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T. Manavedan Tirumalpad, Rajah of Nilambur Vs. Amirchand Doss Dwarakadoss and ors. - Court Judgment

LegalCrystal Citation
Subject Company; limitation
CourtChennai
Decided On
Reported inAIR1944Mad431
AppellantT. Manavedan Tirumalpad, Rajah of Nilambur
RespondentAmirchand Doss Dwarakadoss and ors.
Cases ReferredVairavan v. Avicha A.I.R.
Excerpt:
.....complained of. that is to say, wrongs independent of contract 'i .rather, come to the conclusion that it was intended that two years should be the outside time allowed for bringing a suit founded upon tort, except in certain well defined particular instances......who wrongfully refuses to restore the property lent to him is liable both in contract and in tort, in contract because of his promise to restore it in due time, and in tort because no one has a right to detain another's property without some special justification. so also in all other cases in which, by a wilful or negligent act of misfeasance, harm is done to the person or property of another in the course of performing a contract made with him which involves the use of care and skill; for example, injury done to a borrowed horse by overdriving it.' it seems to me that these are typical cases in which the malfeasance, misfeasance or non-feasance involved is not independent of contract within the meaning of article 36. but in the present case, the wrong complained of is entirely.....
Judgment:

Kunhi Raman, J.

1. This appeal is from the decision of the City Civil Court, Madras, in O.S. No. 3104 of 1939. Defendant 2 is the appellant. The facts are interesting and may be briefly stated. Defendants 2 to 7 are the directors of defendant 1 company which was floated by them and which has now ceased to exist. The plaintiff applied for 250 shares in the newly formed company on seeing the prospectus published in a newspaper in Madras. As required by the rules, he paid Rs. 500 in cash along with his application. The shares applied for were allotted to him. He filed the suit from which this appeal arises for recission of his contract with defendant 1 company known as the Cochin Furniture Co. Ltd., and for Rs. 500 which he claimed as damages from defendants 2 to 7 the directors of the company on the ground that in the prospectus that was published there were misleading or untrue representations which deceived him and made him part with cash. In the course of the trial, the suit was withdrawn as against defendant 1 company and therefore the decision of the suit turned upon the question as to whether the directors of the company-defendants 2 to 7-were liable to pay damages to the plaintiff. There was a question of limitation raised at the trial which has assumed importance also in appeal. The main defences were that the prospectus did not contain any untrue representation but that the statements contained in it depicted a fair account of the situation, that in any event the plaintiff was not deceived by the alleged misrepresentation as is evident from his subsequent conduct when he started negotiating for purchasing more shares even after he became aware of the full facts of the case, and lastly that the claim was barred by limitation because the suit was filled more than two years after the cause of action arose. These defences indicate the points for determination in appeal also, the main contentions of the appellant's learned advocate being based upon these three points.

2. The learned Principal Judge of the City Civil Court who tried the suit was satisfied that the representations complained of were false, that the plaintiff was induced to become a shareholder in the company as a consequence of those representations and that the suit was not barred by limitation. A decree has accordingly been passed in favour of the plaintiff. The plaintiff's complaint is that he was deceived by an untrue representation contained in the prospectus which was printed in bolder type than the rest of the document to catch the eye of the reader. It is worded as follows:

The Government of Cochin, in order to encourage the establishment of industries for which there are natural advantages in the State have agreed to encourage this company by giving a steady and continuous supply of timbers extracted from the State forests required for the purpose of the company at economical prices. This additional facility will enable the company to compete with others successfully...

It was argued at the trial on behalf of the plaintiff that the expression 'economical prices' appearing in this document was a misleading statement because the Cochin Government had only undertaken to supply timber at 'reasonable' prices. This contention seems to have found favour with the learned trial Judge. But it seems to me that there is no substance in this contention. 'Economical' according to the Concise Oxford Dictionary means 'saving, thrifty, not wasteful.' There is no warrant for the assumption that it has any technical significance when used in a commercial document like a prospectus. If the arrangement was that reasonable prices would be charged by the Cochin Government for timber supplied to the company, it cannot be said that the description in the prospectus that economical prices would be charged is in any way misleading or false, much less that it is fraudulent.

3. Another contention urged on behalf of the plaintiff at the trial was that the first part of the statement, viz., that the Cochin Government would encourage the company by giving a steady and continued supply of timbers extracted from the State forests required for the purposes of the company was not warranted. The promoters of the company were carrying on correspondence with the Forest Department of the Cochin Government and asking for special privileges. The ultimate reply received by the Managing Agents of defendant 1 company from the Conservator of Forests, Cochin, contains the following paragraph which is the only justification for the averment in the prospectus:

I have also to inform you that if the first year's undertaking is found to be mutually satisfactory, every consideration will be shown to your company in the matter of giving a steady supply of timber at reasonable rates.

It is clear from this part of the letter that there was only a conditional promise held out by the Cochin Government to give a steady supply of timber at reasonable rates, the condition being that the first year's transaction should be found to be mutually satisfactory. What was asserted in the prospectus was that there was an unconditional promise made by the Cochin Government to encourage the company by giving a steady and continuous supply of timber extracted from the State forests which are required for the purpose of the company.

4. According to Section 100, Companies Act:

Where a prospectus invites persons to subscribe for shares in or debentures of a company, every person who is a director of the company at the time of the issue of the prospectus... shall be liable to pay compensation to all persons who subscribe for any shares or debentures on the faith of the prospectus for all loss or damage they may have sustained by reason of any misleading or untrue statement therein . ...

To escape liability, it is incumbent upon the directors to establish that the statement complained of was a correct and fair representation of what actually transpired. The question is, can such a justification be pleaded successfully by the directors in the present case? There cannot be any doubt that the statement complained of is misleading and untrue. It can hardly be described as a fair representation of what had transpired. If the directors have taken the responsibility of asserting that there was an unconditional promise given by the Cochin Government to supply timber steadily for the purposes of the company, when as a matter of fact there was no such unconditional undertaking, they must bear the consequences. I am therefore satisfied that the finding recorded by the trial Court on issue 1 that the statement referred to which is contained in the prospectus is false and that it did not amount to a true and fair representation of what was stated by the Government of Cochin is correct.

5. An attempt was made on behalf of the appellant to show that the plaintiff was not influenced by this representation when he became a shareholder in the company. For establishing this, reliance was sought to be placed upon the subsequent conduct of the plaintiff, after the shares had been allotted to him. At that stage the plaintiff started negotiations for getting a monopoly of the preference shares of the company. Prior to such negotiations, the plaintiff had seen the correspondence between the promoters of the company and the Cochin Government and therefore it is argued that he must then have been disillusioned about the representations contained in the prospectus. In spite of this, he persisted in endeavouring to obtain a large proportion of the preference shares of the company. There is no doubt that prior to the application sent by the plaintiff for the 250 shares, he had no knowledge of the nature of the correspondence that took place between the promoters of the company and the Cochin Government. He had only seen the prospectus published in the newspaper on which he placed reliance. He swears that he was mainly attracted by the paragraph complained of which, as already stated, was printed in bolder type than the rest of the prospectus. In such circumstances, the fact that subsequent to sending his application for shares, the plaintiff came to know of the true scope of the attitude of the Cochin Government towards the newly promoted company cannot have any significance. It is possible that he tried to get a monopoly in the shares of the company with the object of nullifying by personal effort the evil effects which he foresaw when he came to know that there was no unconditional promise held out by the Cochin Government to supply the company with timber. In my judgment therefore the view taken by the learned trial Judge that the plaintiff in this case, was really induced to purchase the shares by reason of the false statement contained in the prospectus is also correct.

6. The last question for determination is that of limitation. The plaintiff subscribed for the shares on 13th September 1936. The suit was filed on' 8th September 1939 - within three years, but after the expiry of two years, from the date when the cause of action arose. The question discussed at the trial was whether Article 36, Limitation Act which may be described as the residuary article for torts or civil wrongs, applies to this case as contended on behalf of the defendants or whether Article 120 the general residuary article in the Limitation Act which prescribes a period of six years applies to the case. If the former article applies there is no doubt the suit is barred by limitation, because the period fixed by it is two years. The view taken by the learned Judge is that it is Article 120 that applies to the case. The appellant's learned advocate challenges the correctness of this view.

7. Article 36 is worded as follows:

For compensation for any malfeasance, misfeasance or non-feasance independent of contract and not herein specially provided for-two years-when the malfeasance, misfeasance or non-feasance takes place.

The articles immediately preceding this refer to specific kinds of tort or civil wrongs and prescribe the period of limitation in such cases. Therefore Article 36 is undoubtedly the residuary article in the case of torts or civil wrongs. Prima facie the view taken by the trial Court that Article 120 which is the general residuary article applicable to cases which are not provided for elsewhere in the schedule to the Limitation Act, applies, seems to me to be obviously incorrect. The only other alternative may be Article 115 which is the residuary article in the case of suits for compensation for breach of contract which are not specially provided for elsewhere in the statute. The contention urged on behalf of the respondents by their Learned Counsel is that in any event Article 115 applies in which case the suit which was filed before the expiry of three years from the date of the cause of action must be held to be in time.

8. The learned trial Judge has correctly appreciated the position when he states in his judgment that the cause of action in the present case is based upon a tort or civil wrong committed by the defendants. Section 100, Companies Act, recognises an exception in the case of such a civil wrong inasmuch as a right is granted to joint tort-feasors to claim contribution. But that provision only emphasises the fact that the cause of action is not based upon contract, the wording of the section being that contribution may be claimed 'as in cases of contract.' The last few words make it abundantly clear by implication that the situation is entirely unconnected with contract. The section, as already stated, recognises an exception to the general rule that there is no contribution among joint tort-feasors. The English case reported in Geipel v. Peach (1917) 2 Ch. 108 from the judgment in which the learned trial Judge has quoted extensively, also makes it clear that the wrong complained of in a case of this description is a tort and not a breach of contract. Cases arising under Section 235, Companies Act, cannot have any bearing on the question involved in the present case. Those are cases in which a liquidator seeks to make the directors of a company accountable for moneys misapplied or retained by them. In such cases, it has been pointed out, that the tort is not independent of contract, because there is a contractual relationship between the directors and the company, there being a liability on the part of the directors to safeguard the interests of the company and not to misapply the funds of the company. As the learned trial Judge has pointed out in his judgment, there are no authorities directly in point applicable to a case like the present. The reasoning adopted by the trial Court is that Article 36 can only apply to torts or civil wrongs like libel and slander or trespass to immovable property, which are entirely unconnected with contracts. But the question is whether in the present case the cause of action can be said to be connected with a contract or whether it is independent of contract. The untrue or misleading statement made by the directors was contained in the prospectus published by them. At that stage, there was no contract between the plaintiff and anybody else. The directors who had floated the company were making representations with the object of inviting members of the public to apply for shares in the company. The plaintiff was misled by the misrepresentation contained in the prospectus, as a result of which he applied for shares which were accordingly allotted to him. The contract when the shares were allotted was between the plaintiff and defendant 1 company and not with the directors of the company. The wrong complained of by the plaintiff happened before the formation of this contract. In such circumstances, it seems to me that the malfeasance or misfeasance complained of is entirely independent of contract. The facts do not permit of any case based upon contract being set up by the plaintiff in respect of the untrue representation contained in the prospectus. There may sometimes be cases where the same wrong is both a breach of contract and a tort. For example, as explained in Salmond's Law of Torts, Edn. 8 at page 10:

A. physician who harms his patient by negligently administering a deleterious drug is guilty of a wrong, which is both a breach of contract and a tort. It is a breach of contract because the physician has impliedly promised to use due care and skill in the treatment of his patient, and it is also a tort because, apart from contract altogether, no one has a right to do another physical harm by giving him poison. Similarly, a bailee who wrongfully refuses to restore the property lent to him is liable both in contract and in tort, in contract because of his promise to restore it in due time, and in tort because no one has a right to detain another's property without some special justification. So also in all other cases in which, by a wilful or negligent act of misfeasance, harm is done to the person or property of another in the course of performing a contract made with him which involves the use of care and skill; for example, injury done to a borrowed horse by overdriving it.' It seems to me that these are typical cases in which the malfeasance, misfeasance or non-feasance involved is not independent of contract within the meaning of Article 36. But in the present case, the wrong complained of is entirely unconnected with contract. The damage alleged is not connected in any way with any breach of contract committed by the defendants. Before the plaintiff's contract with defendant 1 company came into existence, the other defendants had committed the malfeasance or misfeasance complained of. The suit is thus not based on a cause of action arising out of contract but upon a ' malfeasance or misfeasance independent of contract.

9. The learned advocates appearing in the case have cited a number of authorities which have no direct bearing on the point for decision and for that reason it is not necessary to refer to all of them. The cases discussed below are however relevant.

10. The appellant's learned advocate relies on the following observations made by Sadasiva Iyer J. in his judgment in Veeramma v. Subbarao A.I.R. 1917 Mad. 500:

As said in Rustomji's edition of Limitation Act, Article 36 is a general article for suits for compensation for all possible acts and omissions commonly known as Torts, that is, wrongs independent of contract and which are not provided for by other articles.

The learned Judge quotes the decision in Esso Bhayaji v. The S. S. Savitri (1987) 11 Bom. 133 in support of this observation. That was a case of a collision at sea as the result of which a ship was lost and damages were therefore claimed for the loss. In referring to Article 36 the judgment states:

The words 'malfeasance, misfeasance and non-feasance independent of contract' used in Article 36 are of the widest import, and embrace all possible acts or omissions commonly known as Torts by English lawyers; that is to say, wrongs independent of contract '...'I ... rather, come to the conclusion that it was intended that two years should be the outside time allowed for bringing a suit founded upon tort, except in certain well defined particular instances. No other conclusion can be come to when the provisions of Article 36 are compared with those in Article 115. Such a conclusion is in accordance with the provisions of other systems of law and with the dictates of common sense. There are no cases in which it is more desirable that the evidence by which they are supported or rejected should be promptly given and scrutinised than in actions of tort.

These observations support the appellant's advocate's contention.

11. Mr. Arunachalam on behalf of the respondents places reliance on the decision reported in Vairavan v. Avicha A.I.R. 1915 Mad. 889. The headnote which is extracted below indicates that there an entirely different set of facts which gave rise to a legal position unlike that in the present case came up for consideration:

A suit against a person for breach of contract to sell to the plaintiff certain goods of another on the implied representation that he had authority from his principal to sell them, when in fact he had none, is not one arising in tort or one independent of contract, but one arising out of and incident to a contract and is governed by Article 115, Limitation Act (15 of 1887) and not by Article 36 or Article 120.

The learned Judges, in discussing the nature of the wrong, state as follows in the judgment:

Assuming that the action may be held to be one in tort, it is certainly not for a wrong independent of contract, but one connected with a contract and arising from one of the incidents of a contract. A person entering into a contract on behalf of a principal ought not to do so without authority from the principal. His acting on behalf of the alleged principal amounts to a representation that he has authority from the latter to do so. His acting without such authority is a wrong connected with the contract. The case cannot therefore fall within the purview of Article 36.

12. In my judgment therefore Article 36 applies to the present case, the malfeasance or misfeasance which forms the basis of the plaintiff's case being one independent of contract. Since the suit was brought more than two years after the date of the cause of action, it was barred by limitation. The appeal must therefore be allowed and the suit dismissed. The next question is about costs. There is no doubt that the social and financial standing of the appellant and his co-directors was made use of by the managing director to give an artificial value to the new venture conceived by him. They have permitted their names to be used for influencing a section of the credulous public to sink capital in a company which has collapsed soon after it was started. In the circumstances, the proper order to make will be to direct the parties to bear their own costs in the Court below and to grant the appellant the costs of this appeal to be paid by the plaintiff-respondent.


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