K.C. Pandalai vs The South Indian General Assurance Company Ltd.

Alfred Henry Lionel Leach, C.J.—This is an appeal from an order passed by Gentle, J., confirming the action of the Official Liquidator of

the South Indian General Assurance Company, Ltd, in placing the appellant''s name in the list of contributories. The company was formed in the

year 1929. On the 29th August, 1940, this Court passed an order directing that it be wound up compulsorily. During the eleven years the company

was operating, it never made a profit. Each year, in fact, showed a loss and long before the winding up order was passed, the company was in a

precarious position. The appellant was a director of the company and was also its managing agent. The managing agents were stated to be K. C.

Pandalai and Company, but it is common ground that the appellant is the sole proprietor of that firm. In 1936 the company owed the appellant a

sum of Rs. 16,000. The appellant held 120 preference and 220 ordinary shares of Rs. 50 each in respect of which only Rs. 15 per share had been

paid up. The appellant''s brother, Mr. K.S. Pandalai, was also a director of the company. He held some 200 shares and these also were only paid

up to the extent of Rs. 15 per share. Mr. K.S. Pandalai was not a creditor of the company, but he had lent a considerable sum of money to his

brother and admittedly this money was utilised for the purposes of the company.

Article 29 of the Articles of Association stated that the directors might, if they thought fit, receive from a member all or any part of the capital

due upon shares held by him beyond the sums actually called for, and permitted the directors to pay interest on any sum so received. On the 15th

December, 1936 a meeting of the Board was held and was attended by the appellant, his brother and Mr. P. E. Raman Menon, who was also a

director. They purported to pass the following resolution:

Resolved that as per Article 29 of the Articles of Association of the company the Managing Agents be hereby authorised, if they think fit, to

receive from any member willing to advance the same, all or any part of the capital due upon the shares held by him beyond the sums actually

called for; and upon the amount so paid or satisfied in advance, or so much thereof as from time to time exceeds the amount of the calls then made

upon the shares in respect of which such advance has been made, to pay interest at six per cent. per annum.

There can be no doubt that this resolution was passed in order that an arrangement might be entered into relieving the appellant from liability in

respect of his shares. This is obvious from what happened on the 31st December, 1936. On that date the appellant purported to set off Rs.

11,900, out of the amount due to him from the company against what he owed in respect of the shares and consequently called upon the Registrar

of Joint Stock Companies to record that his shares had been fully paid up. When the company went into liquidation the validity of this transaction

was questioned by the Official Liquidator and he decided that the appellant should be placed on the list of contributories in respect of Rs. 11,900.

The appellant objected and asked the Court to strike out his name from the list, but this Gentle, J., refused to do. The appellant as a director and

the managing agent of the company was in a fiduciary position and in the circumstances the learned Judge held that he was not in a position to

decide whether it was fit and proper from the company''s point of view that there should be this arrangement. The learned Judge relied on the

decision of the Privy Council in Pratt (Bombay) Ltd. M.T. Ltd. and Sasson and Co. v. Pratt (Bombay) Ltd. ILR (1938) Bom. 421 (P.C.) where

the Judicial Committee held that the provisions of Section 91-B of the Companies Act as it was before the amendment of 1936 was a concise

statement of the general rule of equity. The Judicial Committee approved of these observations of the Court of Appeal in England in Transvaal

Lands Co. v. New Belgium (Transvaal) Land and Development Co (1914) 2 Ch. D. 488 :

Where a director of a company has an interest as share-holder in another company or is in a fiduciary position towards and owes a duty to another

company which is proposing to enter into engagements with the company of which he is a director, he is in our opinion, within this rule. He has a

personal interest within this rule or owes a duty which conflicts with his duty to the company of which he is a director. It is immaterial whether this

conflicting interest belongs to him beneficially or as trustee for others. He is bound to do as well for his cestuis que trust as he would do for himself.

Again the validity or invalidity of a transaction cannot depend upon the extent of the adverse interest of the fiduciary agent any more than upon how

far in any particular case the terms of a contract have been the best obtainable for the interest of the cestui que trust, upon which subject no enquiry

is permitted.

When the case was before Gentle, J., it appears to have been accepted that the resolution of the 15th December, 1936 was validly passed. The

only point taken by the Official Liquidator was that the appellant could not act upon the resolution in respect of his own shares. It is, however,

manifest that the validity of the resolution is open to question. Section 91-B (1) of the Indian Companies Act, as it stood at the time read as

follows:

No director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly concerned or interested; and if he

does so vote, his vote shall not be counted.

At the time this resolution was passed there were five directors, but only three of them attended and two of those present, the appellant and his

brother, were not in a position to vote on the question as they were personally interested. Article 113 fixes the quorum for a director''s meeting at

three. As the appellant and his brother were not competent to vote and as the third director present, acting alone, could not give authority to the

appellant to apply the provisions of Article 29 the transaction cannot be regarded as binding upon the company. If three directors who had no

interest in the matter had resolved that the debt due to the managing agent should be set off to the extent of the Rs. 11.900 against the appellant''s

liability on his shares or the company in general meeting had so decided the position would have been different. It is open to a company to agree

with a share-holder to whom it owes money that the debt shall be set off against future calls. This is well settled law. See Adamsons'' case (1874)

L.R. 18 Eq. cases 670, and in re Jones, Lloyd and Co., Ltd. (1889) 41 Ch. D. 159. But here the appellant applied the provisions of Article 29

without lawful authority and consequently he cannot take advantage of what he has done. Even assuming the resolution to have been lawfully

passed there is still the objection pointed out by Gentle, J.

The appeal fails and will be dismissed. There will be no order as to costs as the Official Liquidator appears in person.