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Facts of the Case
The proceeding in case arose over the liquidation of the Haruman Bank LTD. Liquidation proceedings were initiated under the Indian Companies Act 1913[1]. The subscribed and paid-up capital was stated to be Rs. 5, 75,000 and Rs. 4, 31, 00. A provisional liquidator was appointed on August 19, 1947, and the final order, directing the bank to be wound up, was passed on November 5, 1947. On January 12, 1948, the present respondents[2], by order were appointed the official liquidators. One Swaminatha Iyer, the father of the present appellants, who was a retired chief engineer of the Madras government, was a director of the Bank. The liquidators posited that Swaminatha Iyer was deeply involved with managing the affairs of the Bank till it crashed.
According to the Bank’s articles of association, the managing committee was vested with managing the Bank while the supervision and control were vested in the directors. The article of association also gave the managing committee equal powers, the same as the Director, and allowed them to decide how the business of the Bank would be conducted.
Swaminatha Iyer then became a member of the managing committee in August 17, 1937 and on the 22nd of March, 1938, he was elected as the president of the Board of Directors.
According to the liquidators, the managing committee under the influence of Swaminatha Iyer carried on the affairs of the Bank recklessly, and disregarded the powers and duties of the Bank. They further stated that Swaminatha Iyer knew all about the how business was being conducted in the Bank by the Managing Director where he disregarded the rules and regulations put in place in respect of making loans, advances and investments. He was charged of funds misappropriation, unauthorized usage of funds by the managing director K.V Krishnamurthi in purchase of a coffee estate which Swaminatha presided. It was also claimed that K.V enriched himself with the funds of the Bank for his own personal purchase of lands. The loss sustained by the bank on all 3 counts was Rs. 14, 08,647.
Proceedings were initiated under the Companies Act[3], charging the respondents with Misfeasance, Misapplication of funds and breach of trust. However, when argument on the application was coming to an end, Swaminatha died on August 16, 1959. The application proceeded against other respondents to the application. Members of the managing committee were liable to pay compensation to the Bank for losses they suffered by the misappropriation, improper loans, illegal declaration of dividends etc.
The liquidators filed a company application against the present appellant who is sons of Swaminatha, and claimed relief against their father’s estate for losses he caused to the Bank by breach of trust and Misfeasance[4]. The liquidators also prayed for a declaration that the release deed dated July 27, 1945, which was executed by Swaminatha favoring his sons was void against the bank.
Two main contentions raised against the liquidator’s application were that the cause of action has been rendered extinct with Swaminatha’s death and there was a bar on limitation. On the first position, it was held that the liquidators had a prima facie case to proceed against the estate of Swaminatha to recover the lost amount from misappropriation. On the second position, the judge held that the claim was not barred by limitation, as the course of action against the legal representatives arose only after Swaminatha’s death[5]. On appeal, contentionswere raised from legal counsels of the respondents and appellants.
While the contention of section 306 of the Indian Succession Act[6] was accepted, it was posited that while the section governs the liability of executors and administrators, liability of legal representatives and heirs should not be applied here. On contentions that the course of action raised against the estate of Swaminatha could not survive, such position failed. Appeal thus failed.
Issues for Court’s Determination and Analysis Of Case
- Whether the managing committee has equal powers, same as directors of a company.
- Whether Swaminatha Iyer could be vicariously liable for misappropriation of the Bank on account of K.V being the managing director.
- Whether there existed any record that showed K.V misappropriated bank fund for his own personal use.
Powers of a Managing Director and the Managing Committee
A managing director has powers stated in the articles of association of the company or is conferred on him by the board of directors of a company.
According to the Companies Act;
“Managing Director means a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meetings or by its board of directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called……”[7]
In a general sense, the managing committee are vested with the responsibility of directing the activity of the organization, ensuring its smooth running and management. They are also vested with the responsibilities of monitoring the activities of the organization and successes recorded.
It should be noted that managing committees have similar responsibilities as that of the board of directors in a company but they play a greater role in the day to day activities of a company.
Do directors serve as trustees?
In Official Assignee of Madras[8], the court held that the directors of a company were not express trustees within the meaning of section 10 of the Limitation Act, and could, consequently plead the bar of limitation[9].
Overtime and undisputedly, the role of directors have been ascribed as those of agents, trustees etc., and this is mostly because of the fiduciary relationship it shares with the company and its responsibility of managing the affairs of the company which includes making contracts for the company as well as collecting money for and on behalf of the company. This, they shall do in good faith.
But note that the directors of a company are not trustees of the debt of a company or the company’s creditors. One can posit that they are quasi trustees[10]. On the issue of breach of trust which was raised by the liquidators, recourse should be made to Relands Allotment Company[11].It was held in that case, that where directors who had no power to invest the capital of the company in the shares of other companies, so invested, they were guilty of breach of trust.
Having established from the facts of the case that Swaminatha Iyer had substantial control in the affairs of the company, being a member of the managing committee and president of the board, can it then be said that he breached the trust of the company when no record showed that he enriched himself by the act of misfeasance, on which the claim was based?
Validity of a Release Deed
A release deed as the name suggests is a document that releases parties from subsequent claims in respect to the matter in question. Here, such dispute, by virtue of the document, should not arise again as the document dismisses any rights or liabilities between such parties.
How can the validity of a release deed be proved?
It must be registered with the signature of a witness who is not a party to the deed. Such signature must be appended in a stamp paper and the certified copy or original produced before the court in case any issue arises[12].
Note however that the release deed must be executed in accordance with the rules for companies.
Conclusion
While it can be contended that the liquidators are not to file any application claiming relief on the estate of the deceased, also backed up by the Succession Act, the question that comes to mind is why shouldn’t they? Although the input of the release deed prevents subsequent liabilities, losses should be able to be claimed and deemed right against the deceased. This is a necessary evil which should safeguard the interest of the company and provide them the much-needed succor, whether or not the culprit is alive.
Also, in respect to the validity of a release deed which requires the signature of witnesses, there is no record that shows an affirmation of this requirement.
References:
[1] The Haruman Bank LTD was incorporated as a public limited company under the Indian Companies Act 1913
[2] The present respondents are M/S. Brahmayya &Co
[3]Section 235 of the Indian Company Act 1913 (Act No. VII of 1913).
[4]Under Section 45A and 45B of the Banking Company Act
[5] Recourse was made to section 450 of the Banking companies Act 1949
[6] It posits that all rights to prosecute and defend any action or special proceeding in favor of or against a person at the time of his decease, survive to and against his executors and administrators.
[7] Section 2(26) of the Companies Act 1956 [Act No. 1 of 1956]
[8] (1931) I.L.R 54 mad 153
[9] Note that the bar of limitation was greatly emphasized in this case as considerations were made on whether the time of action had already elapsed with the death of Swaminatha Iyer.
[10] Quasi trustees means that they are not trustees entirely. They are partial trustees.
[11]1894 L.R 1 Ch. D 616
[12] For instance, where party A and party B successfully resolve a dispute, the release deed brought up by one of them or both, tries to ensure that no legal proceeding is instituted against any of the parties on the same matter. The deed finalizes the dispute.
