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K.N. Srinivasa Iyer Vs. the Joint Official Liquidators of Nurani Union Bank Ltd. (In Liquidation) and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai High Court
Decided On
Case NumberO.S. Appeal Nos. 2 and 4 of 1961
Judge
Reported inAIR1963Mad464; [1963]33CompCas735(Mad)
ActsCompanies Act, 1913 - Sections 168, 175, 175(1) and 235; Companies (Amendment) Act, 1956 - Sections 449, 450 and 543
AppellantK.N. Srinivasa Iyer
RespondentThe Joint Official Liquidators of Nurani Union Bank Ltd. (In Liquidation) and ors.
Appellant AdvocateT.R. Sangameswara Iyer, Adv.
Respondent AdvocateL.R. Narayanan, ;S.V. Venkatasubramanian, ;T.R. Ramachandran and ;S.R. Subramanian, Advs.
DispositionAppeal dismissed
Cases ReferredNarasimha Iyengar v. Official Assignee
Excerpt:
.....may not be bona fide, and delay the passing of the order of winding up and the appointment of the official liquidator under section 175(1). this would clearly defeat the purpose of section 235. 12. the legislative changes in the section also suggest the interpretation which we place on the section. this clearly shows that the legislature realised that the acts of misfeasance may not at all come to light till after the order for winding up is made and the affairs of the company are investigated with a view to fix the liability of the directors and the other delinquents, and therefore deleted the earlier provision and made the date of the first appointment of the liquidator in the winding up as the starting point the object underlying this change could be subserved and promoted only by..........three appeals arise out of a misfeasance application (appln. no. 420 of 1952) filed by thejoint official liquidators of the nurani union bank ltd. palghat (in liquidation) under section 235 of the indian companies act, 1913 (act vii of 1913) seeking to make the seven respondents in that application pay a sum of rs. 9,19,884-5-0. the seven persons who were impleaded as respondents in the application were directors of the company. the first respondent in that application n.r. lakshmana iyer was the managing director and the seventh respondent k.n. ramalinga iyer was the secretary.the application was tried by ramaswami j. who held that the misfeasance had been proved. respondents 3 and 4 in that application had died before the decision, and in the view that section 235 of the indian.....
Judgment:

Venkataraman, J.

1. These three appeals arise out of a misfeasance application (Appln. No. 420 of 1952) filed by theJoint Official Liquidators of the Nurani Union Bank Ltd. Palghat (in liquidation) under Section 235 of the Indian Companies Act, 1913 (Act VII of 1913) seeking to make the seven respondents in that application pay a sum of Rs. 9,19,884-5-0. The seven persons who were impleaded as respondents in the application were directors of the company. The first respondent in that application N.R. Lakshmana Iyer was the Managing Director and the seventh respondent K.N. Ramalinga Iyer was the secretary.

The application was tried by Ramaswami J. who held that the misfeasance had been proved. Respondents 3 and 4 in that application had died before the decision, and in the view that Section 235 of the Indian Companies Act was a summary procedure, available only against the directors themselves and not their legal representatives, no order for compensation was made in respect of those two respondents. The order for compensation for the sum of Rs. 9,19,884-5-0 was passed against the remaining respondents 1, 2, 5, 6 and 7. Of them the fifth respondent in the application K.N. Srinivasa Iyer has filed O. S. A. No. 2 of 1961. The sixth respondent in the application M.P. Ananthasubramania Iyer has filed O. S. A. No. 4 of 1961 and the managing director N. R. Lakshmana Iyer has filed O. S. A. No. 22 of 1962.

2. The facts and the prior history have been set out in sufficient detail in the judgment under appeal and hence it is sufficient to recapitulate them here briefly. The Nurani Union Bank Ltd., was started in 1929. It was, so to say, a village institution serving the residents of the small village Nurani in Palghat. The residents of the village were mostly Brahmins and most of them were closely inter-related. The directors themselves were closely inter-related. In spite of resolutions which had been passed that advances should be made only to solvent persons and on adequate security and with proper safeguards and also only with the sanction of the Board of Directors in cases where the amount of the loans exceeded a particular sum advances were made in contravention of the resolutions.

The application of the Official Liquidators shows that the bulk of the advances was shared by Sri N.R. Lakshmana Iyer and Sri K.N. Ramalinga Iyer respondents 1 and 7 to the petition. N.R. Lakshmana Iyer became the managing director on 11-9-1947 and till then his own father N.R. Ramaswami Iyer was the managing director, Sri Ramalinga Iyer was the secretary. The unauthorised advances were because the other directors abdicated their duty of exercising even the minimum amount of supervision expected of them, particularly in view of the resolutions which they had passed. Indeed, they themselves took out advances in excess of the sanctioned amounts and evidently for that reason they were not prepared to exercise any supervision over the acts of the Managing Director and the Secretary. Indeed according to the finding of the learned Judge they all conspired together to loot the money of the bank. The result was that bank crashed. On 15-10-1947 a notice was put up stating that all payments were suspended.

3. On 9-12-1947, a creditor filed an application O. P. No. 371 of 1947 for the winding up of the company. On 16-12-1947 two advocates (Sri P.G. Krishna Iyer and C.S. Vidyasankar) were appointed provisional liquidators. Later in Appln. No 194 of 1948, a scheme of composition was proposed and sanctioned according to which 1963 Mad. 30. the directors undertook to pay 12 annas in the rupee to the creditors. Actually only 8 annas was paid. The application O. P. No. 371 of 1947 was revived and the winding up was ordered on 1-11-1949 and the Official Liquidators were appointed. The public examination of the directors took place in 1950, and on 2-2-1952 the Official Liquidators filed Appln. No. 420 of 1952 for misfeasance under Section 235 of the Indian Companies Act.

4. 15 detailed charges were framed. Of them the more important charges are 1 to 6 involving nearly seven lakhs of rupees. It may be mentioned here that the application of the Official Liquidators mentions 13 items making up the total of Rs. 9,19,884-5-0 and charges 1 to 6 relate to items 1 to 3. The first item represents an advance of Rs. 1,25,000, and odd to N.R. Lakshmana Iyer, the managing director. The second item represents an advance of Rs. 2,22,000 and odd to the managing director and the secretary K.N. Ramalinga Iyer jointly. The third represents an advance of Rs. 3,34,000 and odd to the secretary alone. The charges themselves specified the resolutions according to which such huge advances were impermissible. Thus the resolution on 10-7-1937 permitted overdraft accommodation to N. R. Lakshmana Iyer only for Rs. 3000. Another resolution of 1940 prohibited advances exceeding Rs. 5000 except on the recommendation of the majority of the directors. A resolution of 1941 also was to the same effect.

Yet these and the other advances were made by the Managing Director and the Secretary without consulting the other directors. Charges 13 and 15 specified how the other directors totally failed to exercise any supervision. Such total absence of supervision was either due to gross negligence or due to some of the directors having themselves violated the resolutions by drawing monies from the bank in excess of the permitted amounts. Of course they repaid the advances. But the learned Judge thinks that because they themselves had been granted such unauthorised facilities, they were unwilling to exercise any check over the Managing director and the secretary. Further, they were all closely related and the unauthorised advances were spread over a long period and almost continuous and they could not have escaped the knowledge of the other directors. In fact except M.P. Ananthasubramania Iyer, the appellant in O. S. A. No. 4 of 1961, the other directors proceeded to ratify these advances by a resolution dated 27-9-1947. It is on these facts that the learned Judge has held that the charge of misfeasance has been proved. In our opinion this conclusion of the learned Judge is fully justified except with respect to M. P. Ananthasubramania Iyer.

5. Taking first the appeal of N. R. Lakshmana Iyer, appellant in O. S. A. No. 22 of 1962, no doubt he became the managing director only on 11-9-1947, but till then his own father was the managing director. It will be seen that he took away in his own name as much as Rs. 1,25,021-7-0 and a sum of Rs. 2,22,658-5-8 jointly with the secretary K. M. Ramalinga Iyer. Thus he was directly guilty of misfeasance for these substantial amounts. Further, he should have known that though under form F the balance sheet should specify the debt due from each director, the various balance sheets did not exhibit his own indebtedness. That should have put him on enquiry as to whether similar loans had been granted unauthorised to any of the other directors or even to other constituents of the bank. The inference most charitable to him would onlybe that he wilfully abstained from such enquiry and that would constitute gross negligence and breach of his duty.

In short, it would be misfeasance. Actually he would say in his evidence that all these loans in excess of the amounts mentioned in the special resolutions mentioned in the charges were alsosanctioned by the body of directors but he would say that the sanction was oral. The resolutions require the written consent of the majority of the directors in the case of unsecured loan in excess of Rs. 5000 and it is impossible to accept his naive explanation that there was an oral sanction by all the directors. Misfeasance has been clearly proved in his case.

6. So far as K.N. Srinivasa Iyer, appellant in O. S. A. No. 2 of 1961 is concerned, it will be seen that though the limit of overdraft in his case was only Ks. 15,000, according to the resolution on 18th July 1943, Ex. A 18, he had overdrawn that amount consistently as the account from 12th December 1945 to 3rd August 1948 at pages 17 to 22 of book 5 shows. It is seen that his indebtedness once rose even to the extent of Rs. 36,890-14-4 (on 17th May 1947). It is true he repaid the amount, but that it is immaterial so far as the question we are considering is concerned. The point is that he should have known that the resolutions had been violated in his own case and that should have put him on enquiry as to whether there had been similar violation of the resolutions of the Board of directors in the case of any other director or any other constituent. It is significant that Sri K. N. Ramalinga Iyer from whom over five lakhs of rupees was due was none other than the brother of this appellant. Even in his case he should have known that the balance sheet was not in conformity with the prescribed form F because it did not mention his own indebtedness. In our opinion, he too is guilty of misfeasance.

7. Before proceeding further we must express our surprise that no action was taken against the auditor who wrongly certified to the correctness of the balance sheets. He must have known that the balance sheets did not mention the indebtedness of the directors and the violation of the resolutions of the board of directors.

8. The case of M.P. Anantasubramania Iyer, appellant in O. S. No. 4 of 1961, stands on a different footing. In his counter affidavit he states that he was in Nurani village only for two years between 1943 and 1945, and was then transferred he was a Tahsildar. He became a director in 1944 not on his own seeking but, because one of the share-holders proposed his name. The bank was apparently in good working condition then and the managing director was the headmaster of the local High School and a respectable man. The other directors were respectable people and he was told that he had only to attend the meetings of the directors according to his convenience and nothing more. That was why he agreed to be a director. When he had to leave Urani village in 1945, he wanted to resign, but the other directors asked him to continue, stating that all that he had to do was to attend some annual meetings. He fully believed in the solvency of the bank and deposited monies in the names of himself, his wife, his daughter and his sister to the tune of Rs. 8000. These deposits still remain outstanding. He did not take any overdraft and he only took a small loan or Rs. 400 in 1947. He was not aware of any of the unauthorised advances. He has given evidence supporting these averments.

We accept these averments as true. The balance sheets and the audit reports did not mentionthe indebtedness of the other directors and unauthorised loans granted to the other constituents. There was nothing to excite his suspicion about the correctness of the balance sheets and the audit reports as in the case of others. We feel that so fax as he is concerned the charge of misfeasance has not been brought home. Ramaswami, J. himself was conscious that his case stood on a slightly different footing, but thought that it was sufficient to direct that the decree could be enforced against him only after proceeding against the other respondents. In our opinion, however, the charge itself has not been brought home to him. We accordingly allow his appeal straightway.

9. Reverting to the other two appeals one more point remains, viz., that of limitation. The contention of the learned counsel for the appellants in those appeals is that the application for misfeasance is time barred because it was made more than three years from the date of the appointment of the provisional liquidators viz., 16-12-1947. Section 235(1) so far as is relevant says:

'Where, in the course of winding up a company, it appears that any person, who has taken part in the formation or promotion of the company, off any past or present director, manager or liquidator, or any officer of the company has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of trust in relation to the company, the Court may, on the application of the liquidator, or of any creditor or contributory made within three years from the date of the first appointment of a liquidator in the winding up or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer, examine into the conduct of the promoter, director, manager, liquidator or officer, 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 of breach of trust as the Court thinks just.'

10. Sri V.R. Narayanan, learned counsel for the Official liquidators-respondents in these appeals, replies that the liquidator referred to for the purpose of the commencement of limitation is not the provisional liquidator but the liquidator or liquidators appointed after the company is ordered to be wound up, in this case, 1-11-1949. We have no hesitation in accepting this submission and in repelling the contention of the learned counsel for the appellants. The relevant provision is 'made within three years from the date of the first appointment of a liquidator in the winding up.'' This has to be construed along with Section 175, which runs thus (relevant portion atone quoted):

'175(1) For the purpose of conducting the proceedings in winding up a company and performing such duties in reference thereto as the Court may impose, the Court may appoint a person or persons other than the official Receiver to be called an Official Liquidator or Official Liquidators.

(2) The Court may make such an appointment provisionally at any time after the presentation of a petition and before the making of an order for winding up but shall before making any such appointment give notice to the company, unless for reasons to be recorded it thinks fit to dispense with notice.'

Section 175 shows that the liquidator is appointed only for the purpose of conducting the proceedings in winding up the company, and that could be only after the order for winding up is made. No doubt such appointment could be made provisionally even before the making of the order for winding up, but that is only provisional and it is not that appointment which is contemplated in Section 235, though the use of the word 'first' in the relevant portion of the section 'from the date of the first appointment of the liquidator' is not happy. It would apply to a case where, even after the winding up order, there happen to be more than one order of appointment of liquidator for instance, it may happen that first a person A is appointed liquidator (after the winding up) and he is replaced later by another person B or another person C is associated with A as joint liquidator. In such cases the starting point of limitation would be the date of appointment of A in the first instance.

Again it is no doubt true that under Section 168 a winding up of a company by the Court shall be deemed to commence at the time of the presentation of the petition for the winding up. But, in our opinion, that legal fiction has no relevancy on the question of limitation for an application under Section 235. The natural meaning of the words 'the date of the first appointment of the liquidator in the winding up' is only the date of appointment of the official liquidator under Section 175(1). The reason underlying the provision also suggests the same meaning, for it is only after the Official Liquidator investigates the affairs of the company, the acts of misfeasance usually come to light and the provisional liquidator may not be able to discover the acts of misfeasance at all--in fact it is not his primary duty to discover such acts of misfeasance. To interpret the section as meaning that limitation should start even from the first appointment of the provisional liquidator would really defeat the purpose of the section.

11. In this connection, what happened in this very case itself illustrates the point. It will be noticed that it was because of the scheme of composition that the order for winding up and the appointment of the official liquidator were delayed. But for the scheme of composition, the winding up order would have been made much earlier and the official liquidator would have been appointed much earlier and he would have filed the application much earlier within three years of 16-12-1947 itself (the date of the appointment of the provisional liquidator). But because of the scheme of composition, all the delay took place. If the construction put on the section by the appellants were to be accepted, all that the guilty directors need do to succeed on the plea of limitation is to put forward some such scheme of composition even though it may not be bona fide, and delay the passing of the order of winding up and the appointment of the official liquidator under Section 175(1). This would clearly defeat the purpose of Section 235.

12. The legislative changes in the section also suggest the interpretation which we place on the section. Originally the application had to be made within three years from the date of the misfeasance and there was also a third sub-section in Section 235 to the following effect:

'The Indian Limitation Act 1908 shall apply to an application under this section as if such application is for a suit.'

There was a conflict of decisions in the High Court, whether Article 36 of the Limitation Act providing for a period of two years from the date of misfeasance or Article 120 providing for a periodof six years from the date when the right to sue accrues, would apply. In this state of conflict of authority, the Legislature made an amendment in 1936 deleting Sub-section (3) and substituting the words 'made within three years from the date of the first appointment of a liquidator in the winding up or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer' in the place of the original words. This clearly shows that the legislature realised that the acts of misfeasance may not at all come to light till after the order for winding up is made and the affairs of the company are investigated with a view to fix the liability of the directors and the other delinquents, and therefore deleted the earlier provision and made the date of the first appointment of the liquidator in the winding up as the starting point The object underlying this change could be subserved and promoted only by the construction we are placing on the section, viz., that the commencement of the period of limitation is the date of the appointment of the regular liquidator under Section 175(1) and not of the provisional liquidator under Section 175(2).

13. A Bench of the Allahabad High Court has recently interpreted Section 235(1) as we are now doing--vide Vishwapal v. Sukh Sancharrak Co., : AIR1962All88 , There is a decision of this Court in the Official Liquidator v. Krishnaswami Iyengar : (1947)1MLJ234 . In that case the contention on behalf of the directors was that notwithstanding the legislative changes in Section 235 effected in 1936, the principle would apply that if a suit against the directors would have been time barred under Article 36 of the Limitation Act, the application under Section 235 also would be time barred. Clark, J. held that this position had been altered by the legislative changes effected in 1936 and pointed put that Section 235(1) formed a complete code in itself on the question of limitation for the purpose of the application under that section, and he observed that in that case the first appointment of a liquidator in the winding up was on 19th November 1941, when provisional liquidators were appointed and the application under Section 235 was presented within three years thereof, viz., 8th November 1944 and was clearly within time. Actually the winding up order was made on 9th January 1942.

Merely because the learned Judge pointed out that the application was within three years from the date of the appointment of the provisional liquidators, the decision cannot be taken as an authority on the question we are now considering. The learned Judge was not called upon to consider the question which we are now considering, and indeed the reasoning of the learned Judge in repelling the actual contention which was put forward before him and in holding that the legislative changes effected in 1936 altered the law, would rather support the view which we are taking.

14. The learned counsel for the appellants in O. S. A. Nos. 2 of 1961 and 22 of 1962 relies on the decision of Ramesam and Cornish. JJ. in Narasimha Iyengar v. Official Assignee, Madras, ILR 54 Mad 153 : AIR 1931 Mad 58. There, the company was ordered to be wound up by an order in 1922. The application under Section 235 was made in 1923. In other words the question arose for decision before the legislative changes had been effected in Section 235 in 1936. The Court proceeded on the footing that the Limitation Act would apply as if the application were a suit. The acts of misfeasance had occurred more than six years priorto the presentation of the application under Section 235 and in view of that circumstance, it was contended on behalf of the directors that the application was tune barred whether Article 36 or 120 of the Limitation Act applied, the argument being that even if only Article 120 applied, the right to sue had accrued even at the time of the commission of the act of misfeasance, and any share-holder or creditor of the company could have filed a suit immediately thereafter and that all that the summary remedy provided under Section 235 was only for the same reliefs which would previously have been enforced by a suit and was not for a new relief.

On the other hand, the contention of the Official liquidator was that Article 120 applied and the right 'to sue accrued to the official liquidator only on the date of the order of winding up. The learned Judge rejected the contention of the Official liquidator and accepted the argument of the counsel for the directors. In our opinion, this decision is not relevant at all on the question we are considering in view of the legislative changes effected in 1936.

15. In the result, the appeals O. S. A. Nos. 2of 1961 and 22 of 1962 are dismissed with costs.Advocate's fee one set. Appeal O. S. A. No. 4of 1961 is allowed but without costs.


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