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TMI Blog1966 (2) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 455(2) stating that fraud had been committed in the conduct of the business of the company and that a public examination of the persons mentioned above should be conducted. The three persons, C.V. Raman, T.V. Narayanaswami Aiyer and T.K. Balasubramaniam, and one T. N. Nagarajan were the promoter-directors of the company. Nagarajan subsequently resigned his post as a director. C.V. Raman was appointed managing director of the company in charge of all business by a resolution of the company dated September 24, 1957, and was a paid a sum of Rs. 550 per month from September I, 1957, as salary for managing the company's affairs. Narayanaswami Aiyer, who was another promoter-director of the company, was paid Rs. 325 per month as salary for advising the company in the matter of providing finances for various works, contracts, etc. His salary was increased to Rs. 550 per month with effect from June 1, 1958. He acted as chairman at the meetings of the board of directors at all material times. Balasubramaniam was also a promoter-director of the company, and by a resolution of the board dated October 6, 1958, he was being paid Rs. 500 per month with effect from May 1, 1958, for lookin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, runs as follows : "The official liquidator may also, if he thinks fit, make a further report, or further reports, stating the manner in which the company was promoted or formed and whether in his opinion any fraud has been committed by any person in its promotion or formation, or by any officer of the company in relation to the company since the formation thereof, and any other matters which, in his opinion, it is desirable to bring to the notice of the court. " On receiving such a report the court is empowered to proceed under section 478 of the Act, which is as follows: "When an order has been made for winding up a company by the court, and the official liquidator has made a report to the court under this Act, stating that in his opinion a fraud has been committed by any person in the promotion or formation of the company, or by any officer of the company in relation to the company since its formation, the court may, after considering the report, direct that that person or officer shall attend before the court on a day appointed by it for that purpose, and be publicly examined as to the promotion or formation or the conduct of the business of the company, or as to his co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e borrowings were effected on production of documents which were forged and not genuine; ( d )The company borrowed by discounting bills for supply of materials to public concerns like the Neyveli Lignite Corporation, Integral Coach Factory, Madras Port Trust, etc.; some of the documents connected with the borrowings from the several banks appear to be not genuine and contain forged signatures of the directors. It is admitted that the first respondent, C.V. Raman, was the managing director and was put in charge of all business and was managing the company's affairs. The second respondent was paid a salary of Rs. 550 from June 1, 1958, and was the chairman at the meetings of the board of directors. The third respondent was also receiving a salary of Rs. 500 per month from May 1, 1958, and was looking after the various works and was convassing for various agencies. The fourth respondent, who was-the secretary of the company, was authorised to carry on the day to day affairs of the company. It is common ground that the company passed various resolutions for taking loans from the banks, and several loans were obtained in pursuance of the resolutions. These resolutions and the borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduct of the business f of the company. He has not stated that in his opinion respondents Nos. 2, 3 and 4 were in any way concerned with the fraud. It was submitted that it was unnecessary for the official liquidator to state in his report the case against each of the persons and that it was sufficient if it was clear from the facts disclosed that respondents Nos. 2, 3 and 4 were jointly responsible for the fraud. The question as to the liability for being publicly examined has been considered in several decisions and they may be referred to. The leading case on the subject is that of the House of Lords in Exparte Barnes [1896] AC 146. In considering the jurisdiction of the court to direct the public examination of a person under section 8, sub-section (3) of the Companies (Winding-up) Act, which is similar to the provisions of sections 455(2) and 478 of the Companies Act, Lord Halsbury L.C. observed as follows : "If all these provisions have reference to a person who is incriminated by the report, and who is brought there in the position of a person against whom a suggestion is made that he has been guilty of fraud, the whole system, the whole Code thereby created, is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icient by Lindley M.R. in In re Civil, Naval and Military Outfitters Limited [1899] 1 Ch. 232, 233. " Regarding the attribution of particular pieces of alleged fraud to particular individuals, the Privy Council observed : "This appears to their Lordships to compel the conclusion that if a company with, say, three directors was carrying on some business in a fraudulent manner, none of the directors could be brought to book unless he or they chose to tell the Official Receiver which of the three directors had been the actual perpetrator or perpetrators of any of the fraudulent acts in question. This would be a reductio ad absnrdu m which their Lordships find impossible of acceptance. " Strong reliance was placed on this observation by the official liquidator, who contends that the report cannot be expected to disclose which of the directors were the actual perpetrators of the fraudulent act in question. The above observation cannot be read as supporting the contention that, if it is proved that a fraud has been committed in the affairs of the company, every one of the directors is liable to be publicly examined. The report should be of such a nature that will probabilise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, volume 6, page 570, states the position in the footnote thus : "The section does not apply where the only charges against the company are in relation to frauds in the course of its business with the outside world, and not connected with its promotion or formation. " Buckley on the Companies Acts, at page 610, states the position thus : "But the malpractice suggested must be connected with the promotion or formation of the company or the conduct of its affairs in its own economy, ot frauds said to have been committed upon the outside world in the course of its business." Again at page 457 the learned author observes thus: "And a fortiori fraud not connected with the formation or promotion, but against third parties in carrying on the business, does not ordinarily form a ground for a compulsory order by reason of the fact that investigation under such an order would be desirable. " Reliance is placed for these statements by Gore-Browne, Halsbury and Buckley on the decision reported in In re Medical Battery Company [1894] 1 Ch. 444 . In the decision cited, on an action against a company to enforce the debentures on Davis, a chartered accountant was appointed r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany and not with the clause in section 8 relating to fraud committed "by any officer of the company in relation to the company since the formation thereof". The fraud that is referred to in section 455(2) as well as section 478 of the Companies Act covers the fraud "by any officer of the company in relation to the company, since the formation". In the case of the officers, the fraud need not relate to promotion or formation of the company. It is sufficient if it is in relation to the company since its formation. It is intended that "in relation to the company" would only mean fraud by the officer in relation to the company but not as regards outsiders. It is difficult to accept this contention, for, so far as the officer is concerned, by engaging in illegal activities as in the case of obtaining money on false pretences for the company, the officer is committing a fraud in relation to the company. The phrase "in relation to" would mean the way in which the thing is connected with another. The fraud as such is committed by the person as officer in relation to the company. The contention of the directors that acts of the company relating to strangers would not come within the purv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re governed by article 20(3) of the Constitution of India and not by the practice in London. In Raja. Narayan Bansilal v . Maneck Phiroz Mistry [1960] 30 Comp. Cas. 644; [1961] 1 SCR 417 , the Supreme Court, while considering the question whether an examination of a person under the Indian Companies Act would offend the provisions of article 20(3) of the Constitution of India, held that article 20(3) of the Constitution of India had no application, as there was no accusation in the sense in which that expression had been construed. The compulsion introduced by the provision of the Companies Act is not the compulsion which can be struck down by the provisions of the Constitution. In Joseph Augusthi v. Narayanan [1964] 34 Comp. Cas. 564 (SC), the Supreme Court, construing section 45G of the Banking Companies Act, 1949, held that the provisions did not contravene article 20(3) of the Constitution of India. Referring to article 20(3) of the Constitution of India, the Supreme Court observed that it is only when a person is said to have been accused of any offence that the prohibition prescribed by article 20(3) comes into operation and that if a person who is not accused ..... X X X X Extracts X X X X X X X X Extracts X X X X
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