1925 (10) TMI 2 - Commissioner - Indian Laws

Directors Not Liable for Overdrafts, Payment Orders Issued

S.C. Mitra Liquidator, Bank of Oudh Ltd. Lucknow Versus Nawab Ali Khan and others

The court held Mr. E. A. Labanti liable to pay Rs. 76,593-15-4 with interest to the liquidator for overdrafts. Mr. Jang Bahadur Sinha was ordered to repay ... - Issues Involved:1. Overdrafts without security to Mr. E. A. Labanti.2. Overdrafts without security to Messrs. Labanti and Co., Limited.3. Overdrafts without security to the Upper India Investment Limited.4. Directors' personal liability for acts of misfeasance, breach of trust, fraud, or gross and willful negligence.5. Specific liability of individual directors, including Mr. Jang Bahadur Sinha and Lala Jagmohan Lal.6. Plea of limitation raised by Thakur Nawab Ali Khan.Detailed Analysis:1. Overdrafts without security to Mr. E. A. Labanti:The liquidator claimed compensation for overdrafts allowed to Mr. E. A. Labanti amounting to Rs. 91,516 and Rs. 41,393-15-4. The court found that Mr. Labanti's letter dated 14th July 1921 contained an offer of a mortgage of the Labanti buildings as security for a loan of Rs. 1,50,000, which was accepted by the Board of Directors. The advances were made with the consent of all directors, anticipating the execution of the mortgage, which was never executed. The Directors were confident that Mr. Labanti would perform his part of the contract. The court concluded that the Directors allowed the advances based on Mr. Labanti's promise to execute the mortgage, which he failed to do.2. Overdrafts without security to Messrs. Labanti and Co., Limited:The liquidator also sought compensation for overdrafts to Messrs. Labanti and Co., Limited, amounting to Rs. 4,303-5-6. The court found that the transactions were made with the knowledge and consent of the Directors and were not ultra vires. The Directors were not personally liable as the advances were made in good faith, and there was no evidence of gross negligence or breach of trust.3. Overdrafts without security to the Upper India Investment Limited:The liquidator claimed compensation for overdrafts to the Upper India Investment Limited amounting to Rs. 28,927-5-0. The court found no evidence that the Directors as a body were aware of this overdraft. However, Lala Jagmohan Lal, as the Managing Director, was found guilty of breach of trust. The court held that Lala Jagmohan Lal allowed the overdraft for personal gain, as his brother was a director of the Upper India Investment, and concealed the transaction from the other directors.4. Directors' personal liability for acts of misfeasance, breach of trust, fraud, or gross and willful negligence:The court applied the principle that Directors are not personally liable for losses due to errors of judgment or imprudence unless it amounts to gross negligence. The court cited several cases, including Overend and Gurney Co. v. Gibb and In re City Equitable Fire Insurance Company, Limited, to support this view. The Directors acted within their powers, with reasonable care, and in the interest of the Company, and thus were not personally liable for the overdrafts to Mr. Labanti and Messrs. Labanti and Co., Limited.5. Specific liability of individual directors:- Mr. Jang Bahadur Sinha: The court found that Mr. Jang Bahadur Sinha, who was a director, accepted fixed deposit receipts from the Bank in lieu of his claims against Mr. Labanti and cashed three receipts amounting to Rs. 7,844-5-3. The court held that he could not retain this money and must repay it to the liquidator.- Lala Jagmohan Lal: The court found that Lala Jagmohan Lal was guilty of breach of trust in allowing the overdraft to the Upper India Investment Limited for personal gain and ordered him to compensate the Bank for the loss.6. Plea of limitation raised by Thakur Nawab Ali Khan:The plea of limitation was raised by Thakur Nawab Ali Khan. However, since the liquidator's application against him was rejected on merits, the court did not decide on the plea of limitation.Conclusion:The court ordered Mr. E. A. Labanti to pay Rs. 76,593-15-4 with interest to the liquidator. Mr. Jang Bahadur Sinha was ordered to repay Rs. 7,844-5-3 with interest, and Lala Jagmohan Lal was ordered to pay Rs. 28,927-5 with interest. The Directors as a body were not held personally liable for the overdrafts to Mr. Labanti and Messrs. Labanti and Co., Limited, as they acted within their powers and with reasonable care.