second respondent, though a party to the resolution, did not in any way personally profit by the transaction. He could not have known on February 18, 1948, the abstraction of Rs. 13,000 by the first respondent from out of the amounts standing to the credit of the Malayalee Bank Ltd. in the Indo-Mercantile Bank Ltd. But he must have become aware of the same, however, on 8th October, 1948, when the fourth respondent unearthed the diversion of funds. It was then the duty of the second respondent to have collected the sum of Rs. 13,000 from the first respondent. Indeed, he proceeded to sanction the acceptance of the mortgage from the Mannadiar Saw and Oil Mills Ltd. in substitution of the liability of the managing director. He must, therefore, be held liable to pay the excess sum to about Rs. 18,000, But having regard to all the circum stances in the case, we are of opinion that some relief should be given to him under section 281 of the Indian Companies Act, 1913. We fix his liability at Rs. 5,000. This amount will be recovered from him only after exhausting all the remedies against the other respondents. So far as respondent No. 3 is concerned, he was not a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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