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Vadilal Chatrabhuj Gandhi Vs. Thakorelal Chimanlal Munshaw and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberO.C.J. Appeal No. 17 of 1953
Judge
Reported inAIR1954Bom121; (1953)55BOMLR629; [1954]24CompCas25(Bom); ILR1954Bom79
ActsArbitration Act, 1940 - Sections 2; Code of Civil Procedure (CPC), 1908 - Sections 90 and 141 - Order - 14, Rule 6 - Order 23, Rule 3 - Order 36, Rules 1, 2, 3, 4 and 5; Companies Act, 1913 - Sections 153, 234, 234(1), 235, 280 and 281
AppellantVadilal Chatrabhuj Gandhi
RespondentThakorelal Chimanlal Munshaw and ors.
Appellant AdvocateM.P. Amin, Adv. General and ;K.T. Desai, Adv.
Respondent AdvocateM.L. Manekshaw, ;S.K. Desai, ;Nusserwanji Engineer, ;N.A. Mody, ;P.N. Bhagwati, ;A.B. Diwan, ;H.M. Seervai and ;R.J. Joshi, Advs.
Excerpt:
.....and in our opinion it is clear that once a person is permitted to give a decision which is not a judicial decision, that decision can never be considered as an award. the advocate general had laid considerable emphasis on the fact that under this compromise sir jamshedji kanga had to give each of the parties a summary hearing and the advocate general says that this provision clearly indicates that there had to be a judicial inquiry before sir jamshedji kanga. 585, there is a form of the order that is to be made on a misfeasance summons, and that form clearly shows that when the court is of the opinion that a director or an officer of the company is liable and he should make good to the company a certain amount, the order that it passes is an ordinary order for payment of money. in our..........decides that dispute and in deciding that dispute he holds a judicial inquiry and comes to a judicial decision, then undoubtedly that decision would constitute an award. on the other hand if a matter is referred to a person and he is not called upon either to hold a judicial inquiry or to give a judicial decision, but it is permissible to him to rely on his own skill, knowledge or experience in order to arrive at a particular decision, then the decision would not be an award. the authorities have made a distinction between what is known as a valuer and an arbitrator, but there is a third category which may consist of persons who are neither arbitrators nor valuers, and the third category consists of persons who might be broadly denned as persons who are discharging functions other.....
Judgment:

Chagla, C.J.

1. The Exchange Bank of India and Africa, Ltd., was incorporated on 30-4-1942. It suspended payment on 2-5-1949, and an order of winding up was made on 24-6-1949, and the Official Liquidator was appointed liquidator. On 12-9-1951, the Official Liquidator took out a misfeasance summons against eight directors and two auditors calling upon them to pay various sums of money as being due by them on account of misfeasance committed by them. This summons came on for hearing before Tendolkar J. on 3-11-1952. On 4-11-1952, a compromise was arrived at between six directors and the compromise was to the effect that these directors were prepared to pay a total sum of Rs. 20 lakhs to the Liquidator in such proportion or manner as Sir Jamshedji Kanga shall in his absolute discretion decide as a valuer and not as an arbitrator after giving each of the directors a summary hearing. When this compromise was reported to counsel for the Liquidator, he insisted on the liability of all the directors being joint and several. He was prepared to accept a sum of Rs. 20 lakhs, but he did not want the liability to be fixed by Sir Jamshedji Kanga to be several, and he wanted each of the directors to be liable for the whole amount. This anxiety on the part of the counsel for the Liquidator arose from the fact that he had serious doubts as to the solvency of one of the directors who (was Anandji, respondent 3 to the summons. Thereupon the appellant, who was respondent 8, Vadilal Chatra-bhuj Gandhi, offered in Court to guarantee the liability of Anandji to pay such amount as was fixed by Sir Jamshedji Kanga. Mr. Seervai, counsel for the Liquidator, was satisfied with this offer and the matter was adjourned in order that the Liquidator should get the sanction of the Company Judge to this compromise. The Liquidator then made a report to Coyajee J. who was the Company Judge to whom this particular company was assigned and who had made the winding up order, and Coyajee J. sanctioned the compromise on 6-11-1952, and on November 7 Sir Jamshedji Kanga gave his decision fixing the amounts which each of the directors was liable to pay, and he fixed the amount of the appellant at Rs. 2,30,000 and he fixed the amount in respect of Anandji at Rs. 3,60,000. The appellant then took up the contention that there was no binding compromise and that he was neither liable to pay the amount fixed by Sir Jamshedji Kanga, nor was he liable to guarantee the amount fixed in respect of Anandji. A notice of motion was then taken out by Messrs. Amarchand & Mangaldas, attorneys for respondent 4, to record the compromise and Tendolkar J. recorded the compromise and passed an order in terms of that compromise. It is from that decision of Tendolkar J. that Vadilal has now come in appeal.

2. The first contention that has been raised before us by the Advocate General is that the decision of Sir Jamshedji Kanga constituted an award and that award could only be given effect to in the manner provided under the Arbitration Act and that a decree could not be taken on that award by having a compromise recorded. In order to determine this point we have to consider what Sir Jamshedji Kanga had to do in order to fix the liability of each of the directors. If a dispute is referred to a person and if a person decides that dispute and in deciding that dispute he holds a judicial inquiry and comes to a judicial decision, then undoubtedly that decision would constitute an award. On the other hand if a matter is referred to a person and he is not called upon either to hold a judicial inquiry or to give a judicial decision, but it is permissible to him to rely on his own skill, knowledge or experience in order to arrive at a particular decision, then the decision would not be an award. The authorities have made a distinction between what is known as a valuer and an arbitrator, but there is a third category which may consist of persons who are neither arbitrators nor valuers, and the third category consists of persons who might be broadly denned as persons who are discharging functions other than those of an arbitrator. In order to decide whether Sir Jamshedji Kanga was to act as an arbitrator or not, obviously we must first look at the document itself which referred to him the particular question with regard to the allocation of liability to the different directors. It is a commonplace that the intention of the parties must be primarily gathered from the document which purports to express that intention, and when we turn to this document the first significant fact which strikes us is that the parties clearly intended that Sir Jamshedji Kanga should decide the particular matter as a valuer and not as an arbitrator. The Advocate General says that the mere description of Sir Jamshedji Kanga as a valuer will not make any difference to the real decision, if in fact he acted as an arbitrator and not as a valuer. There the Advocate General is perfectly right. But the fact that the parties had a clear conception that Sir Jamshedji Kanga should not give a judicial decision is apparent from the fact that they wanted him to act as a valuer and not as an arbitrator. We are not dealing here with laymen drafting a particular document. It is in evidence that the document was drafted by attorneys and we take it that the attorneys knew their business. But what is more important in this document and more significant is the nature of the decision which Sir Jamshedji Kanga had to give and which is made clear in the document itself. Whatever Sir Jamshedji Kanga had to decide, he had to decide in his absolute discretion. It is clear, therefore, that the decision of Sir Jamshedji Kanga was not to be a judicial decision. A Judge cannot decide according to his discretion; a Judge is bound by rules of evidence; he is bound not to travel outside the record and he must decide according to certain set rules and not permit his discretion to affect his decision. But in this particular case Sir Jamshedji Kanga was given unfettered and unlimited discretion to decide as he liked, and in our opinion it is clear that once a person is permitted to give a decision which is not a judicial decision, that decision can never be considered as an award. The most important characteristic of an award is that it must emanate from a judicial determination. An award must be the result of a judicial decision, and when you have a decision which is the result of a discretion and an absolute discretion exercised by a person, that decision cannot in the very nature of things be an award. The Advocate General had laid considerable emphasis on the fact that under this compromise Sir Jamshedji Kanga had to give each of the parties a summary hearing and the Advocate General says that this provision clearly indicates that there had to be a judicial inquiry before Sir Jamshedji Kanga. Now, even assuming that Sir Jamshedji Kanga was bound to hear the case of each of the parties before he gave his decision, the mere fact that an inquiry had to be held is not sufficient to make the ultimate decision a judicial decision. We must have not only a judicial inquiry, but we must also have a judicial determination. Even assuming in favour of the Advocate General that the compromise provides for a judicial inquiry, it definitely does not provide for a judicial decision. It is not sufficient for parties to say that the person whom they have appointed should observe the rules of natural justice and should hear the parties. They must further provide that he must decide as a Judge and not as a valuer or as a person other than an arbitrator.

3. Turning to the Authorities on which the Advocate General has relied, the leading case is the one reported in -- 'In re Cams-Wilson and Greene', (1886) 18 QBD 7 (A). Lord Esher, M. R., at page 9, lays down the test which should be applied in order to decide whether a person acts as an arbitrator or not. This is what the Master of the Rolls says :

'...If it appears from the terms of the agreement by which a matter is submitted to a person's decision that the intention of the parties was that he should hold an inquiry in the nature of a judicial inquiry, and hear the respective cases of the parties, and decide upon evidence led before him, then the case is one of an arbitration. The intention in such cases is that there shall be a judicial inquiry worked out in a judicial manner.'

Now, two of the important ingredients on which the Master of the Rolls laid emphasis are absent in this agreement. Sir Jamshedji Kanga had not to decide upon evidence led before him; he had to decide in his absolute discretion; and further there was not to be a judicial inquiry worked out in a judicial manner. A judicial inquiry is only worked out in a judicial manner when the inquiry results in a judgment or a decision given upon evidence. Further on the Master of the Rolls says (P. 9) :

'.. .On the other hand, there are cases in which a person is appointed to ascertain some matter for the purpose of preventing differences from arising, not of settling them when they have arisen, and where the case is not one of arbitration but of a mere valuation.'

Therefore, here the lest that is applied is whether the person is appointed to prevent differences or settle differences, and the Advocate General urges that if this test is to be applied in the case before us. Sir Jamshedji Kanga was appointed to settle disputes and not to prevent them. In our opinion that is not quite correct, because what really happened before Tendolkar J. was this. On the one hand, the Liquidator was claiming a certain amount from the directors; on the other hand, the directors were resisting that claim; and therefore the two issues which had to be considered by the learned Judge were as to the liability of the directors and the amount which each director had to pay. When the compromise was arrived at both these disputes were settled. The liability of each director was admitted and the amount to be paid was also settled, viz., Rs. 20 lakhs. But in order that the compromise should go through, the liability had to be allocated between the different directors, and this compromise could not go through if the directors among themselves disputed as to what the liability of each was, and it was in order to prevent this dispute that Sir Jamshedji Kanga was appointed and it was left to his sole discretion to allocate the liability of each director. Therefore, even from the point of view of that test laid down by Lord Esher, in the present case it cannot be said that Sir Jamshedji Kanga was appointed as an arbitrator. Then the Master of the Rolls says further (P. 9) :

'.. .There may be cases of an intermediate kind, where, though a person is appointed to settle disputes that have arisen, still it is not intended that he shall be bound to hear evidence or arguments. In such cases it may be often difficult to say whether he is intended to be an arbitrator or to exercise some function other than that of an arbitrator. Such cases must be determined each according to its particular circumstances.'

Therefore, Lord Esher contemplates the possibility, of a class of persons. which may not fall either in the category of: arbitrators or valuers.

4. The statement of the law to be found in Halsbury, Vol. 1, Edn. 2, on this point is at p. 622:

'In order to constitute a submission to arbitration there must be some difference or dispute, either existing or prospective, between the parties, and they must intend that it should be determined in a quasi-judicial manner. Therein lies the distinction between. an agreement for a valuation and a submission to arbitration, for in the case of a valuation there is not as a rule, any difference or dispute between the parties, and they intend that the valuer shall, without taking evidence or hearing argument, make his valuation according to his own skill, knowledge and experience.'

Therefore, what the learned author emphasises is the intention of the parties that the difference or dispute should be determined in a quasi-judicial manner in order that it should constitute an arbitration, and as we have already pointed out, the document which we are considering makes it patently clear that the intention of the parties was not that Sir Jamshedji Kanga should decide the question referred to him in a quasi-judicial manner. It was rather the intention of the parties that Sir Jamshedji Kanga should decide the matter according to his own skill, knowledge and experience. Parties had ample confidence in Sir Jamsnedji Kanga, and they left it to his vast experience at the bar to come to a fair decision on the question referred to him.

5. Therefore, in our opinion, the learned Judge below was right when he took the view that the decision of Sir Jamshedji Kanga did not constitute an award.

6. The next contention urged before us is that a compromise in a misfeasance summons cannot be recorded under Order 23, Rule 3, and it is pointed out that Order 23, Rule 3, only applies to a suit and not to misfeasance proceedings. Under Section 141 of the Code, the procedure provided in the Civil Procedure Code in regard to suits shall be followed as far as it can be made applicable in all proceedings in any Court of civil jurisdiction and 'proceedings' in this section has been construed to moan independent proceedings in the nature of a suit, and the question that arises for our decision is whether misfeasance proceedings arc proceedings contemplated by Section 141. Section 235, Companies Act confers power upon the Court, on the application of the liquidator, or of any creditor or contributory, to examine into the conduct of the promoter, director, manager, liquidator, or officer, and compel him to repay or restore the money or property or any part thereof by way of compensation in respect of any misapplication, retainer, misfeasance or breach of trust committed by him, and what is emphasised by the Advocate General is that the section empowers the Court to compel a director, among others, to repay or restore the money or property to the liquidator, and the contention is that in compelling a director to repay the money the Court is not passing in order or a decree as it would do in a suit, but is really exercising criminal or quasi-criminal jurisdiction. In our opinion that contention is entirely untenable. When a misfeasance summons is taken out under Section 235, the party taking it out makes allegations against the directors or other officers of the company in respect of misfeasance, breach of trust, etc. and it requires the officers or directors of the company to pay the amount which is mentioned in the summons, and after hearing of the summons the Court passes an order calling upon the guilty parties to pay the amount, and the order so passed becomes executable as if it were a decree. Therefore, the proceedings, by way of a misfeasance summons, are very similar to proceedings in the nature of a suit. In a suit also a party has to make out a cause of action and has to claim a certain amount from the defendant, and after a trial the Court passes a decree in favour of the plaintiff or dismisses his suit. We refuse to attach the same importance to the expression 'compel him to repay or restore the money or property' which, the Advocate General wants us to attach in Section 235. In Palmer's Company Precedents, Part II, at p. 585, there is a form of the order that is to be made on a misfeasance summons, and that form clearly shows that when the Court is of the opinion that a director or an officer of the company is liable and he should make good to the company a certain amount, the order that it passes is an ordinary order for payment of money.

7. Reliance was placed by the Advocate General on a decision of the Allahabad High Court in -- 'Liaqat Hussain v. Official Liquidator' : AIR1933All205 . In that case the security for costs was asked against the liquidator under Section 280 of the Companies Act, and Young J. held that misfeasance proceedings under Section 235, Companies Act were not a suit or other legal proceeding within the meaning of Section 280, and Young J. took the view that a misfeasance proceeding under Section 235 was merely an examination by the Court into the-conduct of an officer of the company, and as a result of that examination the Court may order the officer to restore the money or the property of the company, as the Court may think just. In that case the Court was primarily concerned to construe Section 280, Companies: Act and the words used in that section, viz. any suit or other legal proceeding. The Court was not considering whether misfeasance proceedings were proceedings within the meaning of Section 141 of the Code. The language used in Section 280 and the language used in Section 141 is different. Whereas in Section 280 the words used are 'in any suit or other legal proceeding', the words used in Section 141 are 'in all proceedings in any Court of civil jurisdiction'. Therefore, the-words used in Section 141 are wider in their connotation than the words used in Section 230, and although the decision of the Allahabad High Court may be correct, with respect, as far as Section 280 is concerned, it has no bearing whatever upon the construction we must put upon the language used in Section 141.

8. Then reliance was placed on a decision of the East Punjab High Court in -- 'Bhag-wanti v. New Bank of India' AIR 1950 EP 111 (C). There the Court was considering proceedings under Section 153, Companies Act and what the Court held was that Section 90, Order 14, R, 6, and Order 36, Rules. I to 5, did not apply to those proceedings. It is rather significant to note that the East Punjab High Court held that proceedings under Section 153, Companies Act were proceedings that fell under Section 141 of the Code, but what it decided was that inasmuch as Section 141 did not apply all the provisions of the Code to a particular proceeding but only such proceedings as can be made applicable, the particular procedure laid down in Section 90, Order 14, Rule 6, and Order 36, Rules. 1 to 5, did not apply to proceedings under Section 153. Even in the case before us, although Section 141 would apply to proceedings under Section 235, it does not therefore follow that every provision in the Code would apply to :hose proceedings. We have got to follow the procedure provided in the Code as far as it an be made applicable to proceedings under Section 235. The question is whether there is anything in Section 235 which would make us say that the procedure laid down in Order 23, Rule 3, is not applicable to misfeasance proceedings. In our opinion there could not be a better case where a compromise should be given effect to than in a misfeasance summons, if the compromise is a fair and a proper one. Cases are bound to arise where the liquidator would say to himself that if the officers of the company are prepared to pay a reasonable amount it would not be worth his while to incur heavy costs in establishing the liability of the officers. In company matters it is always difficult to establish the liability of directors or other officers of the company and to bring home to each one of them his misdeeds or his misconduct or his misfeasance. Therefore, even more than in a suit, a fair and reasonable compromise should always be welcomed in company matters where the liquidator would be saving heavy costs which the company would otherwise have to incur; and here again, to set all doubts at rest, we have in Palmer's Company Precedents the form of a compromise on misfeasance summons at p. 598, which shows that in England also orders are taken by consent compromising misfeasance claims.

9. The final point urged by the Advocate General is that the compromise is not a legal one, inasmuch as sanction was not given by Tendolkar J. but was given by Coyajee J. Now, it is incumbent upon the Liquidator under Section 234(l)(iii) to obtain the sanction of the Court if he wants to compromise any liability due from any person to the company, and it cannot be seriously disputed that the Liquidator would have no authority to compromise a misfeasance claim except with the sanction of the Court. In this case sanction was given by Coyajee J. but what is urged is that the proper Judge was not Coyajee J. who should have given the sanction, but Tendolkar J. In this contention there is an underlying fallacy. What Section 234 requires is the sanction of the Court, and every Judge of the High Court sitting on the Original Side constitutes the Court for the purpose of Section 234. As to which particular Judge should give sanction depends upon the allocation of work made by the Chief Justice, but whichever Judge gives the sanction, he is exercising his power as the Court contemplated by Section 234. Therefore, whether the sanction was given by Coyajee J. or by Tendolkar J., it constituted the sanction necessary under Section 234. There is nothing in the Companies Act which requires that the sanction to compromise a misfeasance claim must be given by the very Judge who is trying the, misleasance summons. An attempt was made to rely on Section 281 for this purpose. That section gives power to the Court to relieve a per-son either wholly or partly from his liability in proceedings for negligence, default, breach of duty or breach of trust, where the Court is satisfied that he has acted honestly and reasonably and that having regard to all the circumstances of the case he ought fairly to be excused for the negligence, default, breach of duty and breach of trust. Section 281 has nothing whatever to do with a compromise enter-ed into by the parties. Under Section 281 the Court itself, after apprising itself of the merits of the matter, condones a default on the part of an officer of the company, but the case we have here is not a case of condonation by the Court. It is a case of compromise between the parties, and in order that the compromise should be given effect to, what is required is a sanction by the Court under Section 234 and not a condonation under Section 281. It may be that if the Court wanted to exercise its powers under Section 281, obviously the Court that would exercise those powers would be the Court that would be trying the misfeasance summons, but when we are dealing with a case of a sanction, as we have pointed out before, there is nothing whatever in the Companies Act which indicates as to which particular Judge should give the sanction. The sanction has to be given by the Court and the Court is constituted by any Judge sitting on the Original Side of the High Court.

10. In the Court below the appellant had taken up the contention that the offer of guarantee made by him was withdrawn on 5-11-1952. Evidence was taken before Mr. Justice Tendolkar, Sir Jamshedji Kanga went into the witness-box, and the appellant did not care to step into the witness-box and controvert the evidence given by Sir Jamshedji Kanga. Therefore, on the evidence the learned Judge rightly held that the offer of guarantee made by the appellant had not been withdrawn as alleged by him, and the Advocate General very wisely has not taken up that contention before us. In fact he does not dispute that on the evidence it must be held that the offer of guarantee was not withdrawn by the appellant. Therefore, this appeal has been argued on the basis of all the facts being as found by the learned Judge and only certain legal submissions have been made before us. In our opinion, there was a valid and binding compromise arrived at and that the learned Judge was right in recording that compromise and giving effect to it.

11. The result is that the appeal fails and must be dismissed with costs.

12. Liberty to the attorneys for the respondents to withdraw the amount deposited for security for costs.

13. Appeal dismissed.


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