1963 (2) TMI 23 - HC - Companies Law

Successful Misfeasance Application Against Bank Directors for Unauthorized Advances and Lack of Supervision

KN. Srinivasa Iyer Versus Joint Off. Liq. of The Nurani Union Bank Ltd. (In Liquidation)

KN. Srinivasa Iyer Versus Joint Off. Liq. of The Nurani Union Bank Ltd. (In Liquidation) - [1963] 33 COMP. CAS. 735 (MAD.) Issues Involved:1. Misfeasance application under Section 235 of the Indian Companies Act, 1913.2. Liability of directors for unauthorized advances.3. Total absence of supervision by directors.4. Ratification of unauthorized advances.5. Limitation period for filing a misfeasance application.6. Distinction between provisional and official liquidators.Issue-wise Detailed Analysis:1. Misfeasance Application under Section 235 of the Indian Companies Act, 1913:The judgment revolves around a misfeasance application filed by the Joint Official Liquidators of the Nurani Union Bank Ltd., Palghat, seeking to make the seven respondents (directors of the company) pay Rs. 9,19,884-5-0. The application was tried by Ramaswami J., who found the misfeasance proved. The judgment emphasizes that Section 235 is a summary procedure available only against the directors themselves and not their legal representatives.2. Liability of Directors for Unauthorized Advances:The directors, including the managing director and the secretary, were found to have made advances in contravention of resolutions that required loans to be made only to solvent persons, on adequate security, and with the board's sanction for amounts exceeding a particular sum. The managing director and the secretary were directly guilty of misfeasance for substantial amounts. The judgment highlights that the unauthorized advances were due to the directors abdicating their duty of exercising even the minimum amount of supervision expected of them.3. Total Absence of Supervision by Directors:The judgment notes that the other directors failed to exercise any supervision over the acts of the managing director and the secretary, either due to gross negligence or because they themselves had violated the resolutions by drawing monies from the bank in excess of the permitted amounts. The learned judge found that the directors conspired together to loot the money of the bank, leading to its crash.4. Ratification of Unauthorized Advances:Except for one director, the other directors ratified the unauthorized advances by a resolution dated September 27, 1947. The judgment concludes that the charge of misfeasance was proved based on these facts, except with respect to M.P. Ananthasubramania Iyer, who provided evidence that he was not aware of the unauthorized advances and had not taken any overdraft, only a small loan of Rs. 400 in 1947.5. Limitation Period for Filing a Misfeasance Application:The judgment addresses the contention that the misfeasance application was time-barred because it was made more than three years from the date of the appointment of the provisional liquidators. The court held that the limitation period starts from the date of the appointment of the official liquidators after the winding-up order, not from the appointment of provisional liquidators. The judgment emphasizes that the official liquidator's appointment is for conducting the proceedings in winding up the company, and the acts of misfeasance usually come to light only after such appointment.6. Distinction Between Provisional and Official Liquidators:The judgment clarifies that the appointment of provisional liquidators is only provisional and not the appointment contemplated in Section 235 for the commencement of the limitation period. The judgment reasons that interpreting the section to start the limitation period from the appointment of provisional liquidators would defeat the purpose of the section, as the acts of misfeasance may not come to light until the official liquidator investigates the affairs of the company.Conclusion:The appeals filed by N. R. Lakshmana Iyer and K. N. Srinivasa Iyer were dismissed with costs, while the appeal filed by M.P. Ananthasubramania Iyer was allowed without costs. The court held that the misfeasance application was not time-barred and that the charge of misfeasance was proved against the remaining directors, except M.P. Ananthasubramania Iyer.