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TMI Blog1929 (11) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... bank and the main facts of the case have been set out in the judgment of my brother Patkar which I have had the advantage of reading, and also in the judgment of the Court below. I, therefore, need not detail them. 4. Essential dates to bear in mind are that the bank was registered in 1903 and that it was not till 1913 that any apparent trouble arose. There was then, however, a run on the bank, due, it is said, in part to the well-known crisis in Bombay which arose from the failure of the Indian Specie Bank and other Indian as opposed to European banks. The bank paid out a sum of two and a half lacs of rupees; but on April 23, 1914, it was forced temporarily to suspend payment. On September 9, 1914, there was a petition to the Bombay High Court to sanction a scheme of arrangement, which provided shortly that the creditors should give time to the bank for payment of their debts. This scheme was sanctioned by the Court on January 23, 1915, and the bank resumed business. But on June 2,1917, the bank went into voluntary liquidation. Subsequently, there was an order for the winding up of the bank under the supervision of the Court, but this supervision order has not been shown to us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er or bania. Its initial working capital was only some ₹ 3,885, and even in its most prosperous days that capital only amounted to about ₹ 20,725. With these slender resources the bank proceeded to receive deposits and make loans on an extensive scale ; and indeed as regards one fortunate firm of borrowers in Bombay, in which 1 the agents were personally interested, viz., Mhalsadas Vithal and Company, the advances to them in the course of one year alone amounted to over four lacs of rupees, 8. It is, here, important to note that the three primary objects with which the bank was established as set out in its memorandum are as follows :- 3. (a) To encourage the habit of saving money. (b) To facilitate small but safe investments at reasonable rates of interest. (c) To carry on the trade, and business of bankers in all its branches, and dealings in bullion, money, notes, bills, hundees, or other securities. To receive and employ moneys on loans or deposit, to advance money on substantial personal securities, and securities of all denominations, to conduct and manage exchange operations and such other operations, undertakings and enterprises of a financial chara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a company carrying on a small retail business is very different from that of a director of a railway company. The duties of a bank director may differ widely from those of an insurance director, and the duties of a director of one insurance company may differ from there of a director of another,...The larger the business carried on by the company the more numerous, and the more important, the matters! that must of necessity be left to the managers, the accountants and the rest of the staff. The manner in which the work of the company is to be distributed between the board of directors and the start' is in truth a business matter to be decided on business lines.... In order, therefore, to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company's business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one in the circumstances, and is not inconsistent with any express provisions of the articles of association. 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though when financial troubles overtook the bank, some investigation was at last made, the conduct of the directors continued in my opinion to be open to adverse comment. The balance sheet, Exhibit 62, for the year ending May 31, 1913, which appears to have been published about October 16, 1913, shows no bad debts, and states that debts considered good for which the bank holds no securities amounted to Es. 1,19,207. In the following year the balance sheet, Exhibit 63, as at August 81, 1914, shows the figure of Es. 1,36,212 for a similar item, viz., debts considered good for which the bank holds no security, but adds for the first time an item of no less than Es. 81,926 for debts considered bad or doubtful. And on the other hand the secured debts in the 1913 balance sheet amounting to nearly two and a quarter lacs have dwindled in the 1914 balance sheet to a mere Es. 21,352. On the facts before him the trial Judge has held that the 1913 balance sheet was false as the figure for secured debts was false as was also the figure for unsecured debts considered good (see judgment para 23). In my judgment this finding was correct in both particulars. 16. I also think that the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cised any control and supervision over the agents. He accordingly held that the directors were responsible to make good at least ₹ 53,000 to the liquidator. But as regards two of the directors, they had compromised for ₹ 15,000. So, as regards the appellant, the Judge thought it fair to reduce the ₹ 53,000 to ₹ 38,000 as his strict liability. The Judge then went one step further, and held that under all the circumstances he could reduce the appellant's actual liability to one-fourth of ₹ 48,000, viz., ₹ 12,000, as the appellant was only one of a board of five directors, and one director had retired in 1913 and paid ₹ 5000, thus reducing the above ₹ 53,000 to ₹ 48,000. In making that reduction he in part relied on Section 281 of the Indian Companies Act. 19. It will be seen, therefore, that in the result the appellant has only been ordered to pay about one-ninth of the above aggregate losses of ₹ 1,06,000 as found by the learned Judge. There is, therefore, a very wide margin allowed for difficulties of proof as regards some individual items. Accordingly, it is not surprising that the appellant has not disputed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t' in that article ? Romer J. has analysed with great care the cases on the subject, and in my' opinion he has, as a result of that analysis, come to a correct conclusion. I think that the word ' wilful' in this phrase is of importance, and means that the officer in question is consciously acting, or failing to act, in a reprehensible manner. It may no doubt be for him to show that this is not so, and I do not think he would be protected if he simply failed to give any consideration at all to the question of his duties, if he acted recklessly and without caring whether he was fulfilling them or not. But, in my judgment, these words excuse an officer if through mere inadvertence or error of judgment, and while endeavouring honestly to carry out his duty he does or omits to do something which apart from these words might have rendered him liable. I need not carry the definition further, for as will be seen this is enough, having regard to the view I take of the facts. The reason for this last sentence arose from the special facts of the case. The learned Judge goes on to state that there were two circumstances on which special stress should be laid. The first was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further the accountant Sadashiv (Exhibit 97) deposes that the accounts of the Kolhapur branch were never reconciled with those at Sholapur, and in his report Exhibit 72, he sets out the detailed figures year by year. In his opinion the object of this omission was to conceal the misappropriations by the agents. As to the excuse put forward by the appellant that in 1915 he asked the agents for certain information and did not get it, this seems to me to be insufficient. According to the liquidator, the appellant was the editor of a newspaper, the agent of a life insurance company and a man well versed in business. And no suggestion was made to us that at any time his physical or mental powers were impaired, although he gave his age at the trial as 69. So I see no adequate excuse for his inaction. Further, according to the liquidator, the period of limitation in the Kolhapur Courts was only three years, although in Akalkot it was six years. So some diligence was particularly desirable. 24 Taking then the case as a whole, it more resembles In the matter of the Union Bank, Allahabad, Limited I.L.R. (1925) A11. 669 and The New Fleming Spinning and Weaving Company, Limited v. Kessowji ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There never has been, and I think there never will be, much difficulty in dealing with any particular case on its own facts and circumstances ; and, speaking for myself, I rather doubt the wisdom of attempting to do more. I understand from my noble and learned friend Lord Shand that he also takes this view. Then at p. 489, Lord Davey quotes the judgment in Ranee's Case (1870) L.R. 6 Ch. 104 of Lord Romilly as follows:- The learned judge explained what he meant by a fraudulent payment: ' I mean one where the person who makes it or is concerned in making it is at the time aware of the impropriety of making it, but does so in order to obtain a benefit for himself.' And he adds : 'The director may be ignorant of this fact, but if his ignorance arises from his wilfully shutting his eyes to the facts which are before him, he is equally guilty'. And then Lord Davey proceeds (p. 490):- I think that this statement of the law is very nearly, but not quite, accurate. In my opinion it is not necessary that the motive of the improper payment should be to obtain a benefit for the director himself, I also understand Lord Romilly to include in the expression ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle which the Legislature intended to apply to misfeasance applications by a liquidator. The appellant has put forward Article 36 or alternatively Article 115. The liquidator has put forward Article 120 or alternatively Article 116. The appellant relies on the judgment of Mr. Justice Harrison and Mr. Justice Fforde in Shim Singh v. Liquidator, Union Hank of India I.L.R. (1926) Lah. 107 holding that Article 36 is the appropriate Article in such a case, and dissenting from the judgment of Sir Cecil Walsh and Mr. Justice Mukerji in In the matter of the Union a Bank, Allahabad, Limited I.L.R. (1925) All. 669. The liquidator relies on the latter case where it was held that Article 120 is the appropriate Article, and that Section 235 of the Indian Companies Act confers a new right of action upon the liquidator. That case in its turn dissented from the view taken by the Lahore High Court in the case of The Bank of Multan v. Hukam Chand A. I. R. (1923) Lah. 58 not reported in the authorised reports. My experience in the Bombay High Court is that no Act has given rise to more differences of judicial opinion than the Indian Limitation Act. And in the present case I regret to find that, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite plain that the terms of Article 150 do, according to their proper construction, whatever that may be, effect a modification in what would prima facie be, but for that article, the obligation and liability of the auditors. 32. So, too, in Molineaux v. London, Birmingham and Manchester Insurance Company [1902] 2 K. B. 589 Lord Justice Cozens-Hardy, in delivering the judgment of the Court of Appeal, said (p. 595):- On principle, and apart from authority, it seems to us that a person who accepts an appointment as director, knowing that the holding of a certain number of shares is a necessary qualification, and acts as director, must be held to have contracted with the company that he will, within a reasonable time, obtain the requisite shares either by transfer from existing shareholders or 'directly from the company. And then at p. 596 he said :- The articles, though not themselves a contract between the company and the director, must be regarded as shewing the terms upon which on the one hand he agrees to act as director, and on the other hand the company agree to pay him remuneration for his services. And in Brazilian Rubber Plantations and Estates, Limited, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppointed a director in each of the years 1909, 1912 and 1916. Accordingly there must at various times have been something in the nature of an offer by the appellant to serve further, and an acceptance of that offer by the company or vice versa, either express or implied. And so the whole contract was not in the articles. 35. As regards the directors' remuneration, we have required the Registrar of Joint Stock Companies to produce to us the original memorandum and articles which had been returned to the witness Kashinath (Exhibit 52). This original shows that the amount fixed for remuneration by article 84 was ₹ 5 per meeting, and that the copy Exhibit 53 is incorrect in omitting that figure. This is confirmed by the evidence of the liquidator (Exhibit 65, para. 45), and of the accountant, Exhibit 97. Accordingly that term in the contract between the company and the directors is to be found in the articles. 36. There is no evidence before us to shew that there was ever any formal written contract independent of the articles. Consequently, the possible exception which Warrington L. J. had in mind in the city Equitable case at p. 521 above cited need not be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Indian legislation which by trying to provide for everything conceivable very often ends by leaving out cases of the most glaring description. I might take this as a very good instance, for there is no article which provides simpliciter for a debt due, such a debt as would have been the subject of the old common law action in debt, although, oddly enough, provision is made by article 63 for money payable for interest upon money due from the defendant to the plaintiffs'; so that a special article is enacted for the interest and nothing is said whatever about the principal debt. Maneldal Mansukhbhai v. The Suryapur Mills Co., Ltd. I.L.R. (1927) 52 Bom. 477 was a suit by a company against a shareholder based on the forfeiture of his shares and his consequent liability under an express article to pay all moneys then payable. The Court held that there was an express) or implied contract to pay and that Article 115 was the appropriate Article. Mr. Justice Crump negatived Article 116 because he agreed with the view of the Madras Full Bench that the word registered in Article 116 of the Indian Limitation Act was confined to registration under the Indian Registration Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I.L.R. (1926) Lah. 167 and would follow Cavendish Bentinck v. Fenn, where Lord Macnaghten held that (p. 669):- it has been settled, and I think rightly settled, that that section creates no new offence, and that it gives no new rights, but only provides a summary and efficient remedy in respect of rights which apart from that section might have been vindicated either at law or in equity. That was also the view expressed by the Court of Appeal in the City Equitable case (see the judgment of Pollock M. R. at p. 507.) 40. The case of Cavendish Bentinck v. Fenn also shews that a misfeasance application, to be successful, must establish that actual loss resulted to the company from the misfeasance. But by Section 24 of the Indian Limitation Act, in the case of a suit for compensation for an act which does not give rise to a right of action unless some specific injury actually arises therefrom, the period of limitation is to be computed from the time when the injury results. So, too, under Section 23 in the case of a continuing breach of contract, a fresh period of limitation begins to run at every moment when the breach continues. 41. Now in the present case the losses aros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... desirability of some amendment of the Indian Companies Act 1913, so as to nullify the existing differences of opinion in various High Courts as to the effect of Section 235 of that Act, and also to nullify the wide indemnities given by such articles of association as articles 98 and 99 in the present case. In this connection I would draw attention to Section 152 of the new English Companies Act 1929, which in effect makes articles of that nature void. That Act also makes other important amendments for the protection in England of the investing public. This, however, is a matter for the Indian Legislature to decide on here. Fools cannot wholly be protected from the wiles of company promoters, and agents, but the path of the latter may be made more difficult by the Legislature, and particularly so in a case like the present, where, thanks to the managing agents and the directors, the expressed objects of the company, viz., ' to encourage the habit of saving money and to facilitate small but safe investments', have been sadly falsified in actual practice. S.S. Patkar, J. 47. [His Lordship after setting out facts proceeded : ] It is urged on behalf of the appellant with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, or omits to act, knows what he is doing and intends to do what he is doing, but if that act or omission amounts to a breach of that person's duty, and therefore to negligence, he is not guilty of wilful neglect or default unless lie knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of his duty. At page 428 it was held that the care which a director is bound to take has been described by Neville J. in Brazilian Rubber Plantations and Estates, Limited, In re [1911] 1 Ch. 425 as reasonable care to be measured by the care an ordinary man might be expected to take in the circumstances on his own behalf. In City Equitable Fire Insurance Co., In re, the learned Judge was satisfied from the evidence adduced before him that each one of the directors was willing and anxious to give of his best to the company and at all times took as active a part in the work of the board as the circumstances would reasonably permit (p. 444), arid at page 426 it was laid down that the duties of. a bank director may differ widely from those of an insurance director, and the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld in six years, and though the appellant in his evidence says that he looked to the business and exercised supervision, there is no reliable evidence on the record to establish the truth of his story, Though in August 1912 a list of loans was asked for from the agents, no further steps were taken by the directors although the agents did not supply the list. The number of meetings held by the directors is indicative of the lack of control exercised by them over the agents. In City Equitable Fire Insurance, Co., In re, the directors were men of integrity and high business capacity and were willing and anxious to give their best to the company, and at all times took as active a part in the work of the board as circumstances would reasonably permit. The learned District Judge says in his judgment in this case (paragraph 28) that the measure of the directors' supineness and lack of any attempt to control the agents may be gathered from the fact that the agents even opened a branch at Bombay practically in spite of the directors and yet the directors did nothing. 53. Three statements were filed by the liquidator, Exhibits 107, 108 and 109. Exhibit 107 is the list of money advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors as to the persons to whom loans were to be advanced whether on khatas or on promissory notes, and whether acknowledgments of the debts were to be taken within the period of limitation. It appears from the evidence of the liquidator that the major portion of the amount lost was from the Kolhapur accounts and that neither were suits filed nor acknowledgments taken to keep the debts within limitation. It appears from the evidence of Damodar Vaman Lohokare, Exhibit 100, at page 62, that he looked through the books and did not find a single acknowledgment taken on Khatas. It also appears from the evidence that there was total lack of any system under which the agents were allowed to work the affairs of the bank. It appears from Davey v. Cory [1901] A. C. 477 that there was no allegation in that case that there was neglect or default by reason of the absence of some system under which, if honestly carried out, the interests of the bank would have been in that respect secured. See also the remarks of Walsh J. in In the matter of the Union Bank, Allahabad, Limited I.L.R. (1925) All. 669 referred to above. The appellant admits in his evidence, Exhibit 115, at page 70, that the agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, and that the money remained unpaid. The appellant admits in his evidence, Exhibit 115, at page 70, that his own deposits were a few hundreds only, and the amount was withdrawn before the crisis began, that the funds of the Valctrutvottejak Mandal were withdrawn about the panic time, and that only the minor Thite's money remained in the bank. It appears also from the evidence of Sharangdhar, Exhibit 97, at page 57, that if the directors had taken ordinary care, there would not have been any difficulty for them to have ascertained that moneys were being advanced to relatives and friends of agents and to bogus Ickatas. 56. It is further urged on behalf of the liquidator that the balance sheets were false in two particulars (1) in showing an exaggerated amount of debts for which securities were held, and (2) in showing debts as good which were really not so. Exhibit 62 is the balance-sheet from June 1, 1912, to May 31, 1913, and Exhibit 63 is the balance-sheet from June 1, 1913, to August 31, 1914. It appears from Exhibit 62 that the total amount of debts due to the bank was ₹ 3,67,209-4-5 which consisted of ₹ 2,24,271-0-7 as debts considered good for which the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et of 1913 was false in at least two particulars, namely, in showing an exaggerated amount of debts for which securities were held and as showing debts as good which really were not so, and that the agents must have known and the directors could have with ordinary care ascertained that the balance-sheet was false in these respects. It appears that no certified auditors and accountants were engaged to audit the accounts. It appears from the evidence of the liquidator, Exhibit 65, in paragraph 40, that it was in 1913 only that there was an audit by a professional auditor and subsequently in 1914 by Sahasrabudhe who is a certified accountant. Most of the debts were prior to 1913 as would appear from the evidence of the liquidator in para. 10. Therefore, there was no adequate reason for describing the debts differently in the different balance-sheets. The liquidator in his evidence, para. 25, says that the debts unsecured amounting to about ₹ 40,000 had become time-barred by the time the balance-sheet for 1912-13 was published, and he has put in Exhibit 79, a statement to that effect. It would, therefore, follow that the description in the balance-sheet for 1912-13 that the debts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n might have been vindicated by means of a suit, and that an application under that section, made more than two years after the act of misfeasance complained of, is alleged to have taken place, is barred by Article 36 of the Indian Limitation Act. Article 36 of the Indian Limitation Act refers to a suit for compensation for any malfeasance, misfeasance or nonfeasance independent of contract and would refer to actions founded on torts or such wrongs as are distinguishable from breaches of contract. In In the matter of the Union Bank, Allahabad, Limited I.L.R. (1925) All. 669 it was held that the liquidator's application to make the directors liable for the sums which the manager, through their negligence, has been enabled to make away with, is governed as to limitation by Article 120 of the Indian Limitation Act, and that the time begins to run from the date when the liquidation takes place, that is, when the liquidator first has a right vested in him. It was held that Article 36 would not apply as the claim is not independent of contract, and Articles 115 and 116 would not apply when there was no specific breach of a specific contract made by one or more individuals with the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an application under that section as if such application were a suit, I am not prepared to follow the view of the Allahabad High Court in In the matter of the Union Bank, Allahabad, Limited, that time begins to run from the date when the liquidator first has the right vested in him. In City Equitable Fire Insurance Co., In re [1925] 1. Ch. 407 it was hold that Section 215 of the Companies (Consolidation) Act, 1908 (8 Edw. VII, c. 69) corresponding to Section 235 of the Indian Companies Act, was a procedure section only and created no new or additional liability and that it provided a summary mode of enforcing existing rights. Sec the judgment of Pollock M, B. at page 507, following the cases in Coventry and Dixon's case (1880) 14 Ch. D. 660 ; Brazilian Rubber Plantations and Estates, Limited, In re [1911] 1 Ch. 425; and Cavendish Bentinck v. Fenn (1887) 12 App. Cas. 652 In the last case Lord Horschell observes (p. 661):- I think that in order to establish a claim to relief it would be necessary not only to shew a branch of duty but to shew a breach of duty -which resulted in pecuniary loss to the company. 61. In Halsbury's Laws of England, Vol. V, page 479, paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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