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D.R. Banaji Vs. Manilal T. Patel - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberI.C. No. 94 of 1952
Judge
Reported inAIR1956Bom681
ActsCompanies Act, 1913 - Sections 235
AppellantD.R. Banaji
RespondentManilal T. Patel
Appellant AdvocateR. Mathalone, Adv.
Respondent AdvocateM.V. Desai, ;K.S. Cooper and ;Divan, Advs.
Excerpt:
.....of stores was showed by respondent in accounts - on enquiry number of fictitious entries found in cash book of company - vouchers in respect of fictitious purchase produced by assessee which were false and fabricated documents - balance-sheet and books of accounts considered - respondent found guilty of misappropriation of amount on basis of documentary evidences produced. - - 2,67,932-4-3 by showing in the accounts of the company bogus purchases of tobacco during the year 1944. i shall point out later on in my judgment why the charge relating to tobacco must fail. ' but i am clearly concerned with a case of fraud on the company practised by two of its directors. of course the official liquidator has no title higher than that of the company but i wholly fail to see how the..........purchase of stores during the year 1944 in the books of the company are genuine. according tothe applicant stores of such large value could not possibly have been consumed by the company for the purpose of manufacturing cigarettes during these three months. the official liquidator relies on certain documentary evidence for the purpose of showing that stores of the value of rs. 5,82,606-11-11 should not possibly have been consumed by the company during the three months that it carried on actual operations in 1944. the case is based on the fact that admittedly a bulk of cigarettes manufactured by the company in 1944 was supplied to the government under a contract entered into between the company and the government in august 1943. from the records of the company was tendered certain.....
Judgment:

1. This is a misfeasance summonstaken out by the Official Liquidator of the Masters Tobacco Company (India) Ltd. (in Liquidation) (referred to by me as the Company) against Manilal T. Patel, a director of the Company on theground that he was in management of the affairsof the Company, and as such has been guilty of misfeasance and breach of trust in respect of large sums of moneys belonging to the Company,which was a private limited concern.

The company at the instance of a creditor was taken into liquidation by an order made by this Court on 16-7-1952. A number of allegations and claims were made by the applicant in the Summons and in the affidavit in support of the same. Certain amendments asked for by the applicant wereallowed by me. Out of the five claims mentioned in the summons and described as (a) (1) to (a) (5) items (a) (2) to (a) (4) were, in the course ofthe hearing before me, abandoned by learned counsel appearing for the applicant.

So also was abandoned the first part of theclaim in item (a) (5). As to the latter part ofthat item learned counsel for the applicant did not at the hearing advance any argument in sup-port of it and in fact did not press the same. The result is that the claim that is finally pressed before me on behalf of the applicant is 'for a declaration that the respondent has been guilty of misfeasance and breach of trust in relation to the Company in respect of Rs. 3,99,000-0-0 or suchother sum as this Honourable Court may determine and in respect of Rs. 2,67,982-4-3 or such other sum as this Court may determine as mentioned in Para 3 of the affidavit of the applicant sworn on 23-2-1955'.

2. Prior to 1940 one Bhogilal Patel, the father-in-law of the respondent had, by purchase, become the owner of the business and assets of acigarette manufacturing factory. On 20-10-1940the Masters Tobacco Co. (India) Ltd., was registered, as a private limited company by Bhogilal Patel, his son-in-law the respondent, M.M. Finegold, his son Martin Finegold and Wasudev Dave.

The first Directors of the Company were these five persons. Bhogilal was to be a permanent director of the Company. The issued and paid-up share-capital was 300 ordinary shares of Rs. 100/- each paid up to the extent of Rs. 50/-and 100 preference shares of Rs. 100/- fully paid up. Out of the 300 partly paid-up ordinary shares Bhogilal held either in his own name or in the name of his nominees 155 shares. Finegold and his son held the remaining 145 shares. The 100 fully paid-up preference shares were taken up by Bhogilal Patel.

From the inception the affairs and business of the Company, according to the applicant, were managed by the respondent and M.M. Finegold. After the Company was incorporated it hired from Bhogilal Patel the cigarette manufacturing factory and premises owned by him from 1940 to the end of March 1944 the Company manufactured and sold cigarettes in the premises and factory hired from Bhogilal. Bhogilal also financed the business of the Company. In February 1944 Bhogilal sold to Godfrey Phillips (India) Ltd. the factory and premises whree the business of the Company was carried on.

3. Briefly stated the case of the applicant, as finally presented at the hearing, is that the factory taken on lease by the Company from Bhogilal Patel had been agreed to be sold by Bhogilal in February 1944. The possession of the factory and premises had to be handed over by the end of March 1944. Therefore, in 1944 the Company could carry on its business of manufacturing cigarettes only for three months i.e. between January and March.

As admitted by the respondent himself in his public examination during these months the Company did business on a reduced scale in anticipation of the closing down of the factory. The balance sheet of the Company for the year 1944 and the books of the Company read together show that the opening stock of tobacco on 1-1-1944 was of Rs. 3,44,708-4-11. Tobacco of the value of Rs. 2,68,348-9-3 is shown in the books of account as purchased during the year 1944.

Thus the total of the opening stock of tobacco at the beginning of the year & that purchased during the year came to Rs. 6,13,056-14-2. Tobacco consumed in operations between 1-1-1944 and 7-3-1944, which was the last date on which actual operations took place, as shown in the Blend Book o the Company was of the value of Rs. 1,73,429-5-11. Stock on hand at the end of the year 1944 was nil. Tobacco of the value of Rs. 4,39,627-8-3 lying at Bombay and at Gunthur was sold by the Company to Godfrey Phillips (India) Ltd.

One of the charges made by the applicant against the respondent is that there has been misappropriation by the respondent and Finegold o a sum of Rs. 2,67,932-4-3 by showing in the accounts of the Company bogus purchases of tobacco during the year 1944. I shall point out later on in my judgment why the charge relating to tobacco must fail.

4. The charge strenuously pressed on behalf of the applicant against the respondent, however, relates to the alleged bogus purchase and bogus consumption of stores during the year 1944. The balance sheet for the year 1944 and the books of the Company read together show that the opening stock of stores on 1-1-1944 was Rs. 47,013-7-10. Purchases of stores during the year shown in the books (but not in the balance sheet) were of the value of Rs. 5,66,517-15-6.

Stock on hand at the end of the year ending 31-1-1944 was Rs. 30,924-11-5 as valued at cost and as certified by the management. The total value of stores consumed in 1944 thereforewas Rs. 5,82,606-11-11, if all the entries relating to purchase of stores during the year 1944 in the books of the Company are genuine. According tothe applicant stores of such large value could not possibly have been consumed by the Company for the purpose of manufacturing cigarettes during these three months.

The Official Liquidator relies on certain documentary evidence for the purpose of showing that stores of the value of Rs. 5,82,606-11-11 should not possibly have been consumed by the Company during the three months that it carried on actual operations in 1944. The case is based on the fact that admittedly a bulk of cigarettes manufactured by the Company in 1944 was supplied to the Government under a contract entered into between the Company and the Government in August 1943.

From the records of the Company was tendered certain correspondence carried on by the Company in 1946 with the Comptroller of Foods Accounts, Delhi. The letters relied on by the Official Liquidator are signed by the respondent him-self. It appears from that correspondence that 15,80,00,000 cigarettes were supplied by the Company to the Government under that contract between August 1943 and of March 1944.

Admittedly 10,30,40,500 cigarettes were delivered to the Government between August and December 1943. Therefore, the cigarettes manufactured by the Company in 1944 for making supplies to the Government could not possibly have been more than 5,50,00,000. It was said that this quantity may be taken even at 6,00,00,000. Then it was said that at the maximum about a little over one and a half crore cigarettes could have been sold by the Company during the three months to parties other than the Government. This would appear from the books of the Company.

Therefore, making every calculation in favourof the respondent the maximum number of cigarettes manufactured by the Company during these three months could not exceed 7,7400,000/-. The case is also based on the fact that the quantity of tobacco used during the three months of January to March 1944 is ascertained. The main source of tobacco used was that lying in the bondedwarehouse in Bombay. That quantity was 1,82,345 pounds. There was some rejection of cigarettesby the Government in 1943.

The records show that cigarettes containing 50,000 pounds of tobacco had been rejected by the Government. Under the agreement between the Company and the Government it was necessary that costing certificates should be sent to the Government. These certificates show that the quantity of tobacco salvaged from the rejected-cigarettes was 50,000 pounds and this tobacco was also used in the course of operations in 1944.

In all, therefore, according to the applicant, at the maximum 1,82,345 and 50,000 pounds of tobacco was consumed during the three months of 1944. It is common ground that the maximum number of cigarettes that can be manufactured from one pound of tobacco is 360. This puts the total maximum number of cigarettes that could possibly have been manufactured (out of 232345 pounds of tobacco) during the period to 8,36,00,000/-.

Apart from the Government the Company had sold during this period cigarettes to other customers. About five and a half crores of cigarettes could have been delivered to the Government and the rest to the other parties. These calculations were on the footing that the maximum quantity of cigarettes that could possibly have been manufactured during 1944 may be taken into consideration for the purpose of ascertaining the maximum value of stores that could possibly have been used during these three months of 1944.

On the figures accepted by the respondent himself in his correspondence with the Government, so it was said on behalf of the applicant, the value of stores that could have been consumed during these months for manufacturing 8,36,00,000 cigarettes by using 232345 pounds of tobacco could not have exceesed Rs. 2,38,942. Instead the cashbook of the Company read with the balance sheets and vouchers for the year 1944 shows that stores of the value of Rs. 5,82,606-11-11 had been consumed during that period.

It is therefore, alleged that whatever way you look at it stores of large amounts have been fictitiously shown as purchased during the year 1944.

5. In support of his charge that in the books of the Company fictitious and bogus purchases of stores have been shown in the year 1944 the Official Liquidator draws attention to the cashbook of the Company for the year 1944 which he alleges contains a number of fictitious entries relating to bogus purchases of stores of very large amounts. It is common ground that the stock of tobacco in hand at the end of March 1944 was sold by the Company to Godfrey Phillips (India) Ltd.

The tobacco sold was lying in the bonded warehouse of the Company in Bombay as also at Gunthur. On 5-4-1944 possession of tobacco lying in the bonded warehouse of the Company in Bombay was handed over to the purchasers. The records and cash books of Godfrey Phillips (India) Ltd. Produced in evidence show that a sum of Rs. 2,80,213 was paid by them to the Company as the price of the stock of tobacco lying in Bombay. From the cash book of Godfrey Phillips that amount appears to have been paid by four bearer cheques as follows: Rs. 1,00,000 on 26-5-1944; Rs. 50,000 on 29-5-1944; Rs. 75,000 on 1-6-1944; and Rs. 55,212 on 3-6-1944.

An extract from the Cash Payment Boob of the Mercantile Bank of India Ltd., Bombay, produced in evidence goes, according to the appellant, to establish the fact that the amounts of these four cheques were received on behalf of the Company between 27th May and 12th June 1944 as follows:

DateAccountAmountTo whom paid

27-5-44Godfrey Vhillis (India) Ltd.Rs. 100000M. M Finegold30-5-44Do.Rs. 50000Do.2-6-44Do.Rs. 75000Do.12-6-44Do.Rs. 55212Do.

Therefore, according to the applicant there is clear proof of the fact that the price of tobacco lying in Bombay and amounting to Rs. 2,80,212 could not possibly have been received by the Company before these four dates. The credit entries in the cash book of the Company for the year 1944 however show that these four amounts were received by the Company not by cheques but by cash from Godfrey Phillips (India) Ltd., as follows:

Rs. 1.00,000 received in cash on 25-2-44;

Rs. 50,000 received in cash on 25-3-44:

Rs. 75,000 received in cash on 5-4-44; and

Rs. 55,212 received in cash on 20-4-44.

The cash book of the Company for the year 1944 also contains a number of items of expenditure relating to the purchase of stores which according to tine applicant are fictitious purchases. Particulars of this allegation were given by the applicant and as I have already stated there was an amendment of the particulars. The first three items in the particulars as originally furnished by the applicant related to purchases alleged to be bogus and shown to have been made on dates prior to 29-3-1944.

Now the case of the Official Liquidator in his affidavit in support in terms is in respect of alleged fictitious purchases of stores on 29-3-1944 and thereafter. I declined, therefore, to regard these three items as part of the case which the respondent had to meet. When the particulars were amended during the hearing of the summons the Official Liquidator abandoned these three items by sinking them out from the particulars as originally furnished. But I shall state these items also when I set out below the particulars of the items alleged by the Official Liquidator to be in respect of fictitious purchases and bogus consumption of stores. They are as follows: (After stating the particulars His Lordship proceeded further:)

6. According to the Official Liquidator the four amounts received by the Company for the price of tobacco sold by them to Godfrey Phillips (India) Ltd. were fraudulently credited in the cash book of the Company on various dates between 25th February and 28th April 1944 to enable false debit entries in respect of fictitious purchases of stores being written up in the cash book. These bogus purchases it was said could not have been shown some months after the actual business of the Company had stopped in March 1944.

The allegation is that the cash book has been subsequently got up with a view to showing as genuine these bogus purchases of stores. The argument is that the object of doing so was by an artifice to misappropriate the amount of Rs. 2,30,212 which was the price of tobacco paid by Godfrey Phillips and also to defraud the income-tax authorities. The suggestion is that it would have been very difficult to show these bogus purchases in June or July 1944, i.e., after payments of money were received by the Company from Godfrey Phillips between 28th May and 3rd June 1944 because purchases shown in June and July 1944 would on the face of them have been suspect.

Therefore, so it is alleged, a number of fictitious purchases of stores of large amounts were shown in the cash book of the Company between 28th February and 26th April 1944. It is true that four small sums shown in the particulars via. Rs. 1700, Rs. 1700, Rs. 3015 and Rs. 1700 are in respect of purchases in May. These last four items have not been seriously challenged before me although they are shown in the particulars.

The total amount of the items of expenditure now challenged before me comes to more than Rs. 1,50,000. There are vouchers in respect of these alleged fictitious purchases but it is the case of the Official Liquidator that the vouchers also are false and fabricated documents.

7. The respondent has denied all these charges. He denies that the cash book of the Company has been at all fabricated. He also denies that any fictitious purchases have been shown in the cash book of the Company for 1944, as alleged by the applicant.

Although he has stated in his public examination that he was one of the persons in active management of the company from 1941 to 1944 and had deposed as of personal knowledge to a number of matters relating to the actual administration and the business of the Company it is now his case that he was only attending to the blending operations and manufacture of cigarettes and knew nothing about the business side of the Company or accounts of the Company or the purchase of tobacco and stores or the sale of cigarettes. He also relies on the fact that charges levelled against him relate to misappropriation alleged to have been made in 1944 and this misfeasance summons was taken out after the Company was taken into liquidation in 1952.

Succinctly stated his case is that stores of the value of Rs. 5,82,600-11-11 were in fact consumed during the three months of 1944. According to him not seven to eight crore cigarettes, as made out by the applicant, but a much larger number of cigarettes was in fact manufactured by the Company during the three months of January to March 1944. His case as finally presented is that twelve and a half crores of cigarettes were manufactured during this period and actually supplied to the Government and a little over one and a half crores of cigarettes were manufactured and sold to parties other than the Government.

In all, therefore, according to the respondent, a little over fourteen crores of cigarettes were manufactured and supplied by the Company during these three months. According to the respondent this is the crux of the matter. I shall examine the rival contentions on this point after analysing the evidence led before me.

(His Lordship then examined the evidence and concluded as follows:)

8. I would be extremely slow in a case of charges of this nature made after more than eight years in taking the view that fraud which involves the accusation of falsification of account books and vouchers had in fact been perpetrated by the respondent against the Company. The documentary evidence on the record and the circumstances of the case, however, lead me to the definite conclusion that the applicant has succeeded in establishing the charge about fictitious purchases of stores and fictitious consumption of stores to the extent of Rs. 2,61,700 and all that is involved in, that charge.

9. I must now turn to examine a legal contention that was raised by Mr. M.V. Desai, learned counsel for the respondent. It was said that virtually at all material times the respondent and MM. Finegold were the real shareholders of the Company. It was further said that they being themselves the two directors and the share-holders they must be deemed to have approved of the accounts for the year 1844 submitted to the general-meeting.

It was urged that if with the full knowledge of what they had done in the matter of the moneys received by them from Godfrey Phillips (India) Ltd. they as shareholders authorised the wrongful acts relating to the fictitious purchases the entries relating to those transactions even though wrongful could not be challenged nor reopened or made ground of a claim by the Liquidator at a later stage at the instance of a subsequent creditor of the Company.

On the facts of the case and the record of this summons all that is rather vague and almost equally vague is the manner in which a proposition enunciated by the Privy Council in a case cited by learned counsel was said to be applicable to this case.

In Attorney-General for Canada v. Standard Trust of New York (1911) AC 498 a syndicate of four persons procured a Quebec Act incorporating a railway company which they had promoted and subscribed for $ 300,000 of the Company's shares being all that were Issued), and were with others whom they had qualified elected directors. They then purchased a railway themselves, and the incorporated company, being empowered so to do by their Act, purchased the said railway from them for $ 648,000, paying for it by taking credit for the said subscription and acknowledging indebtedness to those four persons of the balance of $348,000 in equal shares.

On the insolvency of the incorporated company and of another company with which it had been amalgamated their railways were sold, and the respondent company, to whom the syndicate's claim had been assigned, claimed to rank as creditors against the proceeds of sale. It was held that the claim must be allowed. It was held that even if - the price was excessive everyone interested in the capital of the Company concurred in the purchase with full knowledge of ail the circumstances. At page 504 of the report Lord Heldane observed:

'It, therefore, does not matter, for the purposes of a case such as the present, that these persons were also promoters and vendors. If the transaction had been 'ultra vires' in the sense of being outside the legal capacity of the company, and accordingly not its act, the case would have been different. But, although this has been suggested, their Lordships can find no foundation for the argument.

Under the provisions of the statute of the Que-bec Legislature incoporating it, the company had power to purchase the Montreal and Sorel Railway, and was authorised to take payment for the amount subscribed for its stock in bonds of any railway company. The transaction was actually carried out in this form, and was on the face of it 'within the powers conferred by the statute on the company.

If, therefore, what the directors did is to be impeached, it must be on the ground, not of its having been 'ultra vires' of the company, tout of its having been a breach of duty by the directors. Now, although the capital of the company was $ 1,000,000, the only stock issued was to the amount of $ 300,000, and this was taken up and owned by the members of the syndicate and no one else. They and they alone were interested in the capital of the company.

This is not a case of winding up, but even if it were, it would make no difference. In proceedings of the character of the present the title of a liquidator as representing creditors cannot be higher than the title of the company against whom the creditors claim. In this case the interests of the company and of the syndicate were identical. The only persons beneficially interested in the company were the four members of the syndicate.

The law gave them the complete control of their action. Under that control the company gave effect to the policy of the only persons who had any beneficial interest in its capital. The case is not one in which the apparent procedure can be said tq have been unreal, or to have been a cloak under which a conspiracy to defraud was concealed.

Under these circumstances their Lordships are of the opinion that the company notwithstanding that no general meeting, apart from the meeting of directors, appears to have been held for the purpose, was completely bound by the transactions sought to be impeached, and that the appellant, who has certainly no title higher than that of the company against the assets of which he claims, is bound likewise.'

It is significant to note that Lord Haldane in explicit terms excludes the case of fraud from the operation of the principle recognised by the Courts. It is not necessary to examine some other decisions of the Courts in England on this point cited by learned counsel for the respondent. Mr. Mathelone, learned counsel for the applicant referred to certain observations of Lindley L.J. in a decision of the Court of Appeal in England, 'In re George Newman & Co.', (1895) 1 Ch. 674. of the report the learned Lord Justice observes :

But in this case the presents made by the Directors to Mr. Newmen, their chairman, were made out of the moneys borrowed by the company for the purposes of its business; and this money the Directors had no right to apply in making presents to one of themselves. The transaction was a breach of trust by the whole of them; and even if all the shareholders could have sanctioned it, they never did so in such a way as to bind the company.

It is true that this company was a small one, and is what is called a private company; but its corporate capacity cannot be ignored. Those who form such companies obtain great advantages, but accompanied by some disadvantages. A registered company cannot do anything which all its members think expedient, and which, apart from the law relating to incorporated companies, they might lawfully do.

An incorporated company's assets are its property and not the properly of the shareholders for the time being; and, it the directors misapply those assets by applying them to purposes for which they cannot be lawfully applied by the company itself, the company can make them liable for such misapplication as soon as anyone properly sets the company in motion. All this is familiar law and must, be borne in mind in deciding the present case.'

But I am clearly concerned with a case of fraud on the Company practised by two of its directors. ,If the respondent is guilty of misfeasance and breach of trust and has practised on the company fraud such as he is charged with there can be no question of the application of the principles stated by the Privy Council in the decision cited by Mr. M, V. Desai. The present case is very unlike the decision cited by learned counsel. The contention also suffers from some vague analogies.

It is impossible to equate with the Company the respondent and Finegold his associate in these transactions. Of course the Official Liquidator has no title higher than that of the Company but I wholly fail to see how the principle enunciated in the cases cited by Mr. Desai can have any application to a case where fraud practised by the directors upon the company is proved and misfeasance and breach of trust under the statute is established.

It was alternatively argued that the Company was a two-men show and it must be deemed to nave ratified the fraud of the self same two directors who were the only shareholders of the company. It was said that this was a private limited Company and the respondent and Finegold were businessmen who must be regarded as partners and the Company must be treated as a partnership firm and, therefore, the question of the liability of these two persons cannot now be agitated by the Liquidator.

The argument was somewhat metaphysical but mataphysies and businessmen seldom meet. Fraud practised on the Company even by directors who are themselves the sole share-holders cannot, in my judgment, be expurgated by recourse to any such fanciful ratification. The contention fails and must be negatived.

10. In the result the respondent will be directed to contribute to the assets of the Company andpay to the applicant the sum of Rs. 2,61,700 with interest thereon at 4 per cent from the date of the Summons that is 28-2-1955. Costs of these proceedings and interest on judgment at four per cent. Learned counsel for the applicant did not press the claim for interest from any earlier date. Costs Will be on a long Cause Scale. Certificate under H.C. Rule 582 authorising Taxing Master to allow more than Rs. 1000 as instruction charges if he thinks proper so to do. Counsel Certified.

11. Order accordingly.


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