9911796707
TMI Blog1966 (1) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... f the bank while respondents Nos. 8 to 13 were its officers and respondent No. 14, the auditor of the bank. During the pendency of the misfeasance proceedings, respondents Nos. 1, 4, 11 and 14 died. The learned company judge held that the misfeasance proceedings could not be continued against the legal representatives of these four deceased respondents and dismissed the application as against those legal representatives. The learned company judge also held that the application filed by the official liquidator was barred by time as against respondents Nos. 8 to 14 who were not directors of the bank, but was within time as against respondents Nos. 1 to 7, who were the directors of the bank. Hence the application as against respondents Nos. 8 to 14 was dismissed as being barred by time. The learned company judge made an order against respondents No. 2, 3, 5, 6 and 7 directing them to contribute jointly and severally, a sum of Rs. 2,50,000 to the assets of the bank in winding up with interest thereon at six per cent, per annum from the date of the order till payment There was a further direction that if each of respondents Nos. 6 and 7, namely, R.W. Porwal and R.N. Khalghatgi, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt he was engaged in a business of his own and does not appear to have given up that business after his appointment as the managing director. His appointment was intimated to the shareholders at the ensuing annual general body meeting of the shareholders. Though the authorised capital of the bank was Rs. 5,00,000, the bank started business with a paid up capital of about Rs. 59,000. By the year 1946, its paid up capital was only Rs. 83,000. As the amendment to the Indian Companies Act introduced a new provision which required that the paid up capital of a banking company should be at least fifty per cent. of its authorised capital, the management of the bank issued additional shares of the value of Rs. 1,70,000 in the year 1946. But, by the end of June, 1946, such new shares were subscribed only to an extent of about Rs. 1,20,000. To make up this deficiency of about Rs. 50,000 in the paid up share capital, the board of directors of the bank appear to have issued the remaining shares of the value of about Rs. 50,000 to the directors, their relatives and friends without actually receiving cash payment from them. These shares were shown as fully paid up shares and the amounts due fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that there was no system of balancing the ledgers at frequent intervals; and that there was no system of obtaining periodical returns particularly of advances from the branches and of carrying out their inspection; with the result that the control over the branches appeared to be inadequate. The said report of the Reserve Bank (exhibit A-1) was considered by the board of directors of the bank at its meeting held some time after the report was received. In the year 1952, the Reserve Bank conducted another inspection of the affairs of the bank under section 22 of the Banking Companies Act. The report of this inspection (exhibit A-2) was communicated to the managing director of the bank in March, 1953. This report revealed more serious defects in the working of the bank. Inter alia , this report stated that ( i ) the directors did not appear to evince any interest: there was no supervision' or control maintained over the activities of the managing director who was appearing to be exercising very little supervision over the administration and working of the bank and that the control exercised by the head office : over its branches was inadequate; ( ii ) the books of account and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was held between the 17th and the 25th May, 1954, with particular reference to the position of the bank as on the 26th March, 1954. This report of the Reserve Bank dated August 27, 1954, which is marked as exhibit A-3, was communicated to the bank along with its covering letter dated September 13, 1954 (exhibit A-3( i )). Inter alia , this report stated that: ( i )The cash on hand at the head office on May 17, 1954, was found to be short by Rs, 53-15-9; and ( ii )Lack of internal check and the unreconciled statement of banker's accounts appear to have been exploited by certain members of the staff, who in collusion with certain customers of the bank misappropriated the sums aggregating to Rs. 1.21 lakhs during the period 1949 to 1951 by passing debits to the bank's accounts with other banks and thereby inflating the balances with the other banks in the books of the bank. This report was also discussed by the directors. It is only after the third report of the Reserve Bank (exhibit A-3), the directors woke up and started looking into the matter seriously. In an attempt to minimise the losses and to regularise the defects, the directors got some promissory notes execute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll actions and proceedings against the bank during that period and appointing Mr. V.R. Kotbagi, advocate, Belgaum (who is examined as P.W. 4) as the special officer of the bank under section 37 of the Act. By this interim order the High Court called for the report of the Reserve Bank under section 37 of the Act. Mr. Kotbagi took charge of the bank as its special officer on December 7, 1954. The initial period of 2 months' moratorium was extended by the High Court for a further period of two months. On December 3, 1954, respondent No. 2, S.K. Samant, executed another promissory note in favour of the Supreme Bank for a sum of Rs. 58,500. Some time later, a truck and a car belonging to him were sold and a sum of Rs. 14,000 was realised by the bank. On December 29, 1954, he also executed a sale deed, exhibit B-49, conveying a house worth Rs. 24,000 in favour of the bank. The bank filed a suit on the foot of this sale deed and obtained a decree for possession. But his brothers had filed a claim petition in respect of this house. On February 26, 1955, his brothers executed a bond, exhibit B-50, in favour of the special officer of the bank, standing as sureties for his paying a sum of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccept the scheme presumably in view of the report, exhibit A-4, of the Reserve Bank. The application for the sanction of the scheme for reconstruction of the bank was dismissed by the High Court of Bombay on March 17, 1955; on that date, the moratorium granted by the High Court also came to end. The special officer, whose term of office also expired with the moratorium,' handed back charge of the bank to respondent No. 1, the chairman of the bank, on April 4, 1955. After the directors resumed management of the bank, they appointed D.D. Joshi, an auditor (who has been examined as P.W. 2 before the learned company judge), to investigate- into and see whether the responsibility and liability for the fraud and misappropriations alleged to have been committed could be fixed on any particular individual or individuals. By the time he could complete his investigation and make his report, the winding-up proceedings had commenced and he submitted his report (exhibit A-9) to the official liquidator on May 10, 1956. The directors appear to have paid the depositors a certain percentage of the amounts due towards their deposits. But the liquidation of the bank could not be averted. On M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he bank, cash was not paid in respect of these shares except to the extent of Rs. 9,345. After setting out various allegations against the directors, the official liquidator submitted in this application that the respondents had applied or detained or become liable or accountable for a sum of Rs. 4,26,000 to the bank, that they had been guilty of misfeasance, breach of trust and fraudulent conduct in relation to the bank, and prayed for an order directing the respondents to repay and restore the moneys of the bank and/or to contribute such sums to the assets of the bank by way of compensation in respect of misapplication, retainer, misfeasance or breach of trust as the court might be pleased to think just. This application was supported by a formal affidavit in which the official liquidator stated that the facts averred in the application were gathered from the reports and proceedings including those relating to reports of winding-up proceedings and the records of the bank. The official liquidator largely relied upon the reports of inspection carried out by the Reserve Bank and the reports submitted by Wagle and D. D. Joshi (exhibits A-9 A-21). All the respondents filed obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Section 45A of the Banking Companies Act provides that the provisions of Part IIIA of that Act shall override the provisions of other laws. Section 45-G occurs in Part IIIA of that Act. As the present company was a banking company, it was open to the official liquidator to have moved the learned company judge for holding public examination of the directors even before he made an application for initiating misfeasance proceedings against them. If such public examination had been made before the official liquidator filed I.A. No. 1, valuable materials would have been available on which he could have based his application for initiating misfeasance proceedings. Unfortunately, this course was not adopted by the official liquidator. It was only in the middle of the proceedings that the learned company judge suo moto directed the examination of some directors. But the material that became available as a result of examination of those directors could not be made use of in support of the application, LA. No. 1, except for the purpose of establishing the allegations already contained in LA. No. 1. In Cavendish Bentinck v. Fenn [1887] 12 App. Cas. 652 , Lord Herschell obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion, the learned company judge came to the conclusion that it could be safely said that the shortage of cash was at least two lakhs of rupees. The second question formulated was whether the liquidator proves that loss was occasioned to the company by misapplication of cash or funds shown to have been credited to the accounts of the bank with other banks but not actually so credited and, if so, what is the extent of such loss. The conclusion of the learned company judge was that discrepancy in the bank account was of the order of Rs. 1,79,000. But he held that the entire sum represented by the discrepancy of the bank accounts cannot be treated as total loss to the bank because, when the directors discovered this discrepancy, to cover up this discrepancy, they took loan documents from the managing directors and certain officials of the bank who were suspected to have misappropriated moneys by the device of manipulating bank balances and from a few customers who had unauthorisedly utilised the funds of the bank in collusion with the officials. The learned company judge estimated the realisability of these loan documents at no more than 50 or 60 per cent. The third question so f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .A. No. 1, is barred by time even against the directors; ( ii )there is no satisfactory material to justify the estimate made by the learned company judge of the shortage of cash and of the loss due to manipulation of balances with other banks; and ( iii )the sums which the directors are asked to contribute to the assets of the bank are grossly excessive. The learned counsel for respondents Nos. 3 and 5 to 7 also contended that the ordinary directors were not responsible for these losses as the management of the bank had been entrusted to the managing director under the articles of association of the company and hence respondents Nos. 3 and 5 to 7 could not be asked to contribute any amount. The learned counsel for respondents Nos. 6 7 further contended that these two respondents joined as directors of the bank comparatively recently, that they were guided by the senior directors and did not know the alleged acts of mismanagement and hence they are not liable for any losses to the bank. The learned counsel for respondent No. 2 contended that, though this respondent was the managing director, he trusted the officers of the bank and merely carried out the orders of the board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trust, as the case may be, whichever is longer, examine into the conduct of the promoter, director, manager, liquidator or officer, and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the court thinks just. (2) This section shall apply notwithstanding that the offence is one for which the offender may be criminally responsible " (Sub-section (3) was deleted by the amendment Act of 1936). The wording of sub-section (1) of section 235 of the Indian Companies Act, 1913, is practically the same as that of section 165 of the English Companies Act, 1862, of section 215 of the English Companies (Consolidation) Act, 1908, of section 276 of the English Companies Act, 1929, and of section 333 of the English Companies Act, 1948. The scope of section 333 of the English Companies Act, 1948, as stated in Buckley's Companies Acts, (13th edition, at pages 672-673) and Palmer's Company Law (20th Edition, at pages 574-575) and Halsbury's Laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... known to law as misfeasance. The acts which are covered by the section are acts which are wrongful according to established rules of law or equity done by the person charged in his capacity as "promoter", "director", etc. But it is not every kind of wrongful act so done that is comprehended by the section (section 333 of the English Companies Act, 1948). In M.A. Malik v. Thiruvengadaswatni [1949] 19 Comp. Cas. 311 , Horwill J. stated that a failure on the part of a person to do his duty with regard to the property of a company over which he had control by virtue of his being a director amounts to misfeasance within the meaning of section 235 of the Indian Companies Act, 1913. Section 281(1) of the Indian Companies Act, 1913, provides that if in any proceedings for negligence, default, breach of duty or breach of trust against a director, manager, officer or auditor of a company, it appears to the court that the person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably and that, having regard to all the circumstances of the case including those connected with his appointment, he ought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all other claims" occurring in section 45-0(2) of the Banking Companies Act and that, as I.A. No. 1 was filed within five years from the date of the first appointment of the liquidator, the said application was within time as against the directors. Mr. T. Krishna Rao, the learned counsel for the appellant in C.A. No. 10 of 1963, contended that the extended period of limitation provided by section 45-O (2) of the Banking Companies Act is applicable where the enforcement of any claim is sought only by the banking company and not by any other person like the creditor, contributory or the official liquidator. Continuing, Mr. Krishna Rao stated that the present claim under I.A. No. 1, against the directors, was made not by the banking company but by the official liquidator and hence section 45-0(2) of the Banking Companies Act cannot be invoked in the present case. According to Mr. Krishna Rao, when the official liquidator makes a claim under section 235 of the Indian Companies Act, 1913, against the directors for repayment, restoration or for contribution, he does not make such claim on behalf of the banking company but in his own statutory right as the official liquidator, though th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings, civil or criminal, he takes, he must take it in the name and on behalf of the company. No doubt, the liquidator is an officer of the court, having been appointed by the court, and he is under the direction and control of the court. But when a proceeding is started by him, that proceeding is not initiated in his personal capacity but in the name and on behalf of the company, and it must be deemed as if the proceeding is being continued not only in the interest of the company but actually by the company through its liquidator No doubt under section 235 persons other than the liquidator, namely, a creditor or a contributory, also can apply. But, in my opinion, similar considerations apply to these applicants as well. There is no right conferred upon them to start a fresh proceeding in their own right and to get any relief for themselves. They merely move the machinery of the court by filing an application. The purport of the application is to make persons liable to repay money or restore property to the company, so that it may go into the common fund. It is obviously a representative application filed on behalf of a class of persons." In Jwala Prasad v. Official ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 546 of the Companies Act, 1956, is made in the said non-obstante clause because the intention of the legislature, as can be gathered from the language of sub-section (2) of section 45-O, is to alter the period of limitation provided by section 543 of the Companies Act, 1956, and by section 235 of the Indian Companies Act, 1913, in so far as the misfeasance proceedings relate to a banking company. While the observations of so eminent a judge as "Lord Herschell are entitled to the greatest respect, our decision on the question whether section 45-O(2) of the Banking Companies Act applies to an application by the official liquidator under section 235 of the Indian Companies Act, 1913, must ultimately rest on the construction of the provisions of these two Acts, taking into account the scheme of these two Acts. Thus, we are unable to accept the contention of Mr. Krishna Rao that the enlarged period of limitation under section 45-O (2) of the Banking Companies Act will not apply to this application, LA. No. 1, under the Indian Companies Act, 1913. We unhesitatingly hold that the view taken by the learned company judge that this application is within time as against the directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity, nor did they ask the official liquidator to produce before court any particular book or books. This statement has not been controverted by any of the learned counsel for the appellants. It is unfortunate that at no stage of the various proceedings was any inventory of the books and documents with the bank prepared. Even when P.W. 4, Kotbagi, special officer appointed by the High Court of Bombay, took charge of the bank, such an inventory does not appear to have been made nor was such an inventory made when he handed over charge of the bank to the directors when his term as special officer expired. It is also not known whether the official liquidator of the Bombay High Court had prepared any such inventory. On the transfer of the winding up proceedings of this bank from the High Court of Bombay to this court, no such inventory was sent along with the books and records of the company. As pointed out by the learned company judge, there is evidence to the effect that the liquidator appointed by the Bombay High Court or some representative of his had sold by auction at Belgaum some papers belonging to the company. It is not known whether the papers so sold included some im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made and the official liquidator appointed in the case at whose instance the application is presented may have no personal knowledge of the details relating to the alleged transactions. He is bound to rely on the records of the bank, such as are available to him, and, therefore, it is only fair that no such burden of proving act of misfeasance or breach of trust in respect of the assets of the bank should be placed on the applicant as to render his task impossible. This appears to be the meaning underlying section 45H of the Banking Companies Act. Under the law all that has to be shown by the applicant or should appear to the court from the evidence is that there is-a prima facie case made out against the officer complained against, in order to make it obligatory on the court to pass an order directing the officer to repay or restore the assets unless the person concerned proves that he is not liable to make the repayment or restore the property To make out a prima facie case, of course, the burden lies upon the applicant; but if the records do show ( a prima facie case, the task of rebutting that evidence or of exonerating himself from liability would lie upon the perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the bank. Article 108 of the articles of association of this company reads as follows: "The business of the company shall, subject to the control of the board, be carried on by the managing director or the assistant managing director in the name of the company and all contracts, matters and things, which shall be entered into, executed, taken or done by him, on behalf of the company, and all receipts and discharges signed by him as such shall be good and sufficient to all intents and purposes and binding on the company." Article 108( a ) of the said articles reads as follows: "The managing director shall out of the money received by the company make all necessary and proper disbursements in carrying on the business of the company, and shall cause proper accounts to be kept of all transactions of the company and shall, once in every year, settle and adjust such accounts with the board and auditors and shall make out the balance-sheet and profit and loss account and all the returns and statements required by the Acts to be audited and signed." The board of directors had executed a power of attorney (exhibit A-39) in favour of respondent No. 2, managing director (S.K. Sama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned counsel for the appellants contended that, since the articles of association of the company stated what the powers, duties and responsibilities of the managing director should be, there was no necessity for the directors to pass any formal resolution or to issue instructions formulating or defining the functions, duties and responsibilities of the managing director or to indicate the extent to which he can act on his own responsibility independently of the board. We think, this criticism by the learned counsel is well founded. We do not think that there was any breach of duty or negligence on the part of the directors by their omission to pass any such resolutions or to give any such instructions. It was next contended by the learned counsel for the appellants that the learned company judge erred in drawing a conclusion that the directors had taken undue advantage of their position as such and departed from the standard of care and rectitude expected of them and, on account of such conduct on their part, it became difficult, if not impossible, for them to exercise supervision over the managing director and the subordinates or to correct them or to take proper disci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the appellants. It does not admit of any doubt that the directors cannot totally abdicate their powers and functions and divest themselves of responsibility for proper management of the company. But the question is whether the directors are entitled to rely on the honesty and integrity of the managing director and if so, up to what stage; or whether they were bound to keep watch and vigilance over the conduct of business of the company by the managing director and other officers of the bank and, if so, from when. In Nationl Bank of Wales Limited l In re [1899] 2 Ch. 629, 673 Lindley M.R. observed as follows: "Was it his (director's) duty to test the accuracy or completeness of what he was told by the general manager and the managing director ? This is a question on which opinions may differ, but we are not prepared to say that he failed in his legal duty. Business cannot be carried on upon principles of distrust. Men in responsible positions must be trusted by those above them, as well as by those below them, until there is reason to distrust them. We agree that care and prudence do not involve distrust; but for a director acting honestly himself to be he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information and advice, of the chairman and general manager, as to whose integrity, skill and competence he had no reason for suspicion. I agree with what was said by Sir George Jessel in Hallmark's case [1878] 9 Ch.D. 329, and by Chitty J. in Denham Co. In re [1884] 25 Ch. D. 752, that directors are not bound to examine entries in the company's books. It was the duty of the general manager and (possibly) of the chairman to go carefully through the returns from the branches, and to bring before the board any matter requiring their consideration; but the respondent was not, in my opinion, guilty of negligence in not examining them for himself, notwithstanding that they were laid on the table of the board for reference " The following are observations of Romer J. in City Equitable Fire insurance Company Limited In re [1925] Ch. 407, 429 : " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements of the company. On the facts of that case, his Lordship held that, instead of showing reasonable diligence, the directors delegated all control to the agent and so enabled him to misapply the company's money. We do not think that in this case his Lordship laid down any principle different from that laid down in the aforesaid decisions as can be seen from the following observations of his Lordship: "In deciding such a question the court has to hold the balance fairly, in order to avoid alternative dangers. On the one hand, the interests of shareholders and of creditors must be safeguarded against negligence and misconduct. On the other hand, the duties of directors must not be made so onerous as to cause every honest and prudent man shrink from accepting such a post. If directors were to be made pecuniarily liable for every slip and error, all prudent men would refuse to act, and companies would be at the mercy of fools or rogues." In Govind Narayan Kakade v. Rangnaih Gopal Bajopadhye AIR 1930 Bom. 572 , the directors of a bank appointed managing agents giving them wide powers. On account of reckless advances made by the managing agents, the bank had to be wound up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laying down a proposition that the directors cannot trust the manager or officers of the company to perform their duties honestly until there is any reason to distrust them. If his Lordship meant to lay down any such proposition as contended by Mr. Sunderaswamy, we must respectfully dissent from the view taken by his Lordship. That a director is not liable for mere omission to take ail possible care is clear from the following observations of Lindley M.R. in Lagunas Nitrate Company v. Lagunas Syndicate [1899] 2 Ch. 392, 435: "The amount of care to be taken is difficult to define; but it is plain that directors are not liable for all the mistakes they may make, although if they had taken more care they might have avoided them: see Overend, Gurney Co. v. Gibb [1872] L.R. 5 H.L. 480. Their negligence must be not the omission to take all possible care; it must be much more blameable than that: it must be in a business sense culpable or gross. " Applying the principles laid down in the above decisions to the facts of the present case, the position that emerges may briefly be stated as follows: ( i )The directors were not bound to give continuous attention to the affair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Reserve Bank dated March 7, 1951, disclosed very serious defects in the working of the bank and in particular, this report pointed out that the bank's account books and other records were not properly maintained and there was no system of balancing ledgers at frequent intervals. It also pointed out that there was no system of obtaining periodical returns from branches and carrying out inspection of their accounts. When this report was brought to the notice of the directors, they should have given serious thought to the acts of mismanagement brought to their notice and should have taken prompt and effective steps for setting right the affairs of the bank and to prevent further losses to the bank. If the directors failed to do so, their conduct would, in effect, amount to shutting their eyes to the danger and wilful neglect. Respondent No. 5, Ajgaonkar, has stated in his evidence that in relation to the defects pointed out in exhibit A-1, the directors appointed R.P. Joshi to rectify the defects and that at subsequent meetings they used to ask the managing director to expedite the removal of those defects. Respondent No. 3, Tendolkar, has gone so far as to say in his evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross and wilful negligence thereafter. We think the directors are liable for the losses sustained by the bank subsequent to their becoming aware of exhibit A-i. In order to fix the liability of directors other than the managing director, we have to ascertain the losses due to shortage of cash and manipulation of bank balances subsequent to March, 1951. Unfortunately, the official liquidator does not appear to have realised that the starting point for fixing the liability on the directors was the date of exhibit A-1. Hence no attempt has been made by the official liquidator or the witnesses examined to ascertain what portion of the total loss of Rs. 2.65 lakhs (on account of shortage in cash and manipulation of bank balances) can be attributed to the period prior to March, 1951, and to the period sub-sequent thereto. In the circumstances, we must ascertain as best as we can., out of the meagre material available, what losses took place subsequent to March, 1951. Regarding losses due to shortage of cash, the two items, namely, loss of Rs. 42,000 at Aronda Branch and of Rs. 10,000 at Kolhapur branch, undoubtedly took place subsequent to March, 1951. Neither the reports, exhibits A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . By then exhibit A-1, the first report of the Reserve Bank, had already been discussed by the board of directors. It is also in evidence that he attended very few meetings of the board of directors and that he had not borrowed any money. Until exhibit A-2, the second report of the Reserve Bank dated March 5, 1953, was discussed before the board of directors, there was nothing to impute notice to him of the acts of mismanagement of the bank. After the directors became aware of exhibit A-2, Porwal has also shown the same gross negligence as the other directors. Hence, he cannot be altogether exonerated, though his liability to contribute to the assets of the company should be limited at Rs. 10,000 only, together with interest at six per cent. from the date of the order till the date of payment. He will be entitled to the refund of any sum paid by him in excess of the aforesaid sum. Respondent No. 7, Kalghatgi, became a director only in July, 1953. By then exhibit A-2, the second report of the Reserve Bank, had been discussed by the directors. Since the original proceedings book of the company is not available, there is no reliable material to show when exactly he became aware of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The attempt of respondent No. 2 has been to show that he knew nothing of banking, that he was not even fully acquainted with the responsibilities of the managing director and consequently he could not exercise any effective control and supervision over the working of the bank and that he depended upon the honesty, skill and competence of the other officers of the bank. He has also admitted that he made no attempts to acquaint himself with the work of the bank. In taking this stand, little did he realise that if he undertook a task without possessing the requisite knowledge, training and experience, which are usual in that calling, he is liable for breach of contractual duty. He cannot escape the responsibility for the consequences flowing from his lack of knowledge, training, experience and competence. Respondent No. 2, as managing director, is equally responsible with other directors for the loss of Rs. 65,000 proved to have taken place subsequent to March, 1951, when they became aware of exhibit A-1, the first report of the Reserve Bank. Besides, respondent No. 2, who was the managing director, is also responsible for other losses due to shortage of cash and manipulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this statement, these two sums of Rs. 53,000 and Rs. 58,500 are shown as the sums adjusted and to be adjusted by him. Even on December 8, 1954, he did not deny his liability to pay these two sums. Thus, even according to his own admission, respondent No. 2 had undertaken to pay Rs. 1,11,500 to the bank. Hence, this sum can safely be taken as his liability for his negligence and breach of duty. Rupees 14,000 has been realised from him by the sale of his car and truck and another sum of Rs. 24,000 has been realised by the sale deed executed by him in favour of the bank conveying his house. Deducting these two sums, he is still liable for a sum of Rs. 73,500. Thus, his liability to contribute to the assets of the company can safely be fixed at Rs. 73,500 though it is likely that the extent of loss resulting from his negligence and breach of duty as managing director is much larger. He is also liable to pay interest on this sum of Rs. 73,500 at 6 per cent, per annum from the date of the order of the learned company judge till payment. In the result, these appeals are allowed in part and, in modification of the order of the learned company judge, we direct respondents Nos. 2, 3 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
