Official Liquidator, Supreme Bank Ltd. v. P.A. Tendolkar

Supreme Court of India, 19 January 1973, 3 judges, 1973 AIR 1104, 1973 SCR (3) 364, 1973 SCC (1) 602

In misfeasance proceedings against bank directors, the Court held the claims within time under Section 45-O, restored the directors' total liability, and held that only a declaration, not a compulsive order, lies against a deceased director's heirs.

Facts

The Supreme Bank of India Ltd., Belgaum, suspended business in 1954 after gross mismanagement, misappropriation and false entries in its books, which Reserve Bank inspection reports and auditors' reports had exposed. The Bank was ordered to be wound up in 1956, a provisional liquidator having been appointed on 13-3-1956. On 27-8-1960 the Official Liquidator applied under Section 45H of the Banking Companies Act, 1949 read with Section 235 of the Companies Act, 1913 against the directors, including the Managing Director, and officers. The directors blamed the Managing Director, who held a power of attorney; he said he was a mere tool of the Board. The Company Judge fixed the loss at Rs. 2,50,000 and held the Managing Director and directors liable. A Division Bench of the Mysore High Court reduced the liabilities. Director Tendolkar died pending certification, and his heirs were substituted.

Questions before the Court

Were the misfeasance claims against the directors barred by limitation, given Section 45-O(2) of the Banking Companies Act, 1949 as amended in 1959?
Can misfeasance proceedings continue against the heirs and legal representatives of a deceased director, and what order can be made against them under Section 235 of the Companies Act, 1913?
On what principles are the Managing Director and other directors liable for misfeasance, and did the Division Bench rightly reduce their liability?

What the Court held

Limitation is governed by the special law in Section 45-O of the Banking Companies Act, not Section 235 of the 1913 Act. The 1959 amendment conferred a new right to count limitation from the first appointment of the liquidator, which the liquidator exercised after it came into force; this involved no retrospective operation, and the claims were within time.
The maxim actio personalis moritur cum persona does not apply to actions based on contract or where the wrongdoer's estate has benefited, and should not be extended to breaches of fiduciary duty where the deceased director's conduct was fully inquired into and only the extent of liability remains. Such liability is confined to the estate in the successors' hands.
Section 235 of the 1913 Act, like Section 543 of the 1956 Act, does not authorise compulsive orders against heirs. Proceedings may continue against a deceased director after hearing interested persons, but result only in a declaration of liability, which on appeal may be reduced or increased. Enforcement against the estate lies outside Section 235.
Whether a director acted reasonably, honestly and with due diligence is a question of fact. A director long and closely associated with management may be liable for fraud though no specific dishonest act is proved; he cannot shut his eyes to the obvious, and negligence enabling frauds suffices. The power of attorney did not excuse the founder directors.
Section 45G requires only the liquidator's report that loss has been caused; no separate application for public examination is needed. The directors had full opportunity to meet sufficiently particularised charges, and the Division Bench erred in finding them handicapped by vague charges or issues.
The Company Judge's assessment of Rs. 2,50,000 was restored, with a larger separate share on the Managing Director. The liquidator's appeals were allowed, Ajgaonkar's appeal was dismissed, and the heirs' appeal succeeded only to the extent that the compulsive order against Tendolkar was withdrawn.

Why it matters

The judgment holds that misfeasance proceedings under Section 235 of the Companies Act, 1913 survive a director's death to the extent of a declaration of liability against his estate, confining the maxim actio personalis moritur cum persona. It also states the standard of care for directors who leave management to a managing director, and holds that Section 45-O of the Banking Companies Act governs limitation for claims against bank directors.

In the Court's words

Copied from the official judgment; each passage links to its page.

“We see no reason to extend the maxim, as a general principle, even to cases involving breaches of fiduciary duties or where the personal conduct of the deceased Director has been fully enquired into, and the only question for determination, on an appeal, is the extent of the liability incurred by the deceased Director. Such liability must necessarily be confined to the assets or estate left by the deceased in the hands of the successors.”

Beg, J.Page 15 of the judgment

“But, even such proceedings can only result in a declaration of the liability, of a deceased director, because the language of Section 235 of the Act of 1913, as already noticed, does not authorise passing of orders to compel heirs or legal representatives to do anything. Such compulsive proceedings as may become necessary against those upon whom devolve the assets or the estate of a deceased delinquent Director, who may have become liable, could only lie outside Section 235 of the Act of 1913.”

Beg, J.Page 16 of the judgment

“It is certainly a question of fact, to be determined upon the evidence in each case, whether a Director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with due diligence, so that he could not be held liable for conniving at fraud and misappropriation which takes place. A Director may be shown to be so placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of a Company even though no specific act of dishonesty is proved against him personally.”

Beg, J.Page 19 of the judgment

Provisions interpreted

Section 235, Indian Companies Act, 1913
Section 543, Companies Act, 1956
Section 45-O, Banking Companies Act, 1949 (as amended by Act XXXIII of 1959)
Section 45G, Banking Companies Act, 1949
Section 45H, Banking Companies Act, 1949

Case and bench

Parties: Official Liquidator, Supreme Bank Ltd. v. P. A. Tendolkar (Dead) by L. Rs.
Case: Civil Appeals Nos. 195-197, 234 and 300 of 1967
Decided: 19 January 1973
Bench: Beg, M. Hameedullah, Grover, A.N., Mukherjea, B.K.
Opinions: Unanimous. The Judgment of the Court was delivered by Beg, J.

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