1. On 21st July 1939 the Court passed an order for the compulsory winding up of the Oriental Investment Trust, Ltd., a company registered under the Companies Act. An undivided Chettiar family carrying on business under the vilasam of V. K. R. S. T. claimed to rank as a creditor in the sum of Rs. 1,36,274-1-2. The Official Liquidator disputed the validity of the claim, except to the extent of Rs. 6310-7-0. As the investigation of the question involved a lengthy inquiry, it was decided that it should be tried in accordance with the procedure prescribed for the trial of a suit on the original side of the Court. After the pleadings had been closed the suit came on for hearing before Bell J. who held that the contentions of the Official Liquidator were well founded and consequently only allowed the firm to rank as a creditor for the admitted sum of Rs. 6310-7-0. This appeal is from the judgment of the learned Judge. It will be convenient hereafter to refer to the V.K.R.S.T. firm as 'the firm' and the Oriental Investment Trust, Ltd., as 'the company.'
2. The members of the joint family were Kasi Viswanathan, his son Manikkam, his brother Narayanan, and Narayanan's son Somasundara. Narayanan died on 16th January 1939. Kasi Viswanathan died after the trial and the appeal has been preferred by his son as the manager of the family. The company was incorporated on 9th September 1936 with an authorised capital of Rs. 25,00,000 divided into 25,000 shares of Rs. 100 each. The shares actually issued numbered 6068, and at the date of the winding up order only Rs. 25 per share had been paid by the subscribers. The principal promoters of the company were Kasi Viswanathan and P.L.A.V.A.D. Ramanathan Chetty, who was then a local director of the Reserve Bank of India. Kasi Viswanathan and Ramanathan were appointed the managing directors, but from the inception of the company the management of its business was left entirely to Ramanathan, who was also the agent of the Madras branch of the firm. Narayanan was the member of the family in charge of the firm, but there is no doubt that Ramanathan controlled the Madras business of the firm as well as that of the company.
3. The articles of association provided that the business of the company should be managed by the directors of whom there were six, including the two managing directors. Authority was given, to the directors to delegate their powers to a committee consisting of one or more of their number. A formal agreement was entered into between the company and the managing directors under which, subject to the control of the directors they were to have 'either jointly or severally' the general conduct and management of the business and affairs of the company and without prejudice to their general power, jointly and severally the power inter alia of buying and selling shares and securities on behalf of the company and of borrowing Rs. 25,000 without the sanction of the Board of Directors or Rs. 1,00,000 with the sanction of the board.
4. The memorandum of association sets out in unambiguous terms the objects for which the company was formed. The objects are restricted to those expected of a company incorporated for the purpose of carrying on business as an investment trust. Naturally power was taken to buy and sell shares, but this has erroneously been interpreted as authority to deal in differences on the stock exchange. From the very beginning, Ramanathan, with the full consent of his fellow directors, commenced gambling in differences on behalf of the company. The shares subscribed provided a capital of only a little over Rs. 1,50,000. This was supplemented by borrowings from the firm to the extent of Rupees 1,23,136-12-0. The difference between this sum and the sum of Rs. 1,36,274-1-2 claimed by the firm represents interest. Notwithstanding that the funds of the company were so limited, the transactions entered into by Ramanathan on behalf of the company amounted in value to over a crore and a half of rupees and when the company went into liquidation it only possessed securities worth some Rs. 2,0,000. There is here clear indication of the unlawful nature of the business which was done. In fact, neither in this case nor in proceedings against the directors for misfeasance, which have given rise to Thinnappa Chettiar v. Rajagopalan reported in : AIR1944Mad536 (infra) (these appeals are dealt with in a separate judgment) has it been denied that the business done was otherwise than that of a gambling nature. The only excuse put forward is that the directors considered that they were entitled to do such business. At a meeting of the Board of Directors held on 10th April 1937 the following resolutions were passed:
(1) Resolved that managing director Mr.P.L.V. A. Ramanathan Chettiar be and is hereby authorised to invest the money of the company in shares and securities and sell them when deemed necessary provided that shares and securities beyond the value of Rupees 1,00,000 (Rupees one lakh) shall not be bought or sold except with the permission of any other director present in Madras.
(2) Resolved that the Managing Director, Mr. PL. V. A. Ramanathan Chettiar is authorised to borrow money from Messrs. V. K. R. S. T. Firm as and when it is necessary and the amount borrowed by him till date is approved.
5. The statutory report, made up to 3rd April 1937 was passed at this meeting and disclosed that heavy gambling had already been indulged in. It stated that Rs. 11,904-14-8 had been received as profits made in dealing in differences and that a sum of Rs. 41,671-11-6 had been lost in such transactions. The statutory report was passed at a general meeting of the company held on 3rd May 1937. The next balance sheet was made up to 31st May 1937. It showed that there was owing to sundry creditors a sum of Rs. 54,967-0-4 and that this amount stood in a suspense account. This balance sheet was approved of by the directors at a meeting held on 19th July 1937. On 21st February 1938 the Board considered and passed a balance sheet disclosing the position of the company as on 31st October 1937. By that time the advances by the firm had been reduced to Rs. 5575-11-0 and the profit and loss account showed a profit of Rs. 17,974-5-4 out of which a dividend of six per cent. was declared. Kasi Viswanathan was present at this meeting of the directors when this balance sheet was approved, but he was not present at the earlier meetings to which reference has been made. There is, however, no reason to doubt that he knew of what had transpired at the earlier meetings.
6. The next statement of account, and the last before the company went into liquidation was for the period of seventeen months ending 31st March 1939. This disclosed that Rs. 1,33,798-15-6 was due to the firm by the company and that Ramanathan had taken Rs. 1,42,632 6-3 of the company's funds. Until the month of March 1939, neither the directors nor the auditors had any idea that Ramanathan was helping himself to the company's moneys. This was only discovered when he debited himself with the amounts in his personal account. He had been gambling in shares on his own account and these sums had been devoted to the payment of his own differences. He had, of course, grossly abused the trust placed in him and he had rendered himself liable to prosecution. When his misconduct was brought to light he alleged that he had sufficient securities in Bombay to enable him to repay the whole of the Rupees 1,42,632-6-3 and he undertook to deliver the securities over to the company. His co-directors still believed in him and on 16th June 1939 they passed a resolution approving of the balance sheet, which meant that they consented to Ramanathan being treated as having borrowed from the company the Rupees 1,42,632-6-3. Ramanathan went to Bombay with a representative of Kasi Viswanathan to whom he was to hand over the securities. They arrived in Bombay on 22nd June 1939 and then Ramanathan absconded. Although criminal proceedings were instituted against him he has so far evaded arrest.
7. The short ground on which Bell J. dismissed the firm's claim was that it was suing for moneys lent and that it had not been proved that the company had received the moneys. He regarded the firm's books as well as the company's books as being altogether unreliable, because they had been written up under the direction of Ramanathan. In his judgment he refers to both sets of accounts as being 'admittedly faked.' The learned Judge must here have been under a misapprehension, at any rate so far as the firm's books were concerned. The firm relied on its own books and has relied on them here. The entries made in them were made on the instructions of Ramanathan, but this does not mean that the moneys were not taken by Ramanathan as loans to the company under the authority given to him by the company to borrow from the firm. It has not been disputed in this Court that with interest his borrowings amounted at the date of the liquidation to Rs. 1,36,274-1-2, the amount of the appellant's claim. It is, of course, disputed that the company is liable to make good the amount. The learned Judge was also not correct in saying that, except for the admitted amount of Rs. 6310-7-0, none of the money borrowed by Ramanathan had found its way to the company. The Official Liquidator, in the affidavit which he filed in reply to the application of the firm to be allowed to rank as a creditor for Rs. 1,36,274-1-2, admitted that the company had actually received Rs. 31,310-7-0, but he considered that from this sum Rupees 25,000 should be deducted. The firm denies that Rs. 25,000 is deductible and Mr. Rajah Aiyer, on behalf of the firm, has advanced very good reasons in support of this contention. He has also shown that the company actually had the use of a further Rs. 15,000. He maintains that it is not necessary for the firm to recover the full amount claimed to show that the company had the use of the money borrowed by Ramanathan. This broad question will be discussed presently.
8. The reasons given by the Official Liquidator for his contention that the sum of Rupees 25,000 should be deducted from Rs. 31,310-7-0 are these. On 4th August 1937 Ramanathan, on behalf of the company drew a cheque in his favour as the agent of the firm for the sum of Rs. 5000 and on 4th August 1937 he drew a cheque for Rs. 20,000 in the same way. The words 'Account of V.K.R.S.T. firm' appeared under his signature in each case. He did not pay these cheques into the firm. He struck out the words 'on account of V. K. R. S. T. firm' and then cashed the cheques for his own purposes. Subsequently, he made entries in the books of the company debiting the amounts to himself. No part of the moneys ever went back to the firm. In drawing the cheques Ramanathan was acting on behalf of the company, and he embezzled the proceeds before they had reached the firm. The fact that he struck out the words 'On account of V. K. R. S. T. firm' before cashing the cheques is in itself strong indication of the fact that he was not holding the cheques as the agent 'of the firm. As the proceeds of the cheques were never paid into the firm it cannot be said that they represent a reduction in the company's liability to the firm.
9. We turn now to the question of Rs. 15,000. On 9th November 1937 Ramanathan, acting under the authority given to him by the company to borrow from the firm, withdrew from it Rs. 39,500 in cash. Two days later he repaid to the firm Rs. 4500 leaving a balance in his hands of Rs. 35,000. Admittedly, Rupees 20,000 of this sum was used for the company. The Rs. 15,000 remaining was lent to one A. T. V. Subramaniam Chettiar, who had an account with the company. The lender was the company, not Ramanathan. The directors had authorised Ramanathan to lend money to A. T. V. Subramaniam. The loan was made on 9th November 1937 and A. T. V. Subramaniam's account with the company was immediately debited with the amount. As Ramanathan, in lending the money was acting within the scope of his authority there is no escaping from the conclusion that the money was lent by the company. We hold that the firm is, in any event, entitled to rank as a creditor in the sum of Rs. 46,310-7-0, the total of the three sums of Rs. 6310-7-0, Rupees 25,000 and Rs. 15,000.
10. This brings us to the discussion of the question whether the firm is entitled to recover the whole of the Rs. 1,36,274-1-2. As we have already indicated, the directors were not aware of Ramanathan's misappropriations until the month of March 1939. The learned Judge was under the impression that Kasi Viswanathan knew more than he pretended to know. Kasi Viswanathan did not make a good impression in the witness-box and a perusal of his evidence shows that he fenced with the questions put to him. At the same time we cannot believe that he had any inkling of Ramanathan's misconduct until the month of March 1939. It stands to reason that he would not have allowed his agent to borrow from the firm these large sums of money if he had known that he was utilising them for the payment of his own gambling transactions. He was, of course, aware that Ramanathan was borrowing money from the firm under the authority given to him by the company and that he was borrowing money from the firm on his own behalf in respect of which there was a separate account. It is the usual practice in Chettiar firms for the agent to send periodically to his principals copies of the accounts and this practice was followed by Ramanathan. Ramanathan had acquired a reputation as a sound businessman, as his election to the Madras Board of the Reserve Bank of India indicates. In the early stages the company had earned a profit. It had appointed a firm of qualified auditors as the auditors of the company. They had drawn up three balance sheets before 1939 and until the month of March 1939 they had been satisfied that everything was in order. Whether the directors and auditors were justified in regarding gambling in differences as legitimate business of the company is, of course, another matter. Obviously the gambling in differences was most improper and this will be discussed further in the appeals relating to the charges of misfeasance which have been preferred against certain of the directors. But in our opinion it cannot be said that Kasi Viswanathan had any knowledge before the first half of 1939 that Ramanathan had been swindling the company. It is not disputed that if Ramanathan had borrowed money from another firm under the authority conferred upon him by the company the lender would not have been put on inquiry as to the application of the money and that the company would in such circumstances be liable notwithstanding that Ramanathan had misappropriated the moneys borrowed. Ramanathan's knowledge of the fraud which he was committing was not the knowledge of the firm or company. In Houghton & Co. v. Nothard Lowe & Wills, Ltd (1928) A.C. 1 Lord Dunedin said:
The knowledge of a mere official like the secretary would only be the knowledge of the company if the thing of which knowledge is predicated was a thing within the ordinary domain of the secretary's duties. But what if the knowledge of the director is the knowledge of a director who is himself particeps criminis, that is, if the knowledge of an infringement of the right of the company is only brought home to the man who himself was the artificer of such infringement? Common sense suggests the answer, but authority is not wanting.
Lord Dunedin then proceeded to quote from the judgment of Vaughan Williams L. J. in In re Hampshire Land Co (1896) 2 Ch. 743 where Vaughan Williams L. J. said:
If Wills had been guilty of a fraud, the personal knowledge of Wills of the fraud that he had committed upon the company would not have been knowledge of the society of the facts constituting that fraud; because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud. It seems to me that if you assume here that Wills was guilty of irregularity-a breach of duty in respect of these transactions - the same inference is to be drawn as if he had been guilty of fraud. I do not know, I am sure, whether he was guilty of actual fraud; but whether his conduct amounted to fraud or to breach of duty, I decline to hold that his knowledge of his own fraud or of his own breach of duty is under the circumstances, the knowledge of the company.
Therefore, the company must be held to be liable unless the fact that Kasi Viswanathan was a managing director of the company makes a difference. In our judgment it does not. He knew nothing of Ramanathan's defalcations until all the money had been borrowed and on the authorities which we have just referred to he cannot be imputed with knowledge, notwithstanding that he was a co-managing director of the company and the head of the firm which employed Ramanathan as its agent. In order to succeed, the firm has to satisfy the Court that the moneys now claimed were handed to Ramanathan as loans to the company under the authority conferred by it on him, and, we consider that the evidence establishes this. Ramanathan had been given power to borrow from the firm. In the firm's books the withdrawals are entered as loans to the company. In the company's books credit is given to the firm for the amounts. As the money was withdrawn from the firm on behalf of the company under authority given by the company the company must accept liability unless the firm had knowledge that Ramanathan was abusing his authority, which is not the case. For these reasons we direct the Official Liquidator to include the firm in the list of creditors for the sum of Rs. 1,36,274-1-2. As the firm has succeeded it is entitled to the costs here and below. These will be paid out of the assets of the company. The Official Liquidator will also get his costs out of these assets. We certify for two counsel.