LAWS(PVC)-1941-5-1

RAO SAHIB V SUBBAYYA Vs. CTMACHAYYA

Decided On May 01, 1941
RAO SAHIB V SUBBAYYA Appellant
V/S
CTMACHAYYA Respondents

JUDGEMENT

(1.) These four appeals arise out of an order passed by the learned District Judge of Bellary under Section 235 of the Indian Companies Act in the liquidation of Hospet Sugar Mills Limited. The directors past and present of the said Company were sought to be made liable in respect of various acts of misfeasance committed by them in consequence whereof the Company suffered loss. During the course of the hearing of the petition the Official Liquidator confined himself to the claim against them for Rs. 25,000 which was paid as and for remuneration of Messrs. Johnson & Co., the Managing Agents of the said Company, and the income-tax on it. In respect of the said sum R. Narasinga Rao, the appellant in C.M.A. Nos. 576 and 577 of 1938 was made liable for Rs. 25,000, Rao Sahib V. Subbayya the appellant in C.M.A. No. 501 of 1938, for Rs. 5,000 and Rao Sahib V. Dharmalingam Pillai, for Rs. 10,000. Before dealing with the question of liability, it will be very necessary to know the history of this Company, its formation and its subsequent working until the date of its liquidation. This Company as appears from the evidence was the creation of one C. M. Mehta, who is a resident of Bombay and claims to be a share broker and whose antecedents are not at all known to anybody. He conceived the idea of starting this sugar mills with the aid of his relations, his own wife, Mrs. Mehta, his sister-in-law and her husband, R. Narasinga Rao. This Narasinga Rao was originally a copyist in the Anantapur District Court, later became a Local Fund contractor and absolutely had no connection with any sugar business. He was associated in the formation of the said Company and also in its subsequent working until the date he severed connection with the Company. The constitution of this Company from time to time discloses a deep scheme of fraud laid out by Mehta. On the 27 April, 1933, a consent statement was submitted to the Sub-Registrar of Assurances which was signed by Mehta, his wife, R. Narasinga Rao and R. C. Dalai, the nephew of Mehta, Within two or three days after that submission of the statement, there was a change in the directorate, Mehta, his wife and R. C. Dalai having resigned and in their places Rao Sahib V. Subbayya, Rao Sahib V. Dharmalingam Pillai, Mr. McGavin and Mr. C. J. Court having been appointed. Rao Sahib V. Subbayya and Rao Sahib V. Dharmalingam Pillai were recruited on the specific understanding that they need not pay for their qualification shares. As observed by the learned District Judge both of them had titles and Rao Sahib V. Dharmalingam Pillai was besides an M.L.C. and an Honorary Presidency Magistrate. Mr. McGavin and Mr. C. J. Court were recruited for the sake of European names so that the public may be taken in. Mr. McGavin described in the prospectus as a motor engineer was a mechanic in a toddy contractor's lorry living in a small house in Bellary on a rent of Rs. 3 per month. The antecedents of Mr. C. J. Court are not known and he died before the proceedings commenced, though his status seems to have been no better than that of McGavin. One Mr. Hackett was appointed secretary of this Company. He had absolutely no experience of business, much less of sugar business. The object of the Company was to attract a large capital and this Company succeeded in getting nearly two lakhs of rupees. Mehta also at the same time brought into existence three other companies and. their constitution is very curious. Messrs. Johnson & Co., were appointed as the Managing Agents of the Company under a contract, dated 27 March, 1933, (Ex. Y) in and by which they were allowed Rs. 1,000 per month for the management and,, 10 per cent. of the profits. The partners of this Company are Narasinga Rao and his wife, the mother of Mehta and an infant son of Mehta, 18 months old. The partners are therefore Mehta and his relations and except Narasinga Rao the others are ladies and an infant who can hardly be expected to undertake the management of a sugar concern. Another Company which was brought into existence was the Eastern Underwriters Syndicate and its partners are the nephews of Mehta who disclaim all responsibility thereon on the ground that their signatures were forged by Mehta. There was another Company called the Thakore & Co., whose constitution is a mystery and to whom a sum of Rs. 59,000 was advanced for the purpose of erecting a factory. As the learned Judge points out in paragraph 12 of his order these facts show that the control of this Company was directly or indirectly in the hands of Mehta and his various manifestations as Messrs. Johnson & Co., (by his wife, mother and his brother-in-law until 15 July, 1934), as the Eastern Underwriters Syndicate and as Thakore. & Co. and that the directors of the Company were his relations or other persons completely under his influence with the exception of V. Subbayya, V. Dhannalingam, and later of Sirdar Kanjilala, while V. Subbayya and V. Dharmalingam were recruited under conditions suggesting that all that was desired was to make use of their titles for the attraction of investors without anticipating that they would interfere in the working of the Company as they lived in Madras. As already stated, the Sugar Mills Company was incorporated on 27th April, 1933 and the prospectus was fesued on 3 May, 1933 and it was anticipated that the factory for manufacturing sugar would be ready to start work by December, 1934. Although a sum of Rs. 57,000 is shown as spent on factory and equipment, no factory was ever erected except a few small buildings. The Company was voluntarily wound up by a resolution of the directors, dated 13 December, 1935, and in January, 1936, Bhima Rao, who was acting as the legal adviser of the Company was appointed voluntary liquidator, and an original petition (O.P. No. 21 of 1936) for the winding up of the Company subject to the supervision of the Court was presented to the High Court when Mr. C. T. Machayya was appointed additional liquidator. It is admitted that no proper accounts were ever kept. For the purpose of audit the accounts were cooked up in March or April, 1934 and the report of Mr. Batliboi (Ex. N) revealed a deplorable state of affairs. A reply to this report was given by Messrs. Johnson ..& Co., and the meeting, dated 15 July, 1934, presided over by Dharmalingam Pillai accepted the explanation given and condemned Mr. Batliboi's conduct. As the learned Judge remarks, it is difficult to imagine that anybody could have been satisfied with the explanation. Mr. Batliboi pointed out among other things that the entry in the cash book of Rs. 50,000 as received was false, and there was no satisfactory evidence to show that a sum of Rs. 59,000 was paid to Messrs. Thakore & Co. He has also said that he had considerable difficulty in getting the books, that many of the books were stated to be missing and that the books produced before him as rough and fair cash books appeared to him to have been fabricated. The explanation that was given was only an attack against Mr. Batliboi and the answers given to various charges would not appear to any prudent man to be at all convincing. There was a subsequent audit by Messrs. Sharp & Co., whose report was not satisfactory and things were allowed to be drifted on in the same state as it was before, the result of which was that nearly all the money that was received by the Company disappeared and when the liquidators took charge, there was a cash balance of Rs. 2-1-6. It may be stated that V. Subbayya tendered his resignation on 18 August, 1933, that is, even before the Company had been formed. Dharmalingam Pillai resigned on 24 June, 1935 and Narasinga Rao ceased to have connection with the Company in July, 1934.

(2.) In the light of the above facts the question is how far the appellants in the various appeals are responsible for the payment of the remuneration of Rs. 25,000 to Messrs. Johnson & Co. We will first consider the case of Rao Sahib V. Subbayya, the appellant in C.M.A. No. 501 of 1938. It is no doubt true that he signed the prospectus, dated 3 May, 1933, without in the least caring to know what the antecedents of the other directors were or knowing about the way in which the Company was going to be worked and who the partners of Messrs. Johnson & Co., were. But on 18 August, 1933, he tendered his resignation, that is, nearly 12 days before the declaration under Section 103 of the Companies Act was sent to the Registrar of the Joint Stock Companies and before the Company commenced business. It cannot be said therefore that he was guilty of any misfeasance by reason of which any pecuniary loss was sustained by the Company and it is in evidence that whatever payments were made to Messrs. Johnson & Co., it was after July, 1934, i.e., nearly a year after the date of his resignation. We are therefore of the opinion that the finding of the learned Judge in so far as he holds him responsible should be set aside and the appeal allowed. But having regard to his conduct in siigning the prospectus, we deprive him of his costs throughout.

(3.) The case of Dharmalingam Pillai stands on a different footing. Both Subbayya and Dharmalingam Pillai agreed to be directors on the promise held out to them by Mehta that they need not pay for their shares. In the case of Subbayya the shares in favour of the wife of Mehta were transferred while in the case of Dharmalingam Pillai, though he was declared to be the holder of shares, he did not pay anything for them. Becoming a director by accepting a gift of shares without paying for them is a misfeasance. No doubt he cannot be rendered liable for the loss in respect of this act of misfeasance because no charge has been framed against him. But the fact remains that he began his connection with the Company with an act of misfeasance. This fact and the prospect of earning director's fees were the sole motive which induced him to become a director. He could not have known Mehta earlier. Before he signed the prospectus it was his duty to have acquainted himself with the antecendents of Mehta and also of the other directors and furthermore, who the partners of Messrs. Johnson & Co., were. He signed the prospectus with the recital that an agreement had been or would be entered into with Messrs. Johnson & Co. A slight enquiry would have revealed that the directors of Messrs. Johnson & Co., were ladies and an infant and Narasinga Rao who is a relation of Mehta and that that Company would practically be under the control of Mehta. A reference to the agreement of Messrs. Johnson & Co., would have revealed that a sum of Rs. 1,000 was to be paid to them from the date of the registration of the Company exclusive of all rents of the Company, salaries, emoluments and wages paid to the clerks, servants and employees of the said Company which are all to be paid out of the Sugar Mills. Further they were to be paid 10 percent. of the profits of the Company. It was his duty to ascertain whether it would be prudent to entrust the management of the Sugar Mills Company to Messrs. Johnson & Co., on such a very heavy remuneration. No prudent man would consent to the management of the Sugar Mills to a firm constituted as Messrs. Johnson & Co., were. He must have also known who the Eastern Underwriters Syndicate were, which again was the creation of Mehta. There may be cases where a director can confide in a co-director or directors whose antecedents were well-known and whose capacity for business management was well-tried. But there was absolutely no reasonable ground for Dharmalingam Pillai to confide in Mehta whom he could have only met for the first time when a request was made to become a director of the Company and it does not appear from the evidence that either at that time or at any time subsequently Dharmalingam Pillai ever cared to find out what the antecedents of Mehta were and whether it was prudent on his part to continue to confide in him. Whatever may be the justification until 15 July, 1934, we think that after that date his passivity is inexcusable. The audit report of Batliboi & Co., which exposed the frauds of the Company should have put Dharmalingam Pillai on enquiry as to the antecedents of Mehta and particularly as to the propriety of Messrs. Johnson & Co., continuing to be the Managing Agents of the Sugar Mills or of payment of any remuneration to them. But it is rather surprising that he should have accepted the explanation of Johnson & Co., which condemned Batliboi's report on grounds which no man exercising some reasonable care would ever accept. He presided at the meeting and was a party to the resolution which condemned Batliboi's report. He signed the balance-sheet which sanctioned a, remuneration of Rs. 13,000 to Messrs. Johnson & Co. It was between July and November, 1934, that a sum of about Rs. 6,000 was paid to Johnson & Co., and this could not have happened if Dharmalingam Pillai had taken steps to satisfy himself whether the allegations made in Batliboi's report were correct and whether it would be wise or safe to continue the management by Messrs. Johnson & Co., and whether they were entitled to be paid the remuneration which was stipulated, for according to the agreement having regard to the way in which the Company was managed and particularly in view of the serious allegations made by Batliboi that all the account books put before him appeared to be fabricated. We are therefore clearly of the opinion that Dharmalingam Pillai was guilty of gross and wilful negligence and clearly guilty of misfeasance within the meaning of Section 235 of the Act. Mr. V. C. Gopalaratnam cited to us a number of cases to show that Section 235 would not apply to a case of mere non-feasance. Section 235 does not prima facie exclude non-feasance. In our opinion the section would apply to every act whether of commission or omission which is a breach of duty to the Company in consequence whereof loss to the Company results. Mr. Gopalaratnam laid considerable emphasis on In re Etic, Limited (1928) 1 Ch. B. 861, for the position that the section would not apply to a case of non-feasance but that decision does not support him. Maugham, J., after reviewing all authorities sums up the position thus: It ( Section 215) is limited to eases where there has been something in the nature of a breach of duty by. an officer of the Company as such which has caused pecuniary loss to the Company. This would take in non-feasance also. In the earlier portion of the judgment he refers to Ex parte Petty (1882) 21 Ch.D. 492, and to the view of Sir George Jessel, M.E., viz., that Section 215 would apply to every wrongful act by the director, manager, liquidator or other officer of the Company either of the nature of misfeasance or of the nature of a breach of trust in a wide sense including no doubt a breach of trust by negligence or something of that kind. No doubt language is used in some of the cases that mere negligence is not enough but there should be gross negligence but it is unnecessary to deal with those cases because as we have already stated on the facts of this case it is clear that Dharmalingam Pillai was guilty of gross negligence which would be misfeasance within the section. He not only did not exercise that amount of reasonable care which was expected of him as a director in ascertaining the true state of affairs of the Company but also wilfully shut his eyes to it until a very late stage. The only question is, what is the amount for which he should be rendered liable? He is only one of the directors and it cannot be said that he was guilty of any fraud or corruption. We therefore make him liable for a sum of Rs. 5,000. In view of our findings it is not possible to give him relief under Section 281 of the Act, but in assessing compensation we did take the matter also into consideration.