# orFICIAL LIQUIDATOR, SUPREME BANK LTD v. P.A. TENDOLKAR (DEAD) BY L. RS. AND ORS

- **Citation:** [1973] 3 S.C.R. 364
- **Court:** Supreme Court of India
- **Decided:** 1973
- **Bench:** A. N. Grover, M. H. Beg, K. MUKllERJEA
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/orficial-liquidator-supreme-bank-ltd-v-p-a-tendolkar-dead-by-l-rs-and-ors-5820
- **Pages:** 38

## Headnote

Comp<nie.< Act (1 of 1913), s. 235 and Companies Act (I of 1956),
s. 543-Pou•er of Court to 1nake conzpulsive orders agalnst heirs of deccaJetl director in 111isfeaw111ce
p1·ocf.·edings-Actio
pei.rsonGlis 111oritt11
cunz persona-Scope of-Rig/it of appeal h,v end again~t heir.
Banking Companies Act (IO of 1949), ss. 45(G) and 45(0)-0fficial
liquidc .. tor, •;vhether should apply for public exaniiluztion of directors under.
s. 45(G) to s. 45 0(2) as amended by Act 33 of 1959-Scope of t/ze
fresh petiocl of li111itatiQn-S. 45 (0) (2) pre1:ai/s over s. 235 Co111panies
·Act, 1913, ln relation ~o Banking Co111pa111es.
Pi1·inciples deter111ini11g liabilit,v of nu;,iaging director and Board of
J)irectors in 111isfeasance proceedlngs,
On -an app1icati-on tor winding· up 'of a. bank a provisional Jiquidator
was appointed on 15th March 1956. The appellant, who was
there·
'after appointed as Jiquidator filed an application o:n 27th August. -1960,.
for misfcasanc.~ proceedings under s. 45H of the
Banking
Companies
Act,
1949,
and
s. 235
of
the
Indian.
Companies
Act, 1913.
Under s. 45 0 (2) in respect of all other claims by the Banking Company against" its directors, the period of limitation shall be 12 years
from thz date of the accrual of such claims'..
By Am·~nding Act 33
of 1959 the words 'or five yea'rs from the date of the first appointment
of the liquidator whichever is longer', \Vere '3.dded at the end
of the
sub-section.
The official Jiquidator relied upon several reports made by
the Rescrvq Bank and by others under orders of the High Court.
The
procecdi,ngs \\Crc taken against the directors, managing
director
and
officers of the company.
Two of the directors died while the proceedings '\-;Cr~ pe;nt.!ing. 1"hc Com~any judge dismissed the proceedings against
the employees as time-barred, and held that the heirs of the deceased
l.Jirectors could not be proceeded against: but, in respect of the managing dircc:tor and those Directors \liho were alive \vhen he
gave
his
<lecision it was held that the procecdCngs v.·.erc
\Vithin
tin1e,
bCir.g
covered by the _special provisions of s. 450 of the Banking Compani-cs
Act. The directors contended that the whole responsibility
forthe
fraud and misappropriation 'lay with the managing director."
who- had
\vide powers under the Articles of ASsociation, and in
whose
favour
the directors had executed ·a power of attorney. The rna;naging director
however contended that he acted 'according to
the
policy
and
in
accordance with directions of the directors in whose hands he \\'as a
mere tool'.
The Company Judge determined the loss to
the Company
and gave directions as to the liabilities of the managing director
n:rrd
other directors. In appeal, the Division Bench reduced the total liabili·
tv of directors and ttte individual remaining' liability of too
managing
director though it placed a larger share of the .burden of contribution on
.the mana~ing director. The appellant appealed agaimt the
order
in
relation of the liability of the manoging direc!'or and two other directors.
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SUPREME DANK LTD. V. P. A: TENDOLKAR (Beg,/.)
365
One of these t\vo directors died pendi~g the grant of his O\\'n appli·
cation for a certific-atc under Art. 136 _ of the Constitutio,n.
His heirs
got . themselves impleadcd and contended that the proceedings
against
them could not continue and also .. on the mcfits regarding the
liability
of that director.
·
HELD: (I) The contention that s. 235, · Compa;nies
Act,
1913,
_could apply to these proceedings is erroneous because, the proceedings
are governed expressly by the spcci-al la\v on the subject contained
1n
s. 45-0 of the Banking Companies Act,
[376F-G]
• (2) The plea that 12 years from the 'accrual of claims' had expired
before s. 45-0(2) was amended by the Amending Act of
1959,
and
that, therefore; the enlarged period of limitation of 5 years from
the
date of the first appointment of the liquidator was not available to
the ·
Official Liquidato

## Text

_Characters 0–39,992 of 102,113. This is a partial read: ask again with offset=39992 for what follows._

orFICIAL LIQUIDATOR, SUPREME BANK LTD.
v.
P.A. TENDOLKAR (DEAD) BY L. RS. AND ORS.
Januar:r 19, 1973
[A. N. GROVER, M. H. BEG AND A, K. MUKllERJEA, JJ.J
Comp<nie.< Act (1 of 1913), s. 235 and Companies Act (I of 1956),
s. 543-Pou•er of Court to 1nake conzpulsive orders agalnst heirs of deccaJetl director in 111isfeaw111ce
p1·ocf.·edings-Actio
pei.rsonGlis 111oritt11
cunz persona-Scope of-Rig/it of appeal h,v end again~t heir.
Banking Companies Act (IO of 1949), ss. 45(G) and 45(0)-0fficial
liquidc .. tor, •;vhether should apply for public exaniiluztion of directors under.
s. 45(G) to s. 45 0(2) as amended by Act 33 of 1959-Scope of t/ze
fresh petiocl of li111itatiQn-S. 45 (0) (2) pre1:ai/s over s. 235 Co111panies
·Act, 1913, ln relation ~o Banking Co111pa111es.
Pi1·inciples deter111ini11g liabilit,v of nu;,iaging director and Board of
J)irectors in 111isfeasance proceedlngs,
On -an app1icati-on tor winding· up 'of a. bank a provisional Jiquidator
was appointed on 15th March 1956. The appellant, who was
there·
'after appointed as Jiquidator filed an application o:n 27th August. -1960,.
for misfcasanc.~ proceedings under s. 45H of the
Banking
Companies
Act,
1949,
and
s. 235
of
the
Indian.
Companies
Act, 1913.
Under s. 45 0 (2) in respect of all other claims by the Banking Company against" its directors, the period of limitation shall be 12 years
from thz date of the accrual of such claims'..
By Am·~nding Act 33
of 1959 the words 'or five yea'rs from the date of the first appointment
of the liquidator whichever is longer', \Vere '3.dded at the end
of the
sub-section.
The official Jiquidator relied upon several reports made by
the Rescrvq Bank and by others under orders of the High Court.
The
procecdi,ngs \\Crc taken against the directors, managing
director
and
officers of the company.
Two of the directors died while the proceedings '\-;Cr~ pe;nt.!ing. 1"hc Com~any judge dismissed the proceedings against
the employees as time-barred, and held that the heirs of the deceased
l.Jirectors could not be proceeded against: but, in respect of the managing dircc:tor and those Directors \liho were alive \vhen he
gave
his
<lecision it was held that the procecdCngs v.·.erc
\Vithin
tin1e,
bCir.g
covered by the _special provisions of s. 450 of the Banking Compani-cs
Act. The directors contended that the whole responsibility
forthe
fraud and misappropriation 'lay with the managing director."
who- had
\vide powers under the Articles of ASsociation, and in
whose
favour
the directors had executed ·a power of attorney. The rna;naging director
however contended that he acted 'according to
the
policy
and
in
accordance with directions of the directors in whose hands he \\'as a
mere tool'.
The Company Judge determined the loss to
the Company
and gave directions as to the liabilities of the managing director
n:rrd
other directors. In appeal, the Division Bench reduced the total liabili·
tv of directors and ttte individual remaining' liability of too
managing
director though it placed a larger share of the .burden of contribution on
.the mana~ing director. The appellant appealed agaimt the
order
in
relation of the liability of the manoging direc!'or and two other directors.
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SUPREME DANK LTD. V. P. A: TENDOLKAR (Beg,/.)
365
One of these t\vo directors died pendi~g the grant of his O\\'n appli·
cation for a certific-atc under Art. 136 _ of the Constitutio,n.
His heirs
got . themselves impleadcd and contended that the proceedings
against
them could not continue and also .. on the mcfits regarding the
liability
of that director.
·
HELD: (I) The contention that s. 235, · Compa;nies
Act,
1913,
_could apply to these proceedings is erroneous because, the proceedings
are governed expressly by the spcci-al la\v on the subject contained
1n
s. 45-0 of the Banking Companies Act,
[376F-G]
• (2) The plea that 12 years from the 'accrual of claims' had expired
before s. 45-0(2) was amended by the Amending Act of
1959,
and
that, therefore; the enlarged period of limitation of 5 years from
the
date of the first appointment of the liquidator was not available to
the ·
Official Liquidator in the present case is also unacceptable .. The . facts
necessary to determine whether any part of ~he claims ace.rued
against
any director have riot bec:n examined.
Such
a
point
involvinr;;
an
investigation into fresh facts sho\ving when clai1ns for
any
parttcuh1r
item of loss to the ·company accrued or \Vhen they accrued against the
board of di'rectors, cannot be taken up for the first time in this Court
when the matter was riot .raised and gone into the High Court. [376A-FJ
(3) In any case, the amendment of s. 45(0)(2) conferred
a
new
D
nght of counting the period of limitation from the lirH
appointment
·of the liquidator.
The exercise of that. right by the liquidator,
acting
on behalf of the company, certainly took place after .. the comnu::ncemcnt
uf the Amending Act of 1959.
There was no question hcrc .. Q.f giving
any retrospective operation to any right \'.'hethcr procedural or_ substantive.
[377A-C]
E
(4) The maxim acti.o persOnalis 111orilt1r cu1n persona \vould not be
. applicable to actions based on· co,nt:ract or. \vhcrc a tort feasor's estate
had bcncfittcclr from a wro11g done.
There is no .reason to extend the
maxim to cases involving breaches ·of fiduciary dut_ies· where the personal
conduct of the deceased director has been fully inquired into and the
only qucsticm for determination, on an appeal, is the extent
of
the
liability. incurred by the deceased directdr. Such liabilitv
must
neccs~
sarily be confined to the assets or the estate left by the deceased· director
F
in the hands of his successors.
In so far as a heir or_ legal representativ.:
. has an interest in the assets of the deceased director
and . fcpres.enU
the estate, and the Jiquidator represents the interests of t.he compa:n)', . ·
.the heirs as well as the 1iquidator should, 'in cquit}r, be able to question
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a decision which affects the interests represented.
[3800, E-A]
In re. East of England Bmzk-Feltem's Executors case, [1865] 1 Equi>ry
Cc..ses 219. in re. United English and Scottish Assurance Co.--ex. ·parte
Hawkins, [1867] 3 Ch. A.C. 787, in re. British. Guardian Life Assurance Company, [1880] 14 Ch. D. 3 335, S.B. Billimoria Official :Liqui·
dator v. CecUla Mary Desouza and Ors., A.LR. 1926 Lah. 624. Official Liquidators v. Jugal Kisliore and Ors., A.LR. 1939 All I. Manila/
B:,ijal v. Ve11Jr,1vanc/ras, C. Jadav & Ors.,
A.l.R.
1944
Boin.
193,
Puttiani Veettil Afcnokki Si!nkarani Ncunblar
v.
Kottayc.111
Bai1k
bv
Official Liquidator, Tellic/zary & Ors., A.LR. 1946
Mad. 304 · and
In re. The Peedan Ju/zarmal Bank Ltd., A;LR.: 1958 Mau 583
referred to.
·
•
(5) While s. 235 of the Companies
Act 1913
corresponding ·to
s. 543 of the Companies Act, . 1956, gives a power to
the ·court
to
inquire into the conduct of any past or present di'rector; the
sections
/
·•·
366
SUPREME COURT REPORTS
[1973] 3 S.C.R.
•
confine the power of the Court to make orders
for
repayment
or
resroration of money or property or contribution to the assets of the
company •aainst the indjviduals occupying tbe capacities either ~ the
past or present mentioned therein; and, the power does not, on
the
language of the provisions, extend to making compulsive orders against
the heirs of the delinquQJlt directo<s or officers. As the power to take
the special proceedings is discretionary
and does not exhaust other
remedies, although the court may, as a matter of justice and equity,
drop proceedings against the delinquent directors, managers or officers
who are no longer alive, leaving. the complainant to his ordinary remedy by a civil suit agailnst the <IS,<iets of the deceased, yet,
where
nd
injustice may be caused by continuing these proceedings
against
the
past director even though he be dead, the proceedings could continue,
after giving the person who may be interested, an opportunity to be
heard. Jlut ""' such proceedings can only result in a declaration of
tbe liability of a deceased director, because,
the language of s. 235
of the 1913 Act does not authorise passing of orders to compel
heirs or legal representatives to do any
thing.
SUch compulsive
proceedings
as
may become
necessary
against those upon whom
devolve the assets or estate of a deceased delinquent director, who may
have become liable, could only
lie outside
the section. The power
under the section would not extend beyond malting a declaration against
the
deceased
director
provided
he
in
his
Jife
time,
or,
his
heirs,
after his
death, h ave had due opportunity of putting forward
the
case
on
behalf
of the
allegedly
delinquent
director.
U
either a 1i9i<!ator or the heirs of • delinquent director against whom
a declaration of liability has been made, can question the determination of liability of the deceased delinquent, who was alive at the time
of the judgment against him, it is obvious that the appellate court could
give a declaration either reducing or increasing the liability evein thouRh
it may not be able to enforce it by an order under the sect'ion. If the
declaration can be questioned by an appeal the liability can
be
not
only wiped off or reduced but also increased C1J> an appeal heard after
the death of a director held liable.
[381F-H; 382A-B; 383A·Dl
In the p.r:vscnt case, the director whose representatives were impleaded had full opportunity of defending himself in the misfeasance proceed·
ings, he elloercbed his right of appeal against the order of the Company
Judge, and the Division Bench reduced his liability. His
heirs
were
heard on me<tits in the appeal to this Court, and any order passed by
this Court oould only affect the assets or the estate of the
deceased
director.
In these proceedings an order cannot be passed against
the
heirs of the director so as compel them to do anything and the official
liquidator or the co-directors may take any other
prooeeding
which
may be open .~ them under the law so as to obtain the contribution of
that director. · !383£-G]
Erkm41r v. New Sombrero Phosphate Co., [1878] 3 App. Cas. 1218,
llJJmskUI v. £ilW<Zrds, [1886] 31 01. D. 100, In re. Sharne, f1894]
I Ch. 154, L.S. Rarrumwnny Iyer ,., Brahmayya cl Co. Official Uqui·
dators. HIJll"""'n ..,,, Liii., (1944)
}6 Com Cas 270; New Fleming
)pinning cl Weaving Co. Ltd. v. Xesson/i Na'ik and Ori., I.L.R..
9
Bom. 373,
Gopal
Ga11tsh
Abhyankar
v.
Ramachandra
Sadashlv
Sahasrebudh-. I.L.R. 26 Bom. 597, Sakvahani Ingle
Rao Sahib
v.
Bhavanl Bod Sahib and Ors., I.L.R. 27 Mad. 588 and
Padarath
v.
Raia Ram, (1182) 4 All. 235, referred to.
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SUPREME BANK LTD, v. P.A. TENDOLKAR (Beg, J.)
367
( 6) It is a question of fact, to be determined upon the evidence in
each cue, whether a Director, alleged to be liable for misfeasance, had
acted reasonably as well as honestly and with due diligence, so that
he could not be held liable for coimllving Qt fraud and misappropriation
which takes place. A Direcror may be shown to be so placed and to
have been so closely and so long ossociated persOJ!O)ly with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of a Comp...,y
even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to 'what must be obvious to everyone ~o
examines the affairs of the Company even superficially. If h.e does so
he could be held liable for qereliction of duties \lllldertaken by him
and compelled to make good the losses incurred by the Company due
to his neglect even if he is not shown to be guilty of participating in
the commission of fraud.
It is enough if his negligence is of such a
character as to enable frauds to be committed and losses thereby incurred by the Company.
[386E-HJ
On the evidence on record. the promoter or
founder
Directora
who were there since the inception of the Bank, were cognizant of the
nature of the dealings by the Managing Direcror and the officers of the
Bank. The evidence showed that they had bee:n
discussing
matters
relating to the management of the Company at the meetings
of the
Board where items of "policy", which benefited the Directvrs
at the
expense of the depositors, must have been discussed. They could not
have been ignorant of the fact !lhit the
Account
Books
contained
fictitious <11>tries showing payments for shares by them when they had
not actually paid for them. Nor could they be so innocent as not to
know of the window dressing and presentation of false balance-sheets
so as to conceal the true st-ate of affairs from the depositors for years.
Any director conscious of his managerial
responsibilities.
who
had
cared to exami:ne the affairs of the Bank, could not have failed to find
out what was really happening in the Bank.
The fact that these practices
were tolerated for such a long period without any check by the Board
of Directors indicates that the promoter Directors must be participants
i.n the benefits of widespread misappropriati<?n even though they may
have so operated as not to leave any traces of actual misappropriation
by them in the records of the l!ank. [398E-G; 399C-EJ
Upon the facts examined by the trial judge it is therefore clear that
although the Managing Director was conducting the day to day affairs
of the company and must therefore be held responsible for greater share
of the loss incurred due to the misappropriation and misuse of managerial power yet his co-directors could
not
possibly be ignora.11t of
the nature of such dealings and the activities of the employees and the
Managing Director, simply because they had executed
a
power
of
attorney in his favour.
The Company Judge as well as the
Division
Bench had referred to the difficulties encountered in
determin~g the
actual total loss to the Company because of want of any reliable statement of account. This state of the records of the
Bank
was
itself
evidence of breach of thei'r duties by the Managing Director and
the
Board of. Directors to see that the business of the Bank was hOOleStly
and eflic1ently conducted. The proved conduct of the other directors
was such that an inference of their complicity in concealing the
true
state of affairs from depositors, presumablv because they were
thenlselves benefitting from it, could rJOt be avoided. [388B-D E-F; 390E-F]
368
SUPREME COURT REPORTS
[1973] 3 S.C.R •.
In re. City Equitabre~'Life 'Insurance Co., 1925 Ch. 407, Dovey v.
Cory, [1901] A.C. 477, In re Benham & Co., [1883] 25 Ch. D.
752
and Overand & Guma
Co.
v.
Gibb,
{1944) 5 L.R. H.L. 480,
r.cferrcd to.
--
(7) The Division Bench erred in reducing the total liability of. t~e
directors an<l the individual liability of the ma;naging_ director. On his
O\\.'ll admissio.n, the managing director was liable for a larger amo":'nt.
· [393C-EJ
(8) The Division Bench <il;o erred in holding that ·a good deal of
evidence was not placed before the Court, which
would
have
been
ava'HabJc had the Official Liquidators asked for public examination of
the Directors under s. 450 of the Banking Companies Act. The
Official Liquidator could not possibly have done -anythblg
more
in __ his
application than to rely on reports available to him and to prove
the
·correctness _of their contents by producing, as witness-es, those persons
\\.'ho conducted the investigation and
made reports. AH
that
s. 45G
requires is the submissio:n of a report showing that loss has been caused
to the Ba1>king Company in the opinion of the Official Liquidator, and
thereafter it is for the Court to decide whether the Directors should
be publicly· examined. In the present case; the. Company
Judgedid
order the public examination of the Directors. but they v.1ere un\1.diling
to give evidence. [395B-C; 396D-N; 397E-HJ
(9) The Division .Be;nch furth~r erred in holding that the allegations
of improper conduct by the Directors in not exercising proper
super-
~ vision~ did not form the subject-matter of any separate issue
framed
by the Company Judge. The issues framed in the case were wide enough
fo cover the question. The DErcctors _had not only an opportunity of
n1ceting the alicgatio.ns contained in the petition. but also had
knowlcUge of the material brought on record later. The Directors y;ere in
no way handicapped by the alleged vagueness of charges or a failure
to -frame issues more fully.
The Company Judge was therefore tight
in c'onsi<lering the evidence adduced in the
case.
[396E-G~ 3990-E;
398E-GJ
Nagabai A1111nal and Grs. v. B.San1a Rao & Ors .• [1956] S.C.R.
45 J, followed.
[Applying the above principles the liabilHv of the managing director
a:nd the other directors, including .that-· of the deceased director
were
fixed and the case was 'remitted to the trial Judge for passing orders
against the managing directors and the director who was
alive
\\'hen
Judgment in proceedings under s. 235 of the Comp<inies
Act,
1913,.
was- gh:en.
As regards the liabilities of other deceased directors it was
open to the. official liquidator and the director who is alive,
to
take
any other proceedings which may be available u:n<ler the. law againSt his
estate or assets in the hands of his hc'irs.] ·
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos; 195197, 234 and 300 of 1967.
- .
·
Appeals bly a certificate from the judgment an\! order . dated
January 7, 1966 of the Mysore High Court at Bangalore in Company Appeals Nos. 9 and IO of 1967.
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S.· C, Sundraswamy, Ram~shwar .Nath and K.Suryanarayana
II
Rao, for the appellants (in C, As. Nos. 195-197 and Respondent
No. 1 (in C. As. Nos. 234 and 300).
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SUPREME BANK LTD. v. P.A. TENDOLKAR (Beg, J.)
369
C. K. Daphtary, S. K. Mehta, K. R. Nagaraja and Qamuruddin,
for appellant (in C.A. No. 234) respondent No. 1 (in C.A. No.
195).
V. S. Desai and P. C. Bhartari, respondent No. 2 (in C.As.
196 and 197) and respondents Nos. 3-6 (in C.A. No. 300).
B
R. B. Datar, for respondent No. 4.
The Judgment of the Court was delivered by
BEG, J.-These are five appeals by grant of certificates under
Article 133(l)(a) of the Constitution by the Mysore High Court
where the orders of the leamed Company Judge, in misfeasance
c
proceedings, under Section 45H of .the Banking Companies Act,
1949, (hereinafter referred to as 1the Act'), read with Section 235
of the Indian Companies Act, 1913, (hereinafter referred to as
the Act of 1913') had been modified by a Division Bench. These
proceedings were instituted bi)- >the Official Liquidator againilt seven
Directors, including the Cha_i_rman of the Board of Directors and
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the Managing Director, and the Cashiers, the Accountant, too
Branch Managers, another officer, and an auditor of the Supreme
Bank of India Ltd., Balgaum,
(hereinafter referred to as 'the
Bank') under liquidation. The Bank, incorporated on 27-5-1939,
commenced business on 6th October, 1939. It suspended business on 27-11-1954 as a result of gross mis-management which
enabled large sums of money to be misappropriated and false
and fictitious ell'lries to be made in its account books.
Out of the seven Directors mentioned above, five,
namely,
S. G. Pant, 'the Chairman of the Board of Directors, S. K. Sawant,
the M?naging Director from July, 1946. P. A. Tendo[kar, D. R.
Angolkar, and L. S. Ajgaonkar, were promoter or founder Directors. The sixth Director, R. W. Forwal, joined the Board in 1961.
The seventh Director, R. N. Kalghatgi, took charge of his office
in July, 1953, on the death of his elder brother G. N. Kalghatgi.
Before the Company Judge could give his decision, on 8-11-1963,
S. G. Pant, the Chairman of the Board of Directors, had expired
on 29-8-1961. and
D. R. Angolkar, Director,
had died on
10-10-1962. During the pendency of the applications for certification, under Article 133 of the Constitution, for appeals to this
Court, another founder Director, P.A. Tendolkar died, 10-8-1966.
so that his legal representatives were substituted for subsequent
proceedings.
The Official Liquidator had alleged, in the application for misfeasance proceedings, dated 27-8-1960, that "the Directors and
the employees Of the Bank had misapprooriated or become liable
or acoountablle for a total sum of Rs. 26,000/ ·" due to the Com-
370
SUP&EMB COURT REPORTS
[1973] 3 s.c.R.
pany, and were guilty of "misfeasance, breach of trust, and fraudulant conduct in relation to the Company". The Official Liquidator had prayed that the Court may be pleased to take cognizance of the application against the Respondents and examine
their conduct and "direct them all or such of them as may be held
liable, particularly or generally, severally or jointly, and, in such
manner as it may deem just, fit, and proper, to repay and restore
the money of the Bank, together with interest, or, to contribution
such amounts to the assets of tthe Company by way of compensation in respect of mis-application; retainer, misfeasance or breach
of trust" as the Court may deem just. Thus, the prayer for relief
covered every type of order tthe learned Company Judge could
consider fit and proper to meet the needs of the case.
We may now glance at the background of investigations and
reports made which led up to the misfeasance proceedings, befor.:
we consider the issue raised and decision given on these by the
learned Company Judge and then by the Division Bench,
On 7-3-1951, after the coming into force of. the Banking Companies Act 1949, on 16-3-1949, the Reserve Bank of India had
given its short inspection report ( A-1 ) on the affairs of the Bank
under Section 22 of the Act. This n::port showed that even necessary formalities with regard to opening of deposit accoums were
not complied with, over-drafts were allowed in 'savings' Bank
accounts, unsecured advances were disproportionately large, rates
offered on some fixed deposits wer" abnormally high, the Bank
was constantly blorrowing from other Banks by pledging its investments, 16% of the advances were irregular, records to indicate
the correct value of goods pledged or hypothaticated were not
maintained, effective steps against those who obtained proved
irregular advances were not taken, sufficient information was not
available about the means and standing of the borrowers, neither
periodical returns, particularly of advances by ithe Branches, were
made, nor were the Branches inspected periodically, the usual
practice of Balancing the ledger at frequent intervals was not
observed, and account books and records of the Bank were not
duly maintained.
The Reserve Bank, therefore, suspended
its
decision about issue of a licence to the Bank to carrv on banking
business until the Bank had removed these shortcomings.
On 5-3-1953, a second report (A-2), under Section 22 of the
Act, was given by the Reserve Bank, in which it was observed.
inter-alia, that the Bank had not rectified the defects painted out
in the' previous inspection report, that the Board of Directors did
not show sufficient interest in the working of the Bank, and that
there was no proper supervision and control over the activities of
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SUPllBME BANK LTD. v. P.A. TENDOLKAR (Beg, J.)
371
the Managing Director. The question whether the Bank was
eligi!ile or not for a licence was still left undecided after listing
irregularities found under fourteen heads.
On 13-9-1954, a very detailed inspection report (A-3), under
Section 35, sub.s(l) of the Aot, carried out on 26-3-1954, was
sent by the Resenle Bank to the Bank, with a covering letter, in
which the following conclusion was recorded :-
"On the basis of the above report, it appears that
the banking company is conducting its affairs in a manner detrimental to the interests of its depositors.
The
Reserve Bank of India, therefore, proposes to give it a
notice in writing in terms oi the first proviso to subsection (2) of Section 22 of the Act that a licence to
carry on banking business in India cannot be granted
to it''.
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The Bank was given an opport11nity to make a representation
against the report.
After suspension of payments by the Bank on 26th November.
1954, the Bank had applied, on 1-12-1954, 'to the High Court of
Bombay, under Section 37 of the Act, praying for the grant of a
moratorium and for opportunity to be given to reconstruct the
Banking Company as a going concern.
An iD'terim order was
passed by the Bombay High Court granting moratorium for a
period of two months and staying all actions against the Company
for this period. Shri V. R. Kothagi, an Advocate of Belgaum, was
appointed as Special Officer of the Bank under Section 37(3) of
the Act, with powers to file suits.
Under the directions of the Bombay High Court the Reserve
Bank deputed Shri Amrit Lal Bhatia to inspect the records and
the working of the Bank and to submit a rep<)rt under the proviso
to sub.s (2) of Section 37 of the Act. This report, submitted on
13-1-1955
(A-4),
disdosed a deplorable state of accounts
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which contained a number ef false and fraudulent entries, want
of supervision by either the officials or the Directors, unauthenticated erasures and alterations in- the accounts, and a shortage of
cash to the extent of 2.01 lakhs. It showed that the total liability
of the Bank, excluding its share capital, amoull'!ed to Rs. 14.83
lakhs.
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On 20-12-1954, the Directors of the Bank, wfth the concurrence of the Special Officer, had appointed Shri K. Y. Wagle as
Officer to examine the records of the Company with a view to
372
SUPREME COURT REPORTS
(1973] 3 S.C.R.
e\plore the possibilities of its reconstruction. This report, dated
J 6-2-1955 (A-21) said :
"On going through the books of accounts, it is observed that the mis-appropriation penetrates imo the books
from 1948 and still earlier and the amounts misappropriated are through entries from (a) Cash, ( b) Bank
accounts with other Bankers, ( c) Branch accounts".
A list of cash deficits and fictitious entries who also given here.
The report mentions that the assets and liabilities of 1the Bank could
not be verified as no regular audit had been carried out and that
the records had been maintained in "a most deceptive manner"
so that 1the amounts involved could not be ascertained correctly.
The total amount "involved in the fraud" was assessed rou~hly at
Rs. 4.26 lakhs. It said : "So far an amount of Rs. 3. 75 lakhs has
·been traced from various sources.
The balance can be traced
provided the accounts are
reconciled''.
After this report, the
Bombay High Court rejected the application for further moratorium and for a reconstruction of the Company.
On 8-3-1956, a deposi!or of tlte Bank applied to the Bombay
High Court for the winding up of the Banking Company.
On
13-3-1956, a
provisional liquidator was
appointed,
and, on
J 6-4-1956, the Bank was ordered to be wound up. As a result
of reorganisation of States, the winding up proceedings were transferred to the High Court of Mysore, and, the Official Liquidator
at the Mysore High Court was appointed as the Liquidator of the
flank.
On 22-7-1958, the Official Liquidator brought to the notice
of the Company
Judge an elaborate
report
(A-9),
dated
10-5-1957, made by M/s. D. D. Joshi & Co., Auditors, appointed
by the Direction of the Bank themselves. Here, after a survey of
the Bank's history and conduct of its affairs by its Directors and
officers we find, among 1the conclusions. recorded ·
" ( I ) The Directors, by accepting a responsibility
which they never intended to accept, laid the foundation
for the fraud. They have misled the share holders and
the depositors b!)' presenting false Balance Sheets and
Profit and Loss Accounts, at least from 1946 onwards.
knowing them to be false.
(2) The Managing Director Shri S. K. Samant, the
Accountant Shri R. S. Deshpande and the three Cashiers.
K. V. Saudi. V. K. Nadgouda, S. N. Ajrekar took full
advanta2e of the weakness of the Directors, the neglij!ance of the Auditors, and fraudulently mis.appropriated
the monies individually and collectively".
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SUPREME BANK LTD. v. P.A. TENDOLKAR (Beg, J.)
373
The Chartered Accountants were unable to ascertain 'the exact
amounts misappropriated.
They gave the following reasons for
coming to the conclusion that the "Balance Sheets and the Profit
and Loss Accounts for the years from 31-3-1946 onwards
are
false and incorrect":
(a) The staff and the Directors know that the Bank
had not received. the share amount for the majority of the shares allotted which was made up
of the fictitious credits given against these share
applications, and which did not represent the
actual physical cash on hand on that day.
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(b) The amount of unclaimed dividends taken to
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interest account was illegal and against
the
provisions of the .. Articles of Association of the
Bank.
( c) The Auditors, when they counted the cash on
24th March, 1954, could have known that the
actual cash on hand verified tly them was
far
short of <the cash balance shown by
the
Day
Book of that day had they tallied the cash
counted by them with the Day Book.
( d) The Bankers' Balances as shown in the Balance
Sheets did net show the correct balances inasmuch as false debits were made to these Banks
by misappropriating the amounts shown as sent
to the Bank for credit.
( e) The remission of Rs. 1,000 shown in the Profit
and Loss Account of 1947 is a misnomer and the
·wording seems to have been purposely used to
mislead all concerned. Moreover, there is
no
sanction also for this remission.
( f) Due to suppression of overdrafts in the Savings
Bank Accounts, the figures oi deposits
and
consequently of loans, as shown in the Balance
Sheets were incorrect, etc. etc.
In D. D. Joshi Co's report it is also stated :
"On the event of the commencement of our work,
the Directors had resolved to repay a part ( 10% ) of
the deposit amounts to the depositors, This was the best
opportunity to bring forth oass,books and other records
~ the J?05session of the depositors.. for getting the deposits verified for our purposes. The matter was discussed
SUPREME COURT REPORTS
[1973] 3 S,C.R.
with the Chairman and some of 1the Directors and we
handed them a specific form for obtaining letters ol
confirmation of balances from the depositors. The Chairman and the Directors assured us to give due publicity
to the matter before disbursing the amount and upon
insisting on the production of pass-books and other
records available from the depositors at the time of
making the payments. However, it was later on discovered that this proposal of ours had not been carried
out and that the deposit amounts were being disbursed
without insisting upon the production of the pass-books.
When the matter was again referred to the Chairman
we were surnrised to learn 'that the Directors had not
approved o( our proposal on the ground that it would
have caused unnecessary inconvenience and harassment
to the depositors ( Annexure No. 4). By this failure on
the part of the Chairman and the Directors a vary good
opoortunity available to us and the management for
verifving the accounts of the Bank from sources independent of records at the Bank was denied and lost to
us. Thus, the Directors themselves who had apoointed
us and promised us all facilities and co-operotion did not
ex1end the same as and when it was essential. From the
facts !hat came to our notice subsequentlv durin~ the
course of our investigation. it •ee1rn th"t this act of
theirs might even have been deliberate".
After giving 'the Directors and Officers of
the
Bank due
opportunitv to rePlv to D. D. Joshi Co's report.
the Official
Liauidator had filed the apnlication of 27-8-1960, under Section
45H of the Act read with Section 235 of the Indian .Companies
Act. on the s1reneth of all the above mentioned reports. copious
extracts from which were1 annexed to a dulv sworn aflidavit supporting the application for misfeasance proceedings.
In reolv to the application. the Directors
complained of
vegueness and lack qf particulars of the alleqed wrongful
acts
and omissions. Thev also relied strongly on Articles 109 and 112
of the 'Articles of Association' relating to the powers and duties
of Managing Director in whose favour thev are said to have
executed a oower of artornev. Thev tried to out the whole responsibili!v for the alleged fraud and misanoronriations and loss
on the Managing Director. S. K. Samanth. annointed in 1946 and
some officers· of the Bank. denied that the Managing Director
consulted them before taking anv action in !he d•v to dav transactions of the Bank. On the other hand. the Managing Director.
S. K. Samanth. pleaded that the whole business of the Bank was
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SUPREME BANK LTD. V. P.A. TENOOLKAR (fJeg, J,}
37 S
conducted "according to the policy and in accordance with the
instructions of the Board of Directors" in whose hands he was "a
mere tool." All the opposite parties to the application pleaded
that the proceedings were barred by limitation.
The learned Company Judge had dismiSsed the proceedings
against employees of the Bank as time barred on the ground that
their cases were governed by the limitation provided for in Section 235 of the Companies Act of 1913, the application of Section
543 of the Companies Act of 1956 having been. expressly exclnded by Section 64 7 sub. s ( 2) oi. that Act, in a' case in which the
winding up of the Company had begun, as it did in the instant
case, before the commencement of the 1956 Act on 1-4-1956.
But, in respect of the Managing Director and those Directors who
were alive when the learned Company Judge gave his decision
on 8-11-19~3, it was held that the proceedings were covered by
the special provisions of Section 45(0) of the Banking Companies
Act applicable to them. The first two clauses of Section 45(0)
read as follows :
"45 ( 0). Special Period of limitation :-
( 1) Notwithstanding anything to the contrary contained in the Indian Limitation Act,
1908
(IX of 1908) or if any other law for the time
being in before,, in computing the period of limitation prescribed for a suit or application by a
banking company which is being wound
up,
the period commencing from the date of the
presentation of the petition for the winding up
of the banking Company shall be excluded.
(2) Notwithstanding anything to the contrary con•
tained in the Indian Limitation Act,
1908
(IX of 1908) or Section 235 of the Indian
Companies Act, 1913 (VII of 1913), or in any
other law for the time being in force, there
shall be no period of limitation for the recovery
of arrears of calls from any Director of Banking
Company which is being wound up or for the
enforcement by the Banking Company against
any of its directors of any claim based on a
contract, express or implied; and in respect of
all other claims by the
Banking
Company
against its Directors, the
period of limitation
shall be twelve years from the date of the accrual
of such claims".
By the Act XXXIII of 1959. the following words were added at
the end of Section 45 ( 0 )(ii) : "or five years from the date of
first appointment of the liquidator whichever is longer".
376
SUPREME COURT REPORTS
[1973) 3 S.C.R.
The Company Judge had held that the nature of the claims
in the misfeasance proceedings against the Diredors in the instant
case fell under the category of "all other claims", mentioned in
Section 45(0)(ii), for which the period of limitation was either
twelve years from the dates of "accrual of claims" or five year;
from the date of. the first appointment of the Liquidator "whichever is longer", The learned Company Judge held that the first
clause of Section 45 (0) of the Banking Companies Act, 1913.
<lid not apply to a case in which the period of limitation had not
begun to run before the filing of the winding up petition, and
that the misfeasance proceedings against D;rectors, having ~tarted,
on 27-8-1960, within five years of the first appointment of the liquidator on 13-3-1956, were clearly within time. Incidentally, the
finding that limitation did not begin running before filing the misfeasal)ce application implied th:rt this was not a case in which a
claim had "accrued" before the filling of the application. The
objection.that Section 45(0) of the Act 'would apply to claims
made by the Company itself and not to those by a liquidator was
rightly over-ruled on the ground that the Liquidator ·really represented the Company and that a claim made by the liquidator w:1s •
therefore, a claim "by the Banking Company"', as was held
in
Jaivala Prasad Vs. Official Liquidator,(1)
within the
meaning
of this expression used in Section 45(0) of the Act. The Division
Bench, in five appeals by the Directors, had concurred with the
Company Judge's views on the issue of limitation.
It has, however, b~en urged before m, on behalf of the
Directors, that, the period of . three years, provided by Section
235 of the Companies Act of 1913, as well as 12 years from
"accrue! of claims", prescribed by Section 45(0) (ii) of the Act.
having expired before the Act XXXIII of 1959, by which Section
45 (O)(ii) was amended on 1-10-1959, time barred claims couhl
not be revived whether the case was governed by the limitation
laid down in Section 235 of the Act of 1913, or that in Section
45 (0) of the Act.
The contention that Section 235 of the 1913 Act could apply
to these proceedings, governed expressly by the special law on th~
subject contained in Section 45(0) ·of the Act, is plainly erroneous. The plea that twelve years from the "accrual of claims" had
expired before Section 45(0)(ii) was amended on 1-10-1959 h
also unacceptable.
It does not seem to have been specifically
advanced in the High Court so that the facts may be examined
there to detennine when any part of the claims "accrued" against
any Diredor. Such a point, it is obvious, involving ·an investigation into fresh facts, showing when claims for
any· particular
'terns of Joss to the Company accrued, or when
they accrued
(l) A.l.R.1962 All. p. 486.
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SUPREME RANK·LTD. V. P.A .. TENDOLKAR (Beg, J.)
377
I
against its Board of Directors itself cannot be taken up for the
· first ·time in this Court: It was not taken, and, therefore, not gon~
into in the High Court.
'
In any case, the amendment of Section '45(0)(ii) of the Act
had conferred a new right of counting the period of limitation
from •rhe first appointment of the liquidator. The exercise of that
right by the liquidator, acting on behalf of the Company, certainly took place after the commencement of Act XXXIII of 1959.
There was no question here of giving any retrospective operation
to any right· whether procedural or substantive. We,
therefore,
think that the claims against the· Directors, which ·were prima
facie made within time,· were not shown to have been barred by
limitation.
·
We will now consider another question of preliminary nature
with regard to the liabilities of legal representatives of the deceased
respondents. The Company Judge had held that misfeasance
proceedings were of a special nature involving an enquiry into'
the alleged wrongful conduct. of Directors personally. The liability of a Director for such wrong doing was held to b~ of personal
character which vanished with the death of a Director, Reliance
had been placed, by the Company Judge, on : In Re, East of
England Bank-Fe/tom's Executors
Case,( 1) which
had
been
followed in Re : United English and Scottisl1 Assurance Companyex-purte Hawkins,(") and in Re: British Guardian Life Assurance Company.(') The learned Judge observed that 1the principle
lai<l down in these English cases had been followed by Indian
High Courts in the. cases mentioned by him which · were : (I )
S. B. Billimpria, Official Liquidator Vs. Cenilla Mary Desouza &
Ors.,(')
(2) Official Liquidators Vs. /ugal Kishore & Ors.,(')
(3) Mani/a/ .Brijlal Vs, Vendravandas C. Jadev & Ors.,(') (4)
Pattiam Veetti/ Menokki Se11kara111 Nambiar Vs.