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Judgment
Ajit Kumar Sengupta, J.—After the company had gone into liquidation, an auditor was appointed to make an investigation into the affairs of the company. The auditor, T.K. Kar, a chartered accountant, made his final report of the investigation into the affairs of the company prior to its liquidation. On the basis of the said report of investigation, points of claim were submitted by the official liquidator on November 14, 1975, and master''s summons was taken out on behalf of the official liquidator praying the declarations as mentioned in the master''s summons. In the points of claim, it is, inter alia, stated as follows:
"The said company at all material times carried on principally a wholesale business in buying and selling mustard oil and other oils.
The accounting year of the said company was the Bengali calendar year. The accounts of the said company were audited from 1359 B. S. corresponding to the English calendar year 1951-52 and until 1375 B. S. corresponding to the English calendar year 1968-69. Books of account of the said company for the years 1376 B.S. corresponding to the English calendar year 1969-70 and 1377 B. S. corresponding to the English calendar year 1970-71 were not audited, and as far as the applicant has been able to ascertain, no sales nor purchases were made by the said company during the said years 1376 B.S. and 1377 B.S. Many of the entries in the cash book of the said company, when made over to the applicant, were found on inspection to have become illegible and/or effaced due to water stains.
Minute books of the directors and shareholders of the said company have not been made over by the respondents to the applicant, despite requests made to them in that behalf.
Statement as to the affairs of the said company has been filed by respondent No. 2.
The applicant states on the basis of records of the said company made available to him by the respondents, that the respondents and each of them have misapplied or retained and/or have become liable or accountable for the money or property of the said company and/or have been guilty of misfeasance or breach of trust in relation to the said company, inter alia, as follows:
(i) Although the said company did not effect any purchase or sale in 1375 B. S. corresponding to English calendar year 1968-69 as aforesaid and for all practical purposes ceased to carry on any business, the respondents drew or caused to be drawn two sums of Rs. 6,500 and Rs. 576 on the said company''s account as and by way of their remuneration and meeting fees respectively. Receipt of the said sums by the respondents during the said year was unjustified and improper and they and each of them are liable or accountable therefore.
(ii) Large cash belonging to the said company were retained by the respondents in their own hands and utilised for their own purposes even when the bank balance of the said company was overdrawn. Further, by retaining the said moneys in their own hands and utilising the same for their own purposes, the respondents deprived the said company of the benefit thereof and acted to its detriment and prejudice. The respondents and each of them are liable or accountable therefore.
Year ended Particulars : Cash in hand Bank balance
Rs. Rs.
30th Chaitra 1370 B.S. 1,07,763.19 43,163.37
30th Chaitra 1371 B.S. 11,069.80 666.95
30th Chaitra 1372 B.S. 17,144.49 3,738.00(O/D)
30th Chaitra 1373 B.S. 37,564.01 4,958.91(O/D)
30th Chaitra 1374 B.S. 7,623.96 371.90
30th Chaitra 1375 B.S. 225.52
Total 1,81,390.97
Further, interest on the said cash is lying in the hands of the respondents and each of them at the usual bank rate which the respondents and each of them are liable to repay the loan to the applicant.
(iii) The respondents and each of them misapplied the moneys of the said company in speculation and thereby caused loss to the said company. From the profit and loss account of the said company for the year ended 30, Chaitra 1373 B.S. alone it appears that the respondents and each of them paid or caused two sums of Rs. 22,509.48 and Rs. 11,716.73 belonging to the said company to be paid towards commission and arat charges respectively. The said payments were made improperly and in consequence of speculation indulged in on their own account by the respondents and each of them and the said sums were lost to the said company. The respondents and each of them are liable or accountable therefore.
(iv) According to the statement of affairs filed by respondent No. 2, out of Rs. 43,120 due and payable to the said company from its sundry debtors, only Rs. 284.87 is recoverable. The respondents and each of them having neglected to take steps to recover the said sum and by allowing the same to become " bad " have become liable or accountable therefore.
On the basis of the said statements made in the points of claim, the following orders have been asked for in the judges summons:
(a) A declaration that the respondents and each of them have misapplied, or retained, and have become liable or accountable for the moneys and property of the company and/or are guilty of misfeasance or breach of trust in relation thereto as stated in the points of claim;
(b) An order that the respondents and each of them do repay to the official liquidator of the said company the amounts mentioned in the points of claim together with interest at the rate of 6 per cent, per annum from September 7, 1970, to the date of repayment;
(c) Alternatively, an account be taken of the dealings of the property and money of the said company by the respondents and each of them. If necessary, on the basis of wilful default and upon such accounts being taken out, the respondents and each of them be ordered to repay to the official liquidator of the said company such sum or sums as may be found due together with interest at the aforesaid rate till the date of repayment.
(d) Alternatively, an order that the respondents and each of them do contribute such sum or sums to the assets of the said company by way of compensation in respect of their misapplication, retainer, misfeasance and/or breach of trust, as aforesaid.
Respondents Nos. 1, 2 and 3, erstwhile directors of the company in liquidation, filed the points of defence. In the points of defence, they have denied the allegations and disputed the correctness of the particulars given. A statement of account was also annexed to the points of defence.
The auditor was examined on behalf of the official liquidator. In his evidence, he has virtually admitted that no case was made out against the respondents. He has said in his evidence that he based his report on the basis of the statement of accounts and balance-sheets during the period from 1358 B.S. to 1375 B.S. corresponding to 1951-52 to 1968-69 calendar years. He has also said that he had gone through the ledgers and cash books of the company. He admitted that it was not necessary to look into the accounts of the company as the same were audited by a chartered accountant, but for the purpose of verification, he had occasionally consulted the ledgers and cash books. He has also said that he perused the final statement of accounts which were filed by the company in the office of the Registrar of Companies. The auditor was asked a question by learned counsel for the official liquidator whether the directors of the company in liquidation, according to him, were guilty of any misfeasance in relation to the assets and funds of the company in liquidation. According to the auditor, the company carried on its business since 1358 B.S. to 1375 B.S. and during these 18 years, there was a total loss of Rs. 1,42,744 and for the balance six years, there was a profit of Rs. 37,719. So, for the 24 years, there was a net loss of Rs. 1,05,025. For all these years, the company carried on its business with a marginal gross profit and this according to the auditor was an act of misfeasance. That the company did not make any profit and was run at a loss could not be an act of misfeasance on the part of the directors. It was not shown that the compay deliberately created any loss in the books of account or the loss was not a normal incident of the business carried on by the company.
A point was also taken by the auditor that the moneys were retained by the directors of the company and were not deposited in the bank and accordingly this is also an act of misfeasance. He has mentioned that on 30th Chaitra, 1370 B.S., there was a heavy cash balance of Rs. 1,07,763-19 but strangely enough he did not care to examine the cash balance from the accounts for the days following. He also did not even care to find out whether the sum of Rs. 1,07,763.19 was deposited in the bank or not or whether this amount was retained by the directors. He further said he was of the opinion that when the capital of the company was only Rs. 56,200, the company should not have kept the cash balance of Rs. 1,07,763.19 with them in hand in spite of the overdraft account of Rs. 43,168 which overdraft account could have been easily liquidated by the directors. The official liquidator has added up the cash balance from 30th Chaitra, 1370 B.S. to 30th Chaitra, 1375 B.S. and arrived at the figure of Rs. 1,81,390.97. It has been stated in the points of claim that this cash belonged to the said company and this was retained by the respondents. The particulars of the cash balance set out in the points of claim would show that the official liquidator had added up the total of these six years and on that basis claimed that the directors of the company retained the moneys with them. It has been admitted by the auditor that the statement which has been prepared by the directors and annexed to their points of defence are correct. The said statement which is set out below would show the extent of cash balance in their hands and how it was deposited :
STATEMENT OF ACCOUNT
Rs. Rs.
Cash and cheques as on 30th Chaitra, 1370, B. S. 1,07,763.19
Less Cash in hand on 5-1-71 B. S.
Cash 2,995.18
Cheques 3,071.04
6,066.22
1,01,696.97
Less Deposited in bank from 2-1-71 to 5-1-71 1,37,640.86
Collections from 2-1-71 to 5-1-71 35,943.89
30th Chaitra, 1371. B. S.
Cheques 8,102.00
Cash 2,964.91
11,066.91
Less Cash in hand on 4-1-72 3,678.42
7,388.49
Less Deposited in up to 4-1-72 15,915.49
Collections from 2-1-72 to 4-1-72 8,527.00
30th Chaitra, 1372, B. S.
Cash 4,520.55
Cheques 12,623.94
17,144.49
Less Cash in hand 11-1-73 2,136.25
15,008.24
Deposited on 12-1-73 42,858.51
Collections 2-1-73 to 11-1-73 27,850.27
30th Chaitra, 1373. B. S. not 27-5-64
Cash and Cheques 37,564.01
Deposit at bank
3-1-74 32,000
4-1-74 500
5-1-74 500
33,000.00
4,564.01
In his deposition it has also been said by the auditor that the directors kept the cash balance with them but that does not amount to misfeasance at all. In the points of claim and as well as in the report of the auditor, it is suggested that the directors are liable to pay interest on the cash lying in their hands at the usual bank rate for the days the cash was retained by them. The auditor has admitted that there is only a few days'' delay if at all in depositing the amount with the bank. The case which is sought to be made out is wholly untenable. Admittedly, the deposits were made in the bank within three or four days. The delay in depositing the daily cash collections in the bank cannot constitute misfeasance. Similarly, the auditor''s statement that the gross profit of the company was abnormally low as compared with other dealers in this line of business is a surmise not based on facts. The auditor has assumed the facts and submitted his report. He was to find out the facts on the basis of the records and documents. He did not have any material to hold that the profit was abnormally low as compared with other dealers. His conclusion is based, as he said in evidence, on the Income Tax files of other dealers which he had occasion to deal with. It was not for him to fish out the evidence. He has not disclosed in his report the alleged comparative figures which he had allegedly obtained from other files. The respondents did not get any opportunity to meet the allegation made in his report or in the points of claim. His statement was not based on any records of the company. Earning of low profit cannot be a ground for holding that the directors are guilty of misfeasance. If the contention of the official liquidator is accepted, in that event, all the directors of all companies on some day or other have to be found guilty if a loss is incurred in the usual course of business or for not making profit at a rate which the auditor thinks the company should have made on a comparative study of some similar dealers. Even in the assessment order of the company, the Income Tax Officer who was competent to make such finding under Sections 145 of the Income Tax Act, 1961, did not come to such a finding.
One other ground taken is with regard to sundry debtors. It has been alleged that the directors failed to take steps to recover the sundry debts amounting to Rs. 43,120 and by allowing the said sum to be a bad debt, have become accountable therefore. The auditor did not even check up who are the sundry debtors and what were the amounts lying outstanding against each of the sundry debtors. He has not even mentioned in his report that the company filed suits against some of the debtors. The directors took steps but they could not recover. It is not in dispute that some of the amounts of debts are very negligible. It would not have been advisable at all to file suits for realisation of such small sums. It appears from the tenor of the report that the auditor was determined to find fault with the directors. One other aspect that has been mentioned by the auditor in his report is that when there was no or insignificant profit, the directors should not have taken remuneration. This is absolutely a misconceived statement. Each of the directors had taken Rs. 250 per month as remuneration. That cannot be a ground for taking proceedings for misfeasance. Mr. Sinha ultimately has not pressed any of these grounds. The report has been prepared by the auditor carelessly without application of mind. His evidence has not inspired any confidence. Mr. Sinha has left no stone unturned to substantiate a case of misfeasance. Failing in other grounds, he has at last based his case on speculation business allegedly undertaken by the directors. The auditor in his report has stated that the company was engaged " in buying and selling the goods and thereafter getting the difference " which, according to him, is speculation business. He has also said that the objects clause does not permit the company to do so. Mr. Sinha has contended that under the memorandum of association, the company was entitled to carry on business in buying and selling edible oils but the company could not engage itself in speculation business. According to Mr. Sinha, any act done ultra vires the objects clause would by itself constitute an act of misfeasance. He has relied on the objects clause of the company and has submitted that the company was not authorised to carry on speculation business. He has relied on the decision in the case of Sharpe, In re: Bennett, In re [1892] 1 Ch 154.
In that case, the articles of association of the company provided that interest on the money paid up on the shares should be paid to the shareholders until otherwise determined by the directors and that no dividend or bonus should be payable except out of profits. No profits were made by the company ; but the directors paid interest to the shareholders out of the capital of the company. The Court of Appeal, affirming the judgment of the court of the first instance, held that the payment of interest out of the capital when there were no profits was a misapplication of the assets of the company and was ultra vires, that is to say, an act beyond any power which the company could confer on its directors.
Lindley L.J. observed (p. 165):
" As soon as the conclusion is arrived at that the company''s money has been applied by the directors for purposes which the company cannot sanction, it follows that the directors are liable to replace the money, however honestly they may have acted. "
Mr. Sinha has also relied on a judgment of the Madras High Court in the case of Karnataka Films Ltd. v. Official Liquidator, Chitrakala Movietone Ltd. [1951] 21 Comp Cas 138 (Mad). The Madras High Court considered the judgment in the case of Liverpool Household Stores Association Ltd., In re [1890] 59 LJ Ch 616 where the directors were charged with misfeasance on several grounds. The Madras High Court referred to the said decision in the said case and quoted the following passage therefrom (at p. 159):
" Section 165 of the Companies Act, 1862, enables a creditor of a company to obtain by summary process any relief to which he is entitled in respect of damages incurred through the misfeasance of an officer of the company, but the remedy afforded by the section is only for the recovery of damages for losses incurred. The misfeasance to which the section is directed is not restricted to acts of commission, but extends to all breaches of trust in relation to a company through which loss is incurred. Misfeasance is not to be imputed to a director unless he has dishonestly acted, or abstained from acting, in conflict with his plain duty and the burden of proof lies on the party making the charge; but in considering the question of the director''s liability, there must be imputed to him a special knowledge of the business which he has undertaken. Directors are liable for losses occasioned through acts done by them as directors in matters which are ''ultra vires'' the company, and this liability is not dependent upon any question of honesty of intention. "
The principles are well-settled but the question is whether, on the facts and in the circumstances of this case, the principles laid down by the aforesaid decisions can be applied at all. There is no allegation of misapplication of the assets of the company by the directors. The ground now urged by Mr. Sinha, learned advocate for the official liquidator, is that the company carried on business which is ultra vires the object clause and, accordingly, the directors are liable to make good the loss arising therefrom. Even if the business carried on by the directors is ultra vires, it cannot by itself constitute an act of misfeasance. The word "misfeasance" does not cover every misconduct by a director. There must be a breach of trust. Unless a director has done something wrongly by misapplying or retaining in his own hands any money of the company or the director has done something by which the company''s properties had been wasted resulting in actual loss to the company, there cannot be any misfeasance. The case of misfeasance in this case is on the ground that the company has indulged in speculation business. The auditor has stated in his evidence what, according to him, is speculation business. According to the auditor, the company indulged in a speculative transaction within the meaning of the Income Tax Act, 1961. The speculative transaction is not something like a wagering contract. Unless it is proved that at the very inception, the intention was only to deal in difference and in no circumstances to call for or give delivery, there cannot be any wagering contract. The mere fact that on settlement of same contract, the differences were entered into the book cannot establish that it was the intention of the parties not to call for and give delivery. The basic ingredients of a speculative transaction are that the contracts are to be periodically or ultimately settled and the settlement would be otherwise than by actual delivery or transfer of commodity. There is no evidence in this case that there was no delivery. The evidence is that the goods were bought and sold. Speculation business is separately treated under the Income Tax Act. It is treated as distinct and separate from any other business. No evidence whatsoever has been produced to show that the Income Tax Officer treated the business of the company as speculation business. On the contrary, in the report of the auditor, the auditor has referred to the assessment order where the Income Tax Officer held that in view of the financial difficulties, M/s. Abdul Karim Md. (1963) Company at 59, Biplabi, Rash Behari Avenue, Calcutta, took delivery of the goods and sold the same on behalf of the assessee-company. For this the company paid additional commission and ''arat'' charges. The auditor has also referred that commission and ''arat'' charges were paid as the company was unable to sell its goods. The directors were sought to be made liable for the amount of commission and arat charges paid.
I am unable to appreciate the comment of the auditor "that instead of doing regular business in the normal course, the directors were found doing transactions of adventure, some of a wholly risky nature, but offering a chance of great or unusual gain in complete disregard of the objects clauses of the company. Upon scrutiny of the objects clauses, it would be evident that the company was not permitted to do any speculative businesses per objects clauses contained in the memorandum of association of the company. But the directors were found doing purely " fatka " business on behalf of the company in clear violation of the objects clauses."
The said comment is not based on facts. The auditor has drawn from his own imagination facts and circumstances which are not apparent from the records. There is no material to hold that the directors were engaged in speculation business. Even the Income Tax Officer did not go to the length of holding that the business was not carried on in the usual course. For the reasons aforesaid, I am unable to accept the contention of Mr. Sinha.
Before I part with this case, I must also refer to one other aspect of the matter. The auditor has stated that the directors received remuneration although there was no or negligible profit. Each of the directors only received Rs. 250 per month as remuneration. Directors are not expected to render voluntary service to the company. They are entitled to some remuneration. By no stretch of imagination can it be said that the remuneration received by the directors was unreasonable or excessive. The auditor has acted beyond the scope of his appointment.
In the result, this application fails and is dismissed with costs. The official liquidator should not have at all proceeded with this case. The conduct of the official liquidator is far from satisfactory, so also of the auditor who investigated into the affairs of the company. This should not be repeated in future.