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V. Narasimha Aiyangar, Official Liquidator of the City Hygienic Milk Supply Co. Ltd. Vs. the Official Assignee of Madras Representing D. Sadasiva Rao, an Insolvent and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai
Decided On
Reported inAIR1931Mad58; (1931)60MLJ280
AppellantV. Narasimha Aiyangar, Official Liquidator of the City Hygienic Milk Supply Co. Ltd.
RespondentThe Official Assignee of Madras Representing D. Sadasiva Rao, an Insolvent and ors.
Cases ReferredBhim Singh v. Liquidator
Excerpt:
- - one such well-known case is the liability to pay calls as a contributory. and ever since joint stock companies were invented directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees......the official liquidator appeals.2. in appeal the two points that arise are: (1) . whether directors of companies under the indian companies act are trustees for the purpose of section 10 of the limitation act; and (2) if they are not trustees, from what date does limitation run.3. taking up the first point, it is now clear that, even in england in spite of occasional use of loose expressions to the contrary, it is now settled that directors of - companies are not trustees. in in re forest of dean coal mining company (1878) 10 ch.d. 450, jessel, m.r., said at page 451:directors have sometimes been called trustees, or commercial trustees, and sometimes they have been called managing partners.and at page 453:they are no doubt trustees of assets which have come into their hands, or.....
Judgment:

Ramesam, J.

1. This is an appeal against an order of our brother Beasley, J., as he then was, dismissing an application of the Official Liquidator of the City Hygienic Milk Supply Co., Ltd., under Section 235 of the Indian Companies Act for an order compelling the Directors of the Company to pay certain amounts by way of compensation in respect of their acts of misfeasance, etc. Two points were raised before the learned Judge and both were decided against the applicant. The Official Liquidator appeals.

2. In appeal the two points that arise are: (1) . Whether Directors of Companies under the Indian Companies Act are trustees for the purpose of Section 10 of the Limitation Act; and (2) if they are not trustees, from what date does limitation run.

3. Taking up the first point, it is now clear that, even in England in spite of occasional use of loose expressions to the contrary, it is now settled that Directors of - Companies are not trustees. In In re Forest of Dean Coal Mining Company (1878) 10 Ch.D. 450, Jessel, M.R., said at page 451:

Directors have sometimes been called trustees, or commercial trustees, and sometimes they have been called managing partners.

and at page 453:

They are no doubt trustees of assets which have come into their hands, or which are under their control but they are not trustees of a debt due to the company.

4. In Flitcroft's case (1882) 21 Ch.D. 519, Bacon, V.C., no doubt said:

That the relationship of trustee and ceslui que trust subsists between the directors of joint stock companies and the shareholders, I do not entertain the slightest doubt.

5. But this statement is inconsistent with the remarks of Lords Justices in the Court of Appeal and with later special judicial opinions. On appeal in the same case Jessel, M.R., said: 'If directors who are quasi trustees for the company, etc.' Brett. L.T., said: 'They are trustees for the company not for the individual shareholders.' But even this statement is too wide. Cotton, L.J., said: 'They have misapplied funds as to. which they stood in the position of trustees.' In In re Faure Electric Accumulator Company (1888) 40 Ch. D. 141 Kay, J., says:

They certainly are not trustees in the sense of those words as used with reference to an instrument of trust, such as a marriage settlement or a will. One obvious distinction is that the property of the company is not legally vested in them, etc.

6. In In re Lands Allotment Company (1894) 1 Ch.D. 616 Kay, L.J., says at page 639:

As directors they are not trustees at all. They are only trustees qua the particular property which is put into their hands or under their control, etc.

7. Lindley,.., L. J., says: 'Although directors are not properly speaking trustees, etc.' in In re City Equitable Fire Insurance Company (1925) 1 Ch. 407, Romer, J., observes: 'To say that directors are trustees is a wholly misleading statement.' It is unnecessary to refer to English decisions at greater length, for all that we are concerned with is whether they are trustees for the purpose of Section 10 of the Limitation Act.

8. In Kathiawar Trading Company, Limited v. Virchand Dipchand (1893) I.L.R. 18 B. 119 it was held by Sargent, C.J., and Bayley, J., that Directors of Companies are not trustees in whom the property of the Companies has become vested in trust for any specific purpose. 1 entirely agree with this decision. It is contended that the purposes of the Company are specific purposes within the meaning of the section. The purposes of the Company are too wide, and far from being specific, one would say they are very general purposes, and even then it is doubtful whether it can be said that the property of the Company is vested in the Directors. Two decisions have been referred to by the learned advocate for the appellant as somewhat weakening the decision in Kathiawar Trading Company, Limited v. Virchand Dipchand I.L.R. (1893) B. 119. These are Kishtappa Chetty v. Lakshmi Ammal : AIR1923Mad578 and Pachaiyappa Chetti v. Sivakami Ammai : AIR1926Mad109 . I have nothing to say as to the actual decisions in these cases, but I think that the statement of Schwabe, C.J., in the former of these cases, namely, wherever there is control over money there is an express trust, a statement probably based upon the: observations of Lord Esher, M.R., in Soar v. Ashwell (1893) 2 Q.B. 390, must be understood in the light of the other judgments of the Court of Appeal in that case which show that 'control' (in Lord Esher's judgment) must be regarded as synonymous with vesting'. As to the decision in Pachaiyappa Chetti v. Sivakami Ammal : AIR1926Mad109 , the facts are very plain and there is an express trust. I do not think that the remarks in these decisions affect the decision in Kathiawar Trading Co., Ltd. v. Virchand Dipchand I.L.R. (1893) B. 119 with which I entirely agree. It follows therefore that Directors can plead limitation.

9. Coming now to the second point, the question really turns upon whether entirely new rights with a new cause of action arise on the winding up of a Company. That, for certain purposes, new rights may be conferred by the winding up of a Company, there can be no doubt. One such well-known case is the liability to pay calls as a contributory. Both English and Indian authorities are very clear on this matter; but it does not follow from this that the right of a liquidator under Section 235 is a case of a new right accruing by reason of the winding up. The corresponding section of the English Act of 1862 is Section 165 and it has been held by the House of Lords in Cavendish Bentinck v. Fenn (1887) 12 A.C. 652, that that section creates no new rights but only provides a summary and efficient remedy. So also in The City Equitable Fire Insurance Company's case (1925) 1 Ch. 407, Pollock, M.R., said:

That section deals only with procedure and does not give any new lights. It provides a summary mode of enforcing existing rights; and I think that is abundantly shown by the Coventry and Dixon's case (1880) 14 Ch.D. 660, etc.

10. In the last case James, L.J., observed:

I am of opinion that that section does not create any new liability i 0r any new right, but only provides a summary mode of enforcing rights which must otherwise have been enforced by the ordinary procedure of the Courts.

11. So far as contributories are concerned, we have got a specific section fixing the time when the amount is payable. Section 159 says that a contributory shall pay at the time when calls are made for enforcing liability. Naturally limitation runs from the time when calls are so made. We have no corresponding section in the case of liability for misfeasance under Section 235. On this matter two decisions of two Indian High Courts are in conflict-the. decision in In the matter of the Union Bank, Allahabad, Ltd. I.L.R. (1925) A. 669 and the decision in Bhim Singh v. Liquidator, Union Bank of India I.L.R. (1926) Lah. 167, which follows an earlier decision of the Punjab High Court. Agreeing with the learned Trial Judge, I think we should prefer to follow the decision of the Punjab High Court.

12. If the cause of action arises from the time when the misfeasance was committed, it is admitted that the application is barred whether Article 36 or 120 applies. It is unnecessary to consider that question' in this case.

13. Mr. V.K. Thiruvenkatachariar appearing for one of the Directors argued that it is not all misfeasance for which Directors may be liable under Section 235. This might be so; but it is unnecessary to consider this point in this appeal.

14. The appeal fails and is dismissed with costs.

15. The learned Judge has given leave to the Official Liquidator to appeal and has authorized him to incur the expenses of the appeals from the assets of. the Company and we need not pass any further order as we agree with the discretion exercised by him. There will be one set of costs to the respondents.

Cornish, J.

16. Section 10 of the Limitation Act is founded upon the equitable doctrine explained by Bowen, L.J., in Soar v. Ashwell (1893) 2 Q.B. 390, that 'time (by analogy to the statute) is no bar in the case of an express trust, but that it will be a bar in the case of a constructive trust.'

17. In my judgment it is settled by Kathiawar Trading' Co., Ltd. v. Virchand Dipchand I.L.R. (1893) B. 119 and the English authorities there cited that a director of a joint-stock company is not, in the language of Section 10, 'a person in whom property has become vested in trust for any specific purpose'. And a series of later English authorities confirms this view of the position of a Director. In Flitcroft's case (1882) 21 Ch.D. 519, Jessel, M.R.. described Directors as quasi-trustees. In Soar v. Ashwell (1893) 2 Q.B. 390 Kay, L.J., observed:

Generally speaking, a person who is not the appointed trustee and whom it is sought to affect with a trust by reason of his conduct is not a trustee at all, although he may be liable as if he were; which is commonly expressed by saying that he is not an express but a constructive trustee.

18. And in In re Lands Allotment Co. (1894) 1 Ch.D. 616 Lindley, L.J., said:

Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control; and ever since joint stock companies were invented directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees....

19. Lord Justice Kay, in In re Faure Electric Accumulator Company (1888) 40 Ch.D. 141, has pointed out an obvious distinction between directors and express trustees, namely, that the property of the company is not legally vested in the directors. That the property of the company does not become 'vested' in the directors by reason of such property being under their control is also made clear by the authorities referred to in Kathiawar Trading Co., Ltd. v. Virchand Dipchand I.L.R. (1893) B. 119. The dictum of Schwabe. C.J., in Kishtappa Chetty v. Lakshmi Ammal : AIR1923Mad578 , that the word 'vested' in Section 10 of the Limitation Act 'does not mean anything more than properly having control of the property' is opposed to those authorities and appears to have been expressed without those authorities having been brought to his notice. Nor can it be said that the entrustment of the Company's moneys to the Directors for the general purpose of carrying on the business of the Company is an entrustment for a specific purpose within the section. In Khaw Sim Tek v. Chuah Hooi Gnoh Neoh (1922) 1 A.C. 120 their Lordships of the Judicial Committee discussing a Limitation Ordinance similar in terms to the language of Section 10 of the Indian Act stated:

A specific purpose, within the meaning of Section 10, must be a purpose that is either actually and specifically defined in the terms of the will or the settlement itself, or a purpose which, from the specified terms, can be certainly affirmed.

20. It is clear upon these authorities that the Directors in the matter before us cannot be regarded as express trustees, and, if they are not express trustees, Section 10 of the Limitation Act does not operate to deprive them of their right to rely on any available provision or article in the Act as a bar to the liquidator's claim.

21. The question then is, whether a bar is furnished either by Article 36 or Article 120 of the Act, these being the only articles which are suggested as having any application to the case. Admittedly, if the starting point of limitation is the alleged acts of misfeasance or breach of trust by the Directors, the remedy would be, barred whichever article governed it. But it has been contended by the learned Counsel for the liquidator that the winding-up order is the starting point of the liquidator's right of applying to the Court under Section 235 (1) of the Indian Companies Act (VII of 1913). Reliance for this proposition is placed on In the matter of the Union Bank, Allahabad, Limited I.L.R. (1925) A. 669, where this view prevailed, and the reasons for it are given by Mukherji, J., at p. 693 of the judgment as follows:

The claim is by the liquidator who had no existence at the dates on which the amounts claimed are alleged to have been mis-spent. If the liquidator is given permission by the law to claim these moneys, certainly it would be unfair and unjust to say that the claim became time-barred before he came into existence.

22. But, with all respect, it may be pointed out that the right of application to the Court given by Section 235 is not confined to the liquidator; it is given to a creditor and to contributories. And if creditors of a company or the shareholders, who are expected to be alive to their interests, choose to allow remedies which might be open to them in respect of losses attributable! to misfeasance by the directors to become time-barred, it seems * to me that neither fairness nor justice requires that after the Company has been ordered to be wound-up the liquidator shall have the right to enforce those remedies against the Directors for the benefit of the creditors and contributories. It is, however, unprofitable to speculate upon the reasonableness of this particular aspect of Section 235, because it has been most authoritatively settled that the corresponding provision in Section 215 of the English Act, the Companies (Consolidation) Act, 1908, is a procedure section only and gives no new rights. See In re City Equitable Fire Insurance Co. (1925) 1 Ch. 407 Sir E. M. Pollock, M.R., says with reference to this section:

I desire to say, though this is not the first time that it has been said, that that section deals only with procedure and does not give any new rights. It provides a summary mode of enforcing existing rights.

23. To the same effect is the judgment of Sargant, L.J., at p. 527. This ruling is decisive of the question and has been regarded as conclusive of it by a Bench of the Lahore Court in Bhim Singh v. Liquidator, Union Bank of India I.L.R. (1926) L. 167. In my opinion, therefore, it is impossible to hold, that the liquidator acquired a new right from the winding-up order to enforce against the Directors a claim which had already become time-barred whether under Article 36 or Article 120 of the Limitation Act. I think that the judgment of Mr. Justice Beasley should be upheld and that this appeal fails.

24. I agree to the order of costs proposed by my learned brother.


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