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TMI Blog2010 (8) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... ellants had also issued certain cheques to the respondents totalling Rs.9,30,00/-, the details whereof are set out in paragraph 6 of the plaint. On presentation, all the aforesaid cheques were returned dishonoured with the remark PAYMENT STOPPED BY DRAWER , except for one cheque which was dishonoured due to ACCOUNT SEIZED . It is further alleged in the plaint that the respondents subsequently came to know that the aforesaid Company had issued the non-convertible debentures in contravention of the Companies Act, 1956 without creating any charge against them, which is a precondition for the issuance of non-convertible debentures. Accordingly, on 16.04.1999, 19.04.1999 and 19.04.1999, the respondents-plaintiffs submitted their debenture certificates with the office of the Company with a request for premature redemption, but the said request was declined by the appellants, who refused to encash the same. On subsequent enquiry, it came to the knowledge of the respondentsplaintiffs that the said certificates were also not signed by the authorized signatory. The respondents sent a legal notice dated 19.04.1999 under Sections 138 and 141 of the Negotiable Instruments Act read with Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. Thus, it was not open to the respondents to allege that they had been deceived and defrauded. Further, none of the other Directors of the Company arrayed as appellants in the suit were responsible for the discharge of the liabilities of the Company, which had suffered losses due to bad debts and severe recessionary conditions. The debentures, it was asserted, were issued by the Company in accordance with all the rules and regulations. Merely because after the subscription of the debentures the respondent No.4 had resigned as Director due to business reasons, he could not shake off the responsibility of having decided with the other Directors to issue debentures on the terms and conditions as contained in the offer document. 4. The respondents filed reply to the application under Order XXXVII Rule 3, contending that no triable issue had been raised by the appellants and hence the application for leave to defend was liable to be dismissed. Significantly, in the said application, there was no denial of the assertion made by the appellants that the respondent No.4 and his brother were the Directors of the defendant No.1 Company and privy to the decision to invite secured non-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial court failed to appreciate that it is a well settled principle of law that a Director in a Company, being a public limited company or a private limited company, does not have any personal liability towards any of the creditors of the Company. Admittedly, the appellants were merely the Directors of the Company, M/s.Dawson Leasing Limited and had neither executed any personal guarantee nor any security document in favour of the respondents. Hence, the appellants could not have been held personally liable and the impugned judgment and decree were liable to be set aside on this ground alone. 7. Mr.Vachher the learned counsel for the appellant emphasized that decision to issue the secured non-convertible debentures was taken by none other than the respondent No.4 and his brother, namely, Mr.Kapil Bhasin, who were working as full-time functional Directors and were responsible for the day-to-day affairs of the Company M/s.Dawson Leasing Limited. Thus, the respondents allegation that they had been deceived or defrauded by the appellants or any other person is on the face of it devoid of substance. Finally, it was contended that the learned trial court has nowhere held as to how the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owes no contractual duty qua third parties. There are, however, two exceptions to this rule. The first is where the Director or Directors make themselves personally liable, i.e., by execution of personal guarantees, indemnities, etc. The second is where a Director induces a third party to act to his detriment by advancing a loan or money to the Company. On the third party proving such fraudulent misrepresentation, a Director may be held personally liable to the said third party. It is, however, well settled that this liability would not flow from a contract, but would flow in an action at tort, the tort being of misrepresentation and of inducing the third party to act to his detriment and to part with money. 12. This is the settled position ever since 1897 when the House of Lords decided the case of Salomon vs. Salomon Co. Ltd. 1897 AC 22, and Lord Macnaghten, observed as under: - the company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, the same persons are managers, and the same hands receive the profits, the company is not in law the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality of the corporation may be confined more and more. 14. Similar observations were made by the Supreme Court in the case of New Horizons Ltd. v. Union of India: (1995)1SCC478 : 27. The conclusion would not be different even if the matter is approached purely from the legal standpoint. It cannot be disputed that, in law, a company is a legal entity distinct from its members. It was so laid down by the House of Lords in 1897 in the leading case of Salomon v. Salomon Co. Ever since this decision has been followed by the courts in England as well as in this country. But there have been inroads in the doctrine of corporate personality propounded in the said decision by statutory provisions as well as by judicial pronouncements. By the process, commonly described as lifting the veil , the law either goes behind the corporate personality to the individual members or ignores the separate personality of each company in favor of the economic entity constituted by a group of associated companies. This course is adopted when it is found that the principle of corporate personality is too flagrantly opposed to justice, convenience or the interest of the Revenue. (See : Gower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sa Enterprises Ltd. 72 (1998) DLT 666, this Court while dealing with the liability of the Directors of a company for the dishonor of cheques of the company, in a suit filed under Order XXXVII of the Code of Civil Procedure, made the following observations: - 11. In so far as the liability of defendant No. 2 is concerned, the effect of the registration of a company under Section 34 of the Companies Act is that it is a distinct and independent person in law and is endowed with special rights and privileges; a person distinct from its members. Consequently, the company is enabled to contract with its shareholders also, to use common seal and acquire and hold property in its corporate name. The company is distinct from its shareholders and its directors. Neither the shareholders nor the director can treat the companies assets as their own. Directors of a company are liable for misappropriation of company's funds and other misfeasance, but not for an ordinary contractual liability of the company. The liability of the members or the shareholders or the directors is limited to the capital invested by them. So long the liability is not unlimited under Sections 322 and 323 of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted is required to be delineated by the party alleging the same if the plea of fraud is to be made the basis of a decree against the other party. Bald assertions and vague allegations will not be countenanced by the Courts. Rule 4 of Order VI specifically lays down that the particulars of the fraud alleged (with dates and items, if necessary) shall be stated in the plaint. 20. To conclude, the instant case is not one in which the appellants could have been held jointly and severally liable as Directors to pay the amount invested by the respondents in the Company. The appellants are not even alleged to be guarantors or indemnifiers for payment of the amount due from the Company nor it is pleaded in the plaint that the respondents had undertaken to make payment on behalf of the Company. As stated above, no particulars of fraud are set out, presumably for the reason that the respondent No.4 himself was a functional Director of the Company responsible for the day-today affairs of the Company. In such circumstances, in my considered opinion, it is the Company and the Company alone upon whom the liability can be fixed at all. 21. Accordingly, the appeal succeeds and the judgment an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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