B. Subramania Iyer vs The Podanur Bank, Limited

Wadsworth, J.—These appeals arise out of a series of orders directing the Official Liquidator of the Podanur Bank, Ltd., Tiruvadamaruthur,

to prosecute the appellant, his co-directors and the Secretary of the Company for offences under the penal provisions of the Indian Companies

Act. That the orders in question are appealable u/s 202 of the Indian Companies Act is established so far as this Court is concerned by the

decisions in Kesavaloo Naidu Vs. Murugappa Mudali and Another, and Chokkalingam Chettiar Vs. In Re: The Nagarathar National Bank (in

liquidation), . The winding up of the Company was ordered by the learned Judge on the Original Side of this Court in January, 1943, and further

proceedings were to be in the Court of the District Judge of West Tanjore. On 3rd November, 1943, an application was filed u/s 235 of the

Indian Companies Act alleging various acts of misfeasance, etc., on the part of the directors and the Secretary and asking the Court to require the

respondents to make good the loss occasioned by their default. In the enquiry into this petition interrogatories were served on the respondents and

an opportunity was given to them to state their case and to be represented by their Counsel. The enquiry was very prolonged and on 31st July,

1945, the District Judge wrote a detailed order in the course of which he expressed the opinion that whereas the guilt of the Secretary was fairly

clear, so far as the directors were concerned it is a matter of considerable difficulty to decide whether they were merely culpably negligent, or were

conniving parties to the fraudulent concealment of facts from the general body in the balance sheets, or the alleged unauthorised and fraudulent

sales. The learned District Judge came to the conclusion that further investigation was necessary to establish prima facie the criminal liability of the

directors and for the preparation of false balance sheets or for fraudulent sales. He seems to have been influenced by an offer made by Counsel on

their behalf to purchase the unsold decrees and make good any losses so that payment in full may be made. The learned District Judge therefore

directed the Official Liquidator to make a report to the Police and if possible to procure a special officer of the Criminal Investigation Department

to make further investigation. Meanwhile the petition was treated as ""closed."" On 17th February, 1946, the reports of the Special Investigation

Officer was received and on the 19th February, the Official Liquidator applied for the revival of the application praying that the directors and the

Secretary should make good the losses to the Company. On 20th February, 1946, the learned District Judge passed ex parte proceedings reviving

the former application and directing notices to the respondents and he also passed a very unsatisfactory order authorising the liquidator to

prosecute "" any director, manager or other officer for any offence which might have been committed."" This latter order has been set aside in our

judgment in C.M.A. No. 197 of 1946, as being obviously defective. On 13th March, 1946, that is to say, nearly a month after this order for

prosecution had been passed, I.A. No. 96 of 1946 was preferred by two shareholders and one creditor asking the Court to direct the sale of the

unrealised assets and the distribution of a further dividend out of the balance in the hands of the liquidators and also asking that the prosecution

already ordered should not be financed out of the funds of the Company. At the same time there was a further petition, I.A. No. 97 of 1946, in

which the same petitioners prayed for an interim stay of the proceedings for the prosecution of the directors and the secretary. The latter

application was dismissed on the 14th March. On the 29th March, the learned District Judge adjourned I.A. No. 96 of 1946 and at the same time

suo motu he passed orders for the prosecution of the directors and the Secretary for the offences they were alleged to have committed under the

provisions of the Companies Act. It is these orders which are challenged in the appeals now before us.

The contentions taken in the various Memoranda of appeals are that the orders were illegal in that they were passed without notice to the

persons sought to be prosecuted, without enquiry into the question of the desirability of the prosecutions without any materials or legal evidence

justifying the prosecutions and without consultation of the creditors or shareholders who were affected by the charging of the costs of prosecution

to the Company''s assets.

Section 237(1) of the Indian Companies Act runs as follows:

If it appears to the Court in the course of a winding up by, or subject to the supervision of, the Court that any past or present director, manager or

other officer, or any member, of the Company has been guilty of any offence in relation to the Company for which he is criminally liable, the Court

may, either on the application of any person interested in the winding up or of its own motion, direct the liquidator either himself to prosecute the

offender or to refer the matter to the registrar.

This section does not in terms require the Court to make any particular enquiry or to give to the person who is to be prosecuted an opportunity

to show cause before the Official Liquidator is directed to file a complaint. On the facts of the present case it would appear that in the Official

Liquidator''s own enquiry the directors and the Secretary had been given every opportunity to put forward their version of the facts on the various

charges of misfeasance which are substantially the matters-forming the foundation for the present prosecutions. Seeing that the section

contemplates action by Court not merely at the instance of third parties but also on its own motion, we do not think that it can be laid down as an

absolute rule that the Court must call upon the persons concerned to show cause before it directs their prosecution. When as in this case there had

been a very full investigation and an adequate opportunity had been given to the directors and the Secretary to exculpate themselves from the

charges against them we do not think that the order for prosecution can be set aside merely because it was passed ex parte.

On the question of lack of materials before the learned District Judge there were no doubt very considerable materials before him at the time

when he passed his order of 31st July, 1945. Those materials were, so far as directors were concerned, apparently sufficient only to convince the

District Judge that they were either culpably negligent or were conniving parties to the fraudulent concealment of facts from the general body in the

balance sheets and the other misfeasances-alleged. At the time when the orders now under appeal were passed the learned District Judge had also

before him the report of the Special Investigating Officer which unfortunately was treated as confidential. We cannot see what was the necessity for

treating this report as confidential since substantially everything it contained had necessarily to be made public as soon as the prosecution started..

The effect of this rather misguided secrecy is certainly to make it more difficult for any one interested to challenge or support the correctness of the

orders of the learned District Judge. Those orders themselves contain no statement of reasons, whatever and they did not even contain sufficient

materials to enable the appellate Court without further research to satisfy itself that the learned District Judge did give due consideration to the

materials available. There is, however, no provision in Section 237 of the Companies Act requiring the Court to set forth its reasons when directing

the liquidator to launch prosecutions ; and although it is obviously desirable whenever a Court passes an appealable order that some indication

should be given that the Court has applied its mind to the questions which have to be decided in passing the order, it seems to us difficult to say

that the order has necessarily to be vacated, merely because it does not itself set forth the reasons which caused the Court to pass it.

Section 202 of the Indian Companies Act confers a very wide right of appeal against the orders of a Court in the winding up of a Company and

it is perhaps going too far to say that every order in such a matter which might conceivably form the subject of appeal, should contain a detailed

exposition of the reasons supporting it. But we are of opinion that an order directing a prosecution which from its very nature is most likely to result

in appeal and which involves a matter of very great importance to the person to be prosecuted, should be supported by some indication of the

reasons which justify it. We do not, however, think that the order should be set aside merely because of its excessive brevity if it was in fact

justified by the materials before the Court. We have ourselves examined the report of the Special Investigating Officer and we are of opinion that

there were materials before the District Judge which justified, him in directing a prosecution of the appellant for the offences alleged. That being so

we do not think that it is necessary to set aside the order of the District Judge and require him to draw up a fresh order with an adequate statement

of his reasons.

Mr. Jagadisa Aiyar for the appellant has strenuously argued on the authority of In re Northern Counties Bank, Ltd. (1883) 31 W.R. 546 that

the question whether a prosecution should be directed in the matter of the alleged misdeeds of directors of the Company is mainly a question

whether having regard to the financial position of the Company and the desires of the share-holders and creditors, it is reasonable to saddle the-

assets of the company with the costs of prosecution. We do not read the case cited as laying down such a drastic rule and in fact the learned Judge

who decided the case has himself in a later case Re : Charles Denham and Co., Ltd. 51 L.T. 570 pointed out that the Court has a discretion to

ignore the opposition of creditors to the prosecution if in its opinion the object of the opposition was not so much to save the Company''s funds as

to save the guilty director. The principles which should govern the Court in deciding whether or not to direct the prosecution of a delinquent

director of a Company as part of the proceedings in liquidation have been laid down by Buckley, J., in London and Globe Finance Corporation,

Ltd. (1903) 1 Ch. D. 728. The learned Judge says:

What are the considerations which ought to govern it? The principle lies, I think, in the answer to the following question. If the persons at whose

expense the prosecution would be instituted were not a class, but were a single person, and that person were an honest and upright man desirous

as a good citizen of doing his duty by the State, are the circumstances such as that in discharge of that duty he would feel that he ought at his own

expense and to his own loss to institute a prosecution ? Not in every case in which a criminal offence has been committed would such an one think

it his duty to prosecute. The question to be answered is, Would he in this case think his duty to the State required him to prosecute ? If that

question be answered in the affirmative, then, upon principle, I think that the Court ought to direct a prosecution. Further, I think that the Court

can, and in a proper case ought to, direct a prosecution without the assent, and even notwithstanding the dissent, of the class or many of the class

at whose expense the prosecution would be instituted.

Now what are the facts in the present case. The Company in liquidation had already paid a dividend of As. 10 in the rupee. The liquidator had

in cash approximately Rs. 4,000 out of which Rs. 2,500 was set aside for a further dividend of As. 2. It is not shown that the balance after this

distribution of As. 2 would not suffice for the costs of these prosecutions. The opposition to the prosecution was not put forward until after the

District Judge had in his defective order of the 20th February, 1946, come to the conclusion that proceedings ought to be taken and then the

objection was preferred by two share-holders whose holdings were infinitesimal and one creditor. There were no indications before the learned

District Judge of any wide divergence of views on the part of the general body of share-holders and creditors such as would make it desirable for

him to ascertain the wishes of the persons concerned before deciding to launch a prosecution. And the fact that a prosecution was likely to result

from the investigation must have been well known to all parties long before the learned District Judge decided to prosecute. The probable costs of

these prosecutions are not likely to diminish very seriously the dividend which the creditors can expect to get. We are not therefore disposed to

interfere with the order of the learned District Judge on the ground that the District Judge did not give proper consideration to the financial

implications of these orders. In the result, therefore, although we are definitely of the opinion that the orders of the learned District Judge should

have been supported by some indication of the grounds of his decision, we are not prepared on that reason alone to interfere in. appeal. The

appeals are therefore dismissed with costs of the Official Liquidator in C.M.A. No. 216 of 1946.