9911796707
TMI Blog1976 (1) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... ohani (Opposite party No. 3-since also dead), 2.Lakshmi Narain Bhada (O.P. No. 5), 3.Chattu Ram Bhadani (O.P. No. 6), 4.Gokul Chand Bangur (O.P. No. 9), 5.B. P. Khaitan (O.P. No. 14), 6.M. L. Pyne(O.P. No. 18), 7.N. K. Bajoria (O.P. No. 19), 8.Sanwal Ram Bhalotia (O.P. No. 20), 9.Banarsi Prasad Jhunjhunwala (O.P. No. 21-since also dead), and 10.Damodar Prasad (O.P. No. 22). were expunged on the statement of Mr. S. N. Dutta, then appearing on behalf of the official liquidator, as he did not "think that he can make out a case against them". On behalf of Lakshmipat Singhania (original opposite party No. 10), who was then represented by Mr. Sidharth Shankar Ray, and Birdhi Chand Bhalotia (original opposite party No. 13), it was contended that their names should also be expunged as there war no prima facie case against them in the petition in question. The stand of these opposite parties was opposed on behalf of the official liquidator. The then learned company judge (Sahai J.) heard learned counsel for the parties on that matter and by his order dated September 13, 1963, came to a conclusion that no prima facie case for action under section 235 was made out against those two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as the official liquidator, he also investigated into its affairs with the help of the firms of certain chart3red accountants and other accountants appointed by this court from time to time and came to the conclusion that the opposite parties had illegally made use of for their own purpose and/or transacted with the assets of the company and/or misapplied and retained the funds of the company, causing it heavy losses, and thus became liable and/or accountable to the company and were guilty of misfeasance, malfeasance, non-feasance and/or breach of trust, conversion and fraud in relation to the company and, consequently, liable to the company. The principal allegations made by the official liquidator against the various directors of the company are as follows : 1.Ryam Sugar Company Ltd. & Hindusthan Coal Co. Ltd. The capital raised under the permission of the Examiner of Capital Issues of the Government of India, in view of rule 94A of the Defence of India Rules, 1944, and later on released by the Government on the representation of the company that the money was immediately required for payment of the price of the machineries to be installed in the factory at Warsaliganj, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ohan Lal Jajodia (original opposite party No. 11) and Onkar Nath Jajodia (original opposite party No. 16). I shall refer to the defence and the stand taken by the concerned opposite parties in brief a little later. The following issues were framed in this case: 1.Whether all the opposite parties or any one of them is liable for the act of misfeasance or misconduct in making the purchase, pledge or sale of the shares of M/s. Ryam Sugar Company Limited for the value of Rs. 15,09,000 and thereby liable to repay or restore the same or any part thereof? 2.Whether the loss suffered by Messrs. Gaya Sugar Mills Limited for a sum of Rs. 11,72,232 in their deal with Messrs. Mirrless Watson Company Limited was on account of any act of misfeasance or misconduct on the part of any one of the opposite parties ? If so, is any one of them liable to the official liquidator to repay or restore the said loss or any part thereof ? 3.Did the company, Gaya Sugar Mills Limited, suffer a loss of rupees five lakhs for the crushing season 1949-50 on account of any act of misfeasance or misconduct on the part of any one of the opposite parties ? If so, is any one of them liable to the official liquidator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits in its business and its managing director, Lala Guru-saran Lal, and his family occupied a very respectable position in the business circle. Lala Gurusaran Lal was considered to be a clever businessman and had high connections in business and political circles. He was conferred the title of C.I.E. by the British Government. He was also, during the relevant years, the Trade Adviser to the Government of Bihar. According to the evidence of Onkar Nath Jajodia "he was held in great esteem in Bihar and the rest of India. He was president of various chambers of commerce, trade associations and President of the Federation of Indian Chamber of Commerce and Industries in 1946". In the year 1944, the company decided to set up a modern sugar factory at Warsaliganj, and as already stated earlier, raised its capital up to rupees one crore by issue of shares and floating debentures (vide exhibit 13/v). The company then entered into various contracts with a company, namely, Messrs. Mirrless Watson Company Limited of Glasgow, having its registered office in London, for purchase of various machineries and electrical equipments, etc., for setting up the Warsaliganj factory. According to the stipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e delivered in time so as to catch the next season 1946-47." In the report of the directors for the succeeding year, namely, year ending the 30th September, 1946 (exhibit 1/c), the directors had reported as follows : "So far as the erection of our new factory is concerned the plant could not be manufactured by Messrs. Mirrless Watson Co. Ltd., Glasgow, due to various difficulties in the United Kingdom. Our vehement protests and approaches to the various departments of the British Government as well as Government of India could prove of no avail. However, we feel gratified to say that we have received more than 80% of the machinery by now and the construction of the factory including foundation for all the machinery have been completed. About 25% of the machinery have already been installed and it is expected that the erection of the remaining machinery would be completed by December. So far as 20% of the machinery is concerned, they are mostly motors and electrical equipments. These were also to be shipped in September but by the time the report was drawn no information of their being shipped had been received but it is expected they would be shipped in a short time. Everything g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y No. 8) who, as already stated above, is since dead ; "20. That some time in March, 1946, the managing director of the company received a letter from the High Commissioner for India in U.K. enclosing therewith a programme for delivery of the said machineries by Messrs. Mirrless Watson & Co. Ltd., Glasgow. On receipt of the said letter, the managing director instructed the solicitor to apply for release of the share capital and the matter was placed before the board of directors of the company, for their direction and approval in the meeting held on July 8, 1946, and the same was duly approved by them. As I was a director at that time I have got copies of the minutes of some of the meetings of the board of directors which I attended ........." In paragraph 29, it was further stated on behalf of Arjun Prasad as follows: "............. The said Mirrless Watson & Co., however, could not deliver the said goods within that stipulated time and deferred the date of delivery on some pretext or another. During this period the said Mirrless Watson & Co. Ltd. had all along assured the company that the delivery would be effected by the promised date but as noted hereinbefore the said assura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arnest, found the money surplus and, instead of keeping it idle, thought it prudent to invest it somewhere and ultimately decided to purchase 21,100 shares of Ryam Sugar Company Ltd., another prosperous sugar company, which was considered an action in keeping with the scheme and articles of the company of having another sugar factory. By purchase of these shares, it was perhaps thought that the company would acquire a controlling power in this sugar company and earn good dividends." In his affidavit-in-reply to the petition of Harihar Prasad Lohani and others by the liquidator dated January 4, 1957, he has stated that 21,100 Ryam Sugar Company shares were purchased by the company between the 1st March to 27th April, 1946, and the Hindusthan Coal Company Ltd. shares on the 16th of December, 1944. In this affidavit the liquidator had contended that Harihar Prasad Lohani, Lakshmi Narain Bhadani and Vishnu Prasad Bhadani (original opposite parties Nos. 3, 5 and 7, respectively), who were directors during the relevant period, were liable for the loss caused to the company on these amounts as they had taken pa! t in those transactions. Admittedly, except opposite party Jogeshwar Prasad, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Suit No. 1531A of 1951 for the breach of contract on the part of the said Mirrless Watson &Co. Ltd ........" In the reports of the directors for the years ending 30th of September, 1946 and 1947 (exhibits 1 and 1/a, respectively), the following statements were respectively made with respect to the shares of Ryam Sugar Co. Ltd. "Regarding the Ryam Sugar Co. Ltd. share scrips, they will be produced for inspection by the auditors at the next audit. The shares of the Ryam Sugar Co. Ltd. were acquired in or about July, '46. The dividend on the above shares for the period ending 30th June, '45, had been declared before the shares were purchased. The dividend of Ryam Sugar Co. Ltd. for the year ending 30th June, '46, were declared and received after the accounting period of our company and will be taken into account in the balance-sheet for the year ending 30th September, '47. A total sum of Rs. 14,77,000 continues to appear under the head ' Investments ' in the balance-sheet for the cost of 21,100 ordinary shares at Rs. 70 per share (face and paid up value being Rs. 10 per share) of Ryam Sugar Company Limited. We have now been shown share scrips for 36,200 shares in the said company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision taken for purchasing the majority shares of Ryam Sugar Company, thereby acquiring a controlling power in the affairs of that company as also the sole selling agency of that company, can be said to be an act of bad faith, particularly when the said company was considered to be a highly prosperous company, so much so that the Central Bank of India paid the entire sum of Rs. 14,08,785-6-0 being the value of the shares purchased from Ryam Sugar Co. Ltd. for 21,000 shares, as it appears from the ledger of the Central Bank of India Ltd. For the year 1946 (exhibit 8/1). It seems to me that the company's trading capital gradually became blocked up in the Warsaliganj scheme in setting up the factory and purchasing machineries from Messrs. Mirrless Watson Company Ltd. in the years 1946 and 1947, without any return, and as it appears from the statement made in the affidavit-in-opposition filed on behalf of Arjun Prasad, it became impossible for the company to complete the Warsaliganj factory as it could not raise additional amount of about Rs. 40 lakhs needed for the completion of the said plant, which became beyond the means and capacity of the company and the persons running t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . If the company had already entered into the transaction for the purchase of Ryam Sugar Company's shares, it might not have been thought reasonable and proper by the incoming directors, namely, the present opposite parties Nos. 2 to 5 to stop payment of the price of the shares. The action called for by these opposite parties, according to the contention of the learned counsel for the liquidator, would not have been reasonable and proper and might have landed the company in further troubles and earned bad reputation. I may also refer to a further fact in this connection. As already said earlier, the company had instituted Suit No. 1531A of 1951 in April, 1951, on the original side of the Calcutta High Court against Messrs. Mirrless Watson Company Ltd. for recovery of a sum of Rs. 11,41,780-12-0 on the ground of breach of contract in performing the contract on their part in time. Earlier to that, Messrs. Mirrless Wacson Company Ltd. had also instituted a similar Suit No. 2963 of 1950 in July, 1950, in the same court against the company for a decree for Rs. 9,72,232-9-1 as damages suffered on account of the return of the shipment and the loss suffered in re-sale of the materials. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerns under the management of the aforesaid company, including Gaya Sugar Mills. He speaks only with respect to the forfeiture of a sum of Rs. 8 lakhs by Messrs. Mirrless Watson Company in the year 1948. His services were later transferred for some months to the office of the committee of directors of Gaya Sugar Mills. He speaks mostly with respect to the pledge of Ryam Sugar Company shares and the dispute that arose with respect to its sale by Nandkishore Bajoria and Mahadeo Lal Jhunjhunwala which went up to the Supreme Court, with which I am not very much concerned in this case. S.P. Tayal (P.W. 6) is the Registrar of Companies. He is also practically a formal witness. Ram Ekbal Singh (P.W. 7) is a Technical Assistant in the office of the Registrar of Companies, and is not a witness on the merits of the case. M.L. Nigam (P.W. 8) is an Assistant of Messrs. S. Vaish & Company, Chartered Accountants, appointed by this court and has proved certain reports and documents of his company. M.P. Sarkar (P.W. 9) is an Assistant of Messrs. Singhi & Company, Chartered Accountants. He is also a formal witness and has proved certain reports of his company. D.M. Dass (P.W. 10) is a Tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a. loss of about three lakhs only on the resale of the shares (vide discussion made in paragraphs 33 and 35 of the judgment.) Issues Nos. 1, 2, 4 and 5 must, therefore, be decided against the petitioner. Now, I propose to deal with the case of each of the opposite parties separately. I would first take up the case of Jogeshwar Prasad. He has examined himself as O.W. 1. He was holding an M. Sc. degree and was acting as the chief chemist as well as the general manager of the company. As the chief chemist he was in-charge of the quality control of the company and its production. He has stated that he was occupied primarily in the factory and day to day management of the company and had no hand in the policy matters of the company. He was not holding the qualifying shares of the company to be appointed as a director, but was appointed as such, as the managing director nominated him on account of his technical qualifications under the enabling article 97 of the articles of association of the company. He remained a director from February, 1940, to 24th June, 1948, i.e., all material time, and as already stated above, he was the cousin of the wife of Gurusaran Lal (vide evidence of P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als, including Register of Directors (exhibit 6), etc. This date is very much relevant as the company had already placed orders for purchasing various plants and machineries for the establishment of its ambitious new sugar plant at Warsaliganj from Messrs. Mirrless Watson Company Limited of the United Kingdom in September, 1945, with a definite understanding that the manufacturers would supply the ordered machineries and plants during the ensuing current season, which has already been discussed earlier. The special case of this opposite party is that he was living at Calcutta and he could certainly trust and repose confidence in the managing director who was its founder and enjoyed a high reputation at that time and, therefore, he cannot be held responsible for any of the acts or the losses that the company ultimately suffered. The affairs of advancing loans to Messrs. Bhadani Brothers or J.R. Commercial Corporation had all started before he joined as a director, over which he had no control, nor he was in any way concerned with those firms, which, as already indicated earlier, exclusively belonged to the family members of Gurusaran Lal and this opposite party could not have derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties Nos. 10 and 13, respectively), already referred to above; relying upon a number of English decisions, held that a director of a company cannot be made liable for decisions taken by a co-director at meetings which he did not attend, unless it can be shown that he took an active part in giving effect to the decisions (vide In re City Equitable Fire, Insurance Company Ltd. [1925] 1 Ch D 407 at pages 428 and 429). It is the admitted case of the petitioner that the purchase of Ryam Sugar Company Limited shares was made between March and May, 1946, whereas Sohan Lal Jajodia became a director of the company on the 26th of May, 1946, along with Lakshmipat Singhania. While considering the case of Lakshmipat Singhania, Sahai J. held that it was difficult to "conclude that he knew anything about the purchase being in contravention of conditions" imposed by the Examiner of Capital Issues and the Government of India. Mr. Verma, appearing for Sohan Lal Jajodia, therefore, contended seriously, relying upon the aforesaid authority of Sahai J. that the case of the official liquidator against this opposite party stood on no better footing. Once the company had already decided to purchase the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter known to the company and, therefore, this statement made on behalf of the company is very much relevant. By this observation, however, I do not mean to lay down that it is not open to the official liquidator to challenge the transaction itself and prove that the stand of the company then taken before this court was unwarranted and misleading. But as already stated above, no material has been brought on the record to take a contrary view. The official liquidator has stated in the misfeasance petition itself that by purchase of the shares of Ryam Sugar Company Ltd., Gurusaran Lal and his nominees became major shareholders and were in a position to control the affairs of that company. Consequently, their firm, Jitanram Ramchandram, acquired the sole selling agency of the products of Ryam Sugar, thereby earning considerable profit through their firm for themselves at a loss to the company. It is apparent, therefore, that even on the face of the allegations made in the petition under consideration, no case is made out even on merits against any one of the present opposite parties directly. The directors having the complete controlling authority and responsible for all these deals h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manufacturers, to forfeit the money. All these successive events are practically inter-related and form part of one chain and followed as necessary corollaries leading to a major catastrophe which the company could not face and lost its substratum. Now let me consider the specific issues framed against Sohanlal Jajodia, namely, issue No. 8, which is as to whether he is guilty of failure to account for the sum of Rs. 3,99,680, being the realisation of the sale proceeds of the Warsaliganj factory. The relevant allegations have been made in paragraph 42 of the misfeasance petition. It is said that when large scale misappropriation and misapplication of the company's funds and other acts of gross mismanagement and irregularities on the part of Gurusaran Lal and his son, Arjun Prasad, were detected in relation to the company's affairs, the directors of the company at a meeting held on the 7th October, 1948, appointed a committee of directors to control the management and other affairs of the company, consisting of Sohanlal Jajodia and Bhagwati Prasad Khaitan, which is said to have practically assumed the complete management of the affairs of the company, and in. that course, handle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors by this court to audit the accounts for the years ending 30th of September, 1949, 1950 and 1951. After keeping the books and papers for a long time, they submitted a report for the period ending 30th September, 1949, pointing out various defects in the books and papers of the company and stating that they were unable to submit an audit report with balance-sheet and profit and loss account. This report, therefore, is not conclusive on which a court of law can fasten liability and make an order to repay any sum. The official liquidator in this court has also signally failed to establish his case with materials on which a judgment can be rested. This court ultimately called for the papers from Messrs. Singhi & Co. and on the 4th January, 1955, appointed Messrs. S. Vaish & Co. as auditors for all the aforesaid three periods. Their report is exhibit l(c). Messrs. Vaish & Co. also could not come to any definite conclusion in the absence of the relevant documents which the company failed to supply them. It would be relevant to quote here paragraph 12 of the said report of the said auditors which is as follows : "12. With respect to the maintenance of the books of account the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, as per an inventory running into 339 pages alleged to have been prepared en spot." It was, therefore, rightly contended on behalf of the opposite party by Mr. Rama Kant Verma that the official liquidator has suppressed the relevant papers from the auditors appointed by this court from time to time as also from this court to prove conclusively the charge levelled against this opposite party. I would refer in this connection to the evidence of G.G. Dubey (P.W. 5), examined on behalf of the official liquidator, who is the only witness connected with the committee of directors and for only four months during the relevant period. Except a very general statement that "the aforesaid two directors, who were members of the committee of directors, were heavily indebted to the Gaya Sugar Mills", he does not give any specific materials on which any charge could be established against the members of the committee directors. It is, therefore, not possible to hold that the official liquidator is entitled to a direction that this opposite party is in any way guilty of any act of misfeasance, misconduct or liable to account for the amount in question, being the realisation of the sale proceeds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusaran Lal. There was regular staff of the company, including managers, accountants and other officers entrusted with the actual working of the said company, Gurusaran Lal being the Chief Executive Officer. The board of directors was concerned only with discussing matters which were referred to it, and not any other matter, and this opposite party committed no act of bad faith in that regard and discharged his duties bona fide and to the best of his ability. So far as the cash balance is concerned, the case of the liquidator as made out in paragraph 41 of the petition is that on taking delivery of possession of the assets of the company, he got only a sum of Rs. 1,685-6-9, whereas according to the accounts made up by the accountants, appointed by this court from time to time, reveal that the balance on the 1st of December, 1951, was Rs. 4,40,465-4-6, for which all the directors, including this opposite party, are liable. This opposite party in his counter-affidavit has denied his liability and has stated that he had never any occasion to deal with the accounts of the company and all the books of accounts were under the control and charge of Gurusaran Lal and his staff. In his evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Essential Supplies (Temporary Powers) Act, and on the 1st of December, 1950, the District Magistrate, who had been appointed the authorised controller, put Gurusaran Lal in charge of the Guraru Factory. It is, I think, very unfortunate that this was done. The business was carried on throughout another crushing season, but again at a very considerable loss ........ " No evidence has been led on behalf of the petitioner, either oral or documentary, to establish the claim under this issue, much less to establish that the alleged loss was suffered by the company on account of any act of misfeasance, malfeasance or non-feasance on the part of any one of the directors. Mr. R.K. Varma has rightly contended that the total claim of Rs. 67,68,724 in the residue and last issue, namely, issue No. 9, does not contain this sum of Rs. 5 lakhs, and if the claim under this issue is added to the claim under various other issues, the total claim mentioned above would be inflated by this amount of Rs. 5 lakhs. Really, as a matter of fact, on the petition itself, this issue does not arise and was wrongly incorporated as an issue for decision by this court. Now I come to issue No. 6. This issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount had been kept with the bank. In view, however, of the objection taken by the auditors, the company has decided not to have any banking account with Messrs. Bhadani Bros. Limited but the company will be entitled to take advances from them." From this report, it appears that it was not a loan advanced by Gurusaran Lal to this company as alleged by the petitioner, but it was in the nature of a mutual, open, running and current account, sometimes Messrs. Bhadani Bros. Ltd. itself being a creditor of the company and helping the company in its new adventure. In the report for the year ending 30th September, 1947 (exhibit 1/a), it was reported as follows: "The account of Messrs. Bhadani Brothers Limited, a private limited company, in which some of your directors are interested as directors, showed in Nos. I and II accounts as per books of the company, maximum debits during the year of Rs. 25,46,985-15-10 and Rs. 87,900, respectively. The balances to the debit of the two accounts at the close of the year, however, amounted to Rs. 28,782-13-0 and Rs. 3,170-2-3, respectively (aggregating to Rs. 31,952-15-3). At the time we submitted our last report we were given to understand that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditors, this amount was transferred to the account of Bhadani Brothers Ltd. on the 20th of May, along with interest. It is further stated in paragraph 38 of the misfeasance application that in the statement of affairs filed after the winding up order of the company, J.R. Commercial Corporation was still shown as debtor by the directors to the extent of Rs. 7,41,000, further, however, stating that this account was merged with the account of Bhadani Brothers Ltd. during 1947-48, a fact which was disputed by Bhadani Brothers Ltd. The case of the liquidator is that the advance by the directors of such large amount was "in wilful contravention of the provisions of the Indian Companies Act and ultra vires" and, therefore, each of the opposite parties is liable for the same. With respect to this firm I would again refer to the directors' report for the years ending 30th September, 1946 and 1947. The first report reads as follows : "Regarding the account with Messrs. J. R. Commercial Corporation Ltd. which was of a short duration and has been squared up, the company had certain surplus funds at the time and invested the same with Messrs. J. R. Commercial Corporation Ltd. for a short p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cutta and thought to keep it with some firms on interest payable at a very short notice, as and when required, in expectation of the shipments, do not prima facie appear as an act of misfeasance, malfeasance or the like, as alleged by the liquidator. Apart from the fact that the account books in the manner in which they have been made up and subjected to severe criticisms by all the auditors, it is difficult to conclusively come to a concluded view that actually amounts are due from the aforesaid private companies of the family of Gurusaran Lal to the company in question. But even assuming that it is so, as the deposits were made with them under the authority of the resolution of the board of directors in the circumstances already indicated, namely, that the amount was surplus and needed at Calcutta, the action was not in bad faith. It may be a case of a debt recoverable from those two private companies on proof thereof, but the accounts having remained in operation for a pretty long time in the nature of mutual, open and running account, duly approved by the shareholders as well, in my view simply because in course of time those companies failed to repay any outstanding amount for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of winding up of a company, it was entirely different in nature. If that would have been so, there would have been no necessity of engrafting section 45H in the Banking Companies Act, making a special provision for assessing damages against delinquent directors, etc. There seems to be great substance in this contention. The nature of a misfeasance proceeding under the Indian Companies Act has been the subject-matter of judicial scrutiny on several occasions and it has been repeatedly held that such proceedings are judicial in nature and pertain to civil liabilities of a delinquent director, etc., and are very similar to proceedings in the nature of a suit. Reference may be made to only two decisions in this regard, namely, Vadilal Chatrabhuj Gandhi v. Thakorelal Chimanlal Munshaw [1954] 24 Comp. Cas. 25 (Bom.) and Prabhakar Parshuramji Pandit v. Vikram Sugar Mills Ltd. A.I.R. 1963 MP 120 Buckley on the Companies Acts (thirteenth edition), at page 673, says that a company may have claims arising, not under the Companies Act, but under the general law as claims for misconduct for which it could sue. Against the like person it may have claims arising under the Act in the -liquid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular facts and circumstances of the case; it might be that they had placed trust on those who were put in a position of trust for the purpose of attending to the management the learned judge has made a distinction in the case of a managing director and other directors and expressly laid down that the case of the other directors, though they might have signed the balance-sheet, is different; unless it was shown that they had taken an active part in the affairs of the company or were accountable in some manner with the alleged transaction otherwise, it could not be said that any such director was fully aware of the various entries in the accounts and, in such circumstances, they should be given the benefit of doubt. In the case of Karnataka Films Ltd. v. Official Receiver, Madras [1951] 21 Comp. Cas. 138 (Mad.), it was held that the loss to the company in respect of which compensation is asked for should be shown to be direct and not remote and more or less a speculative consequence of the misfeasance or the neglect of duty of the director or officer of the company against whom relief is sought. The facts of the case in hand which have been discussed in sufficient elaboration ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready referred to earlier. After discussing the various English and Indian cases, the principle laid down in paragraph 40 of the report is as follows : "It is certainly a question of fact, to be determined upon the evidence in each case, whether a director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with due diligeuce, so that he could not be hold liable for conniving at fraud and misappropriation which takes place. A director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of a company, even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to ever one who examines the affairs of the company even superficially. If he does so he could be held liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the company due to his neglect even if he is not shown to be guilty of participating in the commission of fraud. It is enough if his negligence is of such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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