1. The defendant in O.S. No. 100 of 1973, on the file of the Sub-court, Coimbatore, who was unsuccessful in both the courts below, is the appellant herein.
2. The appellant was the managing director of M/s. Coimbatore Murugan Mills Ltd., till its management was taken over by the Tamil Nadu Textiles Corporation as authorised controllers by the order of the Govt. of India dated December 19, 1970. When possession was taken over by the said Corporation, there was a deficit in the yarn stocks to the tune of 995.5 kgs., valued at Rs. 9,796.29. Subsequently, the management of the mills was taken over by the National Textile Corporation (Tamil Nadu and Pondicherry) Ltd. Thereafter, the National Textile Corporation field the said suit for the recovery of Rs. 9,796.29 from the defendant.
3. The defendant resisted the suit contending that he was not liable to pay the suit claim, that during the relevant period, he and the staff working under him were physically prevented from entering the mills by the workers, that the stock was not verified in the presence of the defendant, that there was no shortage, and that even if there was any, he was not liable to make good the loss. He also contended that the weight of cotton yarn was subject to variation on account of the climatic factors, and, therefore, the shortage in this case can be attributed to the climatic changes.
4. The trial court held that the defendant was liable to pay the amount, and decreed the suit with costs. On appeal by the defendant, the lower appellate court also held the defendant liable to make good the loss arising out of the shortage of yarn. At the appellate stage, the defendant filed an application, I.A. No. 1588 of 1974, under s. 633 of the Companies Act, alleging that he was physically prevented from entering the mills, that the watchman was having the keys and that no one was allowed to enter the mills, that he could not be expected to check the departments at every stage which was humanly impossible, that he had to accept the statement made by his subordinates, and as such he was not liable for the alleged loss, and that, therefore, the court should pass an order relieving him from the liability even if there was any liability in law. The lower appellate court held that the said section will come into play only if the defendant is shown to have acted honestly and reasonably, that in this case, it has not been shown that the defendant had acted reasonably and honestly, and that, therefore, there is no room for applying s. 633 of the Companies Act. In that view, the lower appellate court confirmed the decree and judgment of the trial court.
5. Aggrieved against the judgment of the lower appellate court, the defendant has come in appeal. According to the defendant, the stock of yarn was not checked in his presence and, therefore, the shortage of yarn cannot be taken to have been duly established in this case. It is seen from the evidence that a notice was given to the defendant to be present at the time of stock taking, but the defendant had absented himself. Therefore, he cannot complain now that the verification of stock was not done in his presence, and, therefore, he is not bound to accept the shortage alleged.
6. In this case, both the courts below have concurrently held that the shortage had been duly proved, having regard to the entries in the accounts and evidence adduced on the side of the plaintiff. I cannot go behind the factual findings of both the courts below at the stage of the second appeal merely because the defendant disputes the shortage. I have to, therefore, agree with the courts below that there was shortage of 995.5 kgs. of yarn worth about Rs. 9,796.29. Thus, the main question is as to whether the appellant is liable for the shortage found.
7. According to the appellant, there was practically a seige of the mills by the workers during the relevant period and, therefore, for the shortage in question, he cannot be held liable. It is seen from the evidence of P.W. 1, that from November, 1970, to February, 1971, there was labour trouble in the mills and the workers had assembled outside and prevented others from entering and, therefore, the defendant could not have gone into the mills. Under Exs. A-30 to A-38 gate passes had been issued and goods had been taken out of the mills. In view of the said gate passes, it is not possible to conclusively say that the yarn inside the mills could not have been removed from the mills during the period from November, 1970, to February, 1971. According to the appellant, there was a possibility of pilferage of yarn from the mills during the period when the workers were on strike, and the shortage might also be due to the climatic changes. The trial court had held that even if there was any pilferage of yarn from the mills, as managing director he should have given a complaint to the police. Since he has not given any complaint as regards pilferage, the defendant as managing director should be held liable for the shortage. The lower appellate court also held that the loss of weight due to any climatic conditions cannot exceed 8 per cent. as stated by P.W. 2, and even that 8 per cent. variation should be noted in the accounts. Since the court below held that there was no pilferage but there was a possibility of the yarn being removed from the mills, with the knowledge of the appellant, he should be held liable for the shortage. In the light of these facts, we have to decide the question as to whether the defendant can be held liable for the shortage of yarn.
8. The learned counsel for the appellant refers to the following passage in Palmer's Company Law in support of his submission that a managing director will be liable only in case of gross, wilful or culpable negligence or has acted dishonestly or fraudulently.
'The duty of a director is not, however, as strict as that of a trustee because, whereas, a trustee is normally liable if he allows trust funds, or the control of such funds, to remain for an unreasonable period in the kinds of his co-trustee or co-trustees and loss results therefrom, a director may, upon the first principle stated, supra, rely upon co-directors or officers of the company, provided that such reliance is reasonable in all the circumstances.'
9. It is no doubt true, in some of the earlier cases, the courts suggest 'gross negligence' as being the measure by which a director would be found to have failed in his duty. But the said view that a director could be held liable only if he was grossly negligent, was doubted by Romer J. in In re City Equitable Fire Insurance Co. Ltd.  1 Ch 407, where the court, after a full examination of the relevant authorities observed :
'........ one cannot say whether a man has been guilty of negligence, gross or otherwise, unless one can determine what is the extent of the duty which he is alleged to have neglected. For myself, I confess to feeling some difficulty in understanding the difference between negligence and gross negligence, except in so far as the expressions are used for the purpose of drawing a distinction between the duty that is owed in one case and the duty that is owed in another. If two men owe the same duty to a third person, and neglect to perform that duty, they are both guilty of negligence, and it is not altogether easy to understand how one can be guilty of gross negligence, and the other of negligence only. But if it be said that of two men one is only liable to a third person for gross negligence, and the other is liable for mere negligence, this, I think, means no more than that the duties of the two men are different. The one owes a duty to take a greater degree of care than does the other : ...... If, therefore, a director is only liable for gross or culpable negligence, this means that he does not owe a duty to his company, to take all possible care.'
10. The learned counsel also contends that the appellant being the managing director cannot be expected to check the stock of yarn every day and he has to naturally depend on the subordinate offices of the company to look after that work and if by their negligence there has been no proper check of the stock of yarn, he, as a managing director, cannot be held liable. It is no doubt true that in determining the director's duties, consideration must be given to the nature of the company's business and the director's right to distribute the work in a reasonable way between the officials of the company. In determining the question whether a director has been guilty of negligence, the court will have to take into account the character of the business, the number of directors, the provisions of the articles, the ordinary course of management, the practice of directors, the extent of their knowledge and experience, and, in short, all the special circumstances of the particular case. Romer J., in the case referred to above, has pointed out that there is little resemblance between the duties of a director, and the duties of a trustee, and that the position of a director of a company carrying on a small retail business is very different from the director of a big company. He had observed (p. 426) :
'The position of a director of a company carrying on a small retail business is very different from that of a director of a railway company. The duties of a bank director may differ widely from those of an insurance director, and the duties of a director of one insurance company may differ from those of a director of another. In one company, for instance, matters may normally be attended to by the manager or other members of the staff, that in another company are attended to by the directors themselves. The larger the business carried on by the company the more numerous, and the more important, the matters that must be necessity be left to the managers, the accountants and the rest of the staff. The manner in which the work of the company is to be distributed between the board of directors and the staff is in truth a business matter to be decided on business lines.'
11. The question whether the director has been guilty of negligence has to be considered in the light of the articles of association of the company and the duties assigned to him thereunder. In that case, Romer J., has laid down the following three tests for determining the extent of the director's liability for loss : (1) The director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience and is not liable for mere errors of judgment. (2) A director is not bound to give continuous attention to the affairs of his company as his duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. In respect of all duties which, having regard to the exigencies of business and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.
12. Sir James Hannen in In re Young and Harston's Contract  31 Ch. D. 168 dealing with the obligations as between the parties to a contract to sell real estate, has observed :
'Our judgment, therefore, is that where a man knowing that some act has to be done by him on the particular day, goes away in disregard of that obligation, he is guilty of default; and doing it intentionally it is wilful within the terms of a contract of this kind.'
13. Of course that was a case where the vendor's default consisted not merely of an omission to do an act which was his duty do, but of omission to do an act which he knew was his duty to do. The same view was taken in a later decision by a Court of Chancery Division in In re Mayor of London and Tubbs' Contract  2 Ch 524 , wherein the default of a vendor consisted of a mis-statement contained in the contract and Lindley L.J. observed that it was difficult to lay down any general definition of 'wilful' that the word was relative, and that each case must depend on its own particular circumstance.
14. The learned counsel for the appellant also places reliance on the decision in Thinnappa Chettiar v. Rajagopalan  14 Comp Cas 207;  2 MLJ 85, where a Division Bench has expressed the view that a managing director, like an ordinary director, is entitled to place reliance on the company's auditors and other subordinate officials unless there exists some ground for suspicion. But that decision has no application to the facts of this case, as the facts therein are entirely different.
15. In In re Denham & Co.  25 Ch.D. 752 , Chitty J. held that an innocent director cannot be held liable for the fraud practised by his co-directors in issuing to the shareholders false reports and balance-sheets, provided that the books and accounts of the company have been kept and audited by duly appointed and responsible officers and he has no ground for suspecting fraud. Relaying on the said decision, the learned counsel for the appellant says that in this case the manager and other subordinate officials of the company have been put in charge of the stock of yarn, and the managing director was justified in relaying on them and there was no ground for suspecting fraud on their part, at the time of entrustment of the stocks of yarn.
16. However, a perusal of the pleadings in this case does not indicate that the appellant/defendant had pleaded that any particular subordinate official of the company was made accountable for the stocks of yarn, and that, therefore, he cannot be held personally liable for any loss in the stock of yarn. On the other hand, it is seen that during the relevant period, gate passes have been issued only by the appellants managing director and not by any other official of the company. The fact that he had issued gate passes for removing the stock indicates that the stock of yarn was under his personal custody, and nobody could have dealt with it without his knowledge. The appellant has not explained as to how the gate passes have been issued by him, if any other subordinate official has been entrusted with the stock of yarn. Thus, the appellant cannot now put forward a plea that the shortage of yarn was due to the negligence of the subordinate staff of the company. As already pointed out, the only explanation given by the appellant for the shortage of yarn is that there was a strike by the workers in the mill during the relevant period and that he or other officers were not allowed inside the mills, and that the shortage might be due to the climatic conditions. Once it is found that the loss has occurred, notwithstanding the above reasons, as a managing director who is in the position of a trustee, he is liable to account for the losses especially in this case where the evidence indicates that the stock of yarn could not have been removed from the mill without the knowledge of, or the gate passes issued by, the managing director.
17. As regards the second point as to the applicability of s. 633 of the Companies Act, it is seen that a relief may be prayed for under that section only if the applicant has acted quite honestly. In this case, the appellant has completely disowned any liability for the shortage and it is not a case where the shortage has occurred by an honest act of the managing director. In this view of the matter, it has been rightly held by the lower appellate court that s. 633 of the Companies Act is not applicable to the facts of this case.
18. We have to, therefore, agree with the findings of the courts below that the appellant is liable to make good the loss which arose out of the shortage of yarn. The second appeal is, therefore, dismissed.
19. There will, however, be no order as to costs.