TaxTMI 
TaxTMI 
1985 (4) TMI 284
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.... and became the prized subscriber and collected the prize amount on 11.2.1974 and a chit promissory note was executed by the then Managing Director as well as another Director of the defendant company, namely, M. Ramasubramaniam and M. Lakshmanan respectively, on 11.2.1974 by way of collateral security for payment of future subscriptions amounting to Rs. 25,052.37. The defendant company paid upto the eighth instalment and from the ninth instalment, which fell due on 15.4.1974, the defendant company committed default. As a result and as per the terms of the transaction, the defendant company became liable to pay all the future subscriptions from the ninth to the fortieth instalment, amounting to Rs. 20,000 in a lump sum with interest at the rate of 12 per cent per annum from the date of default. The following amounts were paid by the defendant company: 17.5.1975 Rs. 2,000/- 30. 5.1975 Rs. 1,000/- 27. 5.1975 Rs. 9,375/- 9. 8.1975 Rs. 600/- 2.10.1975 Rs. 1,200/- The balance payable by the defendant company is Rs. 11,801.03. The plaintiff issued a notice through counsel, which was received by the defendant company on 1.4.1978. The defendant Company sent....
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.... or raise money, with or without security, or otherwise, in such manner as the company may think fit.. *** **** 24. To open banking accounts and to draw, accept, make, endorse, discount, execute and issue cheques, promissory notes, bills of exchange, bills of lading, warrants, debentures and other negotiable or transferable instruments. There cannot be any dispute that the Memorandum of Association of a company is its charter defining the objects of its existence and operations, and it is ultra vires for a company to act beyond the scope of its Memorandum of Association. Mr. V. Shanmugham, learned Counsel for the defendant company, does not dispute that the Memorandum of Association did authorise the borrowing or raising of money, but what the learned Counsel states is that entering into a chit transaction would not amount to borrowing or raising of money and hence, such a transaction must be held to be ultra vires the powers of the defendant company. In support of his submission, learned Counsel relies on two pronouncements, one of a single Judge of the Andhra Pradesh High Court and the other of a Bench of the Kerala High C....
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....talments already paid by him, undertaking to repay the loan in instalments that still remain to be paid, and the liability under the security bond which he executes for the due payment of such instalments is a debitum in praesenti solvendum in futuro, incurred on "the date of bond itself. The question is one of some difficulty not the least part of which arises from the somewhat conflicting decisions dealing with these peculiar kuri transactions which are so common in some parts of this Presidency. On the whole however we are of opinion that the judgment-debtors' contention is supported by a preponderance of authority and must be accepted. As the authorities supporting the above view, the Bench referred to the three pronouncements cited above. 8. In Sri Visalam Chit Funds Ltd. v. P.N. Srinivasa Mudaliar (1975) 88 L.W. 415 a Bench of this Court, consisting of Ramaprasada Rao, J. as he then was, and Maharajan, J. observed as follows: For a considerable time ranging beyond a century, chit fund transactions were resorted to as a means to earn profit and incidentally to sa....
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....hed with the learned Judge of the Andhra Pradesh High Court could hold good only for rendering a decision which the learned Judge was called upon to do in that case and I am afraid, the ratio decidendi in that decision cannot be imported for the purpose of considering the question arising in the present case, namely, whether the entering into a chit transaction as it happened in the present case, and the liability arising thereon would not amount to borrowing and raising of money and the incidence arising thereupon. The expressions 'creditor', 'debt' and 'debtor' occurring in the Andhra Pradesh Act were considered to hold that the relationship between the stake-holder/foreman and the subscriber is not that of a creditor and debtor. The learned Judge referred to and relied on an earlier pronouncement of a Bench of the same High Court in Dhoosa Narsimloo v. Yalala Rajanna (1958) 2 An.W.R. 5. 11. Subba Rao, C.J. as he then was, and Srinivasachari, J. in Dhoosa Narasim-loo v. Yalala Rajanna (1958)2 An.W.R.5 had occasion to consider as to whether the amount drawn by a member of a chit fund, who bids at the periodical auction, giving the largest discount can co....
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....s the pronouncements of this Court are concerned, they have leaned to hold that even such a transaction would amount to a debt and the relationship of debtor and creditor will evolve between the concerned subscriber and the stake-holder/foreman. Vide M. Abdul Aziz v. Yasodammal (1978) 91 L.W.223. 12. With regard to chit transactions as such, the pronouncements referred to above are uniform in holding that there is definitely the element of advancing from the common fund. May be the money advanced is not the money of the stake-holder/ foreman. Even the pronouncements of the Andhra Pradesh High Court do recognise this feature of advancing from the common fund in a chit transaction. That would suffice the purpose of this case. When a subscriber bids at an auction and obtains the amount, he receives it only as a loan from the common fund, undertaking to repay as per terms and conditions agreed upon. This implication is certainly present, according to the pronouncements referred to above, though with regard to the nature of the relationship between the stakeholder/foreman and the subscriber, there seems to be some discord. Hence, I have to hold that when a subscriber to a chit transa....
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....nd 24 of the Memorandum of Association, there is a power to borrow and raise money. One method of raising money is entering into an arrangement with a chit fund organisation, whereby a number of individuals or concerns join together and contribute subscriptions periodically, and further facilitate a member who is in need of finance at a particular point of time to withdraw the funds by means of bidding at the auction at a discount. This is exactly what did happen in the instant case. Learned Counsel for the defendant company would contend that at the time of entering into an arrangement, thrift could have been the motive. This is purely a desperate and at the same time a futile after-thought. It was not claimed before the Court below or at any point of time earlier that the chit transaction was entered into by the defendant company for any such purpose. In any event, the purpose got exemplified, brought to light and got served when actually the money was raised by successfully bidding at the sixth instalment and obtaining the prize amount. If by entering into the chit transaction the defendant company raised money, it cannot be said that the transaction was entered into without any....
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....ularly and the Directors of the defendant company must be deemed to have had acted within their powers. According the rule in Royal British Bank v. Turquand (1856) 6 E and B 327. ...While persons dealing with a company are assumed to have read the public documents of the company and to have ascertained that the proposed transaction is not inconsistent therewith, they are not required to do more; they need not inquire into the regularity of the internal proceedings what Lord Hatherley called in Mahony v. East Holy ford Mining Co. (1875) L.R.7 H.L.869, 898 'the indoor management' and may assume that all is being done regularly Omnia Praesumuntur Rite Ac Solemniter Esse Acta. If this rule is to be applied, then, the plaintiff need not suffer with regard to its claims on the basis that while obtaining the loan or raising the money, there was in fact a lack of resolution by the Board of Directors of the defendant company sanctioning the same, which is mostly connected with the indoor management, and the plaintiff could be held to have acted on the assumption that all acts had been done regularly. A stranger....
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....peaks against the defendant company and dissuades the Court from countenancing this argument to negative the claims of the plaintiff. Assuming that the Directors of a company have indulged in borrowing or raising money without authorisation by means of the requisite resolution, yet, the company cannot escape its liability to repay, if in fact, the benefit of the transaction reached the company as such. Before coming to the facts of the present case, which do demonstrate that the defendant company was benefited by and did enjoy the benefits of the suit transaction, I would like to recapitulate the principle to be countenanced in this behalf. The Directors are the agents of the company. Where acts were done by the agent on behalf of the principal, but without the requisite authority in this behalf, the principal by his conduct may ratify such acts. This is what is called as implied ratification. Accepting the results and benefits of the agent's acts or proceedings would amount to ratification and the principal will be bound as if the acts and the proceedings of the agent were effected with the principal's authority. If an agent who did not have the authority to borrow, did bo....
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.... The Bench of the Patna High Court placed reliance on the pronouncement in T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon and Co. Ltd. (1936)6 Company Cases 90 (Bombay). 19. In the present case, we are not dealing with absolute lack of power to borrow on the part of the defendant company. I have dispelled the first contention put forth by the learned Counsel for the defendant company that such a power was lacking on the part of the defendant company and the suit transaction is ultra vires the powers of the defendant company. It is true that the said methodology or procedure has found expression in statute law, namely, Section 292(1)(c) of the Act when it contemplates that the power to borrow moneys otherwise than on debentures shall be done only by means of a resolution passed at the meeting of the Board of Directors. But, if it is found that the benefit of the suit transaction, did reach the defendant company and the defendant company was benefited by it and further made payments in acknowledgement of its liability, then it cannot absolve itself from its obligations to honour its liability under the suit transaction by projecting this technical plea that the suit transaction lacke....
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....t of the suit transaction did not reach the defendant company. If in fact this was the true position, the conduct and the reaction of the defendant company would be otherwise. D.W.I. the present Managing Director of the defendant company, offers his explanation that both in the reply notice and in the written statement, the defendant company admitted the receipt of the money and the payment of portions of the dues on confidence. This explanation is too puerile to be accepted and it is not clear as to who or what circumstances persuaded him to have such a confidence and how that confidence was shaken and when the truth was discovered that the defendant company was not at all benefited by the suit transaction. The defendant company did and does have accounts. D.W.I would state that he did not obtain the previous accounts from the erstwhile management, because they were not handed over to him. This is too naive an answer and it does not bring conviction to the mind of this Court with regard to the non-production of the accounts. D.W.I admits that the payments towards the dues are reflected in the accounts and they are in his custody. Even these accounts have not been produced. The onl....
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....f the plaint leaves no room for ambiguity in the mind of the Court that the suit is not solely based on the promissory note Ex.A-3. Even the claims in the plaint are not based on and are not referable to the promissory note, Ex.A-3 as such. The claims have been made for the amounts due from the ninth instalment to the fortieth instalment, of course, giving credit to the amounts paid subsequently. Hence, on the simple ground-assuming that it is factually tenable -that Ex. A-3 promissory note does not purport to have been executed in the name or on behalf of, or on account of the defendant company, it is not possible to non-suit the plaintiff, whose cause of action does not solely rest on the promissory note, Ex.A-3. The basis for the suit claim is the chit transaction itself. 22. The fourth contention put forth by the learned Counsel for the defendant company is that his client ought to have been given credit of the dividends for the instalments which fell due after the eighth instalment and in fact credit has not been given to the defendant company in this behalf. It is true that Clause 5(2) of the agreement contemplates disbursement of dividends after deduction of the commissio....