Sinhar Estate Builders P. Ltd. and Another vs B. Nataraj

A.C. Arumugaperumal Adityan, J.—This appeal has been directed against the decree and judgment in O.S. No. 14562 of 1996 on the file of Seventh Additional Judge, City Civil Court, Chennai. The unsuccessful defendants have preferred this appeal.

The averments in the plaint sans irrelevant particulars run as follows: The first defendant is a private limited company registered under the Indian Companies Act. The second defendant is the managing director of the first defendant-company. The plaintiff is the sole proprietor of Adhaye Finance and Investment. For the specific purpose of acquiring an immovable property, the first defendant had borrowed a loan of Rs. 6,00,000 from the plaintiff between the period June 23, 1987 and November 20, 1987, as detailed below:

Borrowed Amount Date (Rs.) 23-06-1987 50,000 07-08-1987 2,75,000 22-08-1987 25,000 13-11-1987 20,000 18-11-1987 50,000 20-11-198 71,80,000

Out of the said amount of Rs. 6,00,000 borrowed from the plaintiff, the first defendant had repaid a sum of Rs. 2,25,000, i.e., a sum of Rs. 50,000 on April 5, 1988 and Rs. 1,75,000 on November 15, 1988. A sum of Rs. 3,75,000 remains to be paid by the first defendant against the said loan. The plaintiff had 1250 equity shares each to the value of Rs. 100 in the first defendant. The first defendant had diverted the funds of the company to other companies controlled by the second defendant and the second defendant had resorted to falsification of the accounts and under statement of income to promote the other companies at the cost of the first defendant. There arose a dispute between the plaintiff and his wife Mrs. Shantha Natraj and the second defendant, the managing director of the first defendant. Mrs. Shantha Natraj, wife of the plaintiff is one of the directors of the first defendant, filed a company petition before this Court for certain relief. Subsequently, the said disputes were settled by entering into a memorandum of understanding dated September 25, 1989, between the plaintiff, defendants and Mrs. Shantha Natraj, the wife of the plaintiff. In terms of the said memorandum of understanding dated September 25, 1989, the second defendant issued five cheques as detailed hereunder:

Amount Cheque No. Date (Rs.) 1040201 31-10-1989 2,00,000 1040202 31-10-1989 1,75,000 1040203 31-10-1989 1,20,000 1040204 31-10-1989 1,30,000 1040205 31-10-1989 1,25,000 ---------- Total amount 7,50,000 ----------

The abovesaid cheques were deposited with one R. Srinivasan, the mediator and the transfer forms signed by the plaintiff regarding the transfer of the said 1250 equity shares were also handed over to the said R. Srinivasan. In terms of the said memorandum of understanding, Mrs. Shantha Natraj was given a cheque dated October 31, 1989, for Rs. 1,000 as the consideration for 100 equity shares held by her. She had also handed over the resignation letter to the mediator R. Srinivasan. On October 31, 1989, the plaintiff presented the said cheques for encashment, the said five cheques were dishonoured by the bank on November 2, 1989. After the presentation of five cheques, the plaintiff received a letter dated October 30, 1989, from the first defendant in the evening of October 31, 1989, admitting the insufficiency of funds in his account. The plaintiff had also received another letter dated November 1, 1989, from the first defendant containing untenable allegations. On November 7, 1989, the plaintiff wrote a letter demanding the payment of Rs. 7,50,000 with interest at the rate of 18 per cent, per annum on the said amount. The reply received from the defendant contained false and frivolous contentions. In respect of the transfer of 1250 equity shares, the plaintiff has done everything to the effect to transfer the same in the name of the second defendant. The plaintiff is entitled to the value of the said shares being Rs. 1,25,000 and also Rs. 6,25,000 as per the memorandum of understanding. Apart from that the first defendant has borrowed on various dates a total sum of Rs. 25,000 which liability he has acknowledged and issued a cheque dated October 31, 1989, for Rs. 25,000. This cheque was also dishonoured on presentation with the bank. Defendants Nos. 1 and 2 are jointly and severally liable for the suit amount. Hence the suit.

Defendants Nos. 1 and 2 have filed a joint written statement contending that the suit is not maintainable either on facts or on law and the same is bad for misjoinder of parties since there is no cause of action as against the second defendant and hence the suit is liable to be dismissed as against the second defendant. According to the first defendant, the plaintiff had never lent any amount and that the second defendant was conducting his business inter alia as a builder and a promoter at Bombay and on the representation made by the plaintiff, the first defendant decided to promote the first defendant-company to carry out specific projects in Madras. Since neither the plaintiff nor the second defendant wanted to block their monies in share capital, it was decided that the subscribed share capital would be Rs. 5,00,000 out of which the second defendant has to subscribe at the first instance 50 per cent, and one another person, Mr. Subramanyam and the plaintiff to subscribe each 25 per cent. Since Mr. Subramanyam backed out, it was decided that the second defendant would subscribe to 75 per cent, of the share capital while the plaintiff would subscribe to 25 per cent, of the share capital. It was also decided that each of the promoter shareholders would bring in finance proportionate to share capital held by them. Accordingly, the second defendant brought in sums totalling Rs. 21.75 lakhs inclusive of his subscription to share capital and the plaintiff brought in 7.25 lakhs inclusive of his subscription to share capital. The understanding between the parties was that the amounts brought in addition to share capital could be taken out at the end of the project. Contrary to the understanding the plaintiff demanded part of the amount brought in by him towards working capital and under pressure a total sum of Rs. 2.25 lakhs was withdrawn by him. The allegation that the plaintiff gave the said amount by way of loan to the first defendant-company is incorrect. The amounts were advanced as working capital at the time of formation of the company to the first defendant-company as agreed upon. There was no agreement to pay any interest to the said working capital amount. Even at the time when a part of the advances was refunded to the second defendant no interest was claimed or collected by him. The allegation that the first defendant diverted the funds of the company to other companies and the second defendant had resorted to falsification of account and under statement of income to promote other companies at the cost of the first defendant are all false and untrue. These defendants admit that the memorandum of understanding was entered into on May 25, 1989. The very idea of having a mediator with whom the cheques were left was to ensure that the terms of the memorandum of understanding were given effect to fully and the cheques were not to be handed over to the plaintiff until these defendants were satisfied that the terms of such understanding were given effect to fully. Under Clause 8 of the memorandum of understanding, the plaintiff and his wife were to sign any document that may be needed to give effect to the understanding. On October 30, 1989, when K. Subramanian, called on the plaintiff to get signatures from his wife on certain company documents like the register of minutes of the board meeting and certain other documents, the plaintiff failed to obtain such signatures and thus committed breach of understanding and the plaintiff was therefore not entitled to collect the cheques. This fact was brought to the notice of the plaintiff by letter dated November 29, 1989, addressed to the plaintiff by the first defendant. These defendants are not bound to take over the shares from the plaintiff and therefore are not bound to pay for the same. The claim for Rs. 25,000 is denied because the defendants had not borrowed any amount much less an amount of Rs. 25,000 as alleged in the plaint. These defendants are jointly and severally liable to pay any amount much less a sum of Rs. 7,75,000. For the suit notice dated June 16, 1989, issued by the plaintiff, the defendant have sent a suitable reply dated June 30, 1989. There was no agreement to pay any interest. The suit is frivolous and vexatious and is liable to be dismissed with costs of the defendants.

On the above pleadings, the learned trial judge had framed as many as six issues for trial. The plaintiff was examined as P.W. 1, and exhibited exhibits A1 to A17 were marked on the side of the plaintiff. On the side of the defendants, the defendants have examined one S. Seshadri as D.W. 1 and exhibits B1 to B4 were marked.

After meticulously scanning the evidence, both oral and documentary evidence and giving due deliberations to the submissions made by both sides, the learned trial judge finding no material to reject the claim of the plaintiff has decreed the suit as prayed for with costs which necessitated the defendants to approach this Court by way of this appeal.

The following points arose for determination in this appeal:

(a) Whether D2 is jointly and severally liable for the suit claim along with D1?

(b) Whether the suit is bad for misjoinder of unnecessary party like D2?

(c) Whether the judgment and decree of the learned trial judge in O.S. No. 14562 of 1996 on the file of Seventh Additional Judge, City Civil Court, Chennai, is liable to be set aside for the reasons stated in the memorandum of appeal?

Heard learned Counsel appearing for the appellants as well as learned Counsel appearing for the respondent and considered their respective submissions.

Point No. 1:

Relying on Clause III to exhibit A1 memorandum of understanding, learned Counsel appearing for the appellants would contend that the first defendant alone is liable to pay the suit amount, if any, to the plaintiff and that the second defendant who is the managing director of the first defendant-company is not liable for the debt incurred by the first defendant. In support of his contention, learned Counsel appearing for the appellants would focus the attention of this Court to Section 46 of the Companies Act which reads as follows:

(1) Contracts on behalf of a company may be made as follows-

(a) a contract which, if made between private persons, would by law be required to be in writing signed by the parties to be charged therewith, may be made on behalf of the company in writing signed by any person acting under its authority, express or implied, and may in the same manner be varied or discharged;

(b) a contract which, if made between private persons, would by law be valid although made by parol only and not reduced into writing, may be made by parol on behalf of the company by any person acting under its authority, express or implied, and may in the same manner be varied or discharged.

(2) A contract made according to this section shall bind the company.

Section 46 of the Companies Act manifest how a contract between the two persons can be entered into. Nowhere it is stated u/s 46 of the Companies Act that a managing director who entered into a contract on behalf of the company is not liable for the debt incurred by the company. Further learned Counsel also placed his reliance on Section 434(1)(b) of the said Act in support of his contention. Section 434(1)(b) of the Companies Act runs as follows:

(1) A company shall be deemed to be unable to pay its debts-....

(b) if execution or other process issued on a decree or order of any court (or Tribunal) in favour of a creditor of the company is returned unsatisfied in whole or in part;....

Relying on a ratio decidendi in M/S. Electronics Corporation of India Ltd. Etc. Etc. Vs. Secretary, Revenue Department Govt. of Andhra Pradesh and Others Etc. Etc., , learned Counsel for the appellants would contend that against the first defendant-company, a legal entity alone, the lis filed by the plaintiff is maintainable and that the second defendant is not liable for the debt incurred by the first defendant. The short facts of the said ratio decidendi are that the Civil Appeal No. 142 of 1983 was filed by the Electronics Corporation of India Ltd./appellant. According to the appellant, in the year 1963, the State of Andhra Pradesh had granted a large area of land to the Department of Atomic Energy of the Central Government. In 1964, the Department of Atomic Energy gave 220.25 acres to the appellant-company. On October 1, 1978, the first defendant issued notices to the appellant-company demanding for non-agricultural assessment on the said land under Andhra Pradesh Non-agricultural Lands Assessment Act, 1963, for the year 1970-71 to 1973-74, demanding a sum of Rs. 1,91,189.68 and also another sum of Rs. 11,98,826.32 for the period 1974-75 to 1978-79. The appellant-company filed a writ petition in the High Court of Andhra Pradesh contending that the said demand is against canon of justice. The appellant''s main contention is that the land belonging to Union of India and the same could not, by virtue of Article 285 of the Constitution of India, be taxed by a State Legislature. The State Government filed a reply to the said writ petition contending that the Act has been amended by Act 28 of 1974 and that thereby the appellant-company had become liable to pay non-agricultural assessment upon the said land. The High Court of Andhra Pradesh directed the appellant-company to file an appeal to the appellate authority under the Act against the impugned demand against which the above appeal was preferred before the Hon''ble apex court. After an elaborate discussion on case law, the Hon''ble apex court ultimately held that there can be no estoppel against a statute and that the provisions under the Andhra Pradesh Non-agricultural Lands Assessment Act (14 of 1963) as amended Act (28 of 1974) are not ultra vires because Article 285 does not apply when the property that is to be taxed is not of the Union of India but of a distinct and separate legal entity.

The other dictum relied on by learned Counsel for the appellants in support of his contention is Tata Engineering and Locomotive Co. Ltd. Vs. State of Bihar and Others, . In the abovesaid ratio-decidendi the law laid down was that the corporations and companies not being citizens cannot file a petition under Article 32 of the Indian Constitution. The relevant observation in the said judgment runs as follows (headnote of Tata Engineering and Locomotive Co. Ltd. Vs. State of Bihar and Others, ):

The corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own, its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them; similarly, the creditors of the members have no right to the assets of the corporation, Salomon v. Salomon and Co. [1897] AC 22 relied on.

There cannot be any two opinion with regard to the abovesaid two ratio-decidendies relied on by learned Counsel appearing for the appellants. But only thing for consideration is whether those dictums can be applicable to the present facts of the case. The plaintiff has filed the suit on the basis of exhibit A1 memorandum of understanding entered into between the plaintiff, defendants and Mrs. Shantha Natraj, the wife of the plaintiff. A careful reading of exhibit A1 will go to show that the said exhibit A1 memorandum of understanding came into existence only because of arriving at the consensus between the parties in respect of the dispute that had arisen between the parties in Suit Nos. 377 and 376 of 1989 before this Court (Original Side). Learned Counsel appearing for the appellants relying on Clause III to exhibit A1, which reads as follows:

Sri B. Natraj and Akshaya Finance and Investments will be paid a sum of Rs. 2,50,000 (rupees two lakhs and fifty thousand only) by way of compensation/interest and the principal amount of Rs. 3,75,000 (rupees three lakhs and seventy five thousand only). These amounts will be paid by Sinhar Estate Builders P. Ltd. on or before October 31, 1989.

would contend that as per Clause III to exhibit A1, first defendant alone is liable to pay the suit amount and not the second defendant, forgetting for a moment, the subsequent Clause IV in exhibit A1 says that Sri Ravi N. Iyer (D2), on behalf of the company (D1) and in his capacity as managing director of the company, shall deposit the cheques for the following amounts with Mr. R. Srinivasan, residing at No. 15, North Mada Street, Srinagar Colony, Madras-15:

(a) Rs. 2 lakhs by cheque No. 104201 dated October 31, 1989.

(b) Rs. 1.75 lakhs by cheque No. 104202 dated October 31, 1989.

(c) Rs. 1.20 lakhs by cheque No. 104203 dated October 31, 1989.

(d) Rs. 1.30 lakhs by cheque No. 104204 dated October 31, 1989.

(e) Rs. 1.25 lakhs by cheque No. 104205 dated October 31, 1989.

(f) Rs. 1,000 by cheque No. 104206 dated October 31, 1989.

Clause V reads that on realisation of the above cheques, Sri R. Srinivasan shall handover all the above referred documents in his possession to Sri Ravi N. Iyer (D2 herein).

In the cause of action column to the plaint, the plaintiff has categorically stated that as per the terms of the memorandum of understanding dated September 25, 1989 (exhibit A1), the defendants had issued five cheques to the value of Rs. 7.50 lakhs and also another cheque for Rs. 25,000 and subsequently, the above cheques were returned "unpaid". According to the plaintiff, the first defendant had borrowed a sum of Rs. 6,00,000 for the purpose of acquiring an immovable property for the first defendant for the purpose of diverting and promoting the same and that a sum of Rs. 3.75 lakhs remains to be paid. It is the further case of the plaintiff that plaintiff had 1250 equity shares each to the value of Rs. 100 with the first defendant besides the plaintiffs wife had 10 equity shares each to the value of Rs. 100 with the first defendant-company and the first defendant diverted the funds of the company to the other companies controlled by the second defendant and the second defendant had also resorted to falsification of accounts and under statement of income to promote the other companies at the cost of the first defendant. Only on that score, the abovementioned civil suits were filed by the plaintiff against the defendants before the High Court and to settle the said issue exhibit A1 came into existence between the parties and that as per the terms of exhibit A1, the second defendant had issued five cheques as detailed above and when those cheques were presented in the bank, were dishonoured. Under such circumstances, the contentions of learned Counsel appearing for the appellants that the second defendant is not liable for the suit claim cannot be sustainable. It is further pertinent to note that the second defendant has not entered into box before the trial court to establish his case. D.W. 1 Seshadri, even in the cross-examination would admit that the entire affairs of the first defendant was looked after only by the second defendant. Hence, I hold on point No. 1 that the second defendant is jointly and severally liable for the suit claim along with the first defendant.

Point No. 2:

Even though there was no specific issue framed before the trial court as to the fact, whether the suit is bad for misjoinder of party like the second defendant, it was contended before this Court that the second defendant is not a necessary party to the suit. But on a perusal of exhibit A1 memorandum of understanding itself, will go to show that the second defendant has signed in the memorandum of understanding only in his individual capacity, even though in the memorandum of understanding at Clause 1, it is stated that the second defendant is a managing director of Sinhar Estate Builders P. Ltd. (D1), the seal of the company does not find a place below the signature of the first defendant at page 4 of exhibit A1. The plaintiff has filed the suit only on the basis of exhibit A1 memorandum of understanding wherein as per Clause IV, the second defendant has to draw six cheques and to hand over the same to the mediator Thiru R. Srinivasan. exhibits A6 to All are the cheques drawn by the second defendant in favour of the plaintiff which were on presentation dishonoured by the bank. Under such circumstances, it cannot be said that the suit is bad for misjoinder of party, i.e., the second defendant. Point No. 2 is answered accordingly.

Point No. 3:

In view of my discussion and finding in the earlier paragraphs, I hold that the decree and judgment of the learned Seventh Additional Judge, City Civil Court, Chennai in O.S. No. 14562 of 1996 need not be interfered with for the reasons stated in the memorandum of appeal. Point No. 3 is answered accordingly.

At this juncture, learned Counsel appearing for the respondent would contend that the defendants/appellants have deposited a sum of Rs. 8,00,000 towards the suit claim in the attachment before judgment petition before this Court and that the respondent was permitted to withdraw 50 per cent, of the said amount and balance 50 per cent, of the amount is in fixed deposit and that the respondent may be directed to withdraw the remaining 50 per cent, also. The request of learned Counsel for the respondent is acceded.

In fine, the appeal fails and the same is hereby dismissed confirming the decree and judgment of the learned trial judge in O.S. No. 14562 of 1996 on the file of the Seventh Additional Judge, City Civil Court, Chennai. No costs.

The respondent is permitted to withdraw the balance 50 per cent, of the suit amount which is lying in the fixed deposit with accrued interest without furnishing any security.