Illegal allotment and commencement: directors who knowingly authorised them are jointly liable to compensate for resulting losses.

Fraudulent floatation was proved: promoters fabricated prospectus, allotments, minutes and commencement declarations, and diverted funds; primary perpetrators and a knowing director were held culpable while some directors were found deceived. Under Section 235 the promoters and the participating director were ordered to compensate the company for misapplication and misfeasance; quantified recovery accounted for liquidator realisations and credits. Under Section 102(2) directors who knowingly authorised illegal allotment and commencement were jointly and severally liable for losses caused. Limitation did not bar relief for proved fraud. An articles clause excluding liability cannot shield dishonest directors.

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Issues: (i) Whether the company was fraudulently floated and who were responsible; (ii) Whether and to what extent defendants are liable under Section 235 of the Indian Companies Act for misapplication, misfeasance or breach of trust; (iii) Whether and to what extent directors are liable under Section 102(2) of the Indian Companies Act for contravention of Section 101 (illegal allotment) and commencement under Section 103; (iv) Whether any portion of the claim is barred by limitation; (v) Validity and effect of Article 180 of the Articles of Association as a defence for directors.

Issue (i): Whether the company was fraudulently floated and who were responsible.

Analysis: Evidence established that the promoters (B.S. Vidyarthi, A.B. Tandon and Gopi Nath Singh) conceived and carried out a fraudulent floatation: false prospectus, false allotments, fabricated minutes, false declaration for commencement of business, and diversion/misapplication of funds. Certain directors (including Kunwar Sardar Singh) knowingly lent their names, participated in or approved false statements and conduct facilitating the fraud. Other directors were found to have been deceived.

Conclusion: The company was fraudulently floated. B.S. Vidyarthi, A.B. Tandon and Gopi Nath Singh were primary perpetrators; Kunwar Sardar Singh was a knowing participant; several other directors were deceived and not held culpable.

Issue (ii): Whether and to what extent defendants are liable under Section 235 of the Indian Companies Act for misapplication, misfeasance or breach of trust.

Analysis: Section 235 empowers the Court in winding up to examine conduct and order repayment, restoration or contribution for misapplication, retainer, misfeasance or breach of trust. The proved misfeasance and misapplication by the promoters and the participating director continued throughout the bank's life and resulted in total loss of paid-up capital and customer funds. Quantification considered amounts realized by Official Liquidator and compromises accepted.

Conclusion: B.S. Vidyarthi, A.B. Tandon, Gopi Nath Singh and Kunwar Sardar Singh are liable under Section 235 to compensate the company for its losses; Govind Prasad is liable to the extent of Rs. 20,000 as compensation; certain auditors and nominated director offers were sanctioned as credits.

Issue (iii): Whether and to what extent directors are liable under Section 102(2) of the Indian Companies Act for contravention of Section 101 and commencement under Section 103.

Analysis: Section 102(2) makes a director who knowingly contravenes Section 101 liable to compensate company and allottees for loss. Section 101 and Section 103 prohibit allotment and commencement absent payment of application/allotment money. The illegal allotments, false declaration for commencement and continued trading constituted repeated breaches entitling full compensation for losses flowing from the illegal commencement and operations.

Conclusion: The directors who knowingly permitted or authorized the contraventions (Vidyarthi, Tandon, Gopi Nath Singh and Kunwar Sardar Singh) are jointly and severally liable under Section 102(2) for the total losses attributable to the illegal allotment and commencement.

Issue (iv): Whether any portion of the claim is barred by limitation.

Analysis: Limitation defence under Article 36 of the Limitation Act was considered and found inapplicable to the presented misfeasance/fraud; where fraud is proved limitation does not bar the relief sought.

Conclusion: Limitation does not bar the claim in respect of the proved fraud and misfeasance.

Issue (v): Validity and effect of Article 180 of the Articles of Association as a defence for directors.

Analysis: Article 180 purports to exempt directors from liability except for acts done through their own dishonesty. Under the Indian Companies Act such articles may be inserted but cannot shield directors proved guilty of dishonesty and fraud.

Conclusion: Article 180 does not protect directors found guilty of dishonesty; it protects only those directors who were deceived and not dishonest.

Final Conclusion: The Court orders that B.S. Vidyarthi, A.B. Tandon, Gopi Nath Singh and Kunwar Sardar Singh are jointly and severally liable to pay Rs. 1,61,434-4-4 with interest at 6% from date of order, plus liquidation costs; further B.S. Vidyarthi, A.B. Tandon and Gopi Nath Singh are jointly and severally liable for an additional Rs. 22,618-7-9 (subject to credit for sums recovered from local directors); Rao Bahadur Govind Prasad is liable to pay Rs. 20,000; sanctioned compromises/credits by auditors and certain directors are to be credited against liabilities.

Ratio Decidendi: Where directors knowingly authorize or permit illegal allotment and commencement in contravention of sections 101 and 103 of the Indian Companies Act, they are accountable for misfeasance and must compensate the company and allottees for losses caused, and such liability may be joint and several under Sections 102(2) and 235 of the Indian Companies Act.

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