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In Re: Madras Native Permanent Fund Ltd. and B.G. Kolandavelu Mudaliar and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai
Decided On
Reported inAIR1931Mad792
AppellantIn Re: Madras Native Permanent Fund Ltd. and B.G. Kolandavelu Mudaliar and ors.
Cases ReferredSinclair v. Brougham
Excerpt:
- - on the best consideration i can give to the matter, i see no escape from the conclusion that the taking of deposits in the deposit branch from strangers to the company was ultra vires of the powers of the company. this point is now well settled by authority. this sum as well as the abovementioned sum of rupees 1347-13-0, together with rs......in 1887 a new branch was started and was called the deposit branch, to distinguish it from the loan branch, the name adopted to designate the company's original activities. the capital of the company was raised by rs. 10,000 divided into thousand shares of rs. 10 each and the shares newly raised were allotted to the deposit branch. it is stated for the respondents, that the accounts of each branch were separately kept and that there was no mixing up of the moneys or the dealings of the two branches. this statement is not merely borne out by such of the balance sheets as have been handed to me but is not even disputed by the applicants. while the loan branch was confined to the original objects, the deposit branch developed into an ordinary bank and carried on banking business. in.....
Judgment:

Venkatasubba Rao, J.

1. This is a misfeasance summons under Section 235, Companies Act. Certain breaches of duty are alleged against the directors and some other officers of the company and the summons asks that they may be ordered to bring into Court a sum of about Rs. 42,000. An objection in limine is taken that the applicants have no locus standi. If they are creditors as they allege themselves to be, they can apply under the section to which I have referred. The question is, are they creditors of the company and have they as such a locus standi?

2. The company was started in 1878 under the name of the Madras Native Permanent Fund Ltd., with a capital of two lakhs divided into two thousand shares of Rs. 100 each. Each shareholder was to pay one rupee per month per share and at the end of seven years, he was to receive from the company Rs. 100 and his account was then to be closed; in other words, on his paying a sum of Rs. 81 he receives Rs. 100. The objects of the company as stated in the Memorandum of Association were, to make advances to shareholders upon security of moveable or immovable property for enabling them to purchase, build and repair houses and to grant to them simple loans to a limited extent and to do such things as are incidental to the attainment of the above objects. In 1887 a new branch was started and was called the Deposit Branch, to distinguish it from the Loan Branch, the name adopted to designate the company's original activities. The capital of the company was raised by Rs. 10,000 divided into thousand shares of Rs. 10 each and the shares newly raised were allotted to the Deposit Branch. It is stated for the respondents, that the accounts of each branch were separately kept and that there was no mixing up of the moneys or the dealings of the two branches. This statement is not merely borne out by such of the balance sheets as have been handed to me but is not even disputed by the applicants. While the loan branch was confined to the original objects, the Deposit Branch developed into an ordinary bank and carried on banking business. In fact, the operations of the deposit branch assumed large proportions, whereas the Loan Branch did business on a very limited scale. In the Deposit Branch, there were deposits and advances, customers depositing money and loans being advanced on pledges of jewels. The customers of the bank included both members and strangers. This-went for about forty years and it was then found that the company's affairs were not being conducted satisfactorily. Certain irregularities occurred, such as loans being advanced on jewels of insufficient value. The result was, the company having sustained a loss, the depositors were unable to get back their moneys. A liquidation petition was filed and a compulsory order was made in May 1927. To make clear the point that has now arisen, I may briefly refer to certain previous orders made in the course of the winding up. The liquidators, Messrs. Fraser & Ross, treated in the list filed by them, certain 357 persons of the Loan Branch, as contributories in the liquidation. Waller, J., observing:

The Loan Branch of the fund is, I consider nothing but a mutual benefit society, with rules resembling those of the Mylapore Hindu Permanent Fund, vide : Gurusami Pandian. v. Chinna Thamliar A.I.R. 1921 Mad. 340,

held that the 357 persons in question could not be treated as contributories. The learned Judge in effect held' that there was nothing illegal in the company closing the accounts of the shareholders of the Loan Branch by paying each Rs. 100 at the end of seven years. The appellate Court reversed the order of Waller, J., holding that the payment of the share capital to the members contravened the provisions of the Companies Act as such payment amounted to a reduction of capital forbidden by the Act. The 357 persons were accordingly declared to be contributories. Before the appellate Court the question was raised. Were the debts which it was sought to make these persons liable to liquidate debts incurred ultra vires of the company? This question was left open and no decision was pronounced upon it. This is what the learned Judges observe:

When these persons are called upon to contribute to the liquidation of definite debts, it will be open to them to argue that the debts which they are called upon to contribute to pay are ultra vires of the powers of the company that is to say, are not in law debts at all.

3. The matter came back to the original side. For the contributories it was contended, that the amounts which the company made itself liable to return were those deposited by its customers, in the Deposit Branch and that the company, in receiving such deposits, practically converted itself into a bank. This, it was argued going beyond the Memorandum of Association, was ultra vires of the company. Pandalai, J., relying upon Ashbury Carriage Co. v. Riche [1875] 7 H.L. 653, accepted this contention. Prom his judgment, I quote the two following passages:

On the best consideration I can give to the matter, I see no escape from the conclusion that the taking of deposits in the Deposit Branch from strangers to the company was ultra vires of the powers of the company.

All that I do decide and declare is that the contributories are not as such liable to contribute to the debts due to stranger depositors in the Deposit Branch of the fund.

4. Some of these depositors are the applicants in this misfeasance summons. The short question I have to decide is, are the amounts due to them debts? In other words, are they lenders, in the eye of the law, creditors and is the borrowing company, debtor? This point is now well settled by authority. Where the carrying on of a business by the company was ultra vires it was held that the ultra vires transactions created no debt either legal or equitable. This was held in In Re: Birkbeck Permanent Benefit Building Society [1912] 2 Ch. 183. The facts of that case resemble those of the present. A building society carried on a banking business altogether beyond what was authorized. Cozens Hardy, M. E., observes that the so called contracts of loan, though not illegal, are void and in truth have no existence. This is treated as the doctrine as to ultra vires borrowing. The case went up to the House of Lords and this view was affirmed, although on another point the decision of the Court of appeal was varied : Sinclair v. Brougham [1914] A.C. 398. The relation between the depositor and the company is not that of debtor and creditor and the only possible remedy for the person who has paid the money is one in rem and not in personam. This is a most unequivocal declaration, that ultra vires transactions do not create the relationship of debtor and creditor. The preliminary objection therefore must be upheld and on this short ground the application is dismissed.

5. From this it does not follow that the lenders can in no circumstances recover their deposits. The very case I have cited, Sinclair v. Brougham, decides what their rights are and how and to what extent they can be enforced. There are no persons other than the depositors who have any claims to the money in the Deposit Branch; the question of priority decided in Sinclair v. Brougham does not therefore arise in this case. The Loan Branch, as I have said, was always treated as being separate from the Deposit Branch. Some trifling amounts are due to some unadvanced shareholders of that branch. I see no reason why they should not be paid the sums due to them from the money to the credit of that branch. Now, as regards the depositors to whom moneys are due from the Deposit Branch, they have already, under orders of Court, been paid sums amounting to over a lakh. These payments cannot be questioned. I may mention that some of the directors of the company are also among such depositors. They have offered, at my suggestion as a matter of fair dealing, to bring back the amounts they withdrew during the period of one year before the commencement of the winding up. As the other depositors have already been paid 11 annas in the rupee, these directors are, on this basis, bound to bring back only a sum which represents five annas of their drawings. The following table shows the amounts that they are thus liable to bring back and I understand that they have this day paid these sums to the liquidators.

-------------------------------------------------------------------------------Name Amount of deposit Amount to be refunded at 5withdrawn within one As. in the rupee. year before liquida-tion. -------------------------------------------------------------------------------P. Lakshminarasu Naidu Rs. 2000 Rs. 625 0 0T. S. Natesa Sastri Rs. 1500 Rs. 468 12 0 V. Sadagopan Naidu Rs. 813 Rs. 254 1 0-------------------------------------------------------------------------------Total Rs. 1347 13 0-------------------------------------------------------------------------------

6. Of the sum of Rs. 436 mentioned in the affidavit of the liquidators Rs. 375 represents the sum paid to them by the first two of the three directors named in the above table, when calls were made after the decision of the appellate Court to which I have referred. This sum as well as the abovementioned sum of Rupees 1347-13-0, together with Rs. 1500 (vide application No. 3485 of 1929), shall, subject to the payment of all proper costs, be treated by the liquidators as available for distribution among the depositors of the Deposit Branch. Rs. 1,955-13-9 in the Loan Branch shall be distributed among the unadvanced shareholders of that branch; if any balance is left over, it shall be carried forward to the Deposit Branch.

7. This order disposes of (1) application No. 820 of 1930 (misfeasance summons), (2) Application No. 346 of 1930 the liquidators' application as to the disposal of Rs. 2330-13-9 said to be the assets of the Loan Branch) and (3) Application No. 3485 of 1929 regarding the disposal of Rs. 1,500. In the misfeasance summons, the liquidators snail take their costs which I fix at Rs. 150 and pay the applicants' costs which are also fixed at Rs. 150. In Application No. 346 of 1930 the liquidators may take Rs. 35 as their costs. I desire before closing to tell the liquidators that they must, to save further costs, take steps to have the affairs of the company wound up as early as possible.


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