Skip to content


G. Thiruvenkatachariar, Official Liquidator of the National Live Stock Registrtion Bank Ltd. (In Liquidation) Vs. A.T. Velu Mudaliar and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai
Decided On
Reported inAIR1938Mad154; (1937)2MLJ820
AppellantG. Thiruvenkatachariar, Official Liquidator of the National Live Stock Registrtion Bank Ltd. (In Liq
RespondentA.T. Velu Mudaliar and anr.
Cases ReferredIn Twycross v. Grant
Excerpt:
- - the certificate permitting the company to carry on the business was issued by the registrar of joint stock companies on the 1st august, 1927. the company was unsuccessful in its operations and went into voluntary liquidation on the 11th december, 1930. the voluntary liquidation was turned into a compulsory liquidation by an order of this court, dated 13th october, 1932. the official liquidator sought to make the respondents liable to repay a sum of rs......was turned into a compulsory liquidation by an order of this court, dated 13th october, 1932. the official liquidator sought to make the respondents liable to repay a sum of rs. 8,865-11-3, which they had received as share-brokers of the company. the respondents are partners of a firm of provision dealers carrying on business under the name of a.t. velu mudaliar and company. they had no previous experience as share-brokers and it is obvious that they owed their appointment to their relationship to v.k. lakshmana mudaliar, one of the promoters of the company, who is the son of the second respondent and the brother-in-law of the first respondent. a draft of the agreement under which the respondents were to act as brokers of the company was drawn up in the month of may, 1927, and, although.....
Judgment:

Alfred Henry Lionel Leach, C.J.

1. This appeal arises out of a misfeasance summons taken out by the official liquidator of the National Live Stock Registration Bank, Ltd., against the respondents, who were the brokers of the company. The company was registered on the 2nd July, 1927, with a nominal capital of Rs. 5,00,000 divided into 50,000 shares of Rs. 10 each, of which 40,500 were preferred and 9,500 ordinary shares. The certificate permitting the company to carry on the business was issued by the Registrar of Joint Stock Companies on the 1st August, 1927. The company was unsuccessful in its operations and went into voluntary liquidation on the 11th December, 1930. The voluntary liquidation was turned into a compulsory liquidation by an order of this Court, dated 13th October, 1932. The official liquidator sought to make the respondents liable to repay a sum of Rs. 8,865-11-3, which they had received as share-brokers of the company. The respondents are partners of a firm of provision dealers carrying on business under the name of A.T. Velu Mudaliar and Company. They had no previous experience as share-brokers and it is obvious that they owed their appointment to their relationship to V.K. Lakshmana Mudaliar, one of the promoters of the company, who is the son of the second respondent and the brother-in-law of the first respondent. A draft of the agreement under which the respondents were to act as brokers of the company was drawn up in the month of May, 1927, and, although the company had not then been registered, it was signed on the 31st May, 1927. Under it the respondents were to receive a very high commission, Rs. 1-8-0, for every share of the company sold through them, and eight annas in respect of every share sold through other agencies. Article 9 of the Articles of Association which came into force at a later date stated that the respondents' firm should be the sole selling brokers of the company, and under it they were to receive a commission of five percent, on the amount subscribed, but the document of the 31st May, 1927, purported to fix the commission at fifteen per cent. After the formation of the company the matter was discussed by the directors and on the 22nd October, 1927, they passed a resolution agreeing to ratify the arrangement, subject to an alteration which amounted to very little. The respondents accepted the modification and were paid on the basis of the modified agreement, notwithstanding that the directors had exceeded their powers in ratifying it. The appeal is not, however, concerned with the liability of the directors in this respect.

2. The amount paid to the respondents was, as I have already indicated, the sum of Rs. 8,865-11-3 which the official liquidator desired to recover from them on the ground that the agreement was ultra vires. Accordingly he took out a summons under Section 235 of the Indian Companies Act, 1913, and the matter in due course came before Stone, J., who referred the question of what was due under the agreement to the Official Referee. After holding an inquiry the Official Referee reported that the respondents were not entitled to retain the Rs. 8,865-11-3. The Official Referee's report came before Gentle, J., when it was contended on behalf of the respondents that all remedy against the respondents had become time barred. It was said that the article which applied to the case was Article 36 of the Indian Limitation Act, which allows only a period of two years. The official liquidator urged that the article which applied was Article 120, which allows a period of six years. The learned Judge found that Article 36 applied and this appeal has been filed to challenge the finding. The Court is, however, not called upon to decide the question, as it is manifest that for other reasons the official liquidator is not entitled to ask for an order against the respondents under Section 235 of the Indian Companies Act, 1913. That section only applies to a person who has taken part in the formation or promotion of the company, to a past or present director, manager or liquidator or to an officer of the company. Neither respondent was ever a director, manager or liquidator of the company, and for reasons which I shall indicate I do not think that either can be deemed to be a promoter or officer. As a matter of fact so far as the second respondent is concerned, the Court is not asked to hold that he was a promoter.

3. I will first discuss the question whether the first respondent can be deemed to be a promoter. In Twycross v. Grant (1877) 2 C.P.D. 469 Cockburn, C.J., defined the word 'promoter ' as being one who undertakes to form a company with reference to a given project, and to set it going, and to take the necessary steps to accomplish that purpose. Other definitions have been given by learned Judges from time to time, but it is impossible to define accurately what is meant by the word 'promoter'. The difficulty is discussed at length by the learned author of Palmer's Company Precedents at pages 103 to 109. After referring to a number of the more prominent cases the learned author observes at page 106:

It is obvious, therefore, that a person who originates the scheme for the formation of the company, has the memorandum and articles prepared, executed and registered, and finds the first directors, settles the terms (if any), and makes arrangements for advertising and circulating the prospectus and placing the capital, is emphatically a promoter in the fullest sense. He controls the formation and future of the company, and it is this control which lies at the root of the fiduciary relation of the promoter to the company. Nor is he the less a promoter if all or most of these activities are performed nominally by a company which he controls.

But a person who has done much less than this--takes a much less prominent part--may bring himself within the meaning of the term and may be held liable as a promoter.

4. Each case must be decided according to the evidence. If it is clear that the persons charged were merely servants or agents of the promoters or servants or agents of the company they cannot be classified as promoters, and in this connection the learned author makes mention of brokers, bankers and solicitors. Of course, brokers, bankers and solicitors could put themselves in the position of being promoters, but in order to do so they would have to travel outside their ordinary spheres.

5. Now, what are the facts here? As I have indicated the question of promotion only applies to the first respondent, it is said that he must be deemed to have taken part in the formation of the company and to be a promoter because he signed the memorandum and articles of association and subscribed for 100 shares. There is no evidence showing that he took any part in discussing the formation of the company or in taking any steps to bring the company into being, apart from the fact that he signed the memorandum of association and paid for 100 shares. It is not even suggested that he had anything to do with the drawing up of the memorandum and articles of association. There is no suggestion that the first respondent had anything to do with the selection of the directors or the settlement of any contract, except the contract under which his firm was to act as brokers. After the company had been formed and had started business, the first respondent's firm induced certain people to subscribe for shares, but it is not alleged that they did anything before the company was launched. The minimum subscription was fixed at 500 shares and the signatories to the memorandum of association themselves subscribed for 1,200 shares. In the memorandum of association the only persons referred to as promoters are V.K. Lakshmana Mudaliar and J.W. Samuel. It comes to this. The Court is asked to hold the first respondent to be a promoter because his signature appears at the foot of the memorandum and he took 100 shares of the 1,200 initially subscribed. This is a contention which I am unable to accept. The law requires that there shall be seven signatories to the memorandum of association of a public company. A person who has taken no part on the formation or promotion of the company may be asked to sign the memorandum as a subscriber for one or more shares, and this usually happens. It was mentioned in the course of the argument that the money subscribed by the first respondent for his 100 shares was utilised in defraying part of the expenses of forming the company. That may be, but it was a matter which concerned the directors. The application of the money which the first respondent paid for his shares was a matter over which he had no control, and the fact that the money was utilised in paying the expenses of formation cannot make him a promoter. The agreement with the respondents was an agreement which conscientious directors ought never to have entered into and in doing so the directors deliberately exceeded their powers. But this, of course, has nothing to do with the question whether the first respondent is to be deemed to be a person who took part in the formation and promotion of the company. For the reasons indicated it must be held that the official liquidator was not entitled to take out a summons against the first respondent on the ground that he was a promoter.

6. Can the respondents be deemed to be officers of the company? Section 2 of the Act defines the word 'officer' as including 'any director, manager or secretary but, save in Sections 235, 236 and 237, does not include an auditor'. The definition is therefore not exhaustive. The inclusion of the auditor for the purposes of Sections 235, 236 and 237 follows the course adopted in England and avoids the discussion which had taken place in the Courts there with regard to the position of the auditor. But it does not follow because the auditor is an officer for the purposes of Section 235 the company's share-broker is in the same position. (In re The Liberator Permanent Benefit Building Society (1894) 71 L.T. 406.) Where the question was whether a person who was appointed to act as solicitor to the society was an officer of the society, Cave, J., observed:

It seems to me that merely because he was appointed solicitor to the society, without more, the solicitor does not become an officer of the society any more than it has been held that a banker does if he is appointed banker to the society, or a broker if he is appointed broker to the society, or the auditor if he is appointed auditor to the society. All these persons render services to the society, but they cannot be said to be in the employment of the society so as to make them officials.

7. I can see no difference in the position of a broker to a company, whose duties are confined to dealing with the shares of the company and the position of the banker who has to deal with the moneys of the company. A broker has nothing to do with the management of the company and may have no knowledge of what is being done inside the company's office. Therefore, to classify him as an officer of the company within the meaning of Section 235 of the Act would, in my opinion, putting too great a strain on the wording of the section. If moneys had been wrongly paid to the brokers the official liquidator had, subject to the law of limitation, other means of recovering them, but he is not entitled to use Section 235 for the purpose.

8. For these reasons the appeal fails and must be dismissed with costs, which will be paid out of the assets of the company. The official liquidator will be allowed his costs out of the assets.

Madhavan Nair, J.

9. I entirely agree and have nothing to add.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //