9911796707
TMI Blog1961 (9) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... s at that time carrying on the business of sugar manufacture in the name of Vijai Sugar Corporation Ltd. at Doiwala in the district of Dehradun. After being incorporated the company purchased and took over all the assets of the Vijai Sugar Corporation Ltd. for a consideration of ₹ 11,15,000/- and started the business of manufacturing sugar at Doiwala. As provided in the Memorandum of Association of the company one of the directors, Seth Radhey Lal, was the director-in-charge. The company got involved in financial difficulties and by two resolutions passed by its members and creditors on the 4th and 5th August 1949, respectively it was decided that it should be voluntarily wound up. Two persons, Sri J. B. Saxena Advocate and Seth Radhey Lal who was formerly the director in-charge of the company, were appointed joint liquidators for the purpose of the voluntary winding up. They took over charge at the affairs of the company. Subsequently on the 19th August 1949, one of the creditors of the company, viz. The Doiwala Corporation Development Union, filed an application in this Court for the compulsory winding up of the company. Later on, on the 23rd A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he liquidators thought that the stores worth ₹ 1,75,508/-/3 had really disappeared and had presumably been misappropriated by the former directors. It was further alleged that according to the stores purchase account the closing balance of the value of stores in hand on the 21st July 1947 was ₹ 4,20,807/2/- but in the balance-sheet dated the 31st July 1949 the stores in hand were shown as worth ₹ 1, 48,340/3/9. That showed, the liquidators alleged, that the value of the stores was reduced by ₹ 2,72,466/14/3 during the period of ten days on the eve of the winding up of the company. There was no explanation, they contended, as to what happened to the stores worth that amount. Thus so far as the general stores were concerned, the liquidators alleged that the former directors were liable to pay and restore to the company the three sums of ₹ 2,02,082/3/-, Rs. l,75,508/-/3-and ₹ 2,72,466/14/3. It was suggested on their behalf that during the three years prior to the order of winding up the former directors purchased all the stores through two firms Mathura Prasad and Sons and Mathura Prasad and Co., both of which were owned by the direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the consumed and unconsumed stores during the accounting year 1947-48. The total valuation of the stores consumed during the year was Rs. l,75,508/-/3. The balance carried forward in the next year was therefore, correctly shown as ₹ 1,77,209/14/3. Their 'explanation in respect of the third item of ₹ 2,72,466/14/3 was similar. They denied that stores worth that amount had been consumed within ten days or had been misappropriated. They said that ₹ 2,72,466/14/3 was really the value of the stores consumed curing the whole year. They said that the sum of ₹ 15,000/- had in fact, been paid in connection with the purchase of the sugar mills from the Vijai Sugar Corporation Ltd. ₹ 11,000/- out of that amount had been paid to Sri Ratten Chand, the Secretary of the Vijai Sugar Corporation Ltd. and ₹ 4,000/- to one Sri Lajja Ram, a broker, for obtaining a loan of ₹ 8,00,000/- from the Lakshmi Insurance Company Ltd. In respect of the other spent sum of ₹ 15,000/-, they said that the amount had been paid to Messrs. Vijai Sugar Corporation Ltd. on account of the price of the stores. They thus denied that these items had been misappropriated. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount? ) Whether the ex-directors are liable to pay the sum of ₹ 15,000/- on account of the price of stores said to have been purchased on 16-6-47 from the Vijai Lakshmi Sugar Corporation? ) Whether purchases were made through Messrs. Mathura Prasad and Sons and Messrs. Mathura Prasad and Company? ) Whether the aforesaid two firms were owned by the ex-directors themselves? If so, have the ex-directors incurred any pecuniary liability towards the Company? ) Whether the ex-directors' conduct in not issuing share-capital and in providing funds to the Company by advancing loans to it was mala fide? ) Whether the liquidators failed to make out an inventory of stores and to value them properly when they took over charge of the Mill? If so, how does that affect the ex-directors' liability? ) Whether the petition is time-barred? ) Whether the petition is bad for non-joinder of necessary parties? ) Whether the petition is mala fide? ) What amount, if any, are the ex-directors liable to pay? 5. During the pendency of the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplained in that case that the words whichever is longer used in Section 235 can only mean whichever period expires later . As the application in this case has been made within three years of the date on which the liquidators were appointed it was open to them to rake up earlier transactions also and the respondents cannot be allowed to say that because the acts complained of were committed more than three years before the date of the application, the application could not be entertained in respect of them. The plea of limitation must, therefore, be overruled. -9. Two items of ₹ 15,000/- each formed the subject-matter of issues Nos. 4 and 5. The former amount is entered in the account books of the company as having been paid on account of commission in connection with the purchase of the sugar mills from the Vijai Sugar Corporation Ltd. The liquidator alleges that this sum was not paid at all and had, in fact, been misappropriated by the former directors. Seth Radhey Lal has, however, stated that the amount was, in fact, paid and his statement receives corroboration from the evidence of Sri Chela Ram Kohli who was the sales accountant of the Vijai Lakshmi Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h went to make up the three figures so that it could be seen what the entries in the account books of the company were in respect of those items and whether they had been properly accounted for. At that stage the liquidator was unable to point out the items. An order was thereupon passed on the 18th August 1959 which was in these terms: When Sri Jagdish Swarup started his arguments I found that the parties had not prepared the necessary figures on the basis of which this case will have to be decided. They have probably been concentrating on the general liability to account of on the fact that the accounts have not been kept properly. Even if that is conceded that will not enable this Court to decide the present case in the proper manner. The main question which has to be decided in this case is for what amount the opposite parties can be made liable. For this purpose the Liquidator must decide in respect of which items in a particular year of accounting he wants to press the claim against the opposite parties. If that item has not been valued in the Issue Register it can be valued on the basis of the entries in the General Ledger or the Receipt Regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company. They pointed out some obvious mistakes and omissions in the charts filed by the liquidator. It was, therefore, not possible to rely on these figures and it became necessary to get the correct figures in respect of the stores received and the stores consumed during the period September 1946 to June 1949. By an order dated the 1st October 1959, therefore, Sri Mukhtar Ahmed, an advocate of this Court, was appointed a commissioner and detailed instructions were given to him to find out the correct figures and to calculate the value of the stores received and consumed during the years in question. As an objection had been raised on behalf of the respondents in respect of the inclusion of fuel wood, lime and lime-stone in the liquidator's charts the commissioner was directed to give separate figures in respect of fuel, wood, lime and lime-stone and other stores. The commissioner held prolonged sittings, considered the cases of the parties in respect of each item of stores in detail and submitted his final report (paper No. A 115). At the end of his report he summarised the figures he had found in the following manner and attached a chart to his report showi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the account books and the registers of the company itself. Where such material was available he naturally based his conclusion on that material. Where such material was not available he generally accepted the valuation of the respondents but for some items he preferred the valuation of the liquidator and in respect of others he gave his own estimate. 14. The objections filed by the respondents against the commissioner's report contained no less than fifteen paragraphs. So far as the mistake of calculation is concerned, in the supplementary report the commissioner has corrected these mistakes. The three points that were pressed in connection with the other objections were: (1) That the commissioner ought not to have allowed the liquidator to alter his own valuation of some of the items; (2) that if the liquidator was to be allowed to alter his valuation of some items the same facility should have been given to the respondents; and (3) that in respect of some items the commissioner has given arbitrary valuations without there being any evidence to support his view. 15. The amount involved in the items of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the balance sheets or the manufacturing accounts were not prepared correctly. In the application, as I have already pointed out, no specific charge of mis-application, retainer, misfeasance or misappropriation was made in respect of the three items with which we are now dealing. The only thing that was said was that the account books of the company did not show what happened to the stores worth those amounts and they had presumably disappeared or been misappropriated. At the trial, however, an attempt was made to prove that some of the stores were removed by the respondents to their own house. The omission to set up the case in the application makes it suspicions. The evidence on the point consists of P. W. 2 Sri K. L. Mehta and of two witnesses Indra Daman and Shiv Lal (P. Ws. 3 and 4). (His Lordship considered their evidence and proceeded). The allegation of the liquidator that the respondents removed any stores to their own house has, therefore, not been substantiated in any way. 18. The contention on behalf of the liquidator, however, is that even if he has failed to prove that any stores were actually removed by the respondents, if during the per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t when the respondents ceased to function as directors the stores which ought to have been there were not in fact there no liability can be fastened on the respondent. It is pointed out that under Section 235 of the Companies Act it is necessary that actual loss to the company should be proved in addition to the fact that the officer or director sought to be made liable was responsible for that loss. In the present case, it is contended, no loss to the company has been proved at all. 22. The third contention is that the respondents can be made liable under Section 235 only if they were guilty of misapplication, retainer, misfeasance, misappropriation or breach of trust. The liquidator has not proved against the respondents that they had been guilty of any of these acts. The-respondents Nos. 1 and 2 were only directors. The respondent Seth Radhey Lal was the director in-charge. Keeping in view the nature of the business carried on by the company the directors could not be expected to personally scrutinise the accounts or to see that the entries in the various account books and the registers kept by the company were properly made. They had to rely o the officers emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the balance-sheets of the three years and that those figures related only to general stores and not to fuel wood, lime or lime-stone. It is however, urged that Section 235 does not contemplate the making of any specific claim. An application under the section cannot be treated as a suit. The only thing which an applicant under that section has to do is to bring to the notice of the Court certain facts which show that the persons sought to be made liable have misapplied, retain- ed, become liable or accountable for any money or property of the company or have been guilty of any misfeasance or breach of trust in relation to the company. He has to do nothing more. The Court has then to investigate into the matter and to examine the conduct of the person sought to to be made liable. If it is satisfied that he is guilty of one of the acts mentioned in the section it can compel him to repay or restore the money or property or any part thereof or to contribute such sum to the assets of the company by way of compensation as it may consider just. Action can therefore, be taken by the Court under the section even in respect of matters not mentioned in the application provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules framed under the 'Companies Act, they will have to be followed. In the absence of such rules, the principles of natural justice will have to be followed. Allegations of misfeasance, misapplication, retainer and breach of trust are serious allegations. The second clause of Section 235 recognises that for act mentioned in this section an officer may be criminally responsible also. Before the amendment of Section 235 by the Companies (Amendment) Act, 1936 the limitation for making an application under this section was to be calculated as that in respect of a suit. It is, therefore, not possible to accept the contention that the only thing which the applicant under the section has to do is to make some for of allegation good enough to start an enquiry and then seek to make the respondent liable for anything that is discovered in course of the enquiry. Specific allegations must be made before the Court can start investigation into the conduct of the respondent. Enough particulars must be furnished so that the respondent may meet the charges levelled against him. If something is discovered during the course of the investigation it may in appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est their case . 29. In In re New Mashonaland Exploration Co. (1892) 3 Ch 577 Vaughan Williams, J. dealing with a summons issued under Section 10 of the Companies (Winding up) Act, 1890, which corresponded to Section 165 of the Companies Act, 1862 and Section 235 of the Indian Companies Act of 1913, laid down that summons in such cases should be in the form given in Mr. Palmer's Company Precedents and should sufficiently define the grounds upon which the liquidator says the directors ought to be ordered to pay the money claimed. It should also say on what grounds it is suggested that the payments made by the directors were wrongful or acts of misfeasance for which the directors were responsible. 30. When, therefore, the application made by the liquidator was confined so far as the liability in respect of stores was concerned to the general stores in which fuel-wood, lime or lime-stone were not included it was in my opinion not open to the liquidator at the time of arguments after the evidence had been closed to include in the lists which he filed items of fuel wood, lime and lime-stone also . The inclusion of these items at that stage deprived the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of which the company is to be compensated . 32. In Kumarpuram Sheshadri Doraswamy v. Pestonjee Jamasjee Padshah 5 Bom LR 633 with reference to Section 214 of the Indian Companies Act of 1882 Jenkins, C. J. quoted with approval the observations of Lord Watson made with reference to Section 165 of the English Companies Act where he had stated: I think it is material to attend to the specific nature of the claim authorized by the section. It authorizes the recovery at the instance of the liquidator, creditor or a contributory of the Company in liquidation, first of monies for which the defendant has become accountable to the Company and secondly the pecuniary loss sustained by the Company through the misfeasance or breach of duty of the defendant . 33. In In re Etic Ltd. (1928) 1 Ch 861 Maugham, J. observed: The conclusion at which I have arrived is that Section 215 is not applicable to all cases in which the company has a right of action against an officer of the company. It is limited to cases where there has been something in the nature of a breach of duty by an officer of the company as such which has caused pec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res consumed and the balance taken forward to the next year as well as the balance of the store-in-hand at the time when the company went into liquidation were incorrect. (v) That the values estimated in the above manner had not been correctly estimated. A more correct estimate of the value of the stores received and consumed in the years in dispute and of the value of the stores which ought to have been in hand at the commencement of each year and on the date on which the company went into liquidation is represented by the figures noted by the commissioner in %is amended report. (vi) That there is nothing to show that Seth Mathura Prasad or Seth Ladli Prasad at any time knew that the Store-keeper or the Accountant incharge had not entered in the registers the correct value of each item of general stores received or issued or that the estimates made at the end of the year for the preparation of the manufacturing account were not correctly made. When Seth Radhey Lal, who was the director in-charge, learnt of the omission of the Store-keeper and the Accountant he dismissed them. The matter was referred to the Conciliation Officer and as the officials con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is a positive act. To prove that the respondent had retained any property of the Company the applicant ought to have proved that the respondent had received and taken some stores which they were bound to return, but have wrongfully kept them and have not restored them to the company, 40. Liability or accountability for any stores belonging to the company can also be fastened on the respondents only if it is established that they have dealt with some property of the company in an unauthorised manner or that some property of the company which was to be accounted for has not been accounted for and the responsibility of the accounting rested on the respondents. So far as the stores in questions are concerned, this has not been established at all. 41. As directors, the respondents had a fiduciary capacity and were bound to take as much care of the property of the company as a reasonable man could be expected to take in the circumstances of the case. No stores belonging to the company were at any time specifically entrusted to them for any particular purpose. It is not alleged that any of the respondents committed any breach of trust in respect of any i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed any actual loss on account of any act or omission of the respondents. 43. The question whether the respondents can be held guilty of misfeasance in the circumstances of the present case can now be considered. 44. The earliest case relating to misfeasance which has been brought to my notice is In re Wincham Shipbuilding, Boiler, and Salt Co. (1878) 9 Ch D 329. In that case a director was sought to be made liable on the assumption that he knew about a resolution entered in the Minute Book of the company said to have been passed at a meeting which he had attended. It was, however, held that there was no presumption of law that a director knew the contents of the books of the company. 45. The next case is In re Forest of Dean Coal Mining Co. (1878) 10 Ch D 450. Certain amount had been paid in that case improperly as promotion money. Mr. Barrett knew about the payment. He subsequently became a director of the company but made no attempt to recover it for the company. When the company was being wound up Mr. Barrett was sought to be made liable for willful default or misfeasance under Section 165 of the Companies Act of 1882. Refusing to ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears to rest on the assertion that Mr. Cory, like the other directors, did not attend to any details of business not brought before them by the general manager or the chairman, and the argument raises a serious question as to the responsibility of all persons holding positions like that of directors, how far they are called upon to distrust and be on their guard against the possibility of fraud being committed by their subordinates of every degree. It is obvious if there is such a duty it must render anything like an intelligent devolution of labour impossible. Was Mr. Cory to turn himself into an auditor, a managing director, a chairman, and find out whether auditors, managing directors, and chairman were all alike deceiving him? That the letters of the auditors were kept from him is clear. That he was assured that provision had been made for bad debts, and that he believed such assurances, is involved in the admission that he was guilty of no moral fraud; so that it comes to this, that he ought to have discovered a network of conspiracy and fraud by which he was surrounded, and found out that his own brother and the managing director (who have since been made criminally respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 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. (5) Directors are not bound to examine entries in the company's books. 52. The principles laid down in the above mentioned cases have been followed by Indian Courts also. Reference may be made by way of example to three cases, which will be found reported in S. C. Mitra v. Nawab Ali Khan AIR 1926 Oudh 153, National Bank of Upper India, Lucknow v. Dina Nath Sapru AIR 1926 Oudh 243 and Thinnappa Chettiar v. Rajagopalan AIR1944Mad536 . 53. If the principles discussed above are applied to the present case it will be found that a distinction must be made between the respondents Seth Mathura Prasad and Seth Ladli Prasad who were only directors on the one hand and Seth Radhey Lal on the ether because the latter was the director in-charge. The former two cannot be held responsible for the acts and omissions of the third in the absence of any proof that they knew of these acts and omissions and c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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