1. These appeals were heard along with, and in continuation of Appeals Nos. 137, 139, 140 of 1963, etc., in which we have just delivered judgment. They arise from. Application No. 2 of 1959 filed by the Official Liquidator of the Popular Bank Ltd., under Section 543 of the Companies Act. The parties to this application are, with one difference, the same as the parties to Application No. 1 of 1959 against which A. S. Nos. 137, 139, 140 of 1963, etc., were directed, the only difference being, that the 9th respondent in Application No. 1 of 1959, is not a party hereto. The result is, that Respondents 10 and 11 in Application No. 1 of 1959 are respondents 9 and 10 in Application No. 2 of 1959. Save where expressly indicated reference would hereinafter be made to the ranks of the parties as before the Trial Judge.
2. Application No. 2 of 1959 sought to make the Respondents liable for misfeasance and breach of trust, in relation to the Company, and for misapplication and retainer of the money and property of the Company, and as being accountable for such money and property. The misfeasance, mis-application, retainer, breach of trust and accountability were claimed under six principal heads. First it was complained that Respondents 1 to 8, the Directors of the Company did not exercise adequate control in the matter of advances of the Company's funds, and in consequence, Respondents 9 and 10 advanced large amounts to various parties without taking adequate securities for the advances and from whom it was not possible to recover the whole or a substantial portion of the advances. Not only were steps not taken to recover the amounts covered by the advances.but the Board of Directors ratified the advances on 10-11-1955. A list of such advances made, together with the amounts likely to prove unrealisable was furnished in Schedule I. The unrealisable amounts aggregate to Rs. 4,76,746/-Secondly, it was alleged that several amounts were withdrawn by Respondents 9 and 10 from other banks, and were wrongfully retained and mis-appropriated. Respondents 1 to 8, who had knowledge of the said withdrawals did not take any steps to recover the amounts withdrawn. The withdrawals thus made were covered up by false entries, made by Respondents 9 and 10 with the knowledge of the Respondents 1 to 8, of advances to different customers of the Company. These fictitious advances were also ratified on 10-11-1955. The list of the withdrawals from other banks was furnished in Schedule II aggregating to Rs. 1,60,500/-. A list of the false and fictitious entries of advances made to cover up the misappropriations was shown in Schedule III. The amount covered by such entries comes to Rs. 1,99,000/-, thirdly it was contended that Respondents 1 to 8, prepared and published false balance-sheets for the years 1954 and 1956 showing profits when the Bank had actually incurred heavy loss. The amounts paid as dividends for the said two years was shown in Schedule IV. Rs. 12,311-8-10 was claimed under this head. Fourthly, it was alleged that there were manipulations and falsification of Accounts in the Bills Negotiated Account of the Company. Several bills have been entered as negotiated, which were actually not so negotiated. A list of bills in the Bills Negotiated Account in respect of which no bills have been actually negotiated, was shown in Schedule V. The amount covered thereby totals to Rs. 98,700/-. Fifthly, Respondents 3 and 5 sanctioned and caused to be paid to the 9th Respondent, a sum of Rs. 7,500/- in February 1956, on a Demand Promissory Note without any security, knowing that the 9tn Respondent had no means to repay the loan. A sum of Rs. 10,000/- deposited by Sri N. Narayanaswamy was also misappropriated. Sixthly it was alleged that there were manipulations in the Profit and Loss Account of the Company. The defences raised will be referred to in the course of the judgment. On these heads of claim, the learned Trial Judge formulated fifteen points for determination and recorded his findings which may be summarized thus;
(1) That the Directors did not exercise adequate control in the matter of adances, and in consequence, Respondents 9 and 10, advanced large amounts to various parties without adequate secu-rity. The Directors did not take effective steps to recover those advances; (2) that the amounts mentioned in ScheduleII, were withdrawn and misappropriated; that the Directors did not take appropriate steps to recover the said amounts from Respondents 9 and 10; and that the misappropriations were covered up by making false entries of fictitious advances, as indicated in ScheduleIII, with the knowledge and consent of the Directors; (3) that the Liquidator had not established any manipulations in the Profit and Loss Account; (4) that the fixed Deposit Amount of Rs. 10,000 of Sri Narayanaswamy was misappropriated, but probably this may not be the direct result of misfeasance of the Directors as it could be discovered only if the Directors looked into the Account Books item by item; and that Respondents 3 and 5 had sanctioned a loan of Rs. 7500/- to the 9th Respondent without security; (5) that there were manipulations in the Bills Negotiated Accounts, as a result of which Bank must have lost at least Rs. 61,800/- as shown in Schedule V; (6) that as far as the balance-sheet for 1954 was concerned, Respondents 1 to 8 might not have known that it was false; but regarding the balance-sheet for 1955, the same was false and incorrect, to the knowledge of Respondents 1 to 8, and they had not established that the dividends covered thereby were not disbursed; (7) that the loss sustained by the Bank can be fixed at Rs. 6,50,000/, being the amount claimed in Application No. 1 of 1959; (8) that the Respondents are guilty of misfeasance and breach of trust in relation to the Bank and are liable to contribute the following sums by way of compensation in respect of the mis-application, misfeasance and breach of trust, namely, Respondents 9 and 10, jointly and severally liable for the entire sum of Rupees 6,50,000/-; the 3rd Respondent liable for Rs. 2,00,000/-; Respondents 1, 4, 5 and 7 liable for Rs. 75,000/- each; and Respondents 2, 6 and 8 liable for Rs. 50,000/-each. The Respondents were made liable for the costs of the Liquidator in the same proportion. It was made clear by the learned Trial Judge that the Liquidator will not in any event be entitled to realise more than the amount of Rupees 6,50,000/. and one set of costs by executing either of the decrees or both the decrees in Applications 1 and 2 of 1959 from Respondents 1 to 8 in the proportion directed. A copy of the judgment in Application No. 1 of 1959 was directed to be appended to the judgment in Application No. 2 of 1959.
3. Against this order of the learnedJudge A. S. No. 370 of 1903. has beenpreferred by the 7th Respondent; A. S.No. 381 of 1903 by the 2nd Respondents A. S. No. 382 of 1963 by the 3rd Respondent; A. S. No. 395 of 1963 by the 8th Respondent; A. S. No. 396 of 1963 by the 1st Respondent; A. S. No. 399 of 1963 by the 4th Respondent; A. S. No. 400 of 1963 by the 5th Respondent; and A. S. No. 412 of 1963 by the 6th Respondent. Respondents 9 and 10 have not filed any appeal. Nor has the Official Liquidator filed either any appeal, or memorandum of cross objections.
4. Since the filing of these appeals, Respondents 1, 3 and 6 died. The legal representatives of Respondents 1 and 6 have impleaded themselves as appellants in the appeals filed by them.
5. On behalf of the 3rd respondent C. M. P. No. 7082 of 1968 was filed on 16-7-1968 after arguments on the appeals were closed and judgment was reserved on 4-7-1968. It was prayed that the entire proceedings initiated by the Liquidator be declared to have abated. The cases were reposted to argue the subject-matter of the petition alone. Arguments on the same were heard on 25-7-1968 and adjourned at the request of counsel to 31-7-1968. After further submissions made on that day on the subject-matter of the C. M. P., orders thereon were reserved. We have repelled a similar argument addressed to us in A. S. No. No. 134 of 1963 in the judgment just delivered in that appeal and other connected appeals. For reasons recorded in paras 12 to 14 therein, we have no hesitation in rejecting the contention that the proceedings initiated by the liquidator terminate on the death of the 3rd respondent after decree and pending appeal. We further hold that, as the 3rd respondent died after conclusion of arguments and before delivery of judgment in his appeal, this judgment of ours would have effect as against him as if it were pronounced while he was alive.
6. The learned Trial Judge by his order, directed that the Liquidator will not in any event be entitled to realise more than Rs. 6, 50,000/- and one set of costs by executing either or both, of the decrees in Applications 1 and 2 of 1959 from Respondents 1 to 8 in the proportion of their liabilities, as determined by the judge. The Liquidator has not appealed from this part of the learned Judge's order. For that reason we say nothing about this aspect of the order. We shall now proceed to consider the various heads of claim. The relevant facts have been stated by us in our judgment in A. S. Nos. 137, 139 and 140 of 1963 etc. As we are directing a copy of the said judgment to be appended to this, it is unnecessary to traverse the same ground over again. The facts stated inthe said judgment will serve as a background to these appeals also. The evidence given in Application 1 of 1959 was treated as evidence in Application No. 2 of 1959 also.
7. Section 543(1) of the Act may conveniently be quoted:
'543. (1) If in the course of winding up a company, it appears that any person who has taken part in the promotion or formation of the company, or any past or present director, managing agent, secretaries and treasurers, manager, liquidator or officer of the company-
(a) has misapplied, or retained, or become liable or accountable for, any money or property of the company; or
(b) has been guilty of any misfeasance or breach of trust in relation to the company;
the Court may, on the application of the Official Liquidator, or the liquidator, or of any creditor or contributory, made within the time specified in that behalf in Sub-section (2), examine into the conduct of the person, director, managing agent, secretaries and treasurers, manager, liquidator or officer aforesaid, and compel him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the Court thinks just'.
Considerable discussion centred round the meaning of the expression 'mis-feas-ance' and the scope of liability sketched by the section. Copious references were made to the English and Indian decisions. We do not think it necessary to survey the entire gamut of these decisions. As we understand them, certain propositions appear to be well settled. Before liability can be attracted under the section it must be shown that the person proceeded against has been guilty of misapplication, retainer, misfeasance, etc., resulting in loss to the Company as a direct consequence of the act complained of. It was argued that mere non-feasance would not be included within the purview of the section. The observations in some cases seem to countenance such a view. But the view of Jessel M. R. in Ex parte, Pelly, 1882-21 Ch D 492 the views expressed in In re, Kingston Cotton Mills Co. (No. 2), 1896-2 Ch 279, and the decision of Maugham J. in In re, Etic Ltd., 1928 Ch 861 are sufficiently clear that the English section -- on which the section in the Indian Act has been modelled -- covers a breach of trust in the wide sense, including a breach of trust by negligence or something of that kind. The same view has been taken in some of the Indian decisions also. (See V. Subbayya v. C. T.Machayya, AIR 1942 Mad 365 and M. A. Malik v. V. S. Thiruvengadaswami Mudaliar, 1949-19 Com Cas 311 - (AIR 1950 Mad 208)). The facts presented here and the conclusions that we have formed, do not warrant any greater elaboration or a more detailed examination of the legal position.
8--12. (After discussing the evidence their Lordships proceeded:)
13. Ext. D39 is the Memorandum and Articles of Association of the Bank. Clause 120 of the Articles of Association declares that no dividend will be paid otherwise than out of the profits of the year or any other undistributed profits. In the face of the above provision in Ext. D39, and on the authorities, there can be little doubt that a declaration of dividend otherwise than out of the pro* fits, and at a time when the Bank was, to the knowledge of the Directors, working at a loss, is an act ultra vires the Directors It was a case of mis-application of the Bank's capital resulting in loss to the Bank. For reasons we have elaborately discussed in the appeals against Application No. 1 of 1959 there can be little doubt that the Directors were aware by the 2nd of July 1955 of the financial bankruptcy of the Bank. They were fully aware that on account of the misappropriations the Bank had suffered heavy loss and that it was not in a position to declare profits or pay dividends. There is also evidence that Nilakanta Iyer (DW. 2) who was the General Manager of the Bank since 21-11-1955 had recommended against the declaration of dividends for 1955 in his draft proposals (Ext. D. 47), that the 1st Respondent corrected the draft proposal, and contrary to it, proposed a declaration of dividend, which was accepted and passed by the Board of Directors, We agree with the learned Trial Judge that the Liquidator having shown that there was a declaration of dividend the burden is on the Directors to show that the dividend thus declared had not actually been paid. This is so, by reason of Section 45-H of the Banking Companies Act, according to which, on the Liquidator making out a prima facie case, the burden shifts to the Directors (in this case) to disprove liability. We shall advert to the section and to the argument based on it, later.
14--19. (After discussing the evidence their Lordships proceeded.)
20. We have extracted the pleading in the Points of claim about the absence of adequate control by the Directors in the matter of advances of the Bank's Funds. The plea of the Directors is that the Executive Committee had been authorised to sanction and review the loans, that the Committee functioned effectively, and that the Directors were on that account relieved from responsibility. It is also pleaded that the Directors placed trust and confidence -- as they were entitled to -- in the 9th Respondent, and therefore again they cannot be held liable for these advances. Neither of these contentions appear acceptable to us. It was accepted before us that by reason of clause 105 of the Articles of Association (D. 39), no less than by reason of Regulation 71 of Table A of the Indian Companies Act 1913 (the provision in the Travancore Act was also similar) the responsibility of managing the business of the Bank is laid upon the Directors. We do not think that the said responsibility can be got rid of altogether by a mere delegation in favour of an Executive Committee, or by blindly reposing confidence and trust in the 9th Respondent. In our judgment in the appeals against Application No. 1 of 1959 we stated that we are unable to endorse the broad submission that irrespective of the size and standing of the Bank, the volume of business transacted therein, and the efficiency and trustworthiness of the delegate, a delegation of powers would per se carry with it a denudation of responsibility. The least that the responsibility placed on the Directors by statute and by the Articles of Association would require and expect them to do, is to see that the delegate or the confidant functioned properly and effectively. In the present case, we find that although it was recorded in Ext. P58 that a meeting of the Executive Committee shall be called at least once a month to consider and review the advances, this was not followed in actual practice, especially at the later stages after 1954. We find again that early in 1954 the Reserve Bank had commented in Ext, P62 report about the lack of supervision and control by the Board of Directors in the matter of granting advances and about the passivity of the Committees constituted from time to time for sanctioning and reviewing the advances. It had also commented upon the undefined powers granted to the Manager in the matter of advances and credits. The Directors were aware of this Report at least in July 1954, and their action in not seeing that their resolution of 6-9-1953 was properly implemented and that the Manager was not given a free hand in the matter of advances amounts to a grave dereliction of duty on their part, and, in our opinion, to misfeasance. Our conclusion is strengthened by the fact that even when the irregularities and defalcations were disclosed to them in the end of July 1955, the Directors in the most perfunctoryfashion, which we have detailed in our judgment in the appeals against Application No. 1 of 1959, ratified the whole series of advances in Ext. P61 list. To a situation such as this, and to the facts disclosed here, we have held in our judgment referred to supra, that the principle in Dovey v. Cory, 1901 A. C. 477 has no application.
21. The learned Trial Judge was satisfied from Schedule I and from Exts. P73 and P75, that the advances listed in Schedule I were not made on proper security. Ext. P73 dated 19-12-1961, is a statement made by the Liquidator regarding the realisations made. The 7th respondent in Appendix D to his Points of Defence showed the probable amounts that may be realised from the parties mentioned in Schedule I. This was answered by the Official Liquidator in Ext. P75 statement. In the light of these, the learned Judge held that he was inclined to hold that the advances were not on proper and adequate security. This finding has been assailed before us, and, as noticed earlier, our attention was called to the proceedings of the Executive Committee recorded in Ext. P63, which showed that in the case of some at least of these advances, the Executive Committee had called for securities at a certain stage and had also directed action to be taken at a certain stage. For instance proceedings of the Executive Committee dated 14-1-1954 and 17-9-1954 were relied on to show that in respect of item 18 in Schedule I a limit of Rs, 10,000/. was directed to be continued and an equitable mortgage of properties was probably taken. In regard to items 26 again, the insistence on title deeds from the party, as seen from the proceedings of the Executive Committee dated 26-9-1954 and 26-10-1954, were stressed. In addition to these, on the aspect of the irrecoverability of the advances, it was pointed out that a detailed cross-examination had been directed of P. W. 3 and P. W. 22 and D. W. 3 to show that many of the advances mentioned in Schedule I cannot be regarded as irrecoverable. Above all, the Liquidator's affidavit dated 4-6-1968, filed before us was relied on to show that a sum of Rs. 41, 225/- had been thus far realised by the Liquidator out of what he characterised as irrecoverable advances.
22. On these aspects, which bear on the loss caused to the Bank, the learned Trial Judge expressed himself thus:
'Last I come to the amount of loss sustained by the Bank and the respective liabilities of the respondents. According to the Liquidator, who is examined as P. W. 24, the loss comes to over,Rs. 7,00,000/- namely the aggregate of the unrealisable advances shown in Schedule I of Rs. 4, 76, 746/- the amounts withdrawn from other banks and misappropriated of Rs, 1,60,500/- shown in Schedule II, the sum of Rs. 12,311/-being the dividends declared Rs. 61,800/-being items 22 to 24 in Schedule V and the sum of Rs, 10,000/-, being the Fixed Deposit of Narayanaswami. Probably the last item may not be the direct result of the misfeasance of the Directors because that amount could be discovered only if the Directors looked into the accounts item by item. Similarly, the dividend declared for 1954 might also be excluded on my finding that the Directors did not know that the Bank was working at loss in 1954. All the other amounts I am inclined to hold, are the result of the misfeasance and breach of trust committed by the respondents. In this case the misfeasance of the Directors ultimately resulted in fraud as I have already indicated in Application No. 1 of 1959. Considering all the circumstances, I am inclined to think that the amount of loss be fixed at Rs. 6,50,000/- being the amount claimed in Application No. 1'.
In our judgment in the appeals against Application No. 1 of 1959 we have already held that we cannot accept the finding of the learned Judge quantifying the deficiency in the assets of the Company to pay creditors in full at Rs. 6,50,000,'-. Much the less can we accept the figure as a correct estimate of the loss caused to the Bank by reason of the misfeasance, misapplication, etc., of the Directors who are the appellants before us. It is a regrettable fact that there is not even formal evidence on the side of the Liauidator of the loss occasioned to the Bank, as a result of the acts of misapplication, misfeasance, breach of trust, etc., of the Directors. The loss had not been estimated even in the pleading. On the pleading and the evidence, we cannot assess the loss caused to the Bank as a result of the grant of irrecoverable advances specified in Schedule I.
23. We may also advert, in this connection, to an argument that has been advanced to us regarding the scope of Section 45-H of the Banking Companies Act. The section reads:--
'45-H. Special provisions for assessing damages against delinquent directors, etc.
(1) Where an application Is made to the High Court under Section 543 of the Companies Act, 1956 (1 of 1956) against any promoter, director, manager, liquidator or officer of a banking Company for repayment or restoration of any money or property and the applicantmakes out a prima facie case against such person, the High Court shall make an order against such person to repay and restore the money or property unless he proves that he is not liable to make the repayment or restoration either wholly or in part:
Provided that where such an order Is made jointly against two or more such persons, they shall be jointly and severally liable to make the repayment or restoration of the money or property.
(2) Where an application is made to the High Court under Section 543 of the Companies Act, 1956 (1 of 1956), and the High Court has reason to believe that a property belongs to any promoter, Director, manager, liquidator or officer of the banking company, whether the property stands in the name of such person or any other person as an ostensible owner, then the High Court may, at any time, whether before or after making an order under Sub-section (1), direct the attachment of such property, or such portion thereof, as it thinks fit and the property so attached shall remain subject to attachment unless the ostensible owner can prove to the satisfaction of the High Court that he is the real owner and the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to attachment of property shall, as far as may be, apply to such attachment'.
The words of Section 45(H) of the Act may be co-related to those occurring in Section 543(1) of the Companies Act, which may also be extracted:
'543 (1) If in the course of winding up a company it appears that any person who has taken part in the promotion or formation of the company, or any past or present director, managing agent, secretaries and treasurers, manager, liquidator or officer of the company-
(a) has mis-applied, or retained, or become liable or accountable for, any money or property of the Company; or
(b) has been guilty of any misfeasance or breach of trust in relation to the company;
The Court may, on the application of the Official Liquidator, or the Liquidator, or of any creditor or contributory, made within the time specified in that behalf in Sub-section (2), examine into the conduct of the person, director, managing agent, secretaries and treasurers, manager, liquidator or officer aforesaid, and compel him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the Court thinksjust'.
* * * * *
Based on these, the argument addressed to us was that the obligation of the Liquidator to make out only a prima facie case and the burden thereafter on the delinquents proceeded against to disprove the liability can arise only when the relief claimed is repayment or restoration of any money or property of the Company, and not compensation in respect of the mis-application, retainer, misfeasance or breach of trust. Going purely by the language of Section 45-H of the Banking Regulation Act, the juxtaposition of the words occurring therein, and correlating them with the words in Section 543 of the Companies Act, we are free to admit that the section has not been artistically drafted. A plainer and simpler drafting was certainly possible. But, on the facts found by us, the argument appears quite academic. On the 2nd, 3rd and 5th Heads of claim, we have found that the Directors, or such of them as are liable, are guilty of mis-application of the Bank's funds. We have also expressed, while dealing with the first head of claim, that it is not possible to assess the loss. On the 4th Head of claim, we have held that the Directors are not liable. On the 6th Head of claim again, the trial Judge found against the liquidator and there is no appeal before us. The result is that to the extent to which we have found the liability of the Directors, the same can be rested on the ground of mis-application of the funds of the Bank. Even on the arguments of Counsel for the Directors, the special provision in Section 45-H of the Banking Companies Act is applicable to a case of mis-application of the Bank's funds. Having regard to the conclusion that we have come to in these appeals that the Directors to the extent to which they or any of them are liable are guilty of mis-application of the funds of the Bank, Section 45-H is attracted. It is therefore unnecessary for us to consider in these appeals whether Section 45-H covers only the cases covered by Section 543(1)(a) of the Companies Act 1956, and does not cover the cases contemplated by Clause (1) (b) thereof.
24. In the result, we record our findings as follows:
(1) On the First Head of claim we find that, the liquidator has not proved the loss caused to the Bank by reason of the irrecoverable advances listed in Schedule 1 and therefore is not entitled to succeed on this head of claim; (2) On the Second Head of claim we find that the Directors were parties to the falsification of the Bank's accounts by making entries relating to the fictitious advances shown in Schedule III for the purpose of coveringup the misappropriations effected by withdrawal of the Bank's monies from its Account with other Banks as shown in Schedule II. We find the loss caused to the Bank under this Head, to be, as stated in Schedule III, a sum of Rs. 1,99,000/-. Respondents 1 to 8 will be jointly liable for this amount. Having regard to all the circumstances, and to the proviso to Section 45-H of the Banking Regulation Act, we fix the several liability of these Respondents for this Head of claim at Rs. 40,000/- each. We make it clear that the total amount recoverable under head of claim will in no event exceed Rs. 1,99,000/-; (3) On the Third Head of claim, we find that all the Directors except the 7th Respondent are responsible for the preparation and acceptance of the false balance sheet for the year 1955 showing profit and declaring dividends when the Bank was, to their knowledge, working at a loss. The loss incurred by the Bank under this head as shown in Schedule IV, is Rs. 6,155-12-5. We hold Respondents 1 to 6 and 8 jointly and severally liable for this amount; (4) On the Fourth Head of claim, we find that the Directors are not liable for the manipulations in the Bills Negotiated Accounts, shown in Schedule V; (5) On the Fifth Head of claim, we find that the 3rd Respondent and the 5th Respondent are liable for the total amount of Rs. 7,500/- given as loan to the 9th Respondent on 13-2-1956, of which the 3rd Respondent is liable for Rs. 7,250/-, and the 5th Respondent for the balance amount of Rs. 250/-.
25. In the result, in modification of the decree passed by the learned Trial Judge, there will be a decree in the following terms:
(1) That Respondents 1 to 8 do jointly contribute to the assets of the Bank a sum of Rs. 1,99,000/- in respect of the Second Head of claim; and that each of them be severally liable under this head for Rs. 40,000/-, the Liquidator not being in any event entitled to recover more than Rs. 1,99,000/- under this head of claim.
(2) That Respondents 1 to 6 and 8 be jointly and severally liable to contribute to the assets of the Bank Rs. 6,155-12-5, being the dividend wrongfully declared for the year 1955.
(3) That the 3rd Respondent be liable to contribute a further sum of Rs. 7,250 to the assets of the Bank under the Fifth Head of Claim, and the 5th Respondent be similarly liable to contribute Rs. 250/-under the same Head of claim.
(4) That In other respects the decree of the learned Trial Judge in so far as the same is against Respondents 1 to 8 do stand vacated.
(5) That the parties do bear their respective costs throughout