1. This is an appeal by the Crown against an acquittal passed by the Sessions Judge at Dacca. The learned Judge himself was dealing with an appeal from convictions and sentences passed upon three respondents here by a Local Magistrate for offences under the Companies Act. The facts which led up to this prosecution are, I think, not in great dispute. It is the construction to be put on those facts which formed conflict between the prosecution and the defence in the trial Court and which has been the subject of an elaborate argument both in the lower Court and before us at the hearing of the appeal. Now, the facts are shortly these: The three respondents Akhil Bandu Guha, Surjya Kumar Bose and Rajani Mohan Basak, were Managing Directors of a concern known as the Dhakeswari Cotton Mills Ltd. They were appointed to this responsible position out of a large Board of Directors amounting sometimes to as many as 17. The Company appears to have been a flourishing one paying dividends and was, as far as one can see, run and intended to be run upon up-to-date modern lines both in its equipment and in its management. It may be seen from the contents of a small booklet that was handed to me which contained both a review of the year's working ending December 1933, the balance sheet, profit and loss account, and the revenue account, that the Directors were full of confidence as to their commercial position and also with regard to certain subsidiary aims which took the form, as authorised by the memorandum and articles of association, of training young Bengalee businessmen in up-to-date business methods. There was another Company formed sometime after the Dhakeswari Cotton Mills Ltd. which was known as the Eastern Bengal Jute and Cotton Mills Ltd. This Company was at the material time in a formative stage only. It was engaged in the same branch more or less, of industry as the Dhakeswari Cotton Mills and it had the advantage of having as its Managing Directors the three respondents here who had already considerable experience in the trade.
2. The trouble, however first came to light with regard to the Dhakeswari Cotton Mills Ltd., and its Directors when the balance sheet for the year ending December 1933, was produced in draft. An objection was taken at a Directors' meeting by one of the Directors, who was not a Managing Director, to two items which appeared in the balance sheet. The first was shown on the capital and liability side of the sheet and was entitled ' Deposits by others' Rs. 2,52,496. Then exception was taken also to an item which appeared on the property and assets side of the balance entitled 'Advances to contractors and others' Rs. 69,334. It is not disputed, to turn first to the deposit item, that this figure represented or purported to represent the net balance of a deposit account which had been opened by the firm for the purpose of receiving cash from depositors which was divided. I think I am right in saying, into two deposit accounts; one on a 4 1/2; per cent basis and the other at a higher rate of interest at 6 per cent. The indulgence in cash deposit taking which the Company had undertaken was perfectly valid. It was authorised generally by Article M of the Memorandum of Association. But it is again not in dispute that this figure of roughly Rs. 2 1/2; lakhs was the net balance of this account, because the actual deposits amounted to nearly Rs. 3 lakhs, but for the purpose of arriving at Rs. 2 1/2; lakhs figure, a deduction had been made from the total deposits by subtracting the loan of over Rs. 40,000 and its interest which had been made by the Managing Directors to the Eastern Bengal Jute and Cotton Mills Ltd. The Eastern Bengal Mills had at one time been depositors with the Dhakeswari Cotton Mills but at the time the loan was made, they were no longer depositors. It may also be noted that earlier than the date of this balance sheet the loans extended to the Eastern Jute Mills had amounted to well over Rs. 60,000. So much for that figure.
3. Turning to the other figure that I mentioned, ' Advances to Contractors and others,' it is said that this figure contained a much smaller item of cash advanced to the Managing Directors themselves by way of prepayment of annual commission on the Company's profits and travelling expenses, and it was objected, as far as the accounting expression ' Contractors and others' was concerned, ' and others' did not indicate clearly that a loan had been made to officers of the Company. In fact it was argued that such payments did not constitute loan items at all. When the objections were raised at the Directors' meeting there was a good deal of fuss and it is said that at the meeting which subsequently took place when the balance sheet was confirmed, the meeting was packed and the objectors were howled down. Then came this prosecution on the part of a nominal shareholder who, it is suggested, was set up to complain by the recalcitrant Director who had started the first objection and had not signed the balance sheet. The respondents were prosecuted under Section 282, Companies Act of 1913. That section is in the following terms:
Whoever in any return, report, certificate, balance sheet or other document, required by or for the purposes of any of the provisions of this Act, wilfully makes a statement false in any material particular, knowing it to be false, shall be punishable with imprisonment of either description for a term which may extend to three years, and shall also be liable to fine.
4. Closely connected with the penalty section of the Act, are the earlier sections which deal specifically with the form of balance sheet to be adopted. Section 132 for example is in these terms:
The balance sheet shall contain a summary of the property and assets and of the capital and liabilities of the Company giving such particulars as will disclose the general nature of those liabilities and assets and how the value of the fixed assets has been arrived at. The balance sheet shall be in the form marked F in the Third Schedule or as near thereto as circumstances admit.
5. Section 134 deals in part with a penalty to be sought in a still earlier section, that of Section 32, if a default is made in the required form of the balance sheet, and the penalty for infringement there is a fine. Turning to the schedule mentioned in Section 132, Form F, one finds a specimen balance sheet in a very full form and as far as this case is concerned, I think the only requirement which needs notice is that, apparently, the Statute insists upon the loans made by the Company being itemised with some precision on the capital and liability side of the sheet. Loans and mortgages are dealt with, also general loans prescribed as loans otherwise secured; and it is necessary according to the form to state the nature of the security. Finally we find the items of unsecured loans.
6. It is not necessary for me I think to enter into all the elaborate arguments which were discussed in the two very long judgments of the Court below. I think it will suffice if I endeavour to deal with the arguments which were addressed to us in this Court. It was contended on the part of the Crown that this manner of accounting concentrating upon the item 'by other deposits' amounted to a breach of Section 282. It was said that this was a false statement because it amounted to a non-disclosure of a material particular. The Crown argued that the figure ought not to have been the net amount at all, but ought to have been in the neighbourhood of Rs. 2,90,000 which would have shown the true deposit account and that the Rs. 40,000 loan ought to have been shown as a separate item altogether. It is necessary to deal with this point more particularly because I had omitted to say that the learned Magistrate, for reasons which commended themselves to him, convicted the respondents for a false statement in relation to the 'by other deposit items', but he acquitted them of the charge based upon the alleged mis-statement wrapped up in the item 'Contractors and others.' The way in which the defence met this argument on the part of the Crown was this: they said that the Company was in reality carrying on a subsidiary banking business and that they were entitled to do this under the two Arts. L and M in the memorandum and that this loan of Rs. 40,000 made to the Eastern Bengal Mills was nothing more or less than a banker's overdraft granted to a banking customer and therefore it was quite in order to enter as the banking deposit account the actual net figure of the account, when showing it in the balance sheet. There was a further argument to illustrate this contention based on the well known difference in banking law between banker's loan and banker's overdraft; and it was strenuously argued that here there was' nothing more or less than an overdraft, because the Eastern Bengal Mills was an old client of the banking side of the Company's activities. I shall deal with that point at once.
7. It seems to me however that in reality this Company was not carrying on a banking business at all. Its object in receiving deposits in cash from its customers was merely to assist its working capital. These were of course deposit accounts and were treated as deposit accounts, but in my experience I have never heard yet of an overdraft based on a deposit account. A common form of deposit account is a Government account in a Savings Bank. It is difficult to visualise any deposit customer of a Savings Bank going to the Manager of the Savings Bank and obtaining an overdraft. Neither do I imagine that anyone would be strictly allowed an overdraft based on a deposit account in an ordinary Bank. Overdrafts are the usual accompaniments of current accounts. Therefore I am not prepared to accept that this figure of Rs. 2,53,200 odd, the net balance of the deposit account, with the isolated loan subtracted, was a proper way of entering the Company's activities in this regard in the balance sheet to be issued to the shareholders. It is not disputed that this was an insolated loan. There was no evidence that any of the other depositors had loans extended to them; and one cannot free one's mind from the thought having regard to the aspect of suggested concealment about the manner of accounting, that the Rs. 40,000 loan was made to a Company of which three respondent persons who made the loan were also the Managing Directors.
8. Another point which was strenuously canvassed before us, and in the Courts below, was that supposing the method adopted of entering this combined financial transaction was a wrong one, could it possibly come within the mischief of Section 282, having regard to the section's exact wording? It must be recollected that the word 'wilfully' is employed in the section and the section also contains the words, as was apparent when when I read it, 'a statement false in any material particular.' This argument based on the word 'wilfully' very greatly impressed the Judge of the lower appellate Court.
9. I have no hesitation in saying that it was largely due to his construction of the expression 'wilfully' on the facts which were disclosed to him when considering the judgment of the Magistrate's Court that he reversed the conviction. The learned Judge apparently took the line that the expression 'wilfully' embodies the idea of a criminal mentality and he came to the conclusion that there was no criminal mentality on the part of the three accused persons here. There I differ from him. In my opinion also the expression 'wilfully' used in the Companies Acts, both in this country and in the United Kingdom, means nothing more nor less than the spontaneous action of a person who is a free agent. The word 'wilfully' has been dealt with in certain well-known decisions to which I need not refer exactly but such seems to be the considered opinion with regard to its exact significance. It is, of course, a term that must be interpreted according to the facts of each case. It has been described as not being a term of art, but a legal expression to be fitted to the circumstances being considered by the Court.
10. Now the really important question in this case falls at last to be considered, and it is this: Was the entry of the figure to which I have referred over and over again appended to the expression 'deposits by others' in the circumstances of the case, a statement false in any material particular? In my opinion, it was. The requirements of a balance sheet have often in law been discussed both in the Courts of this country and in England and it had been said that a balance sheet need not be, in fact it must not be, a mere inventory. It is supposed to be, to use an expression employed in one judgment, a pictorial representation of the trading position of the company, easily appreciated not by ignorant people but by persons who are reasonably able to understand commercial expressions and commercial conditions. There is a well known observation of that great Judge, Lord Macnaughten, in Gluskstein v. Barnes (1900) A C 240 at p. 250. The learned Law Lord there said:
It is a trite observation that every document as against its author must be read in the sense which it was intended to convey. And every body knows that sometimes half a truth is no better than a downright falsehood.
11. Then, again, in the old case, Peek v. Gurney (1874) 6 H L 377, it was said in the House of Lords with regard to a prospectus that
the foundation in relation to a projected company was therefore necessarily laid in concealment; and to render the scheme attractive to the public, the promoters were not only compelled to hide the truth but to give such a colour to the statements put forth in the prospectus as to render them (though perhaps literally true) yet, in the sense in which they must have known the statements would be understood by the public, really false.
12. I apprehend that all these cases which sometimes deal with balance sheets and sometimes with propectuses are governed by the same principles of law with regard to the making of false statements, and it is the effect upon the ordinary investor reading the statements in an ordinarily careful manner in which an investor would do which has to be considered, when one is making up one's mind as to whether the breach of Section 282 in this case of the Indian Companies Act has been committed. Those were the principles which were adopted by the Court of Appeal in England in two recent cases which are very familiar to those of us who study the law in relation to joint stock companies. The first is the case of Rex v. Kylsant (1932) 1 K B 442 the second being the case of Rex v. Bishirgian (1936) 154 L T 499 better known as the Pepper case. These were both instances in which the convictions that followed the trial depended upon the false prospectuses, although in the Royal Mail Case (3) Lord Kylsant was also charged with concealment of material particulars in balance sheets. In both cases also the jury were directed to consider what would be the effect on the minds of the members of the investing public.
13. Now, applying these principles to this case, I have no hesitation in saying that ordinary investors reading the item 'by other deposits' would imagine that it represented a total figure of accumulated deposits and not an incorporated net figure making an outgoing loan. It is quite obvious that a loan and a deposit are items differing completely in principle from the balance sheet point of view. Strictly speaking, they ought to appear on different sides, for one is an asset and the other is a liability. Consolidating the two and presenting them as one item to the readers, to my mind, is a striking case of non-disclosure, amounting to a suppression of the truth. I further regret very much to say that there was every inducement for the people who drew up this balance sheet to make it up, in this irregular fashion. It was certainly an improper thing for the directors of the Dhakeswari Cotton Mills to advance money to the East Bengal Jute and Cotton Mills which was an embryonic concern and which might possibly turn out afterwards to be a competitor. These directors knew, or at any rate ought to have known, before the final minutes, which included the balance sheet, were confirmed that grave objections were being raised among their own colleagues to this type of action being adopted. They knew or at any rate ought to have known that the shareholders of this very big concern, scattered all over India, could not possibly on receiving by post a balance sheet of this nature appreciate these particular activities of the company.
14. In my opinion, the three respondents here were rightly convicted by the Magistrate. It is of paramount importance that the investing public in India, now that modern methods are being adopted in business a fact which should be gratifying to all men of good will should have the utmost confidence in those persons who are managing Indian concerns. Directors of Joint Stock Companies stand in a fiduciary capacity with regard to capital under their control. They are in the position of trustees and I regret to say, that these three gentlemen do not seem to have appreciated their position and that they wilfully misled the shareholders by making up the balance sheet in the way they did. The convictions as passed by the Magistrate on the respondents are restored. As to the sentences, we take a graver view than the learned Magistrate did. We consider that the fines imposed by the Magistrate ought to remain; but the sentences of imprisonment are enhanced in each case to one of three months' simple imprisonment.
15. I have had no difficulty in reaching the conclusion that the balance sheet was false. It was grossly misleading. It suggested that the amount due from the company to depositors was Rs. 2,50,000 odd, whereas in reality it was over Rs. 2,90,000. Then, in the second place, it deliberately suppressed the fact that an advance of Rs. 40,000 was made to the Eastern Bengal Jute and Cotton Mills. No explanation or juggling with figures can suggest that that balance sheet was true. The next question which requires consideration is whether this false balance sheet was prepared wilfully by the respondents and whether they knew that it was false. Their defence was that they had drawn it up in good faith, because they thought that, as drawn up, it was in conformity with law and with Form No. F. I may note that it is clear that the respondents were not over scrupulous or punctillious with regard to money matters from the transactions which formed the subject matter of the third charge. Two of the respondents with the connivance of the third drew advances for themselves on account of their commission and travelling allowances and then showed it under the heading ' advances to contractors and others.' This was clearly an unscrupulous thing to do. But in support of their plea of good faith, they examined two expert witnesses, viz., a chartered accountant, named Reed, and the auditor of their own company, and both these witnesses gave evidence to the effect that, in their opinion, the balance sheet was properly drawn up.
16. Of course, no opinion expressed by an auditor or accountant can turn a false balance sheet into a true one and the only importance of this lies in the effect that it may have had upon the intention of the respondents. So far as Mr. Reed is concerned, it has none at all because he was only shown the accounts a few days before he gave evidence and was merely called to depose that there was nothing wrong in the balance sheet. He was severely shaken in cross-examination and I do not believe him when he says that in his opinion the balance sheet was carefully drawn up. I am further of opinion that the learned Magistrate formed a proper estimate of the auditor. He was related to one of the respondents and was clearly under an obligation to them. That he was not carrying out his duties to the share-holders is abundantly clear from the fact that he did not press and call their attention to his objection that the advances made by the respondents to the Eastern Bengal Jute Mills were improperly made. I cannot place any reliance on the opinion that he has given. But be that as it may, the plain fact of the matter is that the opinion of an accountant or an auditor that a balance sheet, which does not disclose the true state of affairs of a company has been properly drawn is of no value whatsoever.
17. Then, again, the respondent relied upon the fact that the same method had been employed in drawing up previous balance sheets. As my learned brother has pointed out there never was any advance to any depositor, except to the Eastern Bengal Mills. So all this amounts to is that on previous occasions the respondents did the same improper thing for exactly the same reason. This clearly is no evidence of good faith. The explanation given for the contention that the balance sheet was properly drawn up is that this advance was in reality a banker's overdraft and not a loan. My learned brother has given full reasons for rejecting that contention and I have no desire to elaborate it. In my opinion it makes not the slightest difference whether this advance was an overdraft or a loan. Supposing it were true that a banker was bound to disclose the existence of loans but was entitled to suppress the existence of overdrafts, there might have been something to be said. But there cannot be any doubt that a banker in drawing up a balance sheet must disclose both. In my opinion, the respondents have entirely failed to show that the balance sheet was properly drawn up. They knew obviously that it was false, and it was further apparent from their own conduct that it was done wilfully. P. W. 8 is the Director who refused to sign this balance sheet.
18. He had heard rumours of this improper advance to the Eastern Bengal Mills and was anxious to investigate the matter. He was not allowed to enter the office or to inspect the accounts without the permission of the Managing Directors. The Directors' meeting to pass the balance sheet was called on 8th April. This witness received the draft balance sheet the previous evening at 9 p.m. and had not time to examine it properly. In previous years he was given four or five days for this work. Accordingly, as soon as the meeting began, he asked that it might be postponed for three days so that he might have time to examine the balance sheet properly. This was disallowed, and he was left in ignorance of the true position. Such conduct is clearly not the conduct of honest men who think that they have drawn up their balance sheet properly and have nothing to conceal. Then, again, if we found on examination that the irregularities were of no importance to anybody and were of no benefit to the respondents, we might be able to hold that the action of the respondents was not wilful; but exactly the opposite is the case. There were two irregularities both of which were of benefit to the respondents and both of which were necessary to the respondents in order to enable them to cover up their tracks. From this it is transparent that they wilfully drew up a false balance sheet for their own benefit.
19. I think the respondents were ill-advised, when they became the Managing Directors of a rival Company. At any rate, they received a warning from the objection of a co-director, P. W. 8, when he objected to their taking up the management of the new mill as well. They promised him that the new mill would deal with jute and not with cotton; but that promise was soon broken. The result was that when the new mill required money, the respondents were placed in a position in which their duty to one mill conflicted with their duty to the other. Not to mince matters they took money belonging to the Dhakeswari Mill in an improper and irregular way and used it for the rival mill. They knew that their action was improper and irregular, because even their timid auditor had warned them of the fact before. Having done this, they were determined to conceal their improper conduct from their own shareholders and from such members of the public as might be interested in the position of the company. Accordingly, they drew up the balance sheet in this false way and, so far as the balance sheet alone goes, they were completely successful in hoodwinking their shareholders. Thus, there can be no question that they knew the balance sheet to be false, and that they acted wilfully in every possible sense of the term, in order to conceal their own improper conduct. On the question of sentence, Mr. Basu contended that although it is necessary to inflict imprisonment, it should be nominal in the case of a technical offence of this description. I can find nothing technical in this offence. The only thing that can be said in favour of the respondents is that they did not put the money which they had taken from the company into their own pockets. But, of course, if they had done that, they would have been charged with another offence. I entirely agree with my learned brother that this is a serious offence, because persons in the position of these gentlemen are entrusted with the money of the public and are bound to deal with it as trustees and cannot be allowed with impunity to publish false balance sheets in order to conceal their own improper conduct.