9911796707
TMI Blog1968 (10) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... spondents Nos. 10 and 11 in Application No. 1 of 1959 are respondents Nos. 9 and 10 in Application No. 2 of 1959. Save where expressly indicated, reference would hereinafter be made to the ranks of the parties as before the trial judge. Application No. 2 of 1959 sought to make the respondents liable for misfeasance and breach of trust, in relation to the company, and for misapplication and retainer of the money and property of the company, and as being accountable for such money and property. The misfeasance, misapplication, retainer, breach of trust and accountability were claimed under six principal heads. Firstly, it was complained that respondents Nos. 1 to 8, the directors of the company, did not exercise adequate control in the matter of advances of the company's funds, and, in consequence, respondents Nos. 9 and 10 advanced large amounts to various parties without taking adequate securities for the advances and from whom it was not possible to recover the whole or a substantial portion of the advances. Not only were steps not taken to recover the amounts covered by the advances, but the board of directors ratified the advances on November 10, 1955. A list of such advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter of advances, and, in consequence, respondents Nos. 9 and 10 advanced large amounts to various parties without adequate security. The directors did not take effective steps to recover those advances ; (2) that the amounts mentioned in schedule II, were withdrawn and misappropriated ; that the directors did not take appropriate steps to recover the said amounts from respondents Nos. 9 and 10; and that the misappropriations were covered up by making false entries of fictitious advances, as indicated in schedule III, with the knowledge and consent of the directors ; (3) that the liquidator had not established any manipulations in the profit and loss account ; (4) that the fixed deposit amount of Rs. 10,000 of Sri Narayanaswamy was misappropriated but probably this may not be the direct result of misfeasance of the directors as it could be discovered only if the directors looked into the account books item by item ; and that respondents Nos. 3 and 5 had sanctioned a loan of Rs. 7,500 to the 9th respondent without security; (5) that there were manipulations in the bills negotiated account, as a result of which the bank must have lost at least Rs. 61,800 as shown in schedule V ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved on July 4, 1968. It was prayed that the entire proceedings initiated by the liquidator be declared to have abated. The cases were re-posted to argue the subject-matter of the petition alone. Arguments on the same were heard on July 25, 1968, and adjourned at the request of counsel to July 31, 1968. After further submissions made on that day on the subject-matter of the C.M.P., orders thereon were reserved. We have repelled a similar argument addressed to us in A.S. No. 134 of 1963 in the judgment just delivered in that appeal and other connected appeals. For reasons recorded in paragraphs 12 to 14 therein, we have no hesitation in rejecting the contention that the proceedings initiated by the liquidator terminate on the death of the 3rd respondent after decree and pending appeal. We further hold that, as the 3rd respondent died after conclusion of arguments and before delivery of judgment in his appeal, this judgment of ours would have effect as against him as if it were pronounced while he was alive. The learned trial judge by his order directed that the liquidator will not in any event be entitled to realise more than Rs. 6,50,000 and one set of costs by executing either o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eded against has been guilty of misapplication, retainer, misfeasance, etc., resulting in loss to the company as a direct consequence of the act complained of. It was argued that mere nonfeasance would not be included within the purview of the section. The observations in some cases seem to countenance such a view. But the view of Jessel M.R. in Ex parte Pelly [1882] 21 Ch. D.492 , the views expressed in In re Kingston Cotton Mills Company (No. 2) [1896] 2 Ch. 279 and the decision of Maugham J. In re Etic Ltd. [1928] Ch. 861 are sufficiently clear that the English section on which the section in the Indian Act has been modelled covers a breach of trust in the wide sense, including a breach of trust by negligence or something of that kind. The same view has been taken in some of the Indian decisions also. (See Rao Sahib V. Subbayya v. Machayya [1942] 12 Comp. Cas. 102 ; A.I.R. 1942 Mad. 365 and M.A. Malik v. V.S. Thiruvengadaswami Mudaliar [1949] 19 Comp. Cas. 311 ). The facts presented here and the conclusions that we have formed do not warrant any greater elaboration or a more detailed examination of the legal position. We shall first take up the second he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds only on July 29, 1955. The withdrawals shown in schedule II are all before this date. There is no evidence to connect any of the directors with these withdrawals when they were effected. A claim has, however, been made against the directors on the ground that they did not take appropriate steps to recover the amounts withdrawn from respondents Nos. 9 and 10. On the other hand, when they were apprised of these withdrawals as we have held they were, on July 29, 1955 far from taking steps to recover the amounts from respondents Nos. 9 and 10, they were privies to covering up the misappropriations by causing false and fictitious entries to be made in the books of the bank showing these misappropriated amounts as having been advanced to customers of the bank. This conduct of theirs constitutes misfeasance and would attract liability under section 543 of the Act. But we do not think any fresh or independent loss on this account has been caused to the bank, in addition to the loss occasioned by the misappropriations resulting from the withdrawals mentioned in schedule II. Having found the directors liable in regard to these entries in schedule III, we do not feel justified in dupli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 1955 were both false ; but that the respondents Nos. 1 to 8 might not have known the real position that the bank was working at a loss during the year 1954. As far as the 1955 balance-sheet is concerned, the learned trial judge held that the directors (respondents Nos. 1 to 8) must have known about the misappropriations prior to November, 1955, and therefore the balance-sheet for 1955 was false and incorrect to the knowing of the directors. The learned judge noticed that there was no contention on behalf of the directors that the dividends declared in 1955 balance-sheet were not actually paid to, or received by, the shareholders, and that the onus was on the directors to prove that the dividends were not actually paid. We are relieved from considering the liability, if any, of the directors, in respect of the 1954 balance-sheet, as there is no appeal by the liquidator. But in respect of the 1955 balance-sheet, which alone is the subject-matter of the appeal before us, we are of the opinion that liability under section 543 of the Act is attracted. Exhibit D-39 is the memorandum and articles of association of the bank. Clause 120 of the articles of association declares that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Narayanaswami. The first of these relates to the last phase of repayment to the 3rd respondent by the 9th respondent of the "unaccounted money" of the former entrusted with the latter. We have discussed this transaction in detail in paragraphs 39 to 41 of our judgment in A. S. Nos. 137, 139, etc., of 1963. From the circumstances disclosed, which we have detailed in the said judgment and which we need not repeat, we hold that there is a clear misapplication of the bank's funds to the extent of Rs. 7,500 which was paid to the 9th respondent by his own cheque as manager of the bank. The payment was sanctioned by respondents Nos. 3 and 5. We have discussed the evidence in A. S. No. 137 of 1963, etc., and there is little doubt that this amount was paid to the 9th respondent at a time when the bank was in distress and the 9th respondent had landed himself in loss as a result of his satta transactions and was not in a position to repay. Rs. 7,000 out of this amount went in repayment of the dues of the 3rd respondent and the remaining Rs. 500 was credited to the account of the 9th respondent. The learned trial judge held the 3rd respondent liable for Rs. 7,000 as the said amount went direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust". To the same effect are the recitals in paragraph l(a) of the summons. These were traversed by the various respondents, of which paragraphs 22 and 23 of the points of defence of the 1st respondent may be taken as representative. There was a general denial of the allegation that the Directors did not exercise adequate control in the matter of advances of the company's funds, followed by the plea that an executive committee had always been functioning for the purpose of sanctioning loans and that several loans sanctioned by the committee or by the supervisory director after his appointment had been granted only after a careful consideration of the circumstances. It was also pleaded that the 9th respondent was a person of large experience in banking business and the directors had no reason to distrust him. There was no specific denial of the allegations that the advances were irrecoverable or had been made without taking proper security. The learned judge noticed the liquidator's case that the advances in schedule I were made without the sanction either of the board of directors or of the executive committee, and observed : "It is not contended by the directors that any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the bank. Counsel for the directors were at pains to point to us that the executive committee had reviewed many of these advances and directed that suitable action be taken in regard to them from time to time. For instance, attention was called to the minutes recorded in exhibit P-63, regarding the action taken by the committee on August 19, 1954, August 20, 1954, and October 26, 1954, in regard to item 3 of schedule I; the proceedings dated January 14, 1954, in regard to item 4 ; the sanctioning of limits on February 4, 1954, regarding items 32 and 33 ; to the issuance of directions regarding items 8, 9, 10 and 11 by the proceedings of the executive committee on January 24, 1954; to the proceedings dated September 26, 1954, reviewing various items of advances, and such other matters. It was complained that these had escaped the attention of the learned trial judge. None of these, however, establish that the executive committee had initially sanctioned the advances or that the manager had acted on its orders in granting advances as required by proceedings of the board of directors, dated September 6, 1953, to which we have called attention. Whether these further steps taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business transacted therein, and the efficiency and trustworthiness of the delegate, a delegation of powers would per se carry with it a denudation of responsibility. The least that the responsibility placed on the directors by statute and by the articles of association would require and expect them to do, is to see that the delegate or the confidant functioned properly and effectively. In the present case, we find that although it was recorded in exhibit P-58 that a meeting of the executive committee shall be called at least once a month to consider and review the advances, this was not followed in actual practice, especially at the later stages after 1954. We find again that early in 1954 the Reserve Bank had commented in exhibit P-62 report about the lack of supervision and control by the board of directors in the matter of granting advances and about the passivity of the committees constituted from time to time for sanctioning and reviewing the advances. It had also commented upon the undefined powers granted to the manager in the matter of advances and credits. The directors were aware of this report at least in July, 1954, and their action in not seeing that their resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es mentioned in schedule I cannot be regarded as irrecoverable. Above all, the liquidator's affidavit dated June 4, 1968, filed before us was relied on to show that a sum of Rs. 41,225 had been thus far realised by the liquidator out of what he characterised as irrecoverable advances. On these aspects, which bear on the loss caused to the bank, the learned trial judge expressed himself thus : "Last I come to the amount of loss sustained by the bank and the respective liabilities of the respondents. According to the liquidator, who is examined as P.W. 24, the loss comes to over Rs. 7,00,000, namely, the aggregate of the unrealisable advances shown in schedule I of Rs. 4,76,746, the amounts withdrawn from other banks and misappropriated of Rs. 1,60,500 shown in schedule II, the sum of Rs. 12,311 being the dividends declared, Rs. 61,800 being items 22 to 24 in schedule V and the sum of Rs. 10,000 being the fixed deposit of Narayanaswami. Probably the last item may not be the direct result of the misfeasance of the directors because that amount could be discovered only if the directors looked into the accounts item by item. Similarly, the dividend declared for 1954 might also be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court under section 543 of the Companies Act, 1959 (1 of 1956), and the High Court has reason to believe that a property belongs to any promoter, director, manager, liquidator or officer of the banking company, whether the property stands in the name of such person or any other person as an ostensible owner, then the High Court may, at any time, whether before or after making an order under sub-section (1), direct the attachment of such property, or such portion thereof, as it thinks fit and the property so attached shall remain subject to attachment unless the ostensible owner can prove to the satisfaction of the High Court that he is the real owner and the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to attachment of property shall, as far as may be, apply to such attachment". The words of section 45H of the Act may be co-related to those occurring in section 543(1) of the Companies Act, which may also be extracted : " 543. (1) If in the course of winding up a company, it appears that any person who has taken part in the promotion or formation of the company, or any past or present director, managing agent, secretaries and treasurers, manager, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 45H of the Banking Companies Act is applicable to a case of mis-application of the bank's funds. Having regard to the conclusion that we have come to in these appeals that the directors to the extent to which they or any of them are liable are guilty of mis-application of the funds of the bank, section 45H is attracted. It is therefore unnecessary for us to consider in these appeals whether section 45H covers only the cases covered by section 543(1)( a ) of the Companies Act 1956, and does not cover the cases contemplated by clause (1)( b ) thereof. In the result, we record our findings as follows : (1) On the first head of claim we find that the liquidator has not proved the loss caused to the bank by reason of the irrecoverable advances listed in schedule I and therefore is not entitled to succeed on this head of claim ; (2) On the second head of claim we find that the directors were parties to the falsification of the bank's accounts by making entries relating to the fictitious advances shown in schedule III for the purpose of covering up the misappropriations effected by withdrawal of the bank's monies from its account with other banks as shown in schedule II. We find th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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