9911796707
TMI Blog1981 (3) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... . On 22nd April, 1960, Tri-Sure's name was changed to Tri-Sure India Pvt. Ltd. On 17th June, 1960, Tri-Sure was authorised to issue 3,00,000 equity shares of Rs. 10 each on condition that within 24 months from its incorporation American Flange would sell 49% of its voting capital to Indian nationals at par. On 1st August, 1962, the registered office of Tri-Sure was moved from Calcutta to Bombay. Tri-Sure manufactures flanges and bungs (barrel stoppers) at Mahul, Bombay. On 7th March, 1963, Herbert Wheaton, the second petitioner, American Flange's Vice-President, Operations, became a director of Tri-Sure. On 20th October, 1965, Charles Grundy, the fourth petitioner, was appointed a director of Tri-Sure. On 3rd May, 1968, Richard Parish, the first petitioner, American Flange's President, was appointed a director of Tri-Sure. On 23rd November, 1971, Albert Parker was appointed a director of Tri-Sure. On 1st, April, 1970, Shanker Hegde was appointed a director of Tri-Sure. On 1st January, 1972, he was appointed and took charge as Tri-Sures' whole-time director. On 20th November, 1973, Tri-Sure's authorised capital was increased and 2,53,336 fully paid-up equity shares were issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Sure's chartered accountants in Bombay. Parish said that Wheaton would be coming immediately to Bombay and that Fergusons' investigation should not start till he arrived. Grundy got the requisite authority by telex from Parish and authorised Fergusons to cany out a special investigation audit of Tri-Sure. On 10th October, 1975, Wheaton came to Bombay. He has deposed that he was met at the airport by Grundy, Hegde and a representative of Fergusons. They went directly to Tri-Sure's plant. Wheaton told Hegde that he had information that the goods which had been shown as shipped were secreted in outside warehouses and that Tri-Sure's accounts were in a mess. Hegde first said that this was because Tri-Sure's own warehouse was full. This was discovered to be false. Wheaton asked Hegde to bring to his office Tri-Sure's production and sales manager and accountant and Hegde's personal assistant so that Wheaton could confront them with his information. When they came, they first denied the correctness of it but then they admitted that there were goods in outside warehouses. Hegde stated that there were orders for some of those goods and he would get orders for the rest. The accountant, Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust, 1974, as mentioned in the prospectus were not correct and that the statement therein under the heading "present activities", that 30% of the 1972-73 production of Tri-Sure had been exported was not based on correct data. The untrue statements in the prospectus, the Registrar stated, attracted the penal provisions of section 62 and 63 of the Companies Act. On 25th April, 1977, the Tri-Sure's advocates replied to the Registrar. On 24th March, 1977, this court confirmed the reduction of Tri-Sure's capital, as a result thereof the premium amount of Rs. 7.50 per share was returned to all allottees. On 25th April, 1977, the petitioners filed this petition. What precisely was done in regard to the production and sales of Tri-Sure's products and the falsification and fabrication of its books, the fraud, as I shall briefly call it, has not been the subject of evidence before me. Wheaton obtained not arised statements from senior members of Tri-Sure's staff. These are on record. The makers thereof were not subjected to cross-examination. I do not propose to rely upon those statements, except to note that one and all say that Hegde was the one who directed the fraud and compelled T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actured than was justified by the pending or expected orders. Books and records of Tri-Sure relating to stores were falsified. During the last days, August, 1975, stocks of finished goods lying with Tri-Sure were sent out for storage in outside godowns so that at the year end stock-taking, the auditors would not raise queries. So much seems clear that production was shown of goods which had not been produced and sales were shown of goods which did not exist; that the books and records of Tri-Sure were fabricated and falsified to show a false picture ; and that this could not have been done without the complicity of much of Tri-Sure's senior staff. That the figures of profits and sales in the prospectus are incorrect and that the statement in the prospectus that 30% of the production of Tri-Sure in 1972-73 was exported is incorrect is admitted. The petition was first argued before me on the basis of affidavits. When I indicated to the petitioners' counsel that I was not satisfied, the petitioners elected to lead evidence. The evidence of Wheaton, Grundy and Parish was led, in that order. It is necessary first to construe section 633 of the Companies Act as applicable to this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 cannot be compromised nor can the court relieve the petitioner by an order made in invitum, for it has to be, as aforesaid, reasonably satisfied. The Registrar may, of course, state that no prosecution would be launched against the petitioner, in which case the petition would not survive. The relief under section 633 is, as the use of the word " may " implies, discretionary, the discretion to be judicially exercised. Mr. Chagla for the petitioners referred to the judgment in Pyare Lal Bhargava v. State of Rajasthan, [1963] AIR 1963 SC 1094, and to the interpretation placed therein on the word "appears" in section 24 of the Evidence Act. The Supreme Court said that the appropriate meaning of the word "appears" was "seems" and it imported a lesser degree of probability than proof. Mr. Chagla submitted, therefore, that under section 633 something less than proof or satisfaction was required. The Supreme Court construed the word "appears" in the context of section 24 of the Evidence Act whereunder a confession is to be treated as irrelevant if it appeared to the court to have been caused by inducement, threat or promise. Even in that context the court said that the standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count. It held that the petitioners had no idea that they had ceased to be directors and that since, no loss had been caused to the company, the petitioners should be excused. There are also useful judgments on section 633 itself. In re East India Hotels Ltd. [1980] 50 Comp. Cas. 381 (Cal.), there was a default in compliance with the Companies (Acceptance of Deposits) Rules, 1975. The company had asked for an exemption but the request was turned down. After some months, the company secured the excess deposits by creating a trust. In the meantime, the directors filed an application under section 633. The Calcutta High Court held that since there had been no further violation the petitioners should not suffer the consequence of the default which had been committed but which they had made up. In re Tolaram Jalan and hire Filmistan P. Ltd. [1959] 29 Comp. Cas. 34 ; AIR 1959 Bom. 245, the default of the petitioners was that the balance-sheet and the profit and loss account of the company of which they were directors had not been filed in time. It was urged that the omission was unreasonable inasmuch as accounts even for previous years had been delayed. The court held that that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and confront the perpetrators of the fraud with that evidence. The promptitude with which the petitioners acted is indicative of their honesty. When the special investigative audit report was received, the petitioners did not seek to conceal the disclosures. Rather they gave it full publicity by annexing a copy of it to the notice convening Tri-Sure's next annual general meeting. An offer was made in the notice to those who had subscribed to the public issue that their shares would be taken back, if they so desired, and their full share value would be repaid with interest. About 600 shareholders took advantage of this offer. To those shareholders who did not take the advantage of this offer, at the instance of the petitioners, the premium amount of Rs. 7 50 was refunded. This also is an indication of the petitioners' honesty. Lastly, there is no evidence before me, nor have I reason to suspect, that the petitioners bad participated in or had bad knowledge of the fraud. On the material before me, therefore, I am reasonably satisfied that the petitioners acted honestly in signing the prospectus. I now turn to the second requirement of section 633 and ask; did the petitioners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s position a director must act honestly but he must also exercise some degree of skill and diligence. The care that he is bound to take is reasonable care to be measured by the care an ordinary man might be expected to take in the circumstances on his own behalf. The directors are not responsible for mere errors of judgment. They are not bound to give continuous attention to the affairs of the company. In respect of duties that, having regard to the exigencies of business and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. In Huckerby v. Elliott [1970] 1 All ER 189 (QB), the dictum of Romer J. in City Equitable Fire Insurance Company was applied. The court asked itself whether the appellant had had any reason to distrust his co-director who was the company's secretary and fully acquainted with its business. It found on the evidence produced that she had no reason to distrust him and could not be said to have neglected her duty. In re Brazilian Rubber Plantations and Estates Ltd. [1911] 1 Ch D 425, Neville J. measured the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be examined. On 16th October, 1970, Hedge was appointed a consultant by Tri-Sure. He was not then concerned with the management of Tri-Sure. The day-to-day affairs of Tri-Sure were managed by American Operations Managers. On 6th January, 1972, Hedge was appointed a whole-time director. He was required under clause (1) of the agreement between him and the Tri-Sure to comply with the directions of the board. Subject thereto, without having substantial powers of management he had to attend to such aspects of the administration of Tri-Sure's affairs as the board might allocate to him from time to time. Subject to such directions his duties included, inter alia , the administration of the affairs of the office of Tri-Sure in accordance with sound business practice. Under clause 4 of the agreement, Hegde agreed to carry out faithfully and diligently such duties as the board might from time to time decide. Under clause 7 of the agreement, Tri-Sure was entitled to terminate the agreement if Hegde disregarded or acted contrary to directions. On 24th February, 1973, the agreement to appoint Hegde as a whole-time director was renewed, in so far as his duties were concerned, the terms remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct independently and then come to the board and state what he had done. The board tried to curb Hegde's initiative but found that Hegde was doing a good job. The board tried to keep Hegde within bounds. Wheaton and Parish had done this by writing letters to Hegde pointing out where he had exceeded his authority. They had also told him so, personally and over the telephone. Parish had had occasions more than once to express displeasure to Hegde. The board had, however, found that Hegde was doing a good job. He was an Indian, he had initiative and, though he had inexperience of business matters, Parish felt that Tri-Sure needed him. Grundy deposed that he had expressed to the American directors views against the appointment of Hegde as a whole-time director. He had done so because he had thought that better people would be available to run the business and that somebody with wider experience would be better suited. It is noteworthy that by the time Hegde was invested with the powers of managing director, the fraud had already been in operation for two years or so and that, during these two years or so, Hegde had had, under the terms of his agreement with Tri-Sure, no substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and that Tri-Sure were dangerously close to a serious financial problem. On 8th August, 1973, Yien called upon Ram-murthi, the chief accountant of Tri-Sure, to explain why, all of a sudden, the bill acceptance had to be extended to the full 180 days limit and why additional funds were requind. On 10th August, 1973, Hegde wrote to Parish to say that it was prudent to assume that all the sales collections of a month would be fully recovered during the course of the third month only and that, after a careful examination of the financial position, Hegde felt that Tri-Sure required to have all the present bills extended to the maximum limit of 180 days. On 30th April, 1974, Rammuithi wrote to Yien that it was Tri-Sure's practice to send out advance pro forma invoices for expected deliveries at the time shipments were scheduled to take place. On 30th May, 1974, Parish sent a telex message to Hegde, Rammurthi and Grundy through Little and Co. to ask that Tri-Sure should not issue further pro foima invoices until they were in a position to deliver the goods and that Tri-Sure was only authorised cash against document and that the abuse of this authority was regarded as a very serious matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required procedure but such procedure was not consistently followed by Hegde. Tri-Sure, he adds, was registered with the directorate general of technical development, Government of India, and, in this connection, Tri-Sure had been sending to New Delhi monthly returns of production of flanges, bungs, etc ., and quarterly returns of stocks of scarce categories of steel and flange steel. Copies of the returns when sent were also endorsed to American Flange. The returns continued to be submitted by Hedge until the production return for May, 1974, which was dated 14th August, 1974. Thereafter, there was a gap and neither the Director-General nor American Flange received copies of such returns until that dated 29th December, 1975, for the period January-August, 1975, which was sent by the man who succeeded Hegde. Parish states that it was obvious that the reason why such reports were stopped was that, at that point, the records of Tri-Sure were being falsified on instructions by Hegde. Tri-Sure's sales figures were regularly sent to New York. They tell an interesting story. For the months ended September-October, 1973, sales are shown at Rs. 1,18,534 and Rs. 1,88,646 respectively. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Next in order of chronology is the petition. In para 15 it is stated that the information relating to the exports of the Tri-Sure was supplied by Hegde and was, in fact, approved by him and the petitioners had reasonable ground to believe and did in fact believe that the statement that approximately 30% of Tri-Sure's production during 1972-73 was exported was true. Again, in para 24, it is stated that the petitioners had relied upon the information supplied by Hegde with regard to exports of Tri-Sure before signing the prospectus and that, at the time when the prospectus was drafted, it was Hegde who was insisting on the inclusion of a statement regarding Tri-Sure's exports and he wanted to include a statement that Tri-Sure expected to export at least 30% of its production. In Parish's affidavit dated 30th November, 1977, it is stated (in para 5) that when he was in Bombay during February, 1975, the subject of exports came up and Hegde said that the subject of exports should be included in the prospectus. Parish pressed Hegde to be certain not to overstate the figures as he was concerned that the shareholders might be misled as to what to expect in future. Parish pointed out to H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statement that Tri-Sure expected to export 30% of its production did not appear because Grundy had advised that a statement which was not factual should not be made. There was a discussion about the statement that in 1972-73, Tri-Sure had exported 30% of its production. Questions were asked of Hegde by Parish, Drabek and Grundy. Export orders were mentioned by Hegde and by heads of the departments, who were present in support of the statement and Grundy was satisfied. This aspect was reverted to in Grundy's cross-examination. In regard to the statement about 30% exports of the 1972-73 production there was, Grundy deposed, a discussion at an earlier meeting between Hegde, Parish and Yien. He said he had made a mistake in this connection in mentioning Drabek in his examination-in-chief. Parish deposed that he came to Bombay on 16th February, 1975. He was accompanied by Drabek and Yien at the suggestion of American Flange's board. He had no previous experience of the issuance of a prospectus and Drabek and Yien were to aid him. On 18th February, 1975, Parish and Yien went to Fergusons to meet the senior partner, Alpaiwalla. Parish said he suggested to Alpaiwalla that Fergusons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectness of the figure. In cross-examination Parish averred that he had not discovered at the meetings held in February, 1975, any hesitation or reluctance on Hegde's part to give information. After being shown his statement in the affidavit (referred to above), he said that that statement was correct and his answer in evidence was not. He went on to say that Hegde had deliberately absented himself from some of the meetings in connection with the prospectus. After the recess, Parish tried to explain away the hesitation to which he had referred in the affidavit by saying that Hegde had seemed to suggest that somebody else do produce the documents required in connection with the proceedings and not he. I cannot accept Parish's statement that Yien was asked to go to Tri-Sure's Office and work out the figures and that Yien had said that he had satisfied himself or that "they" (if he meant to include Yien) had come back with a statement which showed that 30% of the 1972-73 production had been exported. I cannot do so because: ( a ) It has never been so stated, or even indicated, in any prior statement, affidavit or testimony, ( b ) Yien has not been examined to corroborate Parish' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( e )Hegde insisted on going his own way, contrary to established practice and procedures, despite rebukes from Parish and Wheaton and disagreements with Grundy. ( f )Parish's view that Tri-Sure's board had not exercised effective supervision over Hegde. ( g )Hegde had been reluctant and hesitant to supply information and verify data at the meetings in February, 1975, and had absented him self from some of them. ( h )Parish found the statement that 30% of the production for 1972-73 had been exported difficult to accept in view of the fact that an American Flange subsidiary was the traditional supplier to the market at which Tri-Sure exports were aimed. In the circumstances, Parish should not have accepted at face value the figures of exports in 1972-73 provided by Hegde and Rammurthi. Parish should have done whatever he considered reasonable to determine, independently of Hegde, Rammurthi, et al, whether there was not something about Tri-Sure's affairs which these men were trying to conceal; he did not. Parish could have communicated and discussed the aforesaid factors, or even some of them, with Grundy; he did not. Parish could have communicated the aforesaid factors, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prospectus. I am not, on the material before me, reasonably satisfied that Wheaton acted reasonably. Parish deposed that Parker had been practising as a patent counsel and had now retired. He had not been well enough to come to India in February, 1975, and was still in ill-health. Parker had filed an affidavit in these proceedings in which he has set out matters which make it clear that he was appointed a director of Tri-Sure by reason of his special expertise as a lawyer. He could not have had knowledge of any of the factors that should have raised suspicion and doubt; certainly, there is no evidence that they or any of them were communicated to him. It is reasonable that he should expect that Parish and Yien, who were men of business and directly concerned with Tri-sure's business affairs, would ascertain the truth of the contents of the prospectus before it was signed. On the material before me, I am reasonably satisfied that Parker acted reasonably. Grundy deposed that in 1962-63 Parish's father had asked him whether he would act for Tri-Sure ; he had replied that his firm would. Parish Senior had asked whether the firm would provide two directors and had replied in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , I would extend the protection of section 633 to Parker and Grundy. I wish to make it very clear that this judgment does not indicate, and should not be read to indicate that a prosecution should be launched or should not be launched against Parish and Wheaton. If a prosecution is launched the court hearing it should decide it, on the record before it and independently of this judgment. It will be open to Parish and Wheaton if it is permissible in law to plead section 633 again before the court hearing the prosecution and the court will decide upon this plea again having regard only to the material before it. I wish to record my appreciation of the fairness with which counsel for the petitioners and for the Registrar of Companies have brought to my attention the relevant portions of a voluminous record and the apposite law. In the result, the third and the fourth petitioners are relieved of all liability under section 633 of the Companies Act in regard to the misstatements in the prospectus dated 23rd February, 1975. In so far as the first and the second petitioners are concerned, the petition is dismissed. The petitioners shall pay to the Registrar of Companies the costs o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 633 of the Act relieving them from the proposed prosecution on the ground that they had acted throughout the transaction honestly and reasonably. At the trial three of the four petitioning directors examined themselves on oath, when the learned trial judge indicated that affidavit evidence filed in support of the petition was not enough to enable him to adjudicate the points that arose in the petition. The Registrar of Companies did not think it necessary to examine any witnesses in support of the show-cause notice. Statement of the witnesses examined by one of the petitioning directors, Wheaton, are placed on record, in addition to certain other documents, though no attempt has been made to prove these by examining the authors thereof. By his impugned order dated 8th December, 1980, the learned judge held that all the four petitioning directors acted honestly. He, however, held that of the four directors, Parker and Grundy alone can be said to have acted reasonably. He was, however, not satisfied on the material placed before him that the two appellants, viz ., Parish and Wheaton, had acted reasonably. Consistent with this finding, the learned judge relieved Park ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le-sale fabrication and falsification of Tri-Sure's books of account and records for the years ended 31st August, 1974, and 31st August, 1975." The annual general meeting of the company for the year ending on 31st August, 1975, was convened by a notice dated 28th April, 1976. The special investigative audit report prepared by Ferguson Co. was enclosed along with the notice of the meeting. The report enclosed with the notice disclosed that some of the statements in the prospectus were incorrect and could not be justified. The directors offered to refund share moneys with interest at 6% per annum from the date of allotment to all the allottees of shares who claimed to have subscribed to the prospectus. About 600 allottees appear to have taken advantage of this offer. On "2nd June, 1976, the I.T. authorities seized the account books, records and files of the company and the said records were in their possession till the end of 1977. The inspector also submitted his report on 8th July, 1976, under section 209A of the Act. The report being confidential was not sent to the company and was not available to the learned trial judge. On 10th September, 1976, at an extraordinary general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able with imprisonment for a term which may extend to two years or with fine which may extend to five thousand rupees or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did, up to the time of the issue of the prospectus believe, that the statement was true". Sub-section (2) is not relevant to the points that arise in the present case. That the prospectus does include "untrue" statements in regard to the two matters specified earlier is not in dispute. Under the latter part of sub-section (1) of section 63 of the Act, it is open for the person authorising the issue of the prospectus, such as the present directors, to prove that "he had reasonable ground to believe, and did, up to the time of the issue of the prospectus believe, that the statement was true". It is true that the occasion for such person to prove the reasonableness of his plea can arise only when he is prosecuted for an offence under section 63 of the Act. There is, however, no reason why the Registrar should not take this into account, if in fact any such reasonable ground for such belief is found by him to exist on the plea of such statement be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned advocate for the appellants, contends that none of these factors was enough by itself or collectively to justify any suspicion or doubt in the mind of the chairman, Parish, against Hegde or any officer of the company, and the directors must be held to have acted reasonably while appending their signatures to the prospectus by relying on the managing director, Hegde, and other executive officers of the company who were instrumental in drafting the same. We find much substance in the contention of Mr. Chagla. To begin with, we are unable to see how the company's perennial money problems should have aroused the suspicion of the company's directors. In any business concern, money problems are bound to be there even when it flourishes. That money problem continued from year to year by itself cannot justify any suspicion against the whole-time managing director or against the officers of the company. It is true that the American directors through their local officers had called upon the managing director, Hegde, to submit accounts of the moneys received on pro forma invoice and it appears that such accounts were not sent by Hegde or other officers of the company in spite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the managing director of the company on 21st January, 1975. Suffice it to notice at this stage itself that such appointment of Hegde as the managing director about five to six months after the detection of the irregularities and the failure of Hegde to send the accounts as demanded clearly indicate the degree of irregularities involved both in taking advances against pro forma invoices and not sending the accounts for the benefit of the directors. To our mind, the conclusion is irresistible that this irregularity was not treated as of any consequence whatsoever. This alone can explain the inaction of the directors to take immediate drastic action. It is difficult for us to take subsequent events into account and judge, what appeared to everyone as an insignificant act before 3rd October, 1975, to be an act of unreasonableness. The third circumstance relied on by the learned trial judge is with regard to the phenomenal increase shown in the sales from June, 1974, onwards month by month. It is true that in his evidence, the chairman, Parish, claims to have been stunned by looking at the sale figures of progressive and phenomenal increase. It is, however, not possible to isolate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the Govt. of India under which the products might have been supplied to the Govt. of India. Copies thereof appear to have been sent by the company to the American directors. Its failure to send such copies and not of the statements, that appears to have weighed with the learned trial judge. It is not suggested that sending of such copies was obligatory on the part of Hegde under any arrangement arrived at between the managing director, on the one hand, and the board of directors, on the other. It is true that the directors in America appear to have noticed this failure on the part of Hegde to send such production returns to New York. Though the Indian directors appear to have attributed their ignorance about the company's affairs due to such failure on the part of Hegde, in their statements and affidavits made by them after the fraud was detected, there is nothing on the record to suggest that any one of the directors had any occasion to take a very serious view of the failure of Hegde to send such returns to them. Apart from the absence of anything on record, failure to send such return was never considered to be important by the directors themselves. Failure may assume some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to tell us how this supposedly lack of supervision had anything to do with the detection of inflated sales figures or mis-statements in the prospectus as to the percentage of exports. These two things could not have been ascertained by the directors correctly except by examining the account books themselves. If the information given to them by the managing director turned out to be incorrect and inaccurate, the same cannot be attributed to the supposed ineffective supervision by the board of directors. It is true that the directors' evidence suggests as if Hegde was reluctant to give any information and verify the data contained in the prospectus from other sources, when questions were asked at the meeting held in February, 1975, in which the prospectus appears to have been signed by the directors. The chairman, Parish, suggested that Hegde even absented himself from the meetings on some occasions. The true effect of these supposed acts of Hegde shall have to be determined not by discussing what was discovered subsequently, but what was known to the directors at the time when the prospectus was signed by them on 26th February, 1975. It is in this context that the evidence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the directors acted unreasonably. If they found Hegde to be trustworthy to be appointed as a whole-time director on 21st January, 1975, certainly they could not have found anything suspicious when he himself became a signatory to the prospectus and when the board of directors had chosen him unanimously. The degree of care and vigilance that is required to be exercised by the directors in a limited company is now a matter of settled law. The learned trial judge himself has referred to a judgment of the House of Lords in the case of Dovey v. Cory [1901] AC 477. The said ratio was followed by Romer J. in the case of In re City Equitable Fire Insurance Co. Ltd. [1925] 1 Ch D 407 (CA), at page 427. These observations have been followed by all the Indian courts till this day. If the conduct of the appellants is judged by all the tests laid down by Lord Halsbury and Romer J. in these cases, they, in our opinion, are entitled to be relieved of their liability under section 633 of the Act. We accordingly set aside the judgment of the learned trial judge to the extent to which it applies to the appellants and allow the appeal as also their application for relief under section 63 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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