1958 (8) TMI 33 - HC - Companies Law

Directors held liable for fraudulent acts in investment trust case; Importance of oversight emphasized

The court held the managing director and his associates responsible for fraudulent acts involving advances to Pioneer Investment Trust Ltd. Specific ... Political contributions – Prohibitions and restrictions regarding, Winding up – Power of court to assess damages against delinquent directors, etc. Issues Involved:1. Liability of directors for advances and transactions with Pioneer Investment Trust Ltd.2. Sanction from the board of directors for such advances and transactions.3. Accountability of directors for transactions with United India Land Trust Ltd.4. Impact of a power of attorney executed in favor of the managing director.5. Directors' faith and confidence in the managing director.6. Maintainability of the application due to non-joinder of certain individuals.7. Relief entitled to the bank against specific directors.8. Liability of the secretary for misappropriation of G.P. Notes.Issue-Wise Detailed Analysis:1. Liability of Directors for Advances and Transactions with Pioneer Investment Trust Ltd.:The court examined whether directors B.K. Roy Chowdhury and K. Dutt were liable for advances and transactions with Pioneer Investment Trust Ltd. It was found that on 7th December 1949, Rs. 4,17,367-4-6 was advanced to Pioneer Investment Trust Ltd. without security, constituting a fraudulent breach of trust. However, the court noted that this manipulation occurred just before the bank's closure, and there was no evidence that other directors were aware or had the opportunity to rectify it. Therefore, the managing director and his associates were held responsible for this fraudulent act.2. Sanction from the Board of Directors for Advances and Transactions:The court considered whether the advances and transactions were sanctioned by the board during the tenure of B.K. Roy Chowdhury and K. Dutt. The managing director admitted that he did not obtain board approval for advances, relying on a power of attorney granted in 1935. The court found that the directors did not exercise control over the managing director's actions, but this failure did not amount to reckless indifference or wilful misconduct.3. Accountability of Directors for Transactions with United India Land Trust Ltd.:The court scrutinized the directors' accountability for the transactions with United India Land Trust Ltd. It was revealed that Rs. 7,00,000 was advanced without security on 8th December 1947. The directors, including Debi Das Roy, Asit Kumar Ghosal, and Lakshmi Narayan Hazra, were aware of these unsecured advances but failed to take action. Consequently, these directors were held liable to pay Rs. 7,00,000 to the bank.4. Impact of a Power of Attorney Executed in Favor of the Managing Director:The power of attorney executed in 1935 allowed the managing director to advance loans even without security, subject to regulations framed from time to time. The court noted that the managing director did not bring individual advances before the board for approval, possibly believing that the power of attorney dispensed with this requirement. The directors did not exercise control over the managing director's authority, but this did not constitute reckless indifference or wilful misconduct.5. Directors' Faith and Confidence in the Managing Director:Several directors testified that they had implicit faith and confidence in the managing director, Debi Das Roy. The court acknowledged this trust but emphasized that directors could not completely abdicate their responsibilities. Despite their trust, the directors were expected to exercise some level of oversight.6. Maintainability of the Application Due to Non-Joinder of Certain Individuals:The respondents argued that the application was not maintainable due to the non-joinder of Saradindu Neogy, D.C. Roy, and K.M. Khandelwal. The court dismissed this contention, noting that the directors could be held liable individually for acts of misfeasance. The absence of certain individuals did not invalidate the application.7. Relief Entitled to the Bank Against Specific Directors:The court directed Debi Das Roy to pay Rs. 12,17,367-4-6 to the bank with 6% interest from the date. Directors Bhupendra Nath Roy Chowdhury, Lakshmi Narayan Hazra, Asit Kumar Ghosal, and Dinesh Chandra Roy were ordered to pay Rs. 7,00,000 to the bank with 6% interest from the date. The claim against the secretary, S.K. Neogy, was dismissed.8. Liability of the Secretary for Misappropriation of G.P. Notes:The court examined the charge against the secretary, S.K. Neogy, regarding the misappropriation of G.P. Notes. It was found that the managing director, not the secretary, had misappropriated the G.P. Notes. The secretary was exonerated from liability due to insufficient evidence.Conclusion:The court held specific directors and the managing director liable for various acts of misfeasance, resulting in financial losses to the bank. The application was dismissed against certain directors and the secretary due to lack of evidence or responsibility. The judgment emphasized the importance of directors exercising oversight and not blindly trusting the managing director.