H.K. Bose, J.
1. This is an application by the Official Liquidator under Section 235 of the Indian Companies Act 1913 for the examination of the conduct of Directors, Mr. Birendra Kishore Roy Chowdhury, Asit Kumar Ghosal, Dinesh Chandra Roy, Lakshmi Narayan Hazra, Baidya Nath Mallick, Bhupendra Nath Roy Chowdhury, Kshitish Chandra Dutt and Debidas Roy (Managing Director) and for an order compelling these persons to pay or restore to the Liquidator certain sums of money belonging to the Company with interest at such rate as the Court thinks fit.
2. The facts which have given rise to this application are shortly as follows: The Central Calcutta Bank Ltd. was incorporated in 1928 under the name of Shahazadpur Trading and Banking Corporation Ltd. In 1934 the name of the Bank was altered to Central Calcutta Bank Ltd. In July 1947 it was amalgamated with the Bank of Mymensingh Gouripore Ltd. The authorised capital of the Bank is Rs. 5,00,000/- divided into 35,000 ordinary shares of Rs. 10/- each and 1500 five per cent. cumulative preference shares of Rs. 100/- each. The Bank closed its business on 8th December 1949 or 12th December 1949 and it appears that since 12th September 1949 the Bank was working under a moratorium order till it was finally ordered to be wound up on 9th May 1950. At the date of the winding up order the following persons were Directors of the Bank:
1. Mr. C. C. Dutt (Chairman)
2. Mr. B. K. Roy Chowdhury (Vice-Chairman)
3. Mr. A. K. Ghosal
4. Mr. D. C. Roy,
5. Mr. L. N. Hazra,
6. Mr. B. N. Mallick
7. Mr. B. N. Roy Chowdhury,
8. Mr. K. Dutt and
9. Mr. Debi Das Roy (Managing Director) one S. K. Neogy was its Secretary.
3. It appears further that Mr. L. N. Hazra and A. K. Ghosal were also Directors at the material time of a company known as United India Land Trust Ltd. and Debidas ROY was the Director-in-Charge of this company. There were other Directors of this company of which mention may be made of Sisir Kumar Acharya Chowdhury, A. K. Sen and S. K. Neogy. There was another company named Pioneer Investment Trust Ltd. with which the Central Calcutta Bank had dealings. It was a private limited company with a paid up capital of Rs. 1000/- only and Mr. S. K. Acharya Chowdhury and A. K. Sen two of the Directors of United India Land Trust Ltd., were the only two Directors of the Pioneer Investment Trust Ltd. It appears that these two companies--United India Land Trust Ltd. and Pioneer Investment Trust Ltd.--were ordered to be wound up on 28th February, 1951.
4. The charges which have been laid against the Directors in the petition are as follows:
1. On 30th June 1948 the Pioneer Investment Trust Ltd. applied for an overdraft from the Central Calcutta Bank Ltd. of Rs. 5,00,000/- at an interest of 4 per cent. and on that day the company executed a promissory note for Rs. 5,00,000/-. On 1st July 1949, the Pioneer Investment Trust Ltd. had a credit balance of Rs. 44,727/5/7. On 30th November 1949, the Company sold 10,000 shares of United India Land Trust Ltd. at Rs. 10/- per share and their account was credited with one lakh of rupees. The United India Land Trust Ltd. went into Liquidation shortly thereafter and so the Directors of the Central Calcutta Bank are guilty of fraudulent breach of trust by investing money of the Bank on valueless shares. It is alleged that Rs. 1,00,000/- was thus lost to the Bank due to the misfeasance of or mis-application of the fund of the Bank by the Directors.
2. On 30th November 1949, Rs. 61,146/12/- was debited to the account of Pioneer Investment Trust Ltd. and this amount was adjusted by crediting the personal loan account of Sisir Kumar Acharya Chowdhury, who was a Director both in the Pioneer Investment Trust Ltd. and the United India Land Trust Ltd., but no security was taken. On 7th December 1949 the Pioneer Investment Trust Ltd. was debited with various entries and their credit balance of Rs. 19,441/- was converted into a debit balance of Rs. 4,17,367/4/6. It is alleged that the advance of this sum of Rs. 4,17,367/4/6 by the Bank to the Pioneer Investment Trust Ltd. was a fraudulent breach of trust.
3. The United India Land Trust Ltd. had a current account with the Bank up to 8th December 1947 and this account had a balance of Rs. 60,000/-to its credit. That on 8th December 1947 the United India Land Trust Ltd. was debited to the extent of Rs. 7,00,000/- by one cheque No. 169598 and so the net debit balance stood at Rs. 6,37,190/8/10 on that date. Furthermore, although on 3rd November 1947 there was an agreement entered into between the United India Land Trust Ltd. and the Bank for creating a regular mortgage on all the assets of the company for the advances to be made by the Bank to the company, no mortgage in fact was created nor was any security taken by the Directors of the Bank for the actual advances made. So this sum of seven lakhs of rupees was not covered by any security at all. But after the Bank went into liquidation, the Liquidator with considerable efforts secured deposit of certain title deeds of certain Behala lands from the United India Land Trust Ltd. and the Liquidator filed a suit for enforcement of the equitable mortgage and for recovery of Rs. 8,47,237/3/-. It is alleged that the Directors are liable to restore Rs. 7,00,000/- which have been lost to the Bank due to their acts of misfeasance.
4. A sum of Rs. 81,264/8/- had been advanced to two Directors of the Bank, Mr. Asit Kumar Ghosal and Birendra Kishore Roy Chowdhury without any security, and this advance without security being improper, the Directors are liable to pay this amount to the Bank.
5. Thus the total claim of the Liquidator is laid at Rs. 12,98,631/5/2.
6. There is a charge against the Secretary, Mr. Neogy, which is as follows:
On 30th November 1949 the account of Pioneer Investment Trust Ltd. was debited with a sum of Rs. 49,500/- being the price of G. P. Notes of the face value of Rs. 50,000/- alleged to have been sold by the Bank to Pioneer Investment Trust Ltd. at Rs. 99/- per 100/-. But the Bank is alleged to have purchased these G. P. Notes on 30th June 1946 and there appears a remark in the Bank's investment ledger to the effect 'not received, with S.K. Neogy'. Moreover, another remark appears in the investment ledger of the Bank to the effect. 'Less Rs. 50,000/-, till 30th November 1949 when the Bank sold the G. P. Notes to the Pioneer Investment Trust Ltd.' and the Bank's investment account was credited with Rs. 49,500/-. So it is alleged that this amount is with the Secretary who never parted with the G. P. Notes and the Secretary is liable to restore this amount.
7. Several issues were raised on behalf of the respondent Directors. On behalf of the Directors Birendra Kishore Roy Chowdhury and Kshitish Chandra Dutt, the following issues were raised:
1. Are the respondents Mr. B. K. Roy Chowdhury and Mr. K. Dutt liable for the advances and transactions in respect of Pioneer Investment Trust Ltd. as alleged in the petition?
2. Was there any sanction obtained from the Board of Directors for such advances and transactions during the period that Mr. B. K. Roy Chowdhury and Mr. K. Dutt were Directors of the Bank?
3. Are Mr. B. K. Roy Chowdhury and Mr. K. Dutt liable or accountable for the transactions relating to United India Land Trust Ltd. and, if so, to what extent for the said loans and advances made to United India Land Trust Ltd.?
4. Are Mr. B. K. Roy Chowdhury and Mr. K. Dutt liable for the aforesaid loans and advances in view of the power of attorney executed in favour of the Managing Director on 29th January 1935?
5. Did the Directors, including Mr. B. K. Roy Chowdhury and Mr. K. Dutt, have implicit faith and confidence in the said Managing Director?
6. Is the application maintainable in view of the non-joinder of Saradindu Neogy, D. C. Roy and K. M. Khandelwal?
7. To what relief is the Bank entitled as against Mr. B. K. Roy Chowdhury and Mr. K. Dutt?
8. On behalf of the Director Bhupendra Narayan Roy Chowdhury the following issues were raised:
1. Were the transactions between the Bank and Pioneer Investment Trust Ltd. and United India Land Trust Ltd. with the knowledge and consent of B. N. Roy Chowdhury?
2. Did the respondents B. N. Roy Chowdhury invest or permit to invest Rs. 1,00,000/- for the purchase of the shares of the United India Land Trust Ltd.?
3. Did the respondent B. N. Roy Chowdhury authorise or procure the company to advance Rs. 4,17,367/4/6 to Pioneer Investment Trust Ltd?
4. Did the said respondent authorise the advance of Rs. 7,00,000/- to the United India Land Trust Ltd.?
5. Did the said respondent allow the overdraft as alleged in paragraph 16 of the affidavit of the Liquidator?
6. Is the said respondent guilty of misfeasance and/or breach of trust Or breach of duty in relation to the said Bank?
9. On behalf of the Secretary the following issues were raised:
1. Did the Bank purchase any G. P. Notes of the face value of Rs. 50,000/- on 30th June 1945 and was any such G. P. Notes kept with S. K. Neogy as alleged in paragraph 13 of the affidavit of the Liquidator?
2. Can the entries in the investment ledger mentioned in paragraph 13 be construed in the manner suggested in the said paragraph?
3. Did the respondent S. K. Neogy misapply, retain and become liable for the said G. P. Notes or the sum they represent or has been guilty of misfeasance or breach of trust in respect of the said G. P. Notes?
10. The learned counsel appearing for the Secretary has also adopted the issue as to non-joinder raised on behalf of the Directors B. K. Roy Chowdhury and K. Dutt.
11. Some of the Directors have deposed before this Court in this misfeasance proceeding and the depositions of some of the Directors, who were examined in the proceedings under Section 45G of the Banking Companies Act have been tendered in evidence in this misfeasance proceeding.
12. The Managing Director, Debi Das Roy, has not deposed in this proceeding before me but his deposition recorded under Section 45G proceeding has been tendered in evidence. The sum and substance of the evidence of the Managing Director is that he was the Managing Director of the Bank since 26th of August 1934. He was given a power of attorney on 29th January 1935 and Clause 2 of the said Power of Attorney contains the following clause:
'To lend and make advances of any monies of the Bank at such rate of interest and upon such security as he thinks fit or without security to any person or persons, body politic or corporate or company subject to such regulations as may be framed from time to time and to receive and give good discharges for repayments of any money so lent or advanced and of interest thereon.'
This witness has admitted that advancing of monies without securities was often done. He did not obtain the approval of the Board of Directors in the matter of making advances to other persons. He has also admitted that he himself, Ashit Kumar Ghosal, L. N. Hazra, Dilip Roy and Sudhangshu K. Neogy were Directors both or the United India Land Trust Ltd. and the Central Calcutta Bank Ltd. It is also admitted by him that on 8-12-47 Rs. 7,00,000/- was debited to the account No. 1 of the United India Land Trust Ltd. with the Bank which had a credit balance up till that day.
13. He was both a director of the United India Trust Limited and the bank at the time. The United India Land Trust Limited's account No. 2 with the bank was always in debit since 1946 up to 31st August 1950 and on the last mentioned date, Rs. 74,049/2/6 was the amount of the debit. Later on, the total debit amounted to Rs. 8,47,237/3/-. The witness has made conflicting statements as to whether security had been taken for the overdraft account or not. It appears that no security was in fact taken although mere was an agreement on 3rd of November 1947 for taking such security.
14. With regard to Pioneer Investment Trust Limited the evidence of this witness is that this company had a paid up capital of Rs. 1,000/-, but it dealt in sale and purchase of shares to the tune of lakhs and lakhs. S. K. Acharya Choudhury and A. K. Sen were its two directors. The account of this Pioneer Trust Limited with the bank shows a debit balance of Rs. 4,17,367/4/6 on 7th December, 1949, after giving credit of the sale proceeds of securities of a house and some shares which had been given to the bank by the company. So the debit balance was not covered bv any security. The witness has also admitted with reference to the books that on 30th November 1949 a sum of Rs. 61,146/12/- was debited in the account of Pioneer Investment Trust Limited and credited to the account of S. K. Acharya Chowdhury and by this process the personal liability of Acharya Chowdhury was wiped out; and it was shortly thereafter that on 8-12-49 the bank suspended payment. The witness has further admitted that Acharya Chowdhury was a solvent person but Pioneer Investment Trust Limited was not solvent. So there is no doubt that frantic attempts were being made by the managing director and his associates to reduce their personal liabilities as much as possible and foist such liability on others against whom chances of recovery were practically nil.
15. The witness has also explained the entries in the investment ledger of the bank and has admitted that by sale of the G. P. Notes of the face value of Rs. 50,000/- to Pioneer Investment Trust Limited on 30-11-49 and by crediting the amount of Rs. 49,500/- being the price of the G. P. Notes to the account of the bank, the bank had lost valuable security inasmuch as the Pioneer Investment Trust Limited did not pay any consideration money. It is also clear from his evidence that the G. P. Notes, according to the entries in the investment ledger, were in the custody of Mr. S. K. Neogy, the Secretary, although, according to the usual practice, they should have remained in the custody of the bank. It is, however, fairly clear from the evidence of the Secretary and from certain entries in the books of the bank that the managing director and not the Secretary had actually misappropriated the G. P. Notes and the proceeds thereof.
16. The evidence of the managing director also makes it clear that the purchase by the bank on 30-11-49 of 10,000 shares of United India Land Trust for Rs. 1,00,000/- was an improvident transaction although the witness has tried to suggest that the purchase in fact took place in 1946 and the entry of 30-11-49 was merely reversal of some other entries which were in the name of Asit K. Ghosal and Pioneer Investment Trust Limited. The fact that such entries were being made on 30-11-49 shows clearly that the managing director and some officers were out to defraud the bank by whitewashing the state of accounts as far as possible. According to this managing director, C. C. Dutt, L. N. Hazra, A. K. Ghosal and Dilip Roy were the active directors of the bank and the rest were merely passive directors. The witness also admits after looking into the entries in the account of A. K. Ghosal that Mr. Ghosal was speculating in share transactions. The witness has further admitted that he did not bring the matter of advances to the United India Land Trust Limited or Pioneer Investment Trust Limited before the board meetings, at any time, for discussions. With regard to the entry of Rs. 7,00,000/- on 8-12-47 the evidence is that it was in effect a paper transaction and no money actually passed on this date and the major part of the advances to United India Land Trust Limited took place before the 2nd of July 1947 (Q. 858 and 883-888). It is clear that this managing director who was responsible for building up the bank is primarily responsible for its downfall also and he is responsible for all the loss that has been caused to the bank.
17. The evidence of Baidya Nath Mullick may next be considered. He was co-opted as a director of the bank on 18th November 1943 and continued to act as such till 29th June 1945 when he resigned. He was again co-opted as director on 12th July 1947 and continued to function as such till the bank went into liquidation. He is a B.Sc. of the Calcutta University. He has stated in his affidavit affirmed on the 12th February 1957 that he did not suspect anything as the balance-sheets did not disclose any bad debts, but on being confronted with the balancesheets for the periods ending 30th June 1947 and 30th June 1948 he has admitted that his statement in the affidavit that title balance-sheets did not disclose bad debts is not correct (Q. 56). He has, however, suggested that he signed the balance-sheets of 1947 and 1948 without reading them carefully. His evidence is that he signed the balance-sheet of 1947, by mistake without noticing that he was not a director during the relevant period of 1947. It is upon reading the balance-sheet for the period ending 30th June 1948 at the meeting held on 12th September 1949 that he suspected that fraud had been committed (Q. 71) and he came to the conclusion that the investments had not been properly made (Q. 100-101) and at this meeting a committed was appointed to investigate into the matters (Q. 102). He has also admitted that he came to know of the contents of the balance-sheets of 1947 in June 1948 but he did not take any steps (Q. 107-110). He has also admitted that Article 99 of the Articles of Association was not followed by the directors as the matters of particular investments were not brought before the board meetings (Q. 117-118). The witness has stated further that he was in charge of securing deposits and of the over-all financial improvement of the bank (Q. 131-133) and he did not ask the managing director or the Secretary to realise the investments or to obtain any security in respect of unsecured loans (Q. 157). He has stated that he had faith in the managing director and thought that he was a good man and was doing his work properly (Q. 182).
18. The next witness is Bhupendra Narayan Roy Chowdhury who gave evidence in the proceeding under Section 45(g) of the Banking Companies Act. He was a director of the bank since 8th September 1936 and he is an M.A., B.L. He knew that the United India Land Trust Limited had an account with the bank, but he did not know of the extent of the advances by the bank to the company (Q. 15), nor did he know that advances were made without security (Q. 16). He had some casual and private conversation with the managing director Debi Das Roy to the effect that if dealings could be had between the bank and the United India Land Trust Limited, in land the bank and the company would both profit by such transactions (Q. 27-30). There was also some discussion between him and the managing director about the general policy about investments, but there was no discussion about any particular investment (Q. 35). He has signed the balance-sheets of 1947 and 1948 and he admits that he went through the balance-sheet of 1947, before he signed it (Q. 49) and he noticed that Rs. 8,00,000/- had been advanced to companies which had common directors with the bank but he did not try to find out what those companies were (Q. 50, 51, 54). He did not apply his mind carefully. He found that Debi Das Roy was an expert in banking matters and thought that what Debi Das Roy did was the right thing (Q. 60 and 61). This witness has also admitted that Article 99 of the Articles of Association had been probably contravened but Debi Das was given a power of attorney to make investments and to conduct the day to day business (Q. 71). It appears that the witness affirmed an affidavit on the 29th June 1953 in which he stated that he knew about the advance to United India Land Trust Limited but such investment was proper (Q. 78-81). Before the Court the witness in course of his giving evidence has suggested that the affidavit has not been drafted properly and he did not go through it carefully. The witness has tried to maintain that he did not express either his approval or disapproval about the proposed dealings between the United India Land Trust Limited and the bank as suggested by Debi Das Roy.
19. The next witness whose evidence may be dealt with is Lakshmi Narayan Hazra. He became a director of the bank in 1944. He is a graduate. When he was a student, he knew Debi Das Roy and the latter induced him to become a director. He was also interested in United India Land Trust Limited as a director till 20th May 1948. He had discussions with Debi Das Roy about the general policy of investments and he formed the opinion from such discussions that the management of the bank was in able hands and Debi Das was conducting the bank in the right path. Excepting one particular investment in respect of Chanabali Steamer Service no individual investments were ever brought up before the board of directors for discussion, but only the general policy of investment was discussed at board meetings (Q. 30-31). He signed the balance-sheet of the year ending 30-6-47 as a matter of course without scrutinising or checking the items. He had a cursory glance through it (Q. 40-41). He did not make any enquiries about the items in the Balance-sheet (Q. 44-45). He did not know of the advances to the Pioneer Investment Trust Limited. He admits that at board's meetings he came to know that investments made were not sound and so decision was taken at the meetings to take steps to make sound investments in future.
20. The deposition of Asit K. Ghosal may next be considered. He was at first an employee of the bank and he became a director on the 18th of November 1943 and continued to act as such till the bank was wound up. He has passed the I. Sc. examination and he read up to B.A. standard. In 1945 he was placed in charge of development and public contracts at the head office of the bank at Calcutta. In 1948 he was confirmed as a Deputy Managing Director (Q. 16-21). He was a director of the United India Land Trust Limited. He knew that this United India Trust Limited had only one account with the bank. Debi Das Roy used to do the things necessary in respect of the monetary affairs of the United India Land Trust Limited. The witness had no power to deal with the monetary affairs (Q. 162-164). This witness at first stated that he did not know that the United Land Trust had any overdraft account with the bank (Q. 167), but later on, he said that he knew on 30-4-47 from the balance-sheet that the United India Land Trust had an overdraft with the bank to the extent of Rs. 17,000/- (Q. 169-171). He had discussions with Debi Das Roy about the land development schemes of the United India Land Trust by borrowing money and he was told that if dealings in land could be bad, they would be very profitable. Upon this the witness induced his family and his father to invest money to the extent of about one lakh of rupees in the United India Land Trust Company by way of fixed deposit (Q. 183), The witness admits that be borrowed money from the bank and his liability was to the extent of Rs. 77,2810/-. But it is also his evidence that he had deposited shares as security for such overdraft (Q. 209-212). He has admitted that he made certain purchases and sales of shares and on account of share transactions he became indebted to the bank to the extent of Rs. 76,000/-and odd (Q. 249-252). It appears that the bank filed a suit against the witness and the witness ultimately submitted to a decree for about Rs. 66,000/-on 4th July 1957 and a Receiver has been appointed of the shares which are in the possession of the Bank. The witness has further said that at the meeting of the 12th September 1949 an Investigation Committee was appointed but personally he did not take steps to implement the resolution. He only suggested to Debi Das Roy to take steps. He admits that he did not exercise any control in terms of Article 99 of the Articles of Association. The witness was shown the Power of Attorney dated the 29th January 1935 and this Power of Attorney was tendered in evidence.
20a. Dinesh Chandra Roy, the father of the Managing Director deposed in the proceeding under Section 45G of the Banking Companies Act. He was the promoter of the Bank and is 86 years of age. It appears that he left everything to his son but he attended the Board Meetings regularly. He says that he did not know of the advances to United India Land Trust Ltd. or to Pioneer Investment Trust Ltd. In his affidavit affirmed on the 8th July 1953 he admitted that he knew of the advances to the United India Land Trust Ltd. but according to him these advances were proper. This witness does not remember anything and he describes himself as 'Donothing Director'. It appears to me that this witness knew all the dealings between the bank and the United India Land Trust Ltd. at least and so he knew also that the advances were without security.
21. The evidence of Birendra Kishore Roy Chowdhury may now be considered. He has stated that he became a Director of the Bank when the Bank was amalgamated with Mymensingh Gouripur Bank. This was on 12th July 1947. He became a Director in order to look after the interest of the shareholders of the Mymensingh Gouripur Bank. He attended meetings of the Board where investment policies of the Bank were discussed generally but no particular investment was brought up for consideration. It may be noted in this connection that Debi Das Roy, the Managing Director has also admitted that no individual investment was ever brought up before the Board for consideration but he has suggested that he had informal discussions with the Directors and the Directors knew all about the investments. I, however, do not accept this story of this informal discussion as suggested by Debi Das Roy. I accept the evidence of B. K. Roy Chowdhuri that the individual investments were not brought to the notice of the Directors at any Board meeting and he came to know about the bad debts when he first saw the balance-sheet of the period ending 30th June 1948 at the meeting held on 12th September 1949. His evidence further is that he did not know the two companies, the United India Land Trust Ltd. and Pioneer Investment Trust Ltd., nor did he know that large sums had been advanced to these two concerns. He did not have any suspicion in his mind about any bad investment and so he did not at any time make any enquiry about the investments of me bank. All the discussions that took place at the meetings were about the future investments of the Bank and there was no discussion at any time about any past investment. But when at the Board meeting of 12-9-49 it appeared from the balance-sheet that there were bad debts, the Board at once appointed an Investigation Committee to enquire into the matters. It has been held in some cases both of the English Courts and of the Courts in India that it is no part of the duty of the Directors to scrutinise or examine the entries in the books of account of the company and when there is nothing to raise any suspicion in the mind of the Director no question of any abstention from any enquiry can arise. I am unable to find that the Director B. K. Roy Chowdhury is in any way responsible for or can be held liable for the alleged loss caused to the bank.
22. The next witness whose evidence should be dealt with is Kshitish Chandra Dutt. This gentleman has given evidence on commission. He became a Director of the Bank along with B. K. Roy Chowdhury in July 1947 after the scheme of amalgamation of the Central Calcutta Bank with the Mymensingh Gouripur Bank was given effect to. In the Board meetings that he attended after becoming a Director of the Bank there was no discussion about any particular item of investment but there was general discussion about the policy of investment with the object of making the Bank a scheduled bank. This witness also did not know the United India Land Trust Ltd. or the Pioneer Investment Trust Ltd. nor did he at any time hear their names or about the dealings had with them. The managing director never even talked with this witness. He had no knowledge of the contents of the balance-sheet for the period ending 30-6-47. He, like the Director B. K. Roy Chowdhury, had not been given any notice of the meeting of the Board of Directors which was held on 3rd July 1948 nor of the General Meeting held on the 23rd July 1948 at which the balance-sheet for the period ending 30th June 1947 was adopted and passed. The minutes of these two meetings have been tendered in evidence. It also appears from the evidence of this witness that prior to the amalgamation, neither the witness, nor B. K. Roy Chowdhury, nor the other Directors of the Mymensingh Gouripur Bank had any occasion to examine the books of the Central Calcutta Bank but they relied entirely on their Financial Expert Mr. Nalini Ranjan Sarkar who advised this amalgamation after satisfying himself with regard to the affairs of the Central Calcutta Bank. It appears that the balance-sheet of 1945 of the Central Calcutta Bank was placed before the Directors of the Gouripur Bank before and at the time of amalgamation and this was taken to be the latest balance-sheet of the Central Calcutta Bank and the scheme of amalgamation was put through on the basis of the affairs disclosed by this balance-sheet. This witness attended the meeting held on 12-9-49 for passing the balance-sheet of the period ending 30th June 1948 and at this meeting it was decided to have an Investigation Committee. Although the witness was appointed a member of this committee no such committee was formed later on and shortly thereafter the Bank suspended business. Before this, the witness had no suspicion in his mind of any fraud being committed by Debidas Roy, the Managing Director. He said, he had faith and confidence in Debidas Roy and never got any scent of his wrongful activities. I have no doubt that this Director was innocent and like B. K. Roy Chowdhury he had no occasion or ground for entertaining any suspicion that the affairs of the Bank were being conducted fraudulently or in an improper manner.
23. The evidence of the Secretary Mr. Neogi may now be considered. The charge against the Secretary about the G. P. Notes of the face value of Rs. 50,000 has not to my mind been clearly established. It appears from the entries in the Investment Ledger of the Bank and the overdraft account of Debidas Roy both dated 30th Tune 1945 and the entry in the Investment Ledger dated 30th November 1949 that it is the Managing Director who has misappropriated the G. P. Notes in question or the proceeds thereof. The remark that the G. P. Notes (the numbers of which are not entered anywhere) were with the Secy. may have been made to shift the guilt of the Managing Director on the Secretary and to foist on the Secretary the personal liability of the Managing Director. It is possible that the entry of G. P. Notes being with the Secretary has been inserted on a later date and not on the 30th June 1945 in page 4 of the Investment Ledger. This entry is in a different ink, and the ink used also appears to be quite fresh. The words 'S. N. Bose, etc.' are in faded ink. Harit Majumdar who has deposed on behalf of the Liquidator has stated that this entry is in the handwriting of one Dhruba Bikash Ghose. The Secretary who has deposed before this Court has, however, failed to recognise the writing but it may be that he was feigning ignorance when he suggested that he could not recognise the writing. It may be pointed out that although Duruba Bikash Ghose is in Calcutta he has not been called on behalf of the Secretary. The Secretary has also suggested in his evidence that he never looked into the Investment Ledger and he was not aware of the entry in question till he saw the Liquidator's report. It sounds improbable that the Secretary never had occasion to go through the Investment Ledger. His evidence is that different persons are in charge of different departments and as the Investment Ledger was not kept in his actual custody he did not have occasion to look into it. These are some of the unsatisfactory features about his evidence but it is clear from the entry in the overdraft account of Debidas Roy that, it is the latter who has misappropriated the money or the G. P. Notes. It is possible that the Secretary was a party to the conspiracy to defraud the bank and so he lent his name in the entry, but the case may be otherwise. He may be altogether innocent. In this state of evidence I exonerate the Secretary from the liability which is sought to be imposed upon him.
24. On behalf of the Liquidator one Harit Kumar Majumdar has deposed in this proceedings. He was the officer-in-charge of the loans and overdrafts department prior to the liquidation of the bank. He has described the procedure followed by the bank regarding sanction of loans and overdrafts (qq. 36-147) but no resolution or minutes of the Board has or have been produced to show that this practice was in fact followed. He has stated that the Secretary had the control of the internal management of the bank, and was the custodian of the books of account and it was the Secretary who used to supervise the keeping of the books of account (qq. 37-39). With regard to the entry of Rs. 7,00,000/- on 8-12-47, this witness cannot say why there was debit and credit entries made in respect of this amount in the account Nos. 1 and 2 of the United India Land Trust Ltd. on that day. He cannot say whether it is a mere paper transaction or not (qq. 272-293 and 402-412). His evidence with regard to the account of Poineer Investment Trust Ltd. is to be found in answers to qq. 88-117. He has stated that the entry of Rs. 1,00,000/- on 30-11-49 indicates that 10,000 shares of United India Land Trust Ltd. were purchased by the bank on that day. The entry on 30-11-49 of Rs. 49,500/- was, according to the witness, made under the instruction of the Secretary but the witness cannot identify the handwriting of the entry (qq. 103-107). The investment ledger entries with regard to those G. P. Notes at pages 4 and 53 of the investment ledger have been tendered. The witness has stated that the entry (G. P. Notes with the Secretary) is in the handwriting of one Dhruba Bikash Ghose who is now in Calcutta (qq. 171-174). He has proved the agreement to execute the mortgage which was entered into on 3-11-47 and has stated that no security was taken for the advance made to United India Land Trust Ltd. till after the bank went into liquidation (qq. 120-131). He has stated further that no adequate security was taken in respect of advances which were made to Poineer Investment Trust Ltd., only some shares were taken as security but these have been sold and after giving credit for the sale proceeds a sum of Rs. 4,00,000/-and odd is still due (q. 137). The witness admits that entries under date 7-12-49 show that no money passed out of the till of the bank on that day (qq. 353-371 and 413-416), It is not necessary to deal with the evidence of this witness any further.
25. The various items of claim of the liquidator may now be considered. The first item of claim is, as I have pointed out already, a sum of Rs. 1,00,000/- which the bank has lost as a result of 10,000 valueless shares of United India Trust Ltd. being sold to it by Pioneer Investment Trust Ltd. on 30-11-49. The evidence of H. K. Majumdar on this point is not of any assistance to the Liquidator (qq. 99-103). The Managing Director, Debi Das Roy, while giving evidence was asked in detail about it and his evidence is that these identical shares were in fact purchased in 1946 by the bank and entry was made in the investment ledger. Later on he asked the Secretary to reverse the entry and the Secretary had chosen 30-11-1949 as the date for such reversal. The investment ledger has been produced before the court and it appears at p. 47 thereof that 10,000 shares were purchased by the bank on 25-4-1946, Thereafter out of this lot 6,000 shares were sold to Pioneer Investment Trust on 26-6-46 and Rs. 60,000 was debited against Pioneer, and the balance of 4,000 shares was sold to A. K. Ghosal on 10-12-47 and Ghosal was debited with Rs. 40,000/-. The numbers of the shares are not given. Then on 30-11-49 another entry is made in the investment ledger of 10,000 shares being sold to the bank by Pioneer Investment Trust Ltd. There is nothing to show that these 10,000 shares sold on 30-11-49 were the identical shares purchased by the bank on 25-4-46 nor is there any evidence to show how and when the 400 shares sold to A, K. Ghosal came to be re-acquired by Pioneer Investment Trust Ltd., so that they might be sold again by the Pioneer to the bank on 30-11-49. So this lot of 10,000 shares sold on 30-11-49 may be a different lot. But whether it is the same lot or a different lot, the fact remains that the manipulation of accounts took place on 30-11-49, although money actually might not have passed out of the till of the bank on that date and the transaction might have been a mere paper transaction. There can be no doubt that the Managing Director along with some officers is responsible for this manipulation. It does not appear that the other Directors had any hand in or been aware of this manipulation made on 30-11-49 or had any means of knowing it or had any opportunity of rectifying it. Now, as I have pointed out, it is possible that this transaction of the purchase of 10,000 shares on 30-11-49 is an independent transaction and it has nothing to do with the transaction of 25-4-46. If that is so, there is loss to the, bank and Debi Das Roy is directly responsible for it. The other Directors did not know about it as the last balance sheet that they saw was of 30-6-43 at the Board meeting held on 12-9-49.
26. The next item of claim is a sum of Rs. 4,17,367/4/6 which is alleged to have been advanced by the bank to Pioneer Investment Trust Ltd. without security. (Paragraphs 12 and 17 of the affidavit of the Liquidator). It appears from the account of Pioneer Investment Trust Ltd. which starts from 1-7-1946 that the account started with a credit balance of Rs. 928/- and on 7-12-1949 there was a credit balance of Rs. 19,444/1/6. But on the last mentioned date certain debits and credits were made in the books of the bank and die Pioneer Investment Trust Ltd. is by reason of such debits and credits constituted a debtor to the extent of Rs. 4,17,367/4/6 on 7-12-1949. There is no doubt that this manipulation of accounts was made with ulterior object and to cause loss to the bank. It appears that no cash actually passed out of the bank on this date. The Managing Director has stated that a Bhowanipore house and some shares were given as security, and after crediting the sale proceeds of the house and the shares, the sum of Rs. 4,00,000/- and odd was outstanding. A company whose paid up capital is Rs. 1,000/- only, is debited with this huge sum without security just on the eve of the bank's suspending business. It appears that the bank closed its doors on 8-12-1949 or 12-12-1949. But it is to be noted that as this manipulation took place on 7-12-1949 and it does not appear that the other Directors knew anything about it of got any opportunity to take steps to repair this damage done, the Managing Director and his associates were responsible for this fraudulent act of misfeasance. It has been argued by Mr. Ajit K. Sen, learned counsel on behalf of the Liquidator that although the other Directors might not have known about this manipulation on 7-12-1949, it is clear from the account of Pioneer Investment Trust Ltd. as appearing in the books of the bank that even during 1947 and 1948 large amounts were given from time to time to the Pioneer Investment Trust Ltd., and their account was in debit for quite a long time. So, if the Directors had been vigilant and exercised reasonable diligence, they would have found out the actual position and could have taken steps to put a stop to it. But it may be pointed out that there is no charge laid against the Directors with regard to the earlier advances in the misfeasance summons and they have therefore no opportunity of meeting such a charge. If this charge had been specifically mentioned in the affidavit of the Liquidator, they might have justified these advances by proper materials placed before the court. It will, therefore, not be proper to allow this new charge to be introduced at this stage.
27. The next item of claim is a sum of Rs. 7,00,000/- which is alleged to have advanced to the United India Land Trust Ltd. on 8-12-1947. It appears from the evidence of Debidas Roy and also from the partial admission made by Harit Kumar Majumdar and also upon a comparison and scrutiny of the two accounts of the United India Land Trust Ltd. being account No. 1 and account No. 2, that this entry of Rs. 7,00,000/- was a paper transaction and no money actually passed out of the till of the bank on 8-12-1947. The accounts of the United India Land Trust Ltd. however disclose the fact that account No. 1 was in credit all along till 8-12-1947 when a debit of Rs. 7,00,000/- converted the balance into a debit balance and this account remained in debit all along since then. The account No. 2, on the other hand, discloses that huge sums were withdrawn in this account and this account was in debit all along. It further appears that no security was taken for the huge sums due on these accounts and it also appears that Debi Das Roy, Asit Kumar Ghosal and Lakshmi Narayan Hazra, who were Directors of the bank, were also Directors of the United India Land Trust Ltd. during the material time up to 20-5-1948. The Liquidator with difficulty managed to secure certain title deeds of lands at Behala after the bank went into liquidation. These lands at Behala have been sole under order of this court and they fetched a sum of Rs. 70,000/- only. After giving credit for this Rs. 70,000/- and including the sum of Rs. 1,00,000/-which is the first item of claim, a sum of Rupees 8,16,147/3/- is due to the bank. But as the item of Rs. 1,00,000/- has been dealt with separately the amount will be reduced to Rs. 7,16,147/3/-but the Liquidator has claimed only Rs. 7,00,000/- in respect of this item. It is, however, clear in the evidence that this item of Rs. 7,00,000/- which was included in the balance-sheet of the period ending 30-6-1948 did not come up before the Directors until the meeting held on 12-9-49. It was at this meeting that the Directors detected that there was a large amount of advance which was not covered by securities and it appears that at once a Committee was formed to investigate into the matter. But before any effective steps could be taken the bank suspended business. It is however clear from the books of account disclosed that advances had been made to the United India Land Trust Ltd. of large sums in their overdraft account No. 2 and by 30-6-1947 a sum of Rs. 7,42,782/5/8 had become due from the United India Land Trust Ltd. The balance-sheet for the period ending 36-6-1947 had been signed by Asit K. Ghosal, Lakshmi Narayan Hazara and Bhupendra Narayan Roy Chowdhury and there can be no doubt, that being also Directors of the United India Land Trust Ltd., they knew that sums were being taken by the United India Land Trust Ltd. from the bank without security or against insufficient security. They had wilfully shut their eyes to the facts and improperly abstained from making enquiries and from taking steps. In my view these three Directors and Debidas Roy and his father Dinesh Chandra Roy are liable to pay this amount of Rs. 7,00,000/- to the bank.
28. The next item of claim is a sum of Rupees 81,264/- which is alleged to have been advanced to the two Directors of the bank A. K. Ghosal and B. K. Roy Chowdhury without taking security. It appears that suits have been filed and A. K. Ghosal has submitted to a decree for Rs. 66,000/- including costs, and B. K. Roy Chowdhury has paid to the Liquidator Rs. 4,126/- and odd which was due from him. So this item of claim need not be considered further in this application for misfeasance.
29. The claim against the Secretary has been dealt with in an earlier part of this judgment and so it need not be dealt with again at this stage,
30. The legal position with regard to the claim which is the subject-matter of this application may now be dealt with.
31. It has been held that Section 235 of the Indian Companies Act, 1913 gives a summary remedy only against such Directors and officers as have been personally guilty of some act of misfeasance, and it does not confer upon the court the power to make an order against the Directors En Massee for all acts of misfeasance, without any specific finding against the individuals who are actually responsible for the particular acts of misfeasance. Reference may be made to the case in In re Royal Hotel Co. of Great Yarmouth, (1867) 4 Eq 244 at p. 248; In re New Mashonaland Exploration Co. (1892) 3 Ch. 577 at 581, 584 middle and 586 top; In re National Bank of Wales Ltd. (1899) 2 Ch. 629 at 654 (last para), 664, 671, 673 (second para), 674 (last para), 675 (second para); In re Jehangir B. Karani and Co. Ltd. ILR 19 Bom 88 at 94 (bot.), 95; K. Sheshadri Doraswamy v. Pestonjee Jamsetjee, 5 Bom LR 632 at 636-637 and Indu Nandan Goswami v. Ashutosh Goswami, ILR 29 Cal 688 at 694.
32. It is also well settled that the Directors are not bound to examine the entries in the company's books of account: In re Denham and Co., (1893) 25 Ch. D. 752 (headnote para 2) and at 766; Dovey v. Cory, (1901) AC 477 at 485, 486, 489-490. 492-493; Prefontaine v. Grenier, (1907) AC 101 at 107 to 109; In re City Equitable Fire Insurance Co., (1925) 1 Ch. 407 at pp. 430, 434, 509, 525-526; S. C. Mitra v. Nawabali Khan, AIR 1926 Oudh 153 -- (headnote para 2 and p. 157, 1st column, last para); Thinnappa Chettiar v. Rajgopalan, (1944) 2 Mad LJ 85 at 87 (bot)--88 (2nd paragraph): (AIR 1944 Mad 536 at 538).
33. In an Oudh case National Bank of Upper India v. Dinanath, reported in AIR 1926 Oudh 243, it has been held that where the general board of a bank delegates under the Articles its powers of sanctioning loans to a Committee of Directors and the Committee sanctions a loan to a man of no means the Directors cannot be held personally liable, or guilty of misfeasance.
34. But it must be noted at the same time that in a Bombay case reported in New Fleming Spinning and Weaving Co. v. Kessowji Naik, ILR 9 Bom 373 it has been observed that Directors are responsible for the management of the company whereby under the Articles of Association the business is to be conducted by the Board with the assistance of an agent. They cannot divest themselves of their responsibilities by delegating the whole management to the agent and abstaining from all enquiry. If the latter proves unfaithful under such circumstances the liability is theirs just as much as if they themselves had been unfaithful.
35. Further where Directors wilfully shut their eyes to the acts of the agents or managing agents and recklessly sanction acts of the agents or managing agents, thereby aiding misfeasance or misapplication and falsificaton of balance-sheet and this state of affairs continues over series of years, the Directors had been held guilty of misconduct and liable to pay compensation (Govind v. Rangnath -- IL.R. 54 Bom. 226: AIR 1930 Bom. 572).
36. It is also well settled that directors are trustees of the funds or assets of the company which have come into their hands, but they are not trustees of the loans or debts advanced by the company before their acceptance of the office of directors nor do their failure to take steps for recovery of debts due to the company, amount to misfeasance. In order that misconduct may amount to misfeasance it must be 'wilful misconduct or wilful or culpable negligence.' In re Forest of Dean Coal Mining Company, (1878) 10 Ch. D. 450 at 451, 452, 453 (2nd para), 458 (3rd para) 459; In re Wedgwood Coal & Iron Co. (1882) 47 L.T 612--headnote, 4th para. p. 613; In re Faure Electric Accumulator Co. (1889) 40 Ch. D. 141 at 150-151, 162; In re Etic Ltd., (1928) 1 Ch. 861 at 871, 873, 874 (middle), 875 (2nd para) and Hans Raj Bhandari v. Liquidator of Lahore Bank Ltd. AIR 1915 Lah. 132 at 134 (2nd col).
37. The further proposition which is established by authorities is that in order to bring a case within the section it is essential to establish that (1) there has been a breach of trust and (2) that the breach has resulted in pecuniary loss to the company. Reference may be made to Canadian Land Reclaiming and Colonizing Co., (1880) 14 Ch. D 660 at 670 (middle) and 673-674; Cavendish Bentinck v. Fenn, (1887) 12 A C 652 at 661 (bottom) 662.
38. It has also been held that an innocent director is not liable for the fraud of his co-director (1883) 25 Ch. D. 752.
39. In the case before me the directors had the power of delegation under Article 84 of the Articles of Association. Article 84 is as follows :--
'The directors may from time to time entrust to and confer upon the managing director for the time being such of the powers exercisable under these presents by the directors as they think best and execute a power of attorney in his favour.'
40. The power of attorney executed in January 1935 provides in Clause 2, as I have already indicated, that the managing director's power of advancing loans shall be subject to regulations framed from time to time. The word 'regulations' may refer to resolutions passed at general meetings for regulation of the business of the company, or it may refer to the articles framed by the company. The word 'regulation' in my view is used in the latter sense as is clear from Clause 2 of the group of Articles headed as 'Miscellaneous' towards the end of the Articles of Association of the Bank.
41. Article 99 of the Articles of Association runs as follows :
'The managing director may on his own authority subject to the approval of the directors advance money on approved securities at a time or at different times on the same bond, according to the position and circumstances of the applicant and the maximum limit of such advances shall from time to time be determined by the board of directors'.
42. So it is clear from this Article that it casts a duty on the managing director to advance moneys only on approved securities. The article also imposes on the managing director the obligation to procure the approval of the advances made by the managing director. It also casts an obligation on the directors themselves to take into consideration the question of advances when placed before them and to grant or refuse their approval according as they think fit. The power of attorney, however, by which authority had been delegated to the managing director enables the managing director to advance moneys even without security in certain cases. It appears that the managing director did not bring up the question of particular advances at any time before the board of directors for their approval in accordance with the terms of Article 99 of the Article of Association. It may be that the managing director was under the impression that the power of attorney which conferred on him very wide powers dispensed with the necessity of his bringing up this question of individual advances before the board for their consideration, as the operation of Article 99 had been put out of action, by the grant of this power of attorney. It also appears that for some reason or other, the directors did not exercise any control over the authority of the managing director in the matter of making advances under the power of attorney which was granted to him. It is improbable that some of the directors did not know that advances were being made by the managing director from time to time, but it appears that they remained absolutely idle and did not exercise any control over the acts of the managing director. I do not think that these advances were justified in shirking all responsibilities in respect of the affairs of the bank and leaving everything to be done by the managing director at his own sweet will.
43. In support of the proposition that directors cannot shirk their responsibility in this fashion, reference was made to the cases reported in Leeds, Estate Buildings and Investment Co. v. Shepherd, (1887 36 ChD 787 at 804-805; Drincqbier v. Wood, (1899) 1 Ch. 393 at 406; ILR 9 Bom 373 at 393-594, 395-396; ILR 54 Bom 226: (AIR 1943 Bom 572), M. A. Malick v. Thiruvengadaswami, : AIR1950Mad208 ; In the matter of Union Bank, Allahabad : AIR1925All519 and the unreported case of this court In re. Bank of Commerce Ltd., Matter No. 239 of 1953--judgment dated 7th and 8th February 1957 per S. R. Das Gupta, J.
44. Considerable stress has been laid on the cases reported in ILR 9 Bom 373 and ILR 54 Bom 226: (AIR 1930 Bom 572) on behalf of the liquidator. In the case reported in ILR 9 Bom 373 one of the charges against the directors was that although by the articles they were bound to manage the affairs of the company, they never saw to the proper application of the money by the bankers of the company who were thus enabled to appropriate the sums to their own purposes. The articles of association of the company provided that 'the business of the company shall be managed by the board with the assistance of the agent--Nursey Kessowji.' But the directors were to meet for the despatch of business and they had authority to delegate any of their powers to committees formed out of their own body. They had also power to raise money on the property of the company, to buy raw commodities, to sell manufactured goods, to invest the funds of the company as they thought desirable and generally to do everything. All this work was to be done with the assistance of the agent, who in his turn, with the aid of the manager was to conduct the daily business of the company. So the learned Judge held that such being the division of labour, it was quite clear that the directors could not delegate the whole control to the agent (p. 412). But what the directors actually did was at they all attended every meeting of the board and whatever was done by the board was done by each and all. There was no question of there being any individual director who from inclination or from circumstances took no active part and attended no meeting. The directors used to hold meeting of the board once a month. At such meetings the agent Kessowji used to attend and place before the board a tabular statement of purchase and consumption of cotton, coals, stores etc, and the production of yarn and cloth with the rates of the sales per pound, and the general expenditure for the month. The agent also informed the board about the particulars of loans taken, and of the loans repaid (p. 390-391). The directors made no enquiry or investigation whatsoever at any time. They believed everything to be correct and blindly confirmed the acts of the agent. They practically left everything in the hands of the agent. They voted blindly all the loans raised, not caring to enquire as to whether the loans were required or not and not caring to know whether it was applied to the purposes for which they were raised, nor did they care to find out for themselves what was the best form of raising the loans (p. 413). In these circumstances, the learned Judge held that the directors were liable for the losses caused by the unfaithful and fraudulent acts of the agent.
45. In the case reported in ILR 54 Bom 226; (AIR 1930 Bom 572), although one of the articles (100) of the Articles of Association provided that the business of the bank (Sholapur Bank Ltd.) should be managed by the board with the assistance of the directors, the combined effect of the various clauses in the articles was to vest all real power in the agents and to enable them to usurp the position which the Companies Act intended, should be occupied by the directors (p. 232-233 of ILR Bom): (p. 576 of AIR). But in this case the directors used to do very little work and over a long series of years they held only two effective directors' meetings per annum. The directors did not exercise any effective supervision over the affairs of the bank nor did they make any effective enquiries. The agents even went to the length of opening a new branch at Bombay without the previous consent of the directors, and the directors did nothing. This showed an utter lack of control on the part of the directors over the agents. The directors did not lay down any general roles for the guidance of the agents in making advances. It was in these circumstances held that the directors could not escape liability for misfeasance as they had wilfully shut their eyes to everything and failed in the performance of the duties which were imposed upon them, and were recklessly careless.
45a. In the Bank of Commerce case Matter No. 239 of 1953 (Cal), S. R. Das Gupta, J. found on the facts before him that the principles enunciated in ILR 9 Bom 373 and AIR 1930 Bom 572 were applicable to the case before him.
46. In the case before me the directors Birendra Kishore and K. Dutt had no occasion or opportunity to suspect the honesty of the managing director who was acting since 1935 under the power of attorney. These directors, as I have pointed out already, joined in July 1947 and unless they had any materials before them to raise suspicion in their minds, these directors had no reason to find fault with the acts of the managing director who had been acting for a period of 12 years prior to their joining as directors. These two directors attended most of the meetings of the board held after their joining as directors and since the first meeting that they attended on 3-8-1947 of which they had been given notice, they passed resolutions to the effect that all future investments of the bank should be on sound basis so that the bank might become a scheduled bank. Moreover, as soon as it came to their notice on 12-9-49 that some investments as disclosed in the balance-sheet of the period ending 30-6-1948 were not sound, they passed resolutions appointing an investigation committee. It is true that if they had been more vigilant and had called for monthly statements of account from the managing director or had themselves cared to look into the books, they might have detected the irregularities or the wrongful acts of the managing director and his associates, but I do not think that the failure on their part to observe this standard of care make them guilty of reckless indifference or wilful misconduct. As pointed out in the case of the City Equitable Fire Insurance Co., (1925) 1 Ch 407 at 429-430,
'A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. In the judgment of the Court of Appeal in (1899) 2 Ch 629, the following passage occurs in relation to a director who had been deceived by the manager, and managing director, as to matters within their own particular sphere of activity: 'Was it his duty to test the accuracy or completeness of what he was told by the general manager and the managing director? This is a question on which opinions may differ but we are not prepared to say that he failed in his legal duty. 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 acting 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 business men.'
That case went to the House of Lords, and is reported there under the name of Dovey v. Cory, 1901 AC 477, Lord Davey, in the course of his speech to the House, made the following observations:
'I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information and advice, of the Chairman, and general manager, as to whose integrity, skill and competence he had no reason for suspicion. I agree with what was said by Sir George Jessel in Hallmark's case, In re Wincham Shipbuilding, Boiler and Salt Co., (1878) 9 Ch D 329 and by Chitty, J. in (1883) 25 Ch D 752 that directors are not bound to examine entries in the company's books. It was the duty of the general manager and (possibly) of the Chairman to go carefully through the returns from the branches, and to bring before the board any matter requiring their consideraton; but the respondent was not, in my opinion, guilty of negligence in not examining them for himself, notwithstanding that they were laid on the table of the board for reference.'
47. I, therefore, exonerate these two directors from liability and dismiss the application as against them.
48. The case of Baidya Nath Mullick stands on a slightly different footing. He was a director during 1943-1945 and he also became director again on 12-7-47 and continued as such till the date of liquidation of the bank. So he had some opportunities of becoming acquainted with the activities of the managing director. There is no evidence however before me to suggest that during 1943 and 29-6-1945 the Managing Director had done anything wrongful which would have put Baidya Nath Mullick on his guard or which should have induced Baidya Nath Mullick to entertain feelings of suspicion or distrust about the managing director. This director, however, had signed the balance sheet for the period ending 30-6-1947 in March or April 1948 and this balance sheet disclosed that unsecured loans to the extent of about eight lakhs of rupees had been advanced and there were certain doubtful debts. But all these advances had taken place before he joined as director on 12-7-1947. It has been held, as I have pointed out already, that a Director is not a trustee for the debts recoverable by the company and not taking steps for recovering such debts does not amount to misfeasance. This director also after seeing the balance sheet of 30-6-1948 joined in passing the resolution appointing an investigation committee at the meeting held on 12-9-1949. It is true that if after seeing the balance sheet of 30-6-1947 he had made enquiries and examined the books, he might have discovered the wrongful nature of some of these advances made before he became a director but it is possible that as he thought that he was not directly responsible for any of these advances which took place before his time, he did not take any further interest in the matter. It is to b