V.K.R.S.T. Firm vs Oriental Investment Trust Ltd Case

Introduction to the case

This case is in relation to the borrowing power of a firm and makes it clear that the borrowing is within the powers of a company and the lender will not be prejudiced simple because the officers or the agents of the company applies the loan to any unauthorized activities, provided that the lender had no knowledge of the intended misuse.

Facts of the case

• ●       An order was passed by the court on 21st July 1939 for the compulsory winding up of a company named the Oriental Investment Trust, Ltd. An undivided Chettiar family carrying on business under the name of V. K. R. S. T. firm claimed to be a creditor in the sum of Rs. 1,36,274 to the company. The Official Liquidator disputed the validity of the claim, except to the extent of Rs. 631[1] [2] [3] .

• The members of the joint family who were running the said company were Kasi Viswanathan, his son Manikkam, his brother Narayanan, and Narayanan’s son Somasundara. Narayanan died on 16th January 1939. Kasi Viswanathan died after the trial and the appeal has been preferred by his son as the manager of the family. The company was established on September 9,1936, with a Rs. 25,00,000 authorised capital divided into 25,000 shares of Rs. 100 each.

• Kasi Viswanathan and P.L.A.V.A.D. Ramanathan Chetty, who was then a local director of the Reserve Bank of India, were the company’s principal promoters. Although the managing directors post were held by Kasi Viswanathan and Ramanathan but since the company’s establishment, Ramanathan, who was also the Madras branch’s agent, has been in charge of the company’s operations. While Narayanan was the family member in command of the firm, Ramanathan without any doubt oversaw the firm’s Madras operations as well as the company’s overall operations.

• The company’s operation was to be handled by the directors, who numbered six in total, including the two managing directors, according to the company’s articles of association. The company and the managing directors signed a written agreement under which they were to have “either jointly or severally” the general conduct and management of the company’s business and affairs, subject to the oversight of the directors and  without limiting their general powers, the authority to purchase and sell shares and securities on behalf of the firm jointly and severally, as well as to borrow Rs. 25,000 without the approval of the Board of Directors or Rs. 1,00,000 with the approval of the Board of Directors

• The objectives for which the firm was created are clearly stated in the memorandum of association and those objectives are limited to those that would be anticipated from a company that has been formed for the purpose of operating as an investment trust. But the authorization to purchase and sell shares has been misinterpreted as authorization to trade in stock exchange disparities and in light of it Ramanathan from the start itself began gambling on differences on behalf of the firm with the full consent of his other directors. The capital provided by the shares subscribed was just a little amount of over Rs. 1,50,000 and therefore he supplemented this by borrowings of upto Rupees 1,23,136 from the said firm.

• The difference between this sum and the sum of Rs. 1,36,274 claimed by the firm represents interest. Despite the fact that the firm’s funds limited , Ramanathan’s transactions on behalf of the firm amounted about a crore and a half of rupees, and when the firm went into liquidation, it only possessed securities worth roughly Rs.2,000,000, demonstrating the unlawful nature of the done business

• The matter was determined to be tried in line with the procedure specified for the trial of a suit on the original side of the Court since the question of investigation required extensive inquiry. After the pleadings were closed, the case was scheduled for a hearing before Bell J., who determined the Official Liquidator’s claims to be well-founded and so only permitted the firm to rank as a creditor for the accepted sum of Rs. 6310 agent for an unauthorized purpose unknown to the company

• Whether the company is liable towards the whole amount of Rs. 31,310 or only to the sum of Rs. 6310 as stated by the official liquidator.

Arguments

Defendants

The official liquidator in his contention that the sum of Rupees 25,000 should be deducted from Rs. 31,310 provided following reasons to support the same. According to the liquidator Ramanathan on behalf of the company wrote a check for Rs. 5000 in his favour as the firm’s agent on August 4,1937, and in the same manner drawed another cheque for Rs. 20,000 in the same manner on the same day. In each case, his signature was followed by the phrase “Account of V.K.R.S.T. business.” And later he did not deposit these checks with the company and struck the said words and after that, he cashed the checks for his personal use.

He then created entries in the company’s books, debiting the money to himself and none of the money was ever returned to the firm. Ramanathan was operating on behalf of the corporation when he drew the checks, and he embezzled the funds before they reached the firm. The fact that he crossed out the phrase “On account of V. K. R. S. T. firm” before cashing the cheques is solid evidence that he was not holding the checks as the company’s agent and as the revenues of the checks were never deposited into the firm, it cannot be said that company was liable to pay back the firm.

Appellants

The Official Liquidator in response to the firm’s application to be permitted to rank as a creditor for Rs.1,36,274 accepted that the company had received Rs.31,310, but at the same time said that Rupees 25,000 should be subtracted. The firm in response denied that Rs. 25,000 should be deducted as according to their contention Mr. Rajah Aiyer, on behalf of the firm, has provided compelling evidence i.e. the firm’s and the companies books to support the claim. They also demonstrated that the business has access to an additional Rs. 15,000 in cash. He contends that it is not necessary for the firm to recover the full amount claimed to show that the company had the use of the money borrowed by Ramanathan.

Judgement in the case

The court first answered what could be the grounds that the said the firm’s claim was dismissed by Judge Bell. According to the court the said claim was dismissed as according to Bell J it was not proved that the company had received the moneys which is claimed back by the firm. According to him the evidence such as the firm’s books as well as the company’s books were not reliable since it was written under the direction of Ramanathan and therefore the Judge referred to them as being faked apprehension. The court held this as a misapprehension on the part of the learned judge as the mere fact that the entries of these books were made under the supervision of Ramanathan is not sufficient to claim that the money were not taken by Ramanathan as loans to the company under the authority given to him by the company to borrow from the firm.

The fact is of no dispute to the court that with the interest the borrowing amount Rs. 1,36,274, on the present date. The court said that it is of course a question of dispute that whether the company can be held liable to make good the amount which was borrowed and misappropriated by its agent but we cannot say here that none of the money borrowed by Ramanathan had found its way to the firm except the admitted sum of Rs. 6310. According to the firm’s contention there are compelling evidences provided by Mr. Rajah Aiyer on behalf of the firm that the remaining 25,000 should not be removed from the figure.

The fundamental question in the case is whether the firm is entitled to recover the whole amount of the Rs. 1,36,274 from the company itself. The court held that the directors were not aware of Ramanathan’s misappropriations until the month of March 1939. The learned Judge of the previous suit according to the court was under the impression that Kasi Viswanathan knew more than he pretended to know as Kasi Viswanathan did not make a good impression in the witness-box and a perusal of his evidence shows that he fenced with the questions put to him but that doesn’t in any way can be a factor to believe that he had any clue of Ramanathan’s misconduct until the month of March 1939. It is because if he had realised that his agent was using the funds to pay for his personal gambling transactions, he would not have authorised him to borrow such large and significant sums of money from the business. He was of course well aware of the fact that Ramanathan was borrowing money from the firm using the authorization provided to him by the firm, and that he was borrowing money on his own behalf for which a separate account existed as in Chettiar firm, it is customary practice for the agent to transmit copies of the accounts to his principals on a regular basis, and Ramanathan followed this procedure. Also, Ramanathan had developed a reputation as a good businessman and since the company had made a lot of profit in its early phases under him a belief was put in him by Mr Viswanathan but that cannot mean that he had the knowledge of how Ramanathan was swindling the company. Also it is undisputed that if Ramanathan had borrowed money from another firm under the authority granted to him by the company, the lender would not have been held accountable for the money’s application, and the company would be liable in such circumstances, even if Ramanathan had misappropriated the funds.

Secondly, coming to the question of whether Ramanathan’s knowledge of the fraud which he was committing was can be considered as the knowledge of the firm or company. The court answered this question in negation and took reference of various case laws to justify their point. First is the case of Houghton & Co. v. Nothard Lowe & Wills in which it clearly said that the knowledge of a ordinary official like the secretary can be the knowledge of the company in the situation if the thing of which knowledge is talked about is a thing within the ordinary domain of the secretary’s duties. But at the same time, if the director’s knowledge is of that director who himself is the criminal in the situation i.e. the knowledge of the infringement of the companies rights is to the person who has himself done such infringement then according to basic common sense it will not be considered as the knowledge of the company.

The court finally held that the company must be held to be liable anyway because the fact that Kasi Viswanathan was a managing director of the company makes a difference and in the present case it does not. He knew nothing of Ramanathan’s misappropriations until all the money had been borrowed and in regard to the precedents that has been previously discussed he also cannot be imputed with knowledge but this cannot be used to deny the fact that that he was a co-managing director of the company as well as the head of the firm who employed Ramanathan as its agent. In order to make the company liable the firm had to satisfy the Court that the monies claimed in the present case were delivered to Ramanathan as loans to the company under the authority bestowed on him by the business. The court considers that the various evidences (i.e. the firm’s books which show that the withdrawals are entered as loans to the company and the company’s books where credit is given to the firm for the amounts) has well established this fact that the money was taken from the firm on behalf of the company in accordance with the authority given to Ramanathan and therefore unless the firm had the knowledge that Ramanathan was misusing his position and authority, which is not the case in present scenario, the company must be held liable to payback the loan. In light of the same the official liquidator was instructed to add the firm in the list of creditors for the sum of Rs. 1,36,274 as the result of success of the firm

Analysis of the case

The judgement in the prevalent case has been rightly decided by the Hon’ble Court. The judge has looked into every small aspect of the situation and has rightly interpreted it in the light of the current laws, annexed evidences and previous judgements. The court has first looked into the arguments of the parties of both sides and analyzed what were the reasons behind the dismissal of the firm’s claim by Judge Bell. It has provided a justification and in light of the same he has set aside the previous court order. Then the court first analyzed whether there was knowledge on the part of the head of the company regarding the misappropriation done by Ramanathan and whether the knowledge of Ramanathan will be regarded as the knowledge of the company and after answering all these questions it was rightly held by the court that even if the head of the firm had no knowledge in regard to the misappropriations still the company will be bound by the loan to the loan taken by its agent if he has been authorized to do so by the company.

Conclusion

This case held the rule that if under the authority of the company its managing director has borrowed large sums of money and misappropriated then the company will be held liable even if it didn’t had any knowledge in regard of this misappropriation, provided that the lender also didn’t had any knowledge of the intended misuse at the time of lending money.