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National Textile Corporation (Maharashtra North) Ltd. Vs. Khushalchand Bissesardas Daga - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberAppeal No. 297 of 1976 from Suit No. 35 of 1963
Judge
Reported in[1985]57CompCas511(Bom)
Acts Sick Industrial Companies Act, 1985 - Sections 2, 3, 4, 4(1), 4(6), 5, 5(1) and 5(2); Industries (Development And Regulation) Act, 1951 - Sections 15 and 18A
AppellantNational Textile Corporation (Maharashtra North) Ltd.
RespondentKhushalchand Bissesardas Daga
Excerpt:
a) it was adjudged under sections 4(6) and 5(2) of the sick textile undertakings (nationalisation) act, 1974, the suit was filed by the company, a sick textile undertaking, against the managing director for the recovery f the amount embezzled by him, then the national textile corporation was entitled to continue the suit - the right of the corporation to continue the suits would not be restricted only to the suits mentioned under section 4(6) of the act;b) it was adjudged under articles 120 and 36 of the limitation act, 1908, that where a suit was filed by the company against its managing director for the recovery of amount obtained by him through fraud, then such a suit fall under section 88 of the trusts act;c) it was adjudged under section 18 of the limitation act, 1908, that where the.....madon, j.1. this is an appeal against the judgment and decree of mr. justice vimadalal dismissing a suit filed on the original side of this high court on the ground that the appellants were not entitled to be substituted as the plaintiffs and to continue the suit.2. the suit originally filed by the model mills nagpur ltd. (hereinafter referred to as 'the company'), against the respondent, who was the managing director of the company until july 18, 1959, to recover from him a sum of rs. 48,08,329.69 with interest at the rate of 6 per cent. per annum for rs. 35,55,600 from february 11, 1963, up to the date of the judgment and, thereafter, at the rate of 4 per cent. per annum till payment. according to the case made out in the plaint, the said sum of rs. 33,55,600 represented the aggregate.....
Judgment:

Madon, J.

1. This is an appeal against the judgment and decree of Mr. Justice Vimadalal dismissing a suit filed on the Original Side of this High Court on the ground that the appellants were not entitled to be substituted as the plaintiffs and to continue the suit.

2. The suit originally filed by the Model Mills Nagpur Ltd. (hereinafter referred to as 'the company'), against the respondent, who was the managing director of the company until July 18, 1959, to recover from him a sum of Rs. 48,08,329.69 with interest at the rate of 6 per cent. per annum for Rs. 35,55,600 from February 11, 1963, up to the date of the judgment and, thereafter, at the rate of 4 per cent. per annum till payment. According to the case made out in the plaint, the said sum of Rs. 33,55,600 represented the aggregate of the amounts fraudulently taken away by the respondent in his capacity as the managing director of the company. At the hearing of the suit, the claim for interest on the said sum of Rs. 35,55,600 for the period prior to February 11, 1963, was given up and the suit was confined to the said sum of Rs. 35,55,600 with interest thereon from February 11, 1963, at the rate as aforesaid.

3. The facts which have given rise to this appeal have not been disputed before us, and it will be, therefore, sufficient, instead of setting them out in elaborate detail, to sketch them in order to understand the points which were argued at the hearing of this appeal. The company was incorporated in August, 1920. Prior to the coming into force of the Companies Act, 1956, M/s. Bansilal Abirchand Dadabhoy and Co., a partnership firm, were the managing agents from the company. The respondent was a partner in the said firm. As appears from the evidence of the appellants' witness, Dinshow Dorabji Patel, in or about December, 1950, Sir Maneckji D. Dadabhoy, who was the chairman and managing director, submitted his resignation and in his place, the respondent was appointed as the director in charge. After the respondent was so appointed, the system of purchasing cotton till then followed of asking for samples from merchants and brokers, selecting the samples and then placing the orders was discontinued and M/s. Hari Cotton and Co. were appointed the sole suppliers of cotton to the company. The said firm of M/s. Hari Cotton and Co. was managed by the respondent's brother, Naraindas Bissesardas Daga. Against the cotton alleged to be supplied to the company, large advances were made to the said M/s. Hari Cotton and Co., and were owing by the said firm to the company. In view of the restraints contained in the new Companies Act, 1956, on dealings by a company with concerns owned or controlled by relatives of directors, the said M/s. Hari Cotton and Co. were replaced by M/s. Harakchand Mohanlal, a sole proprietary concern, of which the proprietor was one Mohanlal Daga. Mohanlal Daga's brother, Laxmichand Daga, was the munim in the respondent's Bombay concern, namely, M/s. Daga and Sons. The amounts fraudulently taken away by the respondent have been through the instrumentality of the said firm of M/s. Harakchand Mohanlal. The uncontroverted evidence on the record shows that in May, 1956, Laxmichand met Mohanlal Daga and told him that the respondent and his brother, Naraindas, were withdrawing moneys from the company for their own purposes at Nagpur in the name of the said M/s. Hari Cotton and Co. and that in view of the provisions of the new Companies Act with had come into force on April 1, 1956, the said firm of M/s. Hari Cotton and Co. would have to be replaced by another entity. Thereafter, a meeting took place between the said Mohanlal and the respondent and it was agreed that a new proprietary concern should be started by the said Mohanlal in the name of M/s. Harakchand Mohanlal and that Mohanlal would sign whatever documents were required of him and that the rest of the work would be managed by the respondent. Thereupon under the respondent's instructions, Mohanlal was taken to the branch of the Bank of Bikaner in Bombay and an account in the name of M/s. Harakchand Mohanlal was opened.

4. It may be mentioned at this stage that on September 22, 1956, the Central Govt. gave its approval to the appointment of the respondent as managing director of the company, and at the general body meeting of the company held on December 17, 1956, the respondent was appointed as such managing director and an agreement relating to this appointment was executed between the company and the respondent on December 18, 1956.

5. After the concern of the said M/s. Harakchand Mohanlal had started functioning, orders were placed with it for supply of cotton to the company. The modus operandi which was adopted was that against orders placed amounts were credited to the said M/s. Harakchand Mohanlal in the books of account of the company towards the price of cotton alleged to be in transit to the mills of the company in Nagpur. Against such credit M/s. Harakchand Mohanlal drew hundis upon the company in favour of either M/s. Hari Cotton and Co. or the bank of Bikaner or M/s. Girdharlal Sundarlal. The firm of M/s. Girdharlal Sundarlal consisted of two brothers, namely, Girdharlal and Sundarlal. The father of these two was one Asaram Rathi. Asaram was the munim in M/s. Bansilal Ramachandra, a sole proprietary concern of the respondent. It is not disputed that the amounts of the hundis so drawn have all found their way into the pockets of the respondent, and the cotton alleged to be in transit to the company never found its way to the mills. In certain cases, instead of following the above modus operandi, payments were made by cheques to Mohanlal, put into the bank account of the said Harakchand Mohanlal and then the amounts withdrawn and handed over to the respondent. Elaborate evidence of the fraud so practised upon the company was led in the trial court, and so far as the amounts thus fraudulently taken away by the respondent and proved in court are concerned, they aggregated to Rs. 35,17,600 or in other words, the total amount claimed in the plaint except an item of Rs. 38,000. This has not been disputed before us by the respondent.

6. The fact that the books of account of the company showed advances made to M/s. Harakchand Mohanlal against cotton in transit which had not at any time arrived and thus a large debit stood against the said M/s. Harakchand Mohanlal in the said books of account. This caused concern and the manager of the mills, Jamshedji Pestonji Dordi, wrote letters to the respondent requesting him to see that the amount of outstandings was recovered from the said M/s. Harakchand Mohanlal. Two of these letters are on the record. It is also in evidence that the auditors of the company had also raised queries about such large amounts being allowed to be left outstanding. In order to get over these objections, another plan was hit upon. A company called Storage Batteries Mfg. P. Ltd. (hereinafter referred to as 'Storage Batteries') was got incorporated on May 27, 1958, with an authorised share capital of Rs. 20,00,000. The promoters of the said company were one G. M. Mukherjee and L. N. Dhandotiya and the said Mukherjee advanced Rs. 2,000 for initial expenses. The address of the said company was 15, Narayan Dabholkar Road, Bombay 6, which was the address of one Haridas Mundhra who was a friend of the respondent. Evidence on the record is clear that Storage Batteries was a sham company got floated by the respondent to stave off the evil day when the fraud perpetrated by him upon the company would be discovered. In further pursuance of his plan to defraud the company and to prevent the company from coming to knows of his fraud, a meeting of the board of directors of the company was called on June 11, 1958. The said meeting was attended by the respondent, his son, Laxmichand, one J. R. Motishaw and the said Asaram Rathi, the munim of the respondent's sole proprietary concern. At the said meeting, the resignations from the board of two directors, Lachhmandas H. Daga and Jaykrishnadas Harivallabhdas, were accepted. Amongst the business said to be executed at the said meeting as recorded in the minutes of the said meeting was the consideration of a letter dated January 9, 1958, addressed by the company's auditors to the board of directors with respect to the accounts for the year ended June 30, 1957. Item 1 of the report of the auditors referred to the advances made to the said M/s. Harakchand Mohanlal. The explanation given by the respondent at the said meeting was that advances were made to the said M/s. Harakchand Mohanlal in accordance with the usual practice followed in the past in the matter of purchases of cotton and that of the bales of cotton purchased from the said M/s. Harakchand Mohanlal, all except a small lot of 330 bales of cotton had been received and the said M/s. Harakchand Mohanlal had assured that the remaining bales would be delivered to the mills very soon. When asked about the constitution of the said firm of M/s. Harakchand Mohanlal, the respondent stated that he had no interest whatever in the said firm and that the said Mohanlal was its sole proprietor. According to the said minutes, in view of the explanation given by the respondent, the board ratified the respondent's action in making the above purchases and granting the above advances and apart from the minutes, there is no direct evidence of what transpired at the said meeting. Rajendra Thakorlal Desai, the secretary of the company, who had given evidence at the trial, of the suit, was unwell and was unable to remain present at the said meeting held on June 11, 1958. According to his evidence, he had not attended work on June 11, 1958 but had resumed duties on June 12, 1958 when the respondent gave him a draft of the minutes of the said meeting which the respondent had prepared and asked him to incorporate it in the minutes book. Another meeting of the board of directors was held on June 19, 1958, at which the said Desai was present at which the minutes were dictated by him to his stenographer. At the said meeting, the directors present were the respondent, the said Motishaw, the said L. K. Daga, the respondent's son, and the said Asaram Rathi, the respondents munim. The minutes of the said meeting record that the board considered the question of advances to the said M/s. Harakchand Mohanlal made up to July 1, 1957 which were referred to in the auditors report. Mostly, the same explanation as was stated to be given by the respondent at the said meeting of the board held on June 11, 1958, is stated to have been given at this meeting also. The respondent is further stated to have informed the board that he was doing his best to compel the said M/s. Harakchand Mohanlal to pay the amounts due as early as possible and that after considerable negotiations, the said M/s. Harakchand Mohanlal had proposed to discharge its liability by giving to the company 5000 fully paid up shares of the face value of Rs. 100 each of Storage Batteries, assigning to the company loans and advances in the sum of Rs. 7,00,000 'by way of assigning through the company the party's loans and advances to the Storage Batteries. Payments of rupees five lakhs in cash within one year and Rs. 15 lakhs in cash within two years'. At the said meeting, the other three directors who were present pointed out that the advances in question were made to M/s. Harakchand Mohanlal prior to their joining the board. They demanded from the respondent, a personal guarantee for the amount due to the company, which the respondent did not accept, but ultimately agreed to give a guarantee in the sum of Rs. 10,00,000. The said Mohanlal had been called to the meeting and was made to wait outside. After the proposal made by the respondent was accepted by the board, the said Mohanlal was called in and he agreed to the proposed arrangement. At the said meeting of the board, the respondent was authorised to write a letter to the said M/s. Harakchand Mohanlal setting out the terms which the board had accepted and to obtain from Mohanlal a confirmation in writing thereto as also to confirm in writing the guarantee of Rs. 10,00,000 which he had given to the company. The said Mohanlal wrote a letter to the company in which he stated that he had received the company's letter dated June 20, 1958, along with the draft agreement and that the accepted the terms thereof without reservation. Along with the said letter, he, the said Mohanlal, returned the agreement enclosed in duplicate and signed by him, with a request that the company should sign the counterpart and return it to him. The said agreement is dated June 23, 1958, and is made between the said M/s. Harakchand Mohanlal and the company and signed on behalf of the company by the respondent. Under the said agreement, the said Mohanlal agreed to repay the advances of about Rs. 33,00,000 by paying a sum of Rs. 10,00,000 within four months of the date of the said agreement and a further sum of Rs. 10,00,000 within a period of 12 months from the date of the said agreement and forthwith to deliver to the company 5,000 fully paid-up shares of the face value of Rs. 100 each of Storage Batteries with transfer forms duly executed in favour of the company and to secure transfer and registration of the said shares in the name of the company and to arrange and secure to the company a havala or transfer of a credit of Rs. 7,00,000 which the said M/s. Harakchand Mohanlal declared was due, owing and payable by Storage Batteries to it as and by way of loans and advances. The letter dated June 23, 1958, from the said M/s. Harakchand Mohanlal to Storage Batteries shows that M/s. Harakchand Mohanlal had sold a complete battery manufacturing plant to Storage Batteries for a sum of Rs. 12,00,000. The bill in the said sum of Rs. 12,00,000 was enclosed with the said letter. The said letter records that the said M/s. Harakchand Mohanlal had agreed to accept payment by receiving 4,999 fully paid up shares of Rs. 100 each of Storage Batteries in the name of the sole proprietor of the said concern, the said Mohanlal, and by a credit for the balance of Rs. 7,00,200 in the books of account of Storage Batteries, carrying interest at the rate of 6 per cent per annum. The said letter further records that it was agreed that the said Mohanlal would be invited to join the board of directors of Storage Batteries. It is needless to mention that all the shares of Storage Batteries and the plant to be sold by the said M/s. Harakchand Mohanlal to Storage Batteries existed purely in the said letters and the agreement. To lend further verisimilitude to the fraud perpetrated upon the company, the said Mohanlal wrote a letter dated June 26, 1958, purported to forward along with it 5,000 fully paid up shares of Storage Batteries. It is equally needless to mention that no such shares were at all forwarded to the company along with the said letter.

7. On March 10, 1959, a notice of closure on account of the loss as suffered by the company was put up and on April 6, 1959, the mills closed their doors. On April 24, 1959, the Central Govt. appointed a committee under s. 15 of the Industries (Development and Regulation) Act, 1951, to make an investigation into the circumstances which led to the closure of the company. On June 25, 1959, all the books and records of the company, including the books of account and minute-books of the meetings of the board of directors were seized by the police. Several documents were also seized from the said Mohanlal and from the Bank of Bikaner and others. On July 18, 1959, the central Govt. issued a notification under s. 18A of the said Act authorising one Hanuman Prasad Nevatia to take over the management of the whole of the undertaking, namely, the Model Mills Nagpur Ltd., on the ground that it was being managed in a manner highly detrimental to public interest. The Authorised Controller, Nevatia, thereafter took charge of the management of the company. In the absence of books of the company which had been seized by the police, the accountant, Dordi, prepared provisional statements of account from the last balance sheet. On March 7, 1960 a charge sheet was filed by the police, inter alia, against the respondent. On July 6, 1960, the respondent was adjudicated an insolvent. Two criminal cases, namely, criminal Cases Nos. 307 of 1962, and 309 of 1962, were registered by the police against the respondent and some others in which the accused were committed to the Court of Sessions. On February 8, 1963, leave was granted by the Insolvency Judge to the company to file a suit against the respondent and the suit was filed on February 9, 1963.

8. When the cases against the respondent and the other accused came up for trial before the Court of Sessions, the respondent pleaded guilty to all the charges and was convicted and sentenced on his plea of guilty. The charges against the respondent and the other accused were entering into a criminal conspiracy with the said Mohanlal and Lakhmichand Daga to commit criminal breach of trust of the funds of the company over which the respondent in the course of this business as agent of the company and in his capacity as director-in-charge or managing director was trusted with dominion and committing in pursuance of such criminal conspiracy, the acts of criminal breach of trust charged against the respondent. The other heads of charges set out the specific acts of criminal breach of trust so committed by the respondent.

9. By a notification dated July 14, 1970, the Maharashtra State Textile Corporation was appointed the authorised Controller of the company in place of the said Nevatia. On December 21, 1974, the Sick Textile Undertakings (Nationalisation) Act, 1974 (No. 57 of 1974), was passed by Parliament replacing an Ordinance which had been promulgated earlier by the President of India. The said Act came into force with retrospective effect from April 1, 1974. The company is mentioned in Item 63 of Sch. I to the said Act. By reason of the provisions of the said Act, the appellants applied for and were by an order dated March 24, 1975, substituted as plaintiffs to the said suit in place of the company.

10. At the hearing of the suit, no evidence whatever, either oral or documentary, was led on behalf of the respondent. The appellants led voluminous evidence to prove each item of defalcation committed by the respondent and pleaded in the plaint except an item of Rs. 38,000. After the evidence was closed and during the course of the arguments, learned counsel for the respondent applied for leave to amend the written statement by raising a contention that the appellants were not entitled to maintain the suit as the right to sue had not become vested in them. This application was opposed on behalf of the appellants on the ground that the point sought to be raised by the amendment would, were it upheld, displace the appellants suit and was taken at a very late stage. By his order made on March 24, 1976 Mr. justice Vimadalal rejected the said application for amendment but further stated in the said order : 'It will, however, be open to Mr. Bharucha (learned counsel for the respondent who appeared at the trail of the suit) to contend that notwithstanding the rejection of the application for amendment, the court should pass a decree in favour of a party who has no right to maintain the suit.' The learned judge then heard the arguments on the question of maintainability of the suit and came to the conclusion that the appellants had no right to continue the suit inasmuch as the company's right to sue the respondent had not become vested in them under the provisions of the said Sick Textile Undertakings (Nationalisation) Act. As, however, a complete trial had taken place, the learned judge proceeded to give his findings on all the issues which has been raised. He held that the appellants had, on facts, proved their case, but part of the appellant's claim was barred by the law of limitation. According to the learned judge, the suit was in substance under s. 88 of the Indian Trusts Act, 1882, in respect of which no specific period of limitation had been proved in the old Indian Limitation Act, 1908, by which the case was governed and, therefore, the residuary art 120 of the said Act applied. In the plaint, postponement of the starting point of limitation had been sought by relying upon s. 18 of the Indian Limitation Act by pleading that the respondent had throughout fraudulently concealed the true facts from the company and that the company was by the fraud of the respondent kept from the knowledge of its right to take proceedings to recover the amounts claimed until some time after March 7, 1970, when the company for the first time became aware of the true facts. The learned judge held that s. 18 had no application because all the directors of the company had knowledge of the fraud committed by the respondent and that the knowledge of the directors was the knowledge of the company. The learned judge, therefore, opined that were the suit maintainable, he would pass a decree in the sum of Rs. 23,35,500 being the aggregate of the amounts embezzled by the respondent within a period of six years prior to the date of the filing of the suit. It is against this judgment and decree of the trial court that the present appeal has been preferred.

11. At the hearing of this appeal, only two contentions have been urged on behalf of the respondent namely, (1) that the right to sue the respondent which the company possessed had not become vested in the appellants and, therefore, the appellants were not entitled to continue the suit or to have any decree passed in their favour, and (2) that the whole suit was barred by the law of limitation.

12. Turning now to the first point, namely, that of maintainability, before we refer to the relevant sections of the Sick Textile Undertakings (Nationalisation) Act, 1974 (hereinafter for the sake of brevity referred to as 'the Act'), we may observe that it is somewhat difficult to understand the order passed by the trial court on the application for amendment of the written statement made on behalf of the respondent on June 24, 1976. As mentioned earlier, the application for amendment was opposed on the ground that if the application were allowed and the points raised thereby sustained, the appellants' suit would be displaced and that the application was meet too late a stage of the proceedings and, therefore, should not be permitted. The contention on behalf of the appellants was one founded on a principle well-settled in law and in respect of which no discussion is necessary. This contention apparently found favour with the learned Judge, for he rejected the application for amendment. It, however, appears from the order passed by the learned judge that he gave the respondent's counsel liberty to urge this contention orally. We are unable to understand how, if the point sought to be raised by the amendment was one which could not be permitted to be taken in writing, namely, by incorporating it in the written statement, it could be allowed to be taken orally. It is needless to dwell further upon this aspect, because on a perusal of the relevant sections of the Act, we find no substance in the contention of the non-maintainability of the suit. Clause (j) of s. 2 of the act defines a 'sick textile undertaking'. That definition is in the following terms :

'(j) 'sick textile undertaking' means a textile undertaking, specified in the First Schedule, the management of which has, before the appointed day, been taken over by the Central Government under the Industries (Development and Regulation) Act, 1951, or, as the case may be, vested in the Central Government under the Sick Textile Undertakings (Taking Over of Management) Act, 1972.'

13. It is not disputed that the company is a 'sick textile undertaking' within the meaning of the said cl. (j) of s. 2 of the act. In fact, as mentioned earlier, it one of the undertakings mentioned in Sch. I to the Act. Section 3 of the Act provides as follows :

'3. Acquisition of rights of owners in respect of sick textile undertakings - (1) On the appointed day, every sick textile undertaking and the right, title and interest of the owner in relation to every such sick textile undertaking shall stand transferred to, and shall vest absolutely in, the Central Government.

(2) Every sick textile undertaking which stands vested in the central Government by virtue of sub-section (1) shall, immediately after it has so vested, stand transferred to, and vested in, the National Textile Corporation.'

14. Clause (h) of s. 2 of the Act defines the term 'owner' as follows :

'(h)'owner', when used in relation to a sick textile undertaking, means any person or firm who or which is, immediately before the appointed day, the immediate proprietor or lessee or occupier of the sick textile undertaking or any part of thereof, and in the case of a textile company which is being wound up or the business whereof is being carried on by a liquidator or receiver, includes such liquidator or receiver, and also includes any agent or manager of such owner but does not include any person or body of persons authorised under the Industries (Development and Regulation) Act, 1951, or the Sick Textile Undertakings (Taking Over of Management) Act, 1972, to take over the management of the whole or any part of the sick textile undertaking;.'

15. Thus, on April 1, 1974 which was the appointed day, the undertaking, namely, the company, and the right, title and interest of its owners in relation to such undertaking stood transferred to and were vested absolutely in the central Govt. and, thereafter, stood transferred to and vested in the National Textile Corporation. Under s. 6(1) the National Textile Corporation may, if it considers it necessary so to do, form subsidiary corporations under the companies act, 1956, and register them under that Act and may, by an order in writing, transfer any stick textile undertaking or part thereof to such subsidiary textile corporation, and, thereafter, such subsidiary corporation becomes substituted for all practical purposes in place of the National Textile Corporation. The appellants are a subsidiary corporation formed and registered by the National Textile Corporation to whom the sick undertaking of the company has been transferred. Sub-section (1) of s. 4 contains an extensive definition of the expression 'sick textile undertakings referred to in s. 3'. That sub-section is in the following words :

'4. General effect of vesting. - (1) The sick textile undertaking referred to in section 3 shall be deemed to include all assets, rights, leaseholds, powers, authorities, and privileges and all property, movable and immovable including lands, buildings, workshops, stores, instruments, machinery and equipment, cash balances, cash on hand, reserve funds, investment and book debts and all other rights and interests in, or arising out of, such property as were immediately before the appointed day in the ownership, possession, power or control of the owner of the sick textile undertaking, whether within or outside India, and all books of account, registers and all other documents of whatever nature relating thereto and shall also be deemed to include the liabilities and obligations specified in sub-section (2) of section 5.'

16. It is obvious on a bare reading of sub-s. (1) of s. 4 that all assets, right and property of the company became vested in the Central Government and, consequently, in the National textile Corporation and then in the appellants. Such assets, rights and property included the right to recover from the respondent the moneys of the company which had been misappropriated and embezzled by the respondent. The trial court has, however, placed reliance upon sub-s. (6) of the said s. 4. It, therefore, becomes necessary to reproduce that sub-section.

17. That sub-section is as follows :

'(6) If, on the appointed day, any suit, appeal or other proceeding of whatever nature in relation to any matter specified in sub-section (2) of section 5 in respect of the sick textile undertaking, instituted or preferred by or against the textile company, is pending, the same shall not abate, be discontinued or be, in any way, prejudicially affected by reason of the transfer of the stick textile undertaking or of anything contained in this Act but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the National Textile Corporation.'

18. In order to understand sub-s. (2) of s. 5, it is also necessary to have a look at sub-s. (1) of s. 5. These two sub-sections provide as follows :

'5. Owner to be liable for certain prior liabilities - (1) Every liability, other than the liability specified in sub-section (2) of the owner of a stick textile undertaking, in respect of any period prior to the appointed day, shall be the liability of such owner and shall be enforceable against him and not against the Central Government or the National textile Corporation.

(2) Any liability arising in respect of -

(a) loans advanced by the central Government, or a State Government, or both, to a sick textile undertaking (together with interest due thereon) after the management of such undertaking had been taken over by the Central Government,

(b) amounts advanced to a sick textile undertaking (after the management of such undertaking had been taken over by the central Government), by the National Textile Corporation or by a State textile Corporation, or by both, together with interest due thereon,

(c) wages, salaries and other dues of employees of the sick textile undertaking, in respect of any period after the management of such undertaking had been taken over by the Central Government,

Shall on and from the appointed day, be the liability of the Central Government shall be discharged, for and on behalf of that Government, by the National Textile Corporation as and when repayment of such loans or amounts due or as and when such wages, salaries or other dues become due and payable.'

19. According to the trial court, it is only the types of suits mentioned in s. 4(6) which could be maintained and continued by the National Textile Corporation. In our opinion, sub-s. (6) of s. 4 was designed for a very different purpose. As will be seen on a perusal of sub-ss. (1) and (2) of s. 5, every liability of the owner of a sick textile undertaking, other then the liability specified in s. 5(2), in respect of a period prior to April 1, 1974 is to be the liability of such owner and is to be enforceable against him and not against the Central Govt. or the National Textile Corporation. The only liabilities which could be enforced against the central Govt. or the National Textile Corporation are the liabilities set out in sub-s. (2) of s. 5. These are the liabilities for repayment of loans advanced by the Central or State Govt. to a sick textile undertaking after the management of such undertaking had been taken over by the Central Govt., amounts advanced to the undertaking by the National Textile Corporation or by a State Textile Corporation after the management of such undertaking had been taken over by the Central Govt. and wages, salaries and other dues of employees of the undertaking in respect of any period after the management of such undertaking had been taken over by the Central Govt. Now, the taking over the management by the central Govt. in sub-s. (2) of s. 5 refers to taking over of the management, inter alia, under s. 18A of the Industries (Development and Regulation) Act, 1951. Under s. 5(2), the liability to repay loans given by the Government or by the National Textile Corporation or a state textile Corporation after the management of the undertaking was so taken over and to pay the wages and salaries and other dues of employees of the undertaking in respect of a period after the management was so taken over is not to be the liability of the previous owner of the undertaking, but is to be the liability of the central Govt. and is to be discharged on behalf of that Government by the National Textile Corporation. All other liabilities are, however, to be those of the owner of the undertaking and become enforceable against him and not against the Central Govt. or the National Textile Corporation. Sub-s. (6) of s. 4 was specially enacted to provide that if in respect of a liability mentioned in s. 5(2), a suit, appeal or other proceeding instituted or preferred by or against the textile company was pending, the same was not to abate or to be discontinued or be in any way prejudicially affected by reason of the transfer of the sick textile undertaking; but it could be continued, prosecuted and enforced by or against the National Textile Corporation. Now, a question might well arise as to what are the suits of the nature specified in s. 5(2) which the National Textile Corporation can maintain by reason of the provisions of s. 4(6) of the Act. It is not possible to categories all such suits, but a suit that immediately strikes one is a suit for redemption of a mortgage in respect of a secured loan advanced to the sick textile undertaking by the Government. Further, it is pertinent to bear in mind that s. 4(6) does not speak only of suits. It also speaks of appeals and other proceedings of whatever nature. Thus, it may be that a decree might have been passed against the sick textile undertaking in respect of a suit filed against it to enforce one of the liabilities specified in s. 5(2) and against that decree the six textile undertaking might have gone in appeal. Such an appeal could be continued by the National Textile Corporation. Other examples would be applications in execution. From this sub-section, however, it does not follow that if the sick textile undertaking had assets to recover in respect of which it had filed a suit, the suit could not be continued by the National Textile Corporation. To take an example, supposing a sick textile undertaking owned and immovable property was wrongfully deprived of the possession of such property by trespass and had filed a suit to recover it, on the appointed day, the suit property being an asset of the undertaking would vest forthwith in the Central Govt. and, thereafter, immediately vest in the National Textile Corporation and the owner of the undertaking would cease to be the owner of the suit property and would have no right to obtain possession of the said property. If the construction placed by the trial court upon s. 4(6) were correct, the result would be startling. The owner of the undertaking could not continue the suit, because he is not more the owner of the property. The person in whom the property had become vested, namely, the National Textile Corporation, could not bring itself on the record of the suit, because it was not a suit of the type referred to in sub-s. (2) of s. 5. The astounding result would be that the trespasser would continue to remain in possession of and enjoy for all time the property which belonged to the National Textile Corporation. Neither Parliament could have intended nor the ordinary canon of construction of statutes permit such an interpretation to be placed upon the provisions of the Act above referred to. What we have said with respect to an immovable property would apply equally to recovery of movable property belonging to the undertaking. The trial court was not right in law in holding that the National textile Corporation can prosecute only the suits mentioned in s. 5(2) and not other types of suits. In our opinion, the National Textile Corporation and its subsidiary corporation when any sick textile undertaking is transferred to it is entitled to continue all suits filed by such undertaking to recover any of its assets or properties or to enforce any of its rights. The amount embezzled by the respondent from the funds of the company by perpetrating a fraud upon the company was the property of the company and the company was entitled to have the benefit and advantage of such property restored to it by the respondent who was its managing director and the director-in-charge and thus stood in a fiduciary relation to the company. The appellants were, therefore, clearly entitled to have themselves substituted on the record of the suit under r. 10 of O. XXII of the CPC, 1908, and to prosecute further the suit, and if successful therein, to have a decree passed in their favour.

20. We next turn to the question of limitation. The learned judge has held that the suit was under s. 88 of the Indian Trusts Act, 1882 (2 of 1882). The said s. 88 provides as follows :

'88. Advantage gained by fiduciary. - Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interest are, or may be, adverse to those of such other persons and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.'

21. The section expressly mentions director of a company as being a person bound in a fiduciary capacity to protect the interests of another person, which in the case of the director would be the company of which he is the director. The respondent was not only the managing director but the director in charge of the company. All unknown to the company, he was also, through his nominees, the supplier or rather non-supplier of cotton to the company and the person who received payment in respect of such non supplies. It was argued before us that the article of the old Limitation Act which would apply would be either art 36 or art 95 of Sch. I to the Act, and in either event, the entire claim was time barred. These articles provided as follows :

------------------------------------------------------------------------Description of Suit Period of limitation Time from whichperiod begins to run------------------------------------------------------------------------'36. For Compensation for When the mal-any malfeasance misfeasance feasance, mis-nonfeasance independent Two years feasance, or non-of contract and not herein feasance takesspecially provided for. place.95. To set aside a decree When the fraud becomesobtained by fraud, or for Three years known to the partyother relief on the ground wronged.'of fraud.-----------------------------------------------------------------------

22. Mr. Mehta, learned counsel for the respondent, submitted that the acts of the respondent amounted to malfeasance and, therefore, art 36 applied to the suit and the period of limitation would be two years from the date when the malfeasance took place. In the alternative, Mr. Mehta, submitted that as the plea in the plaint was that of fraud, art. 95 would apply and the period of limitation would be three years.

23. The appellants have sought to postpone the starting point of limitation by placing reliance upon s. 118 of the Indian Limitation Act. If they are right in this, the period of limitation would not begin to run until the company obtained knowledge of the fraud, and it would be immaterial whether art 95 or art 120 applied, because in either event, the suit would be in time, since it was filed within three years of the date on which according to the plaint, the company acquired knowledge of the fraud. If, however, art. 36 applies, the suit would be barred by limitation, because according, to the plaint, the company came to learn about the fraud of the respondent more than two years prior to the date of the suit. Turning, therefore, first to art 36 the condition for the applicability of art 36 is that the malfeasance, misfeasance or nonfeasance must be independent of contract, which is not the case here as will be presently shown. Contentions similar to those taken before us were advanced before a Division Bench of this court in Govind Narayan Kakade v. Rangnath Gopal Bajopadhye AIR 1930 Bom 572 ILR 54 Bom 226. In that case, the liquidator of a bank filed an application under s. 235 of the Indian Companies Act, 1913, to recover from the agents and directors of the bank, various sums of money on the ground of breach of trust, negligence and misfeasance, resulting in loss to the bank. It was contended that the said application was barred by the law of limitation. The Division Bench held that neither art. 36 nor art 115 nor art. 116 of the Indian Limitation Act applied and the application was governed by art, 120. Marten C.J. disposed of the contention based upon art 36 in these words AIR 1930 246 :

'As regards article 36 I feel no difficulty. In my judgment, the present claim against the directors for misfeasance or breach of trust is clearly 'not independent of contract' and consequently, article 36 does not apply. In this respect, therefore, I agree with the view of the Allahabad High Court in In the matter of the Union Bank, Allahabad, Ltd. : AIR1925All519 , in preference to that expressed by the Lahore High Court in Bhim Singh v. Liquidator, Union Bank of India AIR 1927 Lah 433; 100 IC 907. I say this because the relations between the bank and its directors are in part governed by numerous articles in the articles of association, including their qualification shares and remuneration, and indeed the very indemnity which they are relying on in this case. In my opinion, these articles constitute part, though not the whole, of a contract between the company and its directors.'

24. As we have seen, the respondent was not only a director but the managing director of the company. Further, he had entered into an agreement dated December 18, 1956, with the company containing the terms and conditions of his appointment as managing director. Under cl. 2 of the said agreement, the respondent had agreed to manage the business affairs of the company faithfully, diligently, honestly and not the best of his ability and power. The fraud and breach of trust committed by the respondent cannot, therefore, be said to be independent of contract. In India Sugars and Refineries Ltd. v. Estate of Late Ramalingam, , it was held that art. 36 contemplates an action for compensation for a wrong in the nature of a tort and that the suit to which that article would apply is a suit for compensation, but if the suit was for the recovery of a particular property or a sum of money as such, then the suit cannot fall within the scope of art. 36. The case before the madras High Court was also the case of a director and the sole managing agent of a company who had gained for himself a pecuniary advantage by availing himself of his fiduciary character. The court held that in view of the nature of the claim against him, the suit was under s. 88 of the Indian Trusts Act and the only article applicable to such a suit was art. 120.

25. We are in respectful agreement with what was laid down in the above two cases, and, in our opinion, the trial court was right in holding that art. 120 applied to the suit.

26. The only question which now remains to be considered is whether the appellants were entitled to postpone the starting point of limitation under s. 18 of the Indian Limitation Act, 1908. The said section provided as follows :

'18. Effect of fraud - Where any person having a right to institute a suit or make an application has, by means of fraud, been kept from the knowledge of such right or of the title on which it is founded.

or where any document necessary to establish such right has been fraudulently concealed from him,

the time limit for instituting a suit or making an application -

(a) against the person guilty of the fraud or accessory thereto, or

(b) against any person claiming through him otherwise than in good faith and for a valuable consideration,

shall be computed from the time when the fraud first became known to the person injuriously affected thereby, or, in the case of the concealed documents, when he first had the means of producing it or compelling its production.'

27. The learned judge relying upon a decision of the Judicial committee of the Privy Council in Rahimbhoy Habibbhoy v. Charles Agnew Turner [1892] 20 IA 1 : ILR[1892] 17 Bom 341, and a decision of the Full Bench of the Calcutta High Court in Biman Chandra Dutta v. Promotho Nath Ghose ILR[1922] Cal 886: AIR 1922 Cal 157, held that it was for the plaintiff to prove in the first instance, the circumstances which would prevent the statute from having its ordinary effect and person who desired to invoke the aid of s. 18 must establish that there had been fraud and by use of such fraud, he had been kept from the knowledge of his right to sue. The learned judge further held that it was only when the initial ones was discharged by the plaintiff that the burden was shifted to the other side to show that the plaintiff had clear an definite knowledge of the transaction beyond the period of limitation and that, in that connection, it was not sufficient for the defendant to show that the plaintiff had nearly some 'clues' and 'hints' which perhaps might have led to a complete knowledge of the fraud. Applying the above ratio to the facts of this case, the learned judge held that in view of his finding that the appellants had no right to continue the suit, the fact when the Authorised Controller, Nevatia, acquired knowledge of the alleged fraud was irrelevant, and to have had him examined on commission as the appellants wanted to do both before and at the time of trail by reason of the serious illness of Nevatia, would I have been futile. The learned judge further held that for the purpose of question of limitation, what was relevant was the knowledge of the directors of the company. The learned judge further held that the initial fraud had been committed at the time when each individual particular sum of money was fraudulently taken away by the respondent. According to him, the fraud which was committed by holding the said meeting of the board of directors on June 19, 1958, was not the initial fraud but was merely a consequential fraud, being a device to cover up the fraud initially practised. The learned judge further held that the directors of the company who attended the said meeting held on June 19, 1958, knew that it was a sham meeting and they had, therefore, knowledge of this fraud and their knowledge must be attributed to the company. On this line of reasoning, the learned judge held that the part of the plaintiffs' claim which was more than six years prior to the date of the filing of the suit was barred by the law of limitation. With respect, were are unable to agree with any of the conclusions reached by the learned judge on this aspect of the case. In holding that because the appellants had no right to continue the suit, the knowledge of the Authorised Controller, Nevatia, was irrelevant to the question, the learned judge overlooked the fact that the suit as originally filed was filed by the company in its own name and not in the name of the appellants, namely, National Textile Corporation (Maharashtra North) Ltd. The learned judge also overlooked that under the Industries (Development and Regulation) Act, 1951, the entire management of the undertaking, namely, the company, became vested in the Authorised Controller and that after the notification dated July 18, 1959, under s. 18A of the said Act was issued, the company could only act through the Authorised Controller and not through anyone else. Assuming the learned judge was right in the conclusion on facts which he arrived at, namely, that the directors had knowledge that the meeting held on June 19, 1969, was a shame one, the learned Judge overlooked that if knowing this, the directors, closed their eyes to such fraud and failed to take any steps to recover the property of the company from the respondent, they thereby became parties to that fraud, and their knowledge of the fraud perpetrated by the respondent could not be attributed to the company or characterised as knowledge of the company. The knowledge of the directors of a company is a knowledge of the company when it relates to acts which are intra vires the directors. It is not part of the duties or functions of a director to embezzle the funds of the company or to aid or abet a co-director or the managing director in embezzling the funds of the company or to join hands with him in ensuring that such fraud does not come to light. That would be an act on the part of the directors directly contrary to the interests of the company, and in committing such acts the directors would themselves be abusing the fiduciary character which they hold vis-a-vis the company in their capacity as its directors. We must also observe that the two decisions relied upon by the learned judge have not been correctly appreciated and applied by him to the facts of this case. The facts of the case before the Judicial Committee were that a suit was brought by the Official Assignee in 1887, in which suit it was established that the defendant had received in 1869 upon a voluntary transfer, some of the insolvent's assets, had joined as assisted the insolvent in defrauding his creditors and that no disclosure of this fraud was made to the official assignee, while the defendant did what he could to prevent the official assignee from seeing the accounts of the assets transferred. Dealing with the question of the onus of proof, the Judicial Committee observed Rahimbhoy Habibbhoy v. Charles Agnew Turner ILR [1892] 17 Bom 341;

'Their Lordships consider that when a man has committed a fraud and has got property thereby, it is for him to show that the person injured by his fraud and suing to recover the property has had clear and definite knowledge of those facts which constitute the fraud, at a time which is too remote to allow him to bring the suit. That is attempted in the present case. But their Lordships consider, - and in this they agree with both the courts below - that all that the appellant, Rahimbhoy, has done is to show that some clues and hints reached the assignee in the year 1881, which perhaps, if vigorously and acutely followed up, might have led to a complete knowledge of the fraud, but that there was no disclosure made which informed the mind of the assignee that the insolvent's estate had been defrauded by Rahimbhoy of these assets in the year 1867. (that being the year in which Rahimbhoy was adjudicated insolvent.)'

28. In the Calcutta case referred to by the learned judge, it was held that s. 18 of the Indian Limitation Act, was not precisely identical with the provisions of s. 26 of the Real Property Limitation Act, 1833, of the United Kingdom which made time run from the date when the fraud was, or with reasonable diligence might have been, first known or discovered. The Full Bench further held that the true position was that when a suit was on the face of it barred, it was for the plaintiff to prove, in the first instance, the circumstances which would prevent the statute from having its ordinary effect, and if a person who in such circumstances desired to invoke the aid of s. 18 he must establish that there had been fraud and that by means of such fraud he had been kept from the knowledge of his right to sue, or of the title whereon it is founded, and once that was established the burden was shifted to the other side to show that the plaintiff had knowledge of the transaction beyond the period of limitation and that such knowledge must be clear and definite knowledge of the facts constituting the particular fraud.

29. The evidence led by the appellants which was not controverted by the respondent clearly established that fraud was committed right from the date when the said proprietary concern of M/s. Harakchand Mohanlal was formed up to the end and that the whole thing formed but one integral fraud having as its central object the embezzlement of the funds of the company by the respondent. In a fraud so conceived, planned and systematically carried out over a period of three years, each act is linked with the other and forms part of a continuous chain and must be taken as the components of an integrated whole. In such a case, it is open to the court to pick up individual acts of fraud and apply to each the period of limitation and say that the period of limitation commenced from the date of the commission of that particular act. Here, there was no question of any initial fraud or any fraud committed to cover up such fraud. The fraud lay in M/s. Harakchand Mohanlal taking away by way of advances, moneys from the company against cotton alleged to be in transit and routing the moneys to the respondent. In the books of the company, these would be shown as advances made to M/s. Harakchand Mohanlal against the cotton said to be in transit. As the cotton was not received by the company, ultimately a large amount would be outstanding against M/s. Harakchand Mohanlal, but neither in the books of account of the company nor in any of its other books or papers would it ever appear that the moneys advanced to M/s. Harakchand Mohanlal had gone into the pockets of the respondent. No officer or member of the company, nor even a director, unless he was a privy to the fraud, could have knowledge of this type of fraud practised by the respondent. It was sought to be argued by Mr. Mehta, learned counsel for the respondent, that the company had knowledge of the fraud because the auditors of the company had raised certain objections. It was also sought to be argued by Mr. Mehta that the company had knowledge because the manager the company, J. P. Dordi, had written two letters dated October 1, 1958 and May 20, 1958, respectively to the respondent. It was further contended by Mr. Mehta that when the Central Govt. appointed a committee to investigate into the closure of the mills the central Govt. came to know about the respondent's fraud and, therefore, the company must be deemed to have knowledge of the fraud. None of these contentions need detain use long. The auditors' objections related to the board of directors allowing the amount due from M/s. Harakchand Mohanlal to remain outstanding and to the failure of the directors to take steps to recover such amount. From that it does not and cannot follow that the auditors knew the amounts outstanding against M/s. Harakchand Mohanlal had gone into the coffers of respondent. The theme of both the said letters of Dordi related to the bleak position which faced the mills by reason of paucity of funds, and in each of these two letters, Dordi had made an earnest appeal to the respondent to recover the amounts due from M/s. Harakchand Mohanlal. The very fact that the auditors that the manager wanted the directors to recover the outstandings of M/s. Harakchand Mohanlal shows that they were not and could not be aware that these amounts had really been taken way by the respondent. The investigation which was conducted by the Central Govt. prior to the issue of the notification under s. 18A of the Industries (Development and Regulation) Act, 1951, was for the purpose specified in s 15 of the said Act. It was not an investigation into the fraud committed by the respondent. The object of the said Act is to provide for the development and regulation of certain industries set out in Sch. I to the said Act. As a result of the enquiry which was triggered by the closure of the mills, the Central Govt. came to the conclusion that the under taking namely, the company, was being managed in a manner highly detrimental to the scheduled industry, namely, textile industry, and the management of the company was vested by the Central Govt. in the Authorised Controller so that the mills could be revived. The question of the knowledge on the part of the directors of the fraud practised by the respondent is irrelevant. If they were not aware of the fraud practised by the respondent is irrelevant. If they were not aware of the fraud practised by the respondent, they themselves were victims of such fraud and dupes of the respondent. If they or any of them knew of the fraud and took no steps with respect thereto, they became privy to the fraud and privy to concealing the knowledge of it from the company. The question is not a party to the fraud came to learn about it On June, 25, 1959, all book, papers, vouchers and documents of the company, including the books of account and the minute-books of the meeting of the board of directors, were seized by the police and continued to remain in the custody of the police. Thereafter, on July, 18, 1959, Nevatia was appointed Authorised Controller. No books of account or other relevant documents or papers were available to Nevatia, and even had they been available, all that Nevatia would have discovered from them would have been that a large amount was due to the company from M/s. Harakchand Mohanlal. That property of the company and for the purpose of the commission of such fraud had entered into a criminal conspiracy came to light only when a copy of the charge-sheet which was filed by the police came to the knowledge of the Authorised Controller, Nevatia. The charge-sheet was filed in court on March 7, 1960, and a copy of it was forwarded to the company and was received on March 11, 1960 by the said Desai who, after the issue of the notification under s. 18A of the Industries (Development and Regulation) Act, was appointed by Nevatia as his secretary. Desai thereafter forward the said copy to Nevatia, who thereupon discovered the fraud committed by the respondent. We do not have on record the date when Nevatia received the said copy of the charge-sheet but in no event could it have been prior to March 11, 1960. The suit having been filed on February 9, 1963, was, therefor, well within time, whether art 120 or art. 95 applied or not. On this finding, the entire claim of the appellants would be in time, and in view of what we have held earlier that the appellants were entitled to continue the suit, a decree should have been passed in favour of the appellants in the sum claimed by them less a sum of Rs. 38,000 in respect of which there was no evidence and which position has been accepted by Mr Chinoy, learned counsel for the appellants. This appeal must, therefore, succeed.

30. In the result, we allow this appeal, set aside the judgment and decree appealed against and in place of the decree passed by the trial court, was pass in favour of the appellants and against the respondent, a decree in the sum of Rs. 35,17,600 with interest thereon at the rate of 6 per cent. per annum from February 11, 1963, up to the date of the judgment, namely, July 21, 1982, and, thereafter, at the rate of 4 per cent. per annum till payment or realisation, that being the interest on the principal amount claimed by the appellants after giving up interest on the principal sum prior to the date of the suit. The respondent will also pay to the appellants the costs throughout.

31. So far as the costs of the suit are concerned, the suit was filed and disposed of much prior to January 1, 1977, when the dual system was abolished, and the bill of costs of the them attorneys for the appellants would be required to be taxed by the Taxing Master of this court. In view, however, of the long pendency both of the suit and the appeal, Mr. Chinoy, learned counsel for the appellants, has applied that the court itself should tax the bill of costs. Several factors have to be borne in mind in taxing the bill of costs of this suit. They are the elaborate evidence which was required to be led in respect of each item in the account of the said M/s. Harakchand Mohanlal, linking such item with the particular voucher, invoice, hundi and the respondent's bank account, the voluminous nature of such evidence produced at the trial, the fact that until the appellants evidence closed, the appellants could not be aware whether the respondent was going to step into the witness-box or not and whether he was going to lead any evidence or not, and the fact that in his written statement, the respondent had denied fraud and had denied that he had misappropriated any money whatever from the funds of the company, the labour which attorneys and counsel would have had to put in for the preparation of the case, the time which was taken for proving each of the above documents, the number of days which the hearing lasted and the number of days which were taken in the de bene esse examination of the said Mohanlal. Taking into consideration all these factors and the out-of-pocket expenses incurred, we fix the costs of the suit, including the out-of-pocket expenses and the instructions item, at Rs. 1,25,000. So far are concerned, under r. 603 of the Rules of the High Court of Judicature as the costs of the appeal at Bombay (Original Side), 1980, the court will have to quantify the amount of such costs after taking into consideration the work done through attorneys prior to January 1, 1977. This appeal was filed no November 5, 1976. We have seen the various items of expenditure, including the amount of the court-fees paid by the appellants, and such out-of-pocket expenses came to Rs. 25,000. According to the present scale of taxation, the advocates fees would be Rs. 23,550. This together with the out-of-pocket expenses would aggregate to Rs. 48,550. Bearing this in mind and the work which would have been done by the attorneys in filing this appeal, we quantify the costs of this appeal at Rs. 55,000.


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