1934 (4) TMI 9 - HC - Companies Law

Promoters and Directors Liable for Fraudulent Activities

Indian States Bank, Ltd. Versus Kunwar Sardar Singh

The court found the primary promoters and certain directors liable for fraudulent activities, holding them responsible for compensating the company's ... Winding up – Power of Court to assess damages against delinquent directors, etc. Issues Involved:1. Limitation of Claims2. Fraudulent Floatation and Responsibility3. Charges under Section 235 of the Indian Companies Act4. Liability under Section 102 of the Indian Companies Act5. Validity and Effect of Article 180 of the Articles of AssociationDetailed Analysis:1. Limitation of Claims:The court examined whether any portion of the claim was barred by limitation. It was determined that the fraudulent actions of the directors and officers meant that the limitation period did not apply, as fraud was proven.2. Fraudulent Floatation and Responsibility:The company was fraudulently floated by B.S. Vidyarthi, A.B. Tandon, and Gopi Nath Singh in 1929. They conceived the idea of starting a bank without substantial financial backing or genuine intent to pay for shares. They issued a misleading prospectus and used prominent names without consent to inspire public confidence. The company was incorporated in March 1930 with fraudulent signatories to the memorandum of association, who had no intention of paying for their shares. The fraudulent nature of the floatation and the business conduct was admitted by most defendants, with the primary responsibility placed on Vidyarthi, Tandon, and Gopi Nath Singh.3. Charges under Section 235 of the Indian Companies Act:The court found that Vidyarthi, Tandon, Gopi Nath Singh, and Rao Bahadur Kunwar Sardar Singh were guilty of misfeasance and breach of trust. They were responsible for the total losses of the company, including amounts due to creditors and shareholders. The fraudulent actions included illegal allotment of shares, obtaining a certificate for commencement of business by fraud, and carrying on business without directors paying for their shares.4. Liability under Section 102 of the Indian Companies Act:Under Section 102(2), the directors who knowingly contravened Section 101 with respect to allotment were liable to compensate the company and the allottees for any loss, damages, or costs incurred. The court held that Vidyarthi, Tandon, Gopi Nath Singh, and Rao Bahadur Kunwar Sardar Singh were jointly and severally liable for the total losses of the company. They were ordered to pay Rs. 1,61,434-4-4 with interest at 6% per annum from the date of the order until realization, and an additional Rs. 22,618-7-9 for losses sustained by the branches.5. Validity and Effect of Article 180 of the Articles of Association:Article 180 provided that no director or officer of the company could be liable for the defaults of other directors or for losses unless the same happened through their own dishonesty. The court found that this article did not protect the defendants from liability due to their gross dishonesty and fraud. The court suggested that the Indian Companies Act should be updated to provide better protection to the public, similar to the English Act of 1929.Separate Judgments:The court dismissed the claim against Rao Bahadur Lal Bhagwant Singh, B. Hari Saran Das, Anand Sarup Bhatnagar, Seth Tirbhuwan Das, and Khan Saheb Nawab Ali Khan, as they were protected by Article 180 and were themselves deceived. However, Rao Bahadur Kunwar Sardar Singh was found to have conspired with the promoters and was held liable for the fraudulent activities. Rao Bahadur Govind Prasad, although not responsible for the floatation, was found liable for losses after he took office as a director.Compromises and Settlements:The auditors and Nawab Muhammad Jamshed Ali Khan offered settlements without admitting liability, which were accepted by the court. Ahmad Bhai Poonja also offered a settlement, which was accepted considering his partial involvement and subsequent actions.Final Orders:The court ordered Vidyarthi, Tandon, Gopi Nath Singh, and Rao Bahadur Kunwar Sardar Singh to pay the total losses of the company and the costs of liquidation. The official liquidator was directed to give credit for sums already paid by the auditors and Nawab Muhammad Jamshed Ali Khan, and for any sums realized from Ahmad Bhai Poonja under the compromise.In conclusion, the court held the primary promoters and certain directors liable for the fraudulent activities, ensuring that the victims of the fraud would recover their losses. The court also commended the official liquidator and his team for their diligent work in uncovering the fraud.