1. As both the above cases arise out of the same proceedings and involve identical issues, they are dealt with together.
2. An enquiry into the constitution, working and financing condition of the Tenkasi Co-operative Urban Bank Limited, hereinafter referred to as the Bank, was ordered under Sec. 65 of the Madras Co-operative Societies Act, 1961 by the Deputy Registrar, Tirunelveli in his proceedings dated 22-11-1965. A preliminary report of the enquiry Officer was submitted on 19-7-1966 and it showed that there has been misappropriation of the Bank's funds. As a follow-up of the said report the Deputy Registrar issued surcharge notices dated 6-8-1966 under Section 71 of the Act to one M. Chockalingam Pillai the ex-President. and N.T. Pannayar, the ex-Vice-President, and 8 others who were Ex-directors of the Bank. A surcharge notice was also issued to one R. Ulaganathan Ex-clerk of the bank who has alleged to have misappropriated the funds of the bank. At that stage the bank was superseded and a Special Officer was appointed under Section 72 of the Act by an order of the Joint Registrar dated 10-9-1966. In answer to the above surcharge notices issued to them, the Ex-Directors represented that the enquiry officer has sent only a preliminary report, and that surcharge proceedings could be initiated only after a complete and full report of the enquiry is received In view of this objection, a revised surcharge notice was issued on 12-12-1966, after receipt of a complete and full report of enquiry on 29-10-1966, in modification of the earlier surcharge notice dated 6-8-1966. In the surcharge proceedings notices following the said revised notice dated 12-12-1966 it was found that an amount of Rupees 27,519-13 has been misappropriated during the period from 15-1-1948 to 23-8-1966 out of which a sum of Rs. 1,000/- was made good by the said Ulaganathan, Ex-Clerk, However, in view of Section 71(1) which bars recovery of any amount by way of surcharge after a period of six years from the date of any act or omission, the amount misappropriated within six years prior to the notice of surcharge was alone taken into account. The result was the second surcharge notice related only to a sum of Rs.12,718/- referable to the period covering six years preceding the surcharge notice. By his final order dated 19-8-1967 a surcharge order has been passed against Ex-clerk as well as the Ex-President, Ex-Vice-President and the Ex-Directors holding them jointly and severally liable for the said sum of Rupees 12,718/- found to have been misappropriated from the bank's funds.
3. Chockalingam Pillai, the Ex-President of the Bank and N. T. Pannayar, the Ex-Vice-President of the Bank, having died pending the surcharge proceedings, their legal representatives filed appeals before the Co-operative Tribunal, Tirunnelveli (District Judge, Tirunnelveli). The said appeals have been dismissed on 13-12-1971. The legal representatives of Chockalingam Pillai, Ex-President of the Bank has challenged the said decision of the Co-operative Tribunal in the Civil Revision Petition. The legal representatives of the Ex-Vice-President, N. T. Pannayar has filed the writ petition questioning the order of the Co-operative Tribunal.
4. The findings of the enquiry officer on the basis of which the surcharge order has been passed against the Ex-clerk and Ex-Directors s that the entire amount covering Items 25 to 40 has been misappropriated by the Ex-clerk, that he has also been convicted in a Criminal Court for misappropriation of the bank's funds, and that the President and Vice-President and Ex-Directors are liable to be surcharged for their carelessness and negligence. The Co-operative Tribunal refers to the evidence of Ulaganathan, Ex-Clerk who had deposed that he was the only clerk of the Bank from 6-6-1939 to 17-12-1965, that he was in sole charge of the accounts relating to the surcharged Items 25 to 40, that the amounts involved in Item 25 to 40 were in fact misappropriated by him and the former Presidents, Somasundaram Pillai and Chockalingam Pillai and the Ex-Vice-President N. T. Pannayar, that he took only a sum of Rs. 7,000/- for his family expenses and that the balance was taken by the Presidents and Vice-Presidents. As against this, Chockalingam Pillai, and N. T. Pannayar, had denied that they had anything to do with the amount covered by the surcharged Items 25 to 40 and had stated that the entire amount had been misappropriated by the clerk, that they had complete faith in the Secretary and the Clerk Ulaganathan, that the Secretary is expected to exercise control over the work of the clerk and that, therefore, they were not in a position to detect the various defalcations made by the Clerk till the enquiry initiated under Section 65 revealed the various methods through which he has misappropriated the bank's funds. After going through the evidence and the connected records the Tribunal has specifically found that the entire amount involved has been misappropriated by the Ex-Clerk, that the Ex-President, Ex-Vice-President and Ex-Secretary and Ex-Directors on account of their wilful negligence have failed to exercise proper control over the clerk Ulaganathan by checking the cash books and the statement of receipts and disbursements submitted by the clerk at the Board meetings periodically and that, therefore, all of them should be held responsible for the amounts misappropriated by the Clerk. Thus Ex-Presidents, Ex-Vice-President and Ex-Directors have been held liable for the surcharge on the ground hat they were guilty of wilful negligence in the performance of their duties, particularly their failure to check effectively and properly the cash books daily and the statement of receipts and disbursements submitted by the Clerk periodically in the Board Meetings for their scrutiny and approval
5. The learned counsel for the petitioners, on the facts found by the Co-operative Tribunal, contends as follows: The surcharge order so far as it is against the Ex-President and Ex-Vice-resident cannot be submitted under Section 71 of the Act. Under Section 71 a surcharge order could be passed against a person who is entrusted with the organisation and management of the Society if he has (1) misappropriated or fraudulently retied any money or other property of the Society or (2) has been guilty of breach of trust in relation to the Society, or (3) has caused any deficiency in the assets of the Society by breach of trust or wilful negligence or (4) has made any payment contrary to the Act, Rules, byelaws etc. That Tribunal having found that the Ex-President, Ex-Vice-President and the Ex-Directors have not misappropriated or fraudulently retained the monies belonging to the Bank or guilty of any breach of trust the only ground of liability for surcharging them is wilful negligence and, therefore, unless wilful negligence is proved they cannot be held liable for the surcharge.
6. There can be no dispute that Section 71 authorises the surcharge order being passed against persons in management of the Society (1) if they had misappropriated or fraudulently retained the funds of the Society, (2) if they are guilty of breach of trust in relation to the Society or (3) if they had wilfully negligent or has caused any deficiency in the assets of the society and (4) if they had made any payment contrary to the Act, Rules and bye-laws etc. In this case the Ex-President and Ex-Vice-President have been held liable only under the third head for wilful negligence and not under any of the other heads of liability. The learned counsel for the petitioners points out that the circumstances pointed out by the Co-operative Tribunal that the Ex-President and the Ex-Vice-President did not scrutinise the statement of accounts produced before them by the Clerk then and there and such negligence enabled the Clerk to misappropriate such large amounts from the bank cannot indicate that their negligence, if any, is wilful, that there is no material or finding by the Tribunal that the negligence attributed to them is wilful, and that unless wilful negligence is established, Section 71 cannot be invoked against them. The learned counsel points out that the Co-operative Tribunal has overlooked the significance of the word 'wilful' occurring in Section 71 and has proceeded on the basis that a mere negligence on the part of the persons in management will being them under the mischief of S. 71.
7. In my view, the petitioner's learned counsel appears to be right when he says that the Tribunal has completely overlooked the significance of the expression 'wilful negligence' occurring in Section 71 for, after finding that the Ex-President and the Ex-Directors were negligent in not scrutinising the accounts properly then and there it straightway proceeds to say that they have rendered themselves liable for an order of surcharge under Section 71 for such negligence. Whether their negligence was wilful or not has not been specifically considered.
8. The scope of the expression 'wilful negligence' occurring in various statutes had come up for consideration before Courts. In R. v. Downes, 1875 1 QBD 25 it was held that the statutory words 'wilfully neglects such child' are not satisfied by proof of some omission to provide medical aid. In Reg. v. Senior, 1899 1 QB 283 while dealing with the same expression 'wilfully neglects' occurring in Section 1 of the Prevention of Cruelty to Children Act, 1894 Lord Russel, C. J. expressed that whether the words are taken together or separately, the meaning is very clear, that 'wilfully' means an act done deliberately and internationally, not by accident or inadvertence so that the mind of the person who does the act can be said to go with it and that 'neglect' is the want of reasonable care, that is, the omission of such steps as a reasonable person would take. While dealing with the scope of the expression 'wilful neglect' occurring in Section 2 of the Married Women's Protection Act, 1922, the High Court of Australia in Cooper v. Cooper, 65 CLR 162 stated that the phrase connotes a deliberate and intentional act of a culpable nature and that it imports an intention to act or omit to act in a way which the person charged knows, or ought if he is not recklessly careless to have known, will amount to a breach of duty. P. R. Ramanatha Iyer in his 'Law Lexicon' has collected the various decisions interpreting the expressions 'wilful neglect' and 'wilful negligence'. According to the author the expression 'wilful neglect' means an act done deliberately and intentionally and not by accident or inadvertence so that it can be said that the mind of the person who does the act goes with it, that it implies an intentional and purposeful omission to do a certain act, and that it is an even more extreme term than gross and culpable negligence. The expression 'wilful negligence' according to the author means a conscious acting or failing to act in a reprehensible manner.
9. In Ardeshir Bhicaji v. Agent, G. I. P. Ry. Co., Bombay, 54 MLJ 167 : AIR 1928 PC 24 the Privy Council dealing with the scope of the phrase 'wilful neglect' occurring in a Railway risk note issued under Section 72 of the Indian Railways Act, 1890 referred to the decisions in R. V. Downes, 1875 1 QBD 25 and Reg v. Senior, 1899 1 QB 283 above cited and held on the facts of that case that though there was ample evidence of neglect, there was no evidence or finding of wilful neglect and that therefore, there was no wilful neglect within the meaning of the risk note. The Supreme Court in R. C. N. Kukarni v. State, 954 All LJ 822 while interpreting the words 'wilfully detains' occurring in Section 53 of the Post Office Act, 1898 observed that the word 'wilful' has been used by the Legislature to mean only such detention which was deliberate and for some purpose.
10. The above decisions clearly indicate that the use of the phrase 'wilful negligence' in Section 71 of the Act is for the purpose of holding a person in management liable if he has caused loss to the Society by his international and purposeful omission. Therefore, the learned Counsel for the petitioners is right in his submission that mere negligence, however gross t may be, may not be sufficient to attract the section.
11. The question is whether the conduct of the Ex-President and Ex-Vice-President in not checking the accounts properly than and there when presented by the clerk will amount to wilful negligence. It has not been established in this case, nor is there any finding by the Co-operative Tribunal that the negligence attributed to the Ex-President and Ex-Vice-President was wilful in the sense that the omission to check the accounts was intentional and purposeful. It is true, loss has been caused to the Society by misappropriation of its funds by the Clerk. But the question here is whether the Ex-President and the Ex-Vice-President are guilty of wilful negligence as contemplated by Section 71. A loss can be said to be due to wilful neglect if the cause for loss has been materially contributed by it. In this case the Ex-President and the Ex-Vice-President have deposed that as there was a Secretary supervising the work of the Clerk they were of the view that the work of the clerk has been properly supervised by the secretary and they merely affixed their signatures to the various statements and books of accounts brought before them in view of their confidence in the Secretary. It is true, if they had wilfully shut their eyes to facts which were sufficient to throw suspicion on the conduct of the Clerk or the Secretary they can to be held to be guilty of wilful negligence. In this case, however, the methods adopted by the Clerk in the process of misappropriation are such that it cannot be detected easily. The methods adopted are to make payments on forged vouchers, to give wrong totals in the account books, to make credits to persons not entitled and not to credit receipts actually received. The fact that the clerk has been adopting such methods practically from the ear 1948 upto 1965 is clear from the enquiry report. The accounts of the bank have been subjected to departmental audit annually and persons who are specially trained for such audit purposes did not detect the misappropriation made by the clerk all these years, and it is only when a special enquiry was ordered under Section 65 in relation to the bank's affairs, the modus operandi adopted by the Clerk for misappropriating the amounts was known. In these circumstances, the Ex-President an the Ex-Vice-President cannot be expected to be able to detect the misappropriations made by the Clerk on occasions when the account books are produced for heir scrutiny and signature. Even if normal care has been taken by them before signing the accounts that would not have brought to light the various acts of misappropriation made by the Clerk, for each entry in the account book is supported by a voucher eve though forged and false. It is not as if there was any material which could lead to some suspicion against the Clerk and such material was overlooked by the Ex-President and Ex-Vice-President.
12. It has been observed by the Court of Appeal in In Re National Bank of Wales Ltd., (1899) 2 Ch 629:
'Business cannot be carried on upon principles of distrust. Men in responsible positions must be trusted by those above them as well as by those below them until there is reason to distrust them. We agree that care and prudence do not involve distrust, but for a director honestly himself to be held legally liable for negligence in trusting the officers under him not to conceal from him what they ought to report to him, appears to us to be laying too heavy a burden on honest businessmen.'
The Earl of Halsburg, speaking for the House of Lords in Davey v. Cory, 1901 AC 477 said:
'The charge of neglect appears to rest on the assertion that Mr. Cory like the other directors did not attend to any details of business not brought before them by the General Manager or the Chairman and the argument raises a serious question as to the responsibility of all persons holding positions like that of directors, how far they are called upon to distrust and be on their guard against the possibility of fraud being committed, by their subordinate of every degree. It is obvious, if there is such a duty, it must render anything like an intelligent devolution of labour impossible. Was Mr. Cory to turn himself in an auditor, Managing Director, a Chairman and find out whether auditors, Managing Directors and Chairmen were all alike deceiving them.'
It is not in dispute in this case that there was a Secretary functioning in the Bank and it is his duty to supervise the work of the Clerk, and it is a case of negligence, if at all, on the part of the Secretary to properly supervise the work of the Clerk. On the facts of this case, the failure to check the accounts or to detect the misappropriations made by the clerk cannot be said to be due to the wilful negligence of Ex-President, and Ex-Vice-President. I have to, therefore, hold, on the acts of this case that no wilful negligence has been established on their part.
13. The learned counsel for the bank would bring to my notice two decisions of this Court Sundaram v. Deputy Registrar o Co-operative Societies, : AIR1957Mad634 and Kuppuswami v. Deputy Registrar of Co-operative Society, ( : (1967)2MLJ79 ) in support of a contention that mere negligence can be brought under the head 'breach of duty' occurring in S. 71. In the first case a Division Bench of this Court held that negligence to perform their duties by persons occupying fiduciary relationship to the Society can be brought under the expression 'breach of trust' occurring in Section 49(1) of the Madras Co-operative Societies Act of 1932. The same view has also been taken by Kailasam, J. (as he then was) in the second decision where it was held that the negligence on the part of the President of a Co-operative Society which has contributed to a heavy loss incurred by the Society as a result of the fraudulent acts of the manager and the accountant can be brought under the phrase 'breach of trust' occurring in Section 49(1), and therefore action should have been initiated under that section instead of under Section 51 of that Act. Section 49 of the Co-operative Societies Act, 1932 refers to only three instances for which a person taking part in the management of the Society or an officer or a servant can be proceeded against for levy of surcharge and they are: (1) Misappropriation or (2) fraudulent retention of any money or property and (3) guilty of breach of trust in relation to the society. Negligence was not a separate head of liability under that Section. Therefore, in the above two decisions, negligence which amounts to breach of a duty was brought under the head 'breach of trust'. However, Section 71 of the Act of 1961 has set out wilful negligence as a new and separate head of liability. When there is a separate head of liability relating to wilful negligence in Section 71, it is not possible to bring the same under the head breach of trust. Otherwise it will defeat the legislative intention to treat negligence as a separate head of liability.
14. On a due consideration of the matter, I am of the view that the petitions have to succeed and the surcharge order so far as it relates to Ex-President and Ex-Vice-President will have to be set aside and it is accordingly set aside. Both the petitions are allowed. There will, however, be no order as to costs.
15. Petitions allowed.