9911796707
TMI Blog1963 (5) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... hich eventually led to a crash of the bank, in July, 1947. It was ordered to be wound up on November 5, 1947. The application for misfeasance was put in 1950. The acts of misfeasance were grouped under three broad heads. The first was the misappropriation and the consequent falsification of accounts by the managing director, K.V. Krishnamurthi Iyer (2nd respondent), and the other officers of the bank. The second was reckless advances without security which resulted in a huge loss to the bank. The third was payment of dividend out of capital. The learned judge (Subramanyam J.), who enquired into the application, has held that the charges were substantially established and he made most of the respondents liable for the various sums indicated in his judgment. O.S.A. No. 62 of 1960 has been filed by the nth respondent, V. Ganesan, questioning the liability fastened on him. O.S.A. No. 17 of 1961 has similarly been filed by S. Vancheesan and R. Appaswamy Iyer, the 12th and 13th respondents. O.S.A. No. 35 of 1961 is a similar appeal by V. Swaminathan, the 29th respondent. The official liquidators have filed O.S.A. No. 8 of 1961 against respondents Nos. 5, 7, 8 and 9. It may be mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... took place and advances were made recklessly. We may state at once that the learned judge ha?, if we may say so with respect, written a very lucid judgment clearly and elaborately setting out the details, and, further, since these matters are really not challenged before us, the arguments before us being mere questions of law, it will be sufficient if we refer to the instances concerning the parties before us. Thus, the first item, in respect of which liability has been fastened by the learned judge on respondents Nos. 11, 12 and 13, is item 5 of the B-1 Schedule. This is discussed at pages 17 to 19 of the judgment. (There are two sets of pages in it, one in the judgment itself, pages 1 to 195, and another in the bigger pleadings volume given to us, in which the judgment is apart. According to the second pagination, the pages will be 89 to 283. But we will give reference only to the pagination of the judgment itself, that is, from pages 1 to 195). One K. P. Abdul Khader of Pattukottai had sold paddy to the Grain Purchasing Officer, Tanjore, and had received an order from the Grain Purchasing Officer for payment of Rs. 13,796. The order was delivered by Abdul Khader at the Pattukott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent vouchers for transfer from the suspense account. The entries of transfer in the second respondent's account were written by the 13th respondent, accountant in the bank. He is the 12th respondent's father-in-law. He it is that struck off the figures '1' and '3' in the figure '13,796' after the transfer of Rs. 13,000 to the current account and the savings bank account of the managing director. The managing director has to be directed to restore the entire sum to the bank. Respondents Nos. 11,12 and 13 should also be made liable jointly to restore to the bank at least a part of the money, because it is by means of their actions that the fraudulent conversion was effected. "In our opinion, the finding of the learned judge about the participation of respondents Nos. 11, 12 and 13 in this embezzlement of Rs. 13,796 is justified. We shall presently consider the arguments of the learned counsel for respondents Nos. 11, 12 and 13 that, on the facts proved, respondents Nos. 11, 12 and 13 cannot in law be held liable. To complete the picture, we may however state that in respect of this item, the liability fastened on respondents Nos. 11, 12 and 13 was the sum of Rs. 3,450 roughly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on December 31, 1944. But there are clear indications that no money was actually received by the bank. Actually, what was made to appear in the books of the bank was that a letter of credit issued by the Chartered Bank and the National Bank was discounted as B.C. 1746 on December 31, 1944, and Rs. 25,000.is stated to have been paid out. There is no such bank as "Chartered Bank and Nationa.1 Bank". The accounts do not state to whom the money was paid. The letter of credit is not a document which could be presented by the Hanuman Bank to anybody for payment. On these facts, the learned judge finds that respondents Nos. 2 and 11 are liable to restore the money to the bank. The liability of respondent No. 11 is evidently fastened on the ground that he was the secretary and the agent of the branch at the head office at the time and that these transactions could not have taken place without his knowledge. Actually in respect of the sum of Rs. 25,000 the learned judge fastened the liability only of a fourth thereof, namely, Rs. 6,250, on the 11 respondent: vide page 179 of the judgment. The next item concerning the parties before us is item 13 of B-1 Schedule, which is discussed at pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irector and possibly of the other officers. Later, false credit entries were made as though these loans were repaid and the process was repeated from year after year. These acts of fraud are discussed in the earlier portions of the judgment of the learned judge (pages 4 to 9). The next items with which we are concerned are items 9, 10 and 14 of B-i Schedule. These are discussed at pages 26 to 28 of the judgment. What happened was this. In December, 1945, entries were made in the books of the head office as if three persons discounted orders for payment issued in their favour by the Grain Purchasing Officer, Tanjore. Actually, the Grain Purchasing Officer, Tanjore, had not issued any orders for payment, and these bills were admittedly not sent to the Grain Purchasing Officer for realisation and this device was adopted merely to cover up the misappropriation by the managing director with the assistance of respondents Nos. 11 and 12, the nth respondent being the secretary and the agent of the branch at the headquarters and the 12th respondent being the assistant secretary. The total loss to the bank was Rs. 39,442-9-6 in the first instance. In respect of this, the learned judge has d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Rs. 50,000. Those cheques were sent from the head office to the Madurai branch. The part played by respondents Nos. 11 and 12 in this transaction was this. The cash transfer voucher for Rs. 65,000 mentioning the denominations of the notes which were alleged to have been sent from the head office at Madurai was signed by respondents Nos. 11 and 12. The signed cheques of Veerappa Pillai were filled in by the 12th respondent. In respect of this, the learned judge, besides making the 2nd respondent liable, has directed respondents Nos. 11, 12 and 16, to pay a fourth, namely, Rs. 12,500, the liability being joint and several: vide pages 179 and 180 of the judgment. The next item, for which respondents Nos. 11, 12 and 13 have been charged, relates to misappropriation of a sum of Rs. 3,54,649-2-7. This is the subject-matter of paragraph 15(iii) of the petition and discussion in pages 34 to 38 of the judgment. Three different kinds of methods were adopted to effect this misappropriation. Firstly, in carrying over from one year to another the indebtedness of certain constituents, a larger figure was adopted and the difference was misappropriated and false credits were made during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re made in December, 1946, and the account was closed. The next instance relates to account No, 162 which stood in the name of one Abdul Majid and was closed in 1942, but was revived in 1944 in the name of Appaswami Pillai with a debit balance of Rs. 25,410-4-3. Fictitious credit entries were made in December, 1946, and the account was closed. The third type was this. Fictitious loan accounts were opened in the names of Karuppiah Pillai, Balasubramania Pillai and Narayana Pillai of the amounts of Rs. 50,000, Rs. 60,000 and Rs. 60,000 respectively and fictitious credit entries were made in December, 1946. The sum thus misappropriated under those heads was Rs. 1,70,000. The sum thus misappropriated by these three methods of misappropriation is Rs. 3,54,649-2-7, in respect of which the learned judge felt that respondents Nos. 2, 11, 12 and 13 were liable to restore that amount. Besides the specific part played by respondents Nos. 11 and 12, the learned judge points out that these debit and credit entries could not have been made without the knowledge and assistance of the 13th respondent, who was the accountant at the headquarters. He felt that respondents Nos. 2, 11, 12 and 13 were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout adequate security was Rs. 22,000 and only a sum of Rs. 2,602 was realised by way of rateable distribution. So far as the 11th respondent, who was the agent of the branch at the head office, is concerned, he- has been made responsible for a part of the amount advanced at the branch at the head office. His liability has been fixed at Rs. 1,200. The next item for which a liability of Rs. 2.000 has been fastened on the nth respondent is item 135 of the C-1 Schedule, which has been discussed in detail at pages 109 to 114 of the judgment. The nth respondent has been held responsible only in respect of the advances made at the branch at the head office. As a matter of detail, it may be mentioned that the total indebtedness of the constituent of the bank was Rs. 32,905. He was declared insolvent and the entire sum has been a loss to the bank. The last item under which the liability his been fastened on the 11th respondent under the C-1 Schedule is item 147 thereof, which has been discussed at page 115 of the judgment. A current account was opened in the name of one K. Ramaswami Pillai in 1942, at the branch at the head office. It soon became overdrawn. The only security was an unr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed overdraft accommodation up to a limit of Rs. 4,000 on the security of his immovable property. But the 29th respondent allowed the overdraft to be exceeded by Rs. 2,000 and odd. However, no liability was fastened on him on that account. But he allowed another overdraft, again without security of any kind and without any sanction by the managing director or any other officer, and the amount due on that account on July 31, 1947, was Rs. 6,938-1-3. Similarly, on May 21, 1947, the 29th respondent allowed the constituent to discount a hundi for Rs. 1,000 without any security. The two amounts of Rs. 6,938-1-3 plus Rs. 1,000 have become irrecoverable. In respect of it, the 29th respondent has been asked to pay Rs. 3,000 as compensation. We shall now consider the arguments advanced by the learned counsel appearing in the appeals filed by respondents Nos. 11, 12 and 13 (O.S.A. Nos. 62 of 1960 and 17 of 1961). The learned counsel were naturally not in a position to dispute the findings of facts of the learned trial judge, based as they are on unimpeachable documentary and circumstantial evidence. But they contend that, in law, these parties are not responsible even on the. basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 237, does not include an auditor." In Dilworth v. Commissioner of Stamps [1899] AC 99, 105, 106 their Lordships of the Privy Council observed: "The word 'include' is very generally used in interpretation clauses in order to enlarge the meaning of words 01 phrases recurring in the body of the statute ; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. But the word 'include' is susceptible of another construction which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions denned. It may be equivalent to ' mean and include ', and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to those words or expressions." See also Halsbury's Laws of England, volume 36, Simonds edition, paragraph 574. The contention of the learned counsel for respondents Nos. 11, 12 and 13 is that the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer" of the company coming within the mischief of this section. Thus, the nth respondent was the secretary of the he td office and besides was the agent of the branch at the head office. The 12th respondent was the assistant secretary of the branch at the head office. The 13th respondent was the accountant. Each of them had defined duties to perform in relation to the bank and in respect of those dunes, they were bound to act honestly in the interests of the bank; but it will be evident that their actions were just the reverse. Taking for example item 5 of the B-1 Schedule, it will be seen that it was their actions that facilitated the misappropriation of the sum of Rs. 13,796 by the 2nd respondent and his son. The 11th respondent, being the agent at the branch of the headquarters, must necessarily have known all the fraudulent entries, and in fact, he initialled the voucher of the transfer of Rs. 796 to the account of Nagaraj on Similarly, the 12th respondent wrote the subsequent entries for transfer of the amount from the suspense account to the account of the managing director and his son. The 13th respondent made the necessary entries and corrections. In doing these particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be an "officer" amenable to the summary process of section 235, whereas a director who has failed to exercise the necessary check to prevent such misappropriation might be caught within the mischief of the section. We now turn to the other branch of the contention that loss was not caused to the bank as a result of the acts of respondents Nos. 11, 12 and 13 and that consequently they would not be guilty of misfeasance. Now, in view of the speeches of the noble Lords in Bentinck v. Thomas Fenn [1887] 12 App. Cas. 652, it may be taken that misfeasance contemplated in section 235 is one which must result in loss (see for instance pages 662 and 669). But that test has been satisfied in this case. Thus, so far as item 5 of the B-1 Schedule is concerned respondents Nos. 11i, 12 and 13 were actual parties to the means by which the loss of Rs. 13,796 directly occurred. So far as item 6 of B-1 Schedule is concerned, a sum of Rs. 5,000 was misappropriated by utilising the names of E.K. Subrahmanya Iyer and Ananth and, therefore, loss directly occurred. Because the nth respondent was the agent at the time, the transactions must have taken place with his knowledge and connivance. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss to the bank as a result of the action of the 11th respondent, can be rested on more direct grounds as we have pointed out already. Sri Swaminathan also quoted the decision of Maugham J. in Etic Limited In re. [1928] 1 Ch. 861, 871-874. Maugham J. quotes from the decision of James L.J. in a previous case, Coventry and Dixon's case [1880] 14 Ch. D. 660, 670-673: "I am of opinion also that the word 'misfeasance' in that section means misfeasance in the nature of a breach of trust, that is to say, it refers to something which the officer of such company has done wrongly by misapplying or retaining in his own hands any moneys of the company, or by which the company's property has been wasted, or the company's credit improperly pledged ". Now, the portion of the above passage applicable to us can be thus abstracted : "misfeasance" means misfeasance in the nature of a breach of trust, that is to say, it refers to something by which the company's property has been wasted. In this case also, for the reasons we have indicated, a sum of Rs. 25.000 belonging to the company has been wasted, and is in fact, a loss to the company. In the same decision at page 874 Maugham J. recognises tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , I think, be taken as authority, or as included among the authorities, establishing that a simple case of negligence at common law would not be within the section. But in my judgment Lindley L.J. and Lopes L. J. did not intend to lay it down by inference that any breach of duty, including a breach of trust, which did not involve a misapplication of assets, was outside the section. What they were saying was the converse-- that, where a breach of duty had been committed, which did in fact result in a misapplication of the company's property, then such transactions would be within the ambit of the section." In other words what the learned Master of the Rolls expressed was that merely because there was no actual misapplication of the assets by the act (the act of the 11th respondent in being a party to the false entry of repayment on December 31, 1944), it would not necessnrily follow that it would not be an act of misfeasance. Sri Swaminathan also referred to the decision of the Supreme Court in Dalmia v. Delhi Administration [1962] 32 Comp. Cas. 699 (SC) to the effect that falsification of accounts to cover up a false misappropriation would be fraudulent conduct. But in this case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aging director. Learned counsel himself conceded that there was no evidence in support of it. Even if it were true that the advances were made under instructions of the managing director, that could not exonerate the 29th respondent completely. It could only be a factor which might be taken into consideration by granting relief under section 281 of the Act. We are satisfied even on that footing that the liability which has actually been fastened on him is quite just and reasonable and we see no reason to reduce the amount of Rs. 8,000 for which he has been made liable. His appeal is accordingly dismissed. We now turn to O.S.A. No. 8 of 1961, the appeal tiled by the official liquidators. We shall first deal with the liability which the official liquidators seek to fasten on respondents Nos. 5, 7, 8 and 9 in respect of the period prior to March 7, 1947. Sri S. Swaminathan, learned counsel for the official liquidators, had naturally to concede, in view of the principle laid down by the House of Lords in the leading case of Dovey v. Cory [1901] A.C. 477 and the cases following it, that these directors were entitled to presume in the absence of features arousing their suspicion, that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on before him. Thus in page 20 of the judgment the learned judge observed that the pendency of the drafts drawn by Premier Traders for over two years could not have escaped the attention of the auditor at the time of his audit in the beginning of 1943 and 1944 if he was duly discharging his duty pertaining to his office. Thirdly, it is admitted that the originals of these notes which are claimed to have been sent to the bank by the auditor, are not available and even the official liquidators rely only on copies furnished to them by the auditor (see for instance page 107 of volume 14 where the official liquidators rely on the copy of the audit notes for 1944 sent by the auditor. (Volume 14 contains the report of the official liquidators on the affairs of the company with reference to these alleged audit notes). Fourthly, there are intrinsic indications that these audit notes could not have been brought to the notice of the directors. Leaving aside the details and putting it broadly, the fact remains that year after year, the auditor subscribed to a statement in the balance-sheet that the balance-sheet was in accordance with the books and exhibited a true and correct view of the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove these alleged notes and no question was put to these directors whether they had knowledge of the notes or anything to put them on notice thereof. On account of all these circumstances, we have no hesitation in ruling out these alleged notes from our consideration. The next circumstance on which Sri Swaminathan relies to fasten liability on the directors prior to March 7, 1947, is the loss of Rs. 5,000 which was transferred from Mayavaram branch to Shiyali branch. There is certainly something very mysterious about this. The letter dated October 5, 1942, of the managing director to the 8th respondent, Ganapathi Subramania Iyer (copy is at page 17 of volume 3 of the pipers supplied to us by Sri M.S. Venkatarama Iyer, learned counsel for Ganapathy. Subramania Iyer, states: "The amount was made good by the party concerned. I shall let you know the details in person." But in the proceedings dated October 13, 1942, of the board of directors, which find place at pages 193 to 197 of volume 4, the following occurs in resolution XII. "A report of the incident which took place in Shiyali bank while conveying cash from the Mayavaram branch was submitted by the managing director who has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution VII of October 13, 1942, and that it was the duty of the other directors to verify whether their resolutions were being followed or violated. Similarly, the learned counsel says that on October 21, 1945, the board of directors passed resolution (page 245 of volume 4) appointing an internal auditor and an inspector. But the proceedings of the subsequent meetings show that they did not ensure the implementation of the above resolution. We have carefully considered all these submissions. In our view, having regard to the principles laid down in the leading case of Dovey's case ( supra) and the other decisions, these are not sufficient so far as respondents Nos. 7, 8 and 9 were concerned. Indeed, so far as the 8th respondent was concerned, he had large deposits which finally stood at Rs. 87,000 and that itself shows that he for one believed that the bank was being run on sound lines. He also inspected the branch at Mayuram, though the inspection might not have been quite thorough. Altogether we feel that so far as respondents Nos. 7, 8 and 9 are concerned, no case has been made out to fasten liability for the period prior to March 7, 1947. The matter, however, stands on a diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall not take any loan from the bank as a general rule. In any case it is clear that the indebtedness of the director at the end of the year should be disclosed in the balance-sheet. This is a statutory requirement which finds place in Form "F" prescribed under section 132 of the Indian Companies Act, 1913. The form states that the debts due by directors or other officers of the company or any of them either severally or jointly with any other persons should be separately stated. Now, in the case of Dr. T.S. Varadachariar the report of the official liquidators at page 35 of volume 14 shows that as on December 31, 1945 he was indebted to the bank to the extent of Rs. 5,702 but the published balance-sheet (see page 110 of the same volume) did not disclose that debt. It discloses only the debt of Rs. 9,908-5-0 due from another director Viswanatha Iyer. The correctness of this statement of the official liquidators was not questioned before us. Thus, so far as Dr. T. S. Varadachari is concerned it is clear that he knew that he was allowed to contravene the rules of the bank by discounting post-dated cheques and was being allowed overdraft facility without express resolutions by the boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... katarama Iyer, stated that he could not really say anything useful against the findings of the learned judge and his only anxiety was to limit the liability of his client to a sum of Rs. 25,000 apart from costs. Sri M.S. Venkatarama Iyer stated that the 8th respondent would be prepared to have Rs. 25 000 adjusted out of the deposit of Rs. 87,000 and odd standing in the name of the 8th respondent and his son in respect of the liability for the period after March 7, 1947, without reference to any of the other directors, in other words, without a right of contribution in his turn from any of the other directors. The considerations which he suggested in support of the request were these. He was a rich man owning over 200 velis of land and some few lakhs of rupees and he honestly believed, even after March 7, 1947, that the affairs of the bank were not so bad as they eventually turned out to be and that was proved by the fact that he left outstanding as much as Rs. 87.000 as deposits in the name of himself and his son. He referred also to the resolution dated March 7, 1947, of the board of directors (page 264 of volume 4) where the directors referred to "the genuine interest taken by Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny such offer at this stage. Before making up our mind, we also asked a statement of assets and liabilities to be filed by Dr. T.P. Varadachari. He has accordingly filed a statement in which he states that he has 12 acres of wet and dry lands in Nannilam Taluk worth Rs. 25 000 and three old tiled houses in the village worth Rs. 3.000 and has movables to the value of Rs. 8,000 besides a sum of Rs. 3,000 kept in deposit in the Hanuman Bank. He has simple debts to the tune of Rs. 8,000 and his annual income as a doctor is Rs. 9.000 according to the income-tax assessment orders. As we have already stated, there has been no attempt before us to challenge the fact that in respect of the period after March 7, 1947, the directors Nos. 5, 7 and 8 would be liable for payment of Rs. 22,000 as dividend out of capital and in respect of the sum of Rs. 60,000 advanced without adequate security, and the attempt has been only to limit their liability to an equitable extent. Since the point has not been contested, it is sufficient to state that there can be no doubt that at the meeting of March 7, 1947 the auditor's notes for the year 1946 which gave a sufficiently damaging account of the affairs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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