TaxTMI 
TaxTMI 
TaxTMI 
1944 (2) TMI 13
X X X X Extracts X X X X
X X X X Extracts X X X X
....harges of misfeasance were preferred against Kasi Viawaaattiau, S Subbaraya Mudaiiar, Palaniappa, Ramanathan and Thinnappa. It was claimed that as the result of their misconduct they were liable jointly and severally in the sum of Rs. 2,77,531-5-9. The learned Judge (Bell, J.) considered that S. Subbaraya Mudaliar had not acted unreasonably and was entitled to the benefit of Section 281 of the Indian Companies Act. He found that the Official Liquidator had established a charge of misfeasance against the other respondent and that the loss was to be apportioned as follows: Kasi Viswanathan and Ramanathan were to be jointly and severally liable for Rs,. 1,11,909-10-0. Palaniappa for Rs 18,651-9-8 and Thinnappa for Rs. 18,651-9-8. Appeal No. 44 and 1942 has been preferred by Thinnappa, Appeal No. 47 of 1942 by the legal representatives of Kasi Viswanathan and Appeal No. 52 by Palaniappa. Ramanathan has not appealed. He obsconded on the 22nd June, 1939, after it has been discovered that he had misappropriated large sums belonging to the company. The principal promoters of the company were Kasi Viswanathan and Ramanathan who were appointed joint managing directors. Kasi Viswanathan was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the company. He succeeded in deceiving his brother directors, the auditors of the company and the partners of the firm until the month of March, 1939, when he debited to his personal account with the company the moneys which he had borrowed for the company from the firm. On the 13th June, 1939, the auditors prepared a balance sheet which showed that Ramanathan had taken altogether Rs. 1,42,632-6-3. The Board very complacently agreed to treat this amount as representing loans from the company to Ramanathan. This was done because he said that he possessed securities in Bombay which were sufficient to meet his liability and he undertook to hand them over to the company. Kasi Viswanathan sent his representative with Ramanathan to Bombay to take delivery of the alleged securities, but when they arrived in Bombay Ramanathan absconded. Criminal proceedings were instituted against him and a warrant was issued for his arrest, but this has never been executed. The amount which the Official Liquidator sought to recover in the misfeasance proceedings represented what the company had lost by reason of these gambling transactions and what the company had to pay to the V.K.R.S.T. Firm in respe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompany had received in payment of differences Rs. 11,904-14-8 and had paid out in similar transactions the sum of Rs. 41,671-11-6. While directors are not trustees in the technical sense they hold a fiduciary position with regard to the assets of the company and the appellants were guilty of a grave breach of duty in allowing the company's funds to be dissipated in this way. It has been pointed out that all the balance sheets, except the last one, which was drawn up as on the 31st March, 1939, were approved of by the company in general meeting. But this makes no difference to the position. There can be no ratification of an illegal contract so far as the company is concerned. See Ashbury Railway Carriage and Iron Co. v. Riche [1875] 7 HL 653 and Flitcrojt's case [1882] 21 Ch.D 519. In the former case, Lord Cairns said: "Now I am clearly of opinion that this contract was entirely, as I have said beyond the objects in the memorandum of association. If so, it was thereby placed beyond the powers of the company to make the contract. If so, my lords, it is not a question whether the contract ever was ratified or was not ratified. If it was a contract void at its beginning, it was void....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not bound to examine entries in the company's books. The opinion that directors are not bound to examine entries in the company's books had previously been expressed by Jessel, M.R., in Halmark's case [1878] 9 Ch.D 372 and Lord Davey in Dovey v. Cory [1901] AC 477 agreed with what was said in these cases. In the present case, it cannot be said that, either Thinnappa or Palaniappa had any ground for suspecting that Ramanathan was acting fraudulently. The company had appointed a firm of qualified auditors and until Ramanathan had completed his misappropriations the auditors them-, selves were entirely in the dark. The balance sheets of the 3ist May, 1937, and 31st October, 1937, which were the last to be drawn up until the fraud had been discovered, had been passed by the auditors. When the statutory report was drawn up on the 3rd April, 1937, there was owing by the company to the firm Rs. 1,06,100. The balance sheet of the 31st May, 1937, showed that the amount owing to the creditors had been reduced to Rs. 54,967-0-4, and that of the 3lst October, 1937, showed that there was only due to the V.K.R.S.T. Firm Rs. 5,575-11-0. Therefore it may safely be taken that the directors had no ....