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B. Subramania Iyer Vs. the Podanur Bank, Limited (In Liquidation), by Its Official Liquidator - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai
Decided On
Reported in(1947)1MLJ54
AppellantB. Subramania Iyer
RespondentThe Podanur Bank, Limited (In Liquidation), by Its Official Liquidator
Cases Referred and Chockalingam v. Official Liquidator
Excerpt:
.....one think it his duty to prosecute. and the fact that a prosecution was likely to result from the investigation must have been well known to all parties long before the learned district judge decided to prosecute......v. official liquidator : air1944mad87 . the winding up of the company was ordered by the learned judge on the original side of this court in january, 1943, and further proceedings were to be in the court of the district judge of west tanjore. on 3rd november, 1943, an application was filed under section 235 of the indian companies act alleging various acts of misfeasance, etc., on the part of the directors and the secretary and asking the court to require the respondents to make good the loss occasioned by their default. in the enquiry into this petition interrogatories were served on the respondents and an opportunity was given to them to state their case and to be represented by their counsel. the enquiry was very prolonged and on 31st july, 1945, the district judge wrote a.....
Judgment:

Wadsworth, J.

1. These appeals arise out of a series of orders directing the Official Liquidator of the Podanur Bank, Ltd., Tiruvadamaruthur, to prosecute the appellant, his co-directors and the Secretary of the Company for offences under the penal provisions of the Indian Companies Act. That the orders in question are appealable under Section 202 of the Indian Companies Act is established so far as this Court is concerned by the decisions in Kesavaloo Naidu v. Murugappa Mudali : (1906)16MLJ537 and Chockalingam v. Official Liquidator : AIR1944Mad87 . The winding up of the Company was ordered by the learned Judge on the Original Side of this Court in January, 1943, and further proceedings were to be in the Court of the District Judge of West Tanjore. On 3rd November, 1943, an application was filed under Section 235 of the Indian Companies Act alleging various acts of misfeasance, etc., on the part of the directors and the Secretary and asking the Court to require the respondents to make good the loss occasioned by their default. In the enquiry into this petition interrogatories were served on the respondents and an opportunity was given to them to state their case and to be represented by their Counsel. The enquiry was very prolonged and on 31st July, 1945, the District Judge wrote a detailed order in the course of which he expressed the opinion that whereas the guilt of the Secretary was fairly clear, so far as the directors were concerned it is a matter of considerable difficulty to decide whether they were merely culpably negligent, or were conniving parties to the fraudulent concealment of facts from the general body in the balance sheets, or the alleged unauthorised and fraudulent sales. The learned District Judge came to the conclusion that further investigation was necessary to establish prima facie the criminal liability of the directors and for the preparation of false balance sheets or for fraudulent sales. He seems to have been influenced by an offer made by Counsel on their behalf to purchase the unsold decrees and make good any losses so that payment in full may be made. The learned District Judge therefore directed the Official Liquidator to make a report to the Police and if possible to procure a special officer of the Criminal Investigation Department to make further investigation. Meanwhile the petition was treated as 'closed.' On 17th February, 1946, the reports of the Special Investigation Officer was received and on the 19th February, the Official Liquidator applied for the revival of the application praying that the directors and the Secretary should make good the losses to the Company. On 20th February, 1946, the learned District Judge passed ex parte proceedings reviving the former application and directing notices to the respondents and he also passed a very unsatisfactory order authorising the liquidator to prosecute ' any director, manager or other officer for any offence which might have been committed.' This latter order has been set aside in our judgment in C.M.A. No. 197 of 1946, as being obviously defective. On 13th March, 1946, that is to say, nearly a month after this order for prosecution had been passed, I.A. No. 96 of 1946 was preferred by two shareholders and one creditor asking the Court to direct the sale of the unrealised assets and the distribution of a further dividend out of the balance in the hands of the liquidators and also asking that the prosecution already ordered should not be financed out of the funds of the Company. At the same time there was a further petition, I.A. No. 97 of 1946, in which the same petitioners prayed for an interim stay of the proceedings for the prosecution of the directors and the secretary. The latter application was dismissed on the 14th March. On the 29th March, the learned District Judge adjourned I.A. No. 96 of 1946 and at the same time suo motu he passed orders for the prosecution of the directors and the Secretary for the offences they were alleged to have committed under the provisions of the Companies Act. It is these orders which are challenged in the appeals now before us.

2. The contentions taken in the various Memoranda of appeals are that the orders were illegal in that they were passed without notice to the persons sought to be prosecuted, without enquiry into the question of the desirability of the prosecutions without any materials or legal evidence justifying the prosecutions and without consultation of the creditors or shareholders who were affected by the charging of the costs of prosecution to the Company's assets.

3. Section 237(1) of the Indian Companies Act runs as follows:

If it appears to the Court in the course of a winding up by, or subject to the supervision of, the Court that any past or present director, manager or other officer, or any member, of the Company has been guilty of any offence in relation to the Company for which he is criminally liable, the Court may, either on the application of any person interested in the winding up or of its own motion, direct the liquidator either himself to prosecute the offender or to refer the matter to the registrar.

4. This section does not in terms require the Court to make any particular enquiry or to give to the person who is to be prosecuted an opportunity to show cause before the Official Liquidator is directed to file a complaint. On the facts of the present case it would appear that in the Official Liquidator's own enquiry the directors and the Secretary had been given every opportunity to put forward their version of the facts on the various charges of misfeasance which are substantially the matters-forming the foundation for the present prosecutions. Seeing that the section contemplates action by Court not merely at the instance of third parties but also on its own motion, we do not think that it can be laid down as an absolute rule that the Court must call upon the persons concerned to show cause before it directs their prosecution. When as in this case there had been a very full investigation and an adequate opportunity had been given to the directors and the Secretary to exculpate themselves from the charges against them we do not think that the order for prosecution can be set aside merely because it was passed ex parte.

5. On the question of lack of materials before the learned District Judge there were no doubt very considerable materials before him at the time when he passed his order of 31st July, 1945. Those materials were, so far as directors were concerned, apparently sufficient only to convince the District Judge that they were either culpably negligent or were conniving parties to the fraudulent concealment of facts from the general body in the balance sheets and the other misfeasances-alleged. At the time when the orders now under appeal were passed the learned District Judge had also before him the report of the Special Investigating Officer which unfortunately was treated as confidential. We cannot see what was the necessity for treating this report as confidential since substantially everything it contained had necessarily to be made public as soon as the prosecution started.. The effect of this rather misguided secrecy is certainly to make it more difficult for any one interested to challenge or support the correctness of the orders of the learned District Judge. Those orders themselves contain no statement of reasons, whatever and they did not even contain sufficient materials to enable the appellate Court without further research to satisfy itself that the learned District Judge did give due consideration to the materials available. There is, however, no provision in Section 237 of the Companies Act requiring the Court to set forth its reasons when directing the liquidator to launch prosecutions ; and although it is obviously desirable whenever a Court passes an appealable order that some indication should be given that the Court has applied its mind to the questions which have to be decided in passing the order, it seems to us difficult to say that the order has necessarily to be vacated, merely because it does not itself set forth the reasons which caused the Court to pass it.

6. Section 202 of the Indian Companies Act confers a very wide right of appeal against the orders of a Court in the winding up of a Company and it is perhaps going too far to say that every order in such a matter which might conceivably form the subject of appeal, should contain a detailed exposition of the reasons supporting it. But we are of opinion that an order directing a prosecution which from its very nature is most likely to result in appeal and which involves a matter of very great importance to the person to be prosecuted, should be supported by some indication of the reasons which justify it. We do not, however, think that the order should be set aside merely because of its excessive brevity if it was in fact justified by the materials before the Court. We have ourselves examined the report of the Special Investigating Officer and we are of opinion that there were materials before the District Judge which justified, him in directing a prosecution of the appellant for the offences alleged. That being so we do not think that it is necessary to set aside the order of the District Judge and require him to draw up a fresh order with an adequate statement of his reasons.

7. Mr. Jagadisa Aiyar for the appellant has strenuously argued on the authority of In re Northern Counties Bank, Ltd. (1883) 31 W.R. 546 that the question whether a prosecution should be directed in the matter of the alleged misdeeds of directors of the Company is mainly a question whether having regard to the financial position of the Company and the desires of the share-holders and creditors, it is reasonable to saddle the-assets of the company with the costs of prosecution. We do not read the case cited as laying down such a drastic rule and in fact the learned Judge who decided the case has himself in a later case Re : Charles Denham and Co., Ltd. 51 L.T. 570 pointed out that the Court has a discretion to ignore the opposition of creditors to the prosecution if in its opinion the object of the opposition was not so much to save the Company's funds as to save the guilty director. The principles which should govern the Court in deciding whether or not to direct the prosecution of a delinquent director of a Company as part of the proceedings in liquidation have been laid down by Buckley, J., in London and Globe Finance Corporation, Ltd. (1903) 1 Ch. D. 728. The learned Judge says:

What are the considerations which ought to govern it? The principle lies, I think, in the answer to the following question. If the persons at whose expense the prosecution would be instituted were not a class, but were a single person, and that person were an honest and upright man desirous as a good citizen of doing his duty by the State, are the circumstances such as that in discharge of that duty he would feel that he ought at his own expense and to his own loss to institute a prosecution Not in every case in which a criminal offence has been committed would such an one think it his duty to prosecute. The question to be answered is, Would he in this case think his duty to the State required him to prosecute If that question be answered in the affirmative, then, upon principle, I think that the Court ought to direct a prosecution. Further, I think that the Court can, and in a proper case ought to, direct a prosecution without the assent, and even notwithstanding the dissent, of the class or many of the class at whose expense the prosecution would be instituted.

8. Now what are the facts in the present case. The Company in liquidation had already paid a dividend of As. 10 in the rupee. The liquidator had in cash approximately Rs. 4,000 out of which Rs. 2,500 was set aside for a further dividend of As. 2. It is not shown that the balance after this distribution of As. 2 would not suffice for the costs of these prosecutions. The opposition to the prosecution was not put forward until after the District Judge had in his defective order of the 20th February, 1946, come to the conclusion that proceedings ought to be taken and then the objection was preferred by two share-holders whose holdings were infinitesimal and one creditor. There were no indications before the learned District Judge of any wide divergence of views on the part of the general body of share-holders and creditors such as would make it desirable for him to ascertain the wishes of the persons concerned before deciding to launch a prosecution. And the fact that a prosecution was likely to result from the investigation must have been well known to all parties long before the learned District Judge decided to prosecute. The probable costs of these prosecutions are not likely to diminish very seriously the dividend which the creditors can expect to get. We are not therefore disposed to interfere with the order of the learned District Judge on the ground that the District Judge did not give proper consideration to the financial implications of these orders. In the result, therefore, although we are definitely of the opinion that the orders of the learned District Judge should have been supported by some indication of the grounds of his decision, we are not prepared on that reason alone to interfere in. appeal. The appeals are therefore dismissed with costs of the Official Liquidator in C.M.A. No. 216 of 1946.


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