Section 48
EXECUTION
OF DEEDS
[1931] 1 COMP CAS 227 (ALL.)
HIGH COURT OF
Dehra Dun-Mussoorie Electric Tramway Co. Ltd.
v.
BANERJI, J., AND KING, J.
MAY 11,1931
K. N. Katju and K. Verma, for the Appellants.
Iqbal Ahmad and Mansur Alam, for the Respondent.
This is a defendant's appeal arising out
of a suit for sale upon the basis of a mortgage. The defendant is the Dehra
Dun-Mussoorie Electric Tramway Company, Limited, (in liquidation). This company
was incorporated about the end of August, 1921, having a registered office at
The first question is whether Mr. Beltie Shah had authority to borrow Rs. 25,000 from the plaintiffs on behalf of the company. This question formed the subject of the first issue in the trial court.
The Board of Directors undoubtedly had
power under the articles of association to borrow money for the purposes of the
company and to secure the loan by a mortgage. The appellants rely upon article
104 of the articles of association which lays down that "The Board may
delegate any of their powers, other than powers to borrow and make calls, to
committees consisting of such member or members of their body as they think
fit." Under this article the Board are expressly prohibited from delegating
their power to borrow money. Under article 120 the managing agent was given
very extensive powers to conduct and manage the business and affairs of the
company and he was given power "to enter into all contracts and to do all
other things usual, necessary or desirable in the management of the affairs of
the company." The respondents contend that the power of entering into
contracts would include the power of contracting loans. In our opinion,
however, this contention cannot be accepted. The articles must be read as a
whole and as article 104 restricts the Board from delegating its powers of
borrowing, we think that article 120 could not be interpreted so as to give the
managing agent unrestricted powers of borrowing money on behalf of the company.
It is open to question, however, whether under the ordinary rules of law
relating to agency the managing agent should not be held to have been
authorized to obtain the overdraft in the circumstances of this case. The loan
was urgently required for the purposes of the company. Machinery and stores had
been ordered and had arrived from
Even if Mr. Beltie Shah, acted ultra vires in obtaining this loan, it appears that his action was clearly ratified by the Board of Directors. We cannot lay stress upon the resolution which purports to have been passed at a meeting of the Board on the 2nd of June, 1923, as it appears to us (for reasons which we shall presently give) that this resolution was not passed by a properly convened meeting of the Board. The directors' report to the shareholders for the period ending the 31st of March, 1923, submitting the audited accounts for that period, shows the item of Rs. 24,454-3-8 as due to Bhagwan Das and Company (the plaintiffs) as an unsecured loan. This report purports to be signed by four of the directors of the company at a meeting dated 17th September, 1923, and it has not been argued that this meeting was not properly convened. We take it, therefore, that the Board of Directors clearly ratified the loan to the plaintiffs in their report dated the 17th of September, 1923.
Similarly the directors' report for the period ending the 31st of March, 1924, was signed by the directors on the 7th of January, 1925. This report submitted the audited accounts of the company and the accounts clearly show a sum of Rs. 26,802-7-3 as due to Bhagwan Das and Company secured by charge over the company's lands. Even if Mr. Beltie Shah exceeded his powers in obtaining the loan to meet an emergency, his action was never repudiated, but, on the contrary, was clearly ratified by the Board of Directors; so we hold that the company cannot escape liability on the ground that their managing agent had no authority to raise the loan.
The second question is whether the mortgage deed was executed in such a manner as to bind the company under the provisions of company law.
The mortgage deed was signed by Mr. Beltie Shah in his capacity as magaging agent of the company and it bears the common seal of the company. The appellants refer to article 98 (t) of the articles of association and argue that the execution of the mortgage deed is invalid because under article 98 (t) a document to which the common seal is affixed must also be signed by at least one director and countersigned by the agent or other officer appointed by the Board for that purpose. Mr. Beltie Shah is an ex officio director as well as managing agent, but it is clear that, even if he be considered to have signed the document in his capacity as director, article 98 (t) requires counter-signature by the agent or some other officer duly appointed and the document in question bears no counter-signature.
The respondent contends that there was no
necessity for affixing the common seal to the mortgage deed and the presence of
the seal may be ignored. In our opinion, the affixation of the seal was not
required by company law. Under section 88 of the Companies Act the mortgage
could be validly executed by any person acting under the authority of the
company. No rule of law applicable to companies in general, or to this company
in particular, has been shown to us requiring a deed of mortgage to be executed
on behalf of a company by affixation of the common seal. If a document under
seal is not necessary, then a mere defect in the manner of affixing the seal
will not render the document invalid. This was the view taken by the Calcutta High Court in Prabodh Chandra Mitra
v. Road Oils (
The next question is whether Mr. Beltie Shah was authorised to execute the mortgage on behalf of the company.
The minute book of the company (page 121 of the printed record) sets forth a resolution which purports to have been passed by the directors of the company on the 2nd June, 1923, in these terms : —
"Resolved that the Board of Directors of the Dehra Dun Mussoorie Electric Tramway Company, Limited, approve of the proposal of the managing agents to the effect that in order to secure the overdraft of Rs. 25,000 obtained by the company from Messrs. Bhagwan Das & Company, bankers at Dehra Dun, the company's land known at the Khazanchi Bagh, near the Dehra Dun Railway Station, be legally assigned to the said Messrs. Bhagwan Das & Company on such terms and conditions as may be settled between the managing agents and Messrs. Bhagwan Das & Company. The Board of Directors authorize Mr. Beltie Shah to enter into the agreement and give the necessary deed to Messrs. Bhagwan Das & Co.: "and to sign and seal and deliver the deed on behalf of the Board."
This resolution purports to be signed by three directors namely, Bakhshish Singh, B. N. Sen and Beltie Shah.
It has been strenuously contended for the appellant that this is a mere bogus resolution as no meeting of directors was, in fact, held on the 2nd June, 1923, and even if some directors did meet together, it was not a properly convened meeting in accordance with the procedure laid down in the articles of association. It has been argued for the respondent that it is not open to the defendant on the pleadings to argue that no meeting took place. Paragraph 16 of the additional pleas at page 6 states "That the Directors" meeting referred to in paragraph No. 7 of the plaint was not properly convened inasmuch as due notice had not been given to all the directors and a ratification, if any, by any such improperly convened meeting cannot legally bind the company." We think there is much force in this objection. The defendant did not deny that a meeting took place but they alleged that the meeting had not been properly convened as due notice had not been given to all the directors. On these pleadings we think it was only open to the defendant to contend and establish the fact that the meeting had not been properly convened and, therefore, any resolution passed by such a meeting was not legally binding upon the company. If the fact of a meeting had been expressly challenged, then the plaintiff might have called evidence to prove that in fact a meeting did take place. The defendant did not call any director to prove that no meeting took place as alleged. The question, however, does not appear to be of much importance since, if the meeting of directors had not been properly convened, after due notice, its proceedings would not have been valid and binding upon the company. No trace has been found of any notice convening a meeting on the 2nd of June, 1923, nor is there any trace of the agenda of any such meeting. From the letter, Exhibit E, page 127, dated the 7th June, 1923, from Mr. Beltie Shah to Mr. Sen, one of the directors, it appears that although Mr. Beltie Shah, Mr. Narsingh Rao and Mr. Sen might have met together on the 2nd June, 1923, they did not in fact pass the resolution which appears in the company's minute book on that date. The letter of the 7th of June states the fact of the overdraft having been obtained from Messrs. Bhagwan Das & Company who were pressing for repayment and wanting security Mr. Beltie Shah enclosed a draft resolution (to the same effect as the resolution appearing in the company's minute book on the 2nd of June, 1923) asking Mr. Sen to sign it and to get it signed by Mr. Rao and Sardar Bakhshish Singh. In view of this letter, we think, it is clear that there could not have been a-properly convened meeting of directors on the 2nd June, 1923, which passed the resolution set forth above.
The next question is whether the plaintiff knew that there could have been no properly convened meeting of directors on the 2nd June which passed the resolution mentioned.
The appellant contends that the plaintiff Jagmandar Das knew perfectly well that no meeting had been held on the 2nd June and that the resolution was a mere bogus resolution. He relies mainly on the letters, Exhibit Q and Exhibit CC. Exhibit Q (page 135) is a letter from Mr. Beltie Shah to the plaintiff, dated the 12th June, 1923. Mr. Beltie Shah complains that the plaintiff is unreasonably impatient to obtain security for his loan and states that the company are doing everything in their power to meet the plaintiff's wishes and adds : "You are perfectly well aware of the fact that in the case of limited company the procedure laid down by the articles and law has to be gone through and the delay is only natural as all our directors are non-residents of Dehra Dun."
The appellant argues that the plaintiff on receiving this letter must have known that no resolution sanctioning the execution of a mortgage to secure the overdraft could have been passed by a meeting of directors on 2nd June. Exhibit CC (p. 139) is a letter dated the 16th June, 1923, from the plaintiff to Mr. Beltie Shah. The plaintiff complains of the delay in adjusting the overdraft and giving security for it and says :
"Till now you ought to have got the matter settled by the directors by means of correspondence." This is interpreted by the appellant as showing that the plaintiff knew that no resolution sanctioning the mortgage had been passed on the 2nd June but he hoped that the business would be settled by means of correspondence. For the respondent ft is contended that although no resolution may have been passed at a properly convened meeting of directors on the 2nd of June, the plaintiff was not aware of that fact. Exhibit HH (page 117) which is a letter written by the plaintiff to Mr. Beltie Shah on the 16th of May, 1923, shows that there was a talk about giving security for the overdraft from about the 25th of May. It was possible, therefore, for the managing agent to have given one week's notice of a meeting to the directors before the 2nd June. Exhibit Q does not show for certain that no resolution was passed on the 2nd June, nor does Exhibit CC show for certain that the plaintiff knew that no resolution could have been passed on the 2nd June. Buggan Lal, manager of the plaintiff's bank, deposed that Mr. Beltie Shah had shown him the minute book of the company, containing the resolution of the 2nd June, a day or two before the execution of the deed, i.e., on the 18th June. The question was expressly put to him that when he knew from the letter of the 12th June (Ex. Q) that Beltie Shah had spoken of the necessity of sanction by the directors why did he not suspect Mr. Beltie Shah of being a tricky and unreliable man when he showed the witness a resolution purporting to have been passed on the 2nd June. The witness answered:
"I took him to be extra honest because he had frankly shown me the minute book of the company and because he had said that money was being expected from Nabha every day."
In all the circumstances of this case, we think it was very possible that Buggan Lal and the plaintiff were deceived by Mr. Beltie Shah. One must remember that in June, 1913, there was no suspicion that the company would go into liquidation and the plaintiff had no reason to suspect Mr. Beltie Shah of being a tricky and unreliable man. Subsequent events have no doubt cast a lurid light upon his character and methods and in the light of such subsequent events it may be argued that the plaintiff and Buggan Lal ought not to have put so much trust in Mr. Beltie Shah. It is easy to be wise after the event, but in the circumstances, we think that Mr. Beltie Shah who appears to have been a very capable and plausible man persuaded the plaintiff that the execution of the mortgage had really been sanctioned by a properly convened meeting of the directors. Buggan Lal and the plaintiff may have thought it strange that Mr. Beltie Shah did not refer to the resolution in his letter of the 12th June but he seems to have explained to them that he was in daily expectation of receiving large sums of money from Nabha out of which he could repay the overdraft, thus rendering the execution of a mortgage deed unnecessary, and, therefore, he made no previous mention of the resolution sanctioning the mortgage. However this may be, when Mr. Beltie Shah showed Buggan Lal the minute book of the company containing the resolution signed by three of the directors, as we believe he did, we think it would have been difficult for Buggan Lal to disbelieve the representation that the resolution had been duly passed. Moreover, the conduct of the plaintiff in accepting the mortgage supports the view that he believed that the execution of the mortgage had been sanctioned by the Board of Directors. The plaintiff would not have been likely to accept a mortgage which, to his knowledge, had not been sanctioned by the directors and was not binding upon the company. If the plaintiff had known or even strongly suspected that the mortgage had not been sanctioned, he would not have accepted it but would have sued the company for recovery of the loan.
It has further been argued for the appellant that the directors were not authorized under the articles of association to empower Mr. Beltie Shah to execute the mortgage. The argument is that, as the directors cannot delegate their power to borrow, they could not leave the details of the mortgage transaction to be settled by the managing agent. The reply to this is that the loan had already been incurred and there was no question of delegating the power of borrowing any further sums. The only question for the directors was whether they should give the plaintiff a security for the loan which he had already advanced. Under article 104, we think the board could legally empower one of the directors to execute the mortgage deed on their behalf and to settle the details of the mortgage transaction.
The result is that in our opinion the Board of Directors could legally authorize Mr. Beltie Shah to execute the mortgage on behalf of the company by a resolution passed at a properly convened meeting. As a matter of fact, we hold that there was no properly convened meeting which passed the resolution, dated the 2nd June, but the plaintiff had no reason to suppose that the resolution had not been properly passed and was not binding upon the company. On these facts we consider that the plaintiff is protected, in spite of the defect in passing the resolution, and the company is bound by the mortgage so far as company law is concerned. The law on this point is laid down in Halsbury's "Laws of England,"
Volume V, page 302, as follows :—
"The persons contracting with a company and dealing in good faith may assume that acts within the power of the company have been properly and duly performed and are not bound to enquire whether acts of internal management have been regular."
The case of the Royal British Bank v. Turquand is one of the most important cases on this point. In that case the Directors of the company were authorized in certain circumstances to give bonds but the company sought to escape liability on the ground that there had been no resolution authorizing the making of the bond in suit. It was held that the plaintiff was entitled to judgment having a right to presume that there had been a resolution at a general meeting authorizing the borrowing of the money on the bond.
For an Indian decision on this point we may refer to the case of Ram Baran Singh v. Mufassil Bank Limited in which it was held that a company is liable for all acts done by its directors even though unauthorized by it, provided such acts are within the apparent authority of the directors and not ultra vires of the company. Persons dealing bona fide with a managing director are entitled to assume that he has all such powers as he purports to exercise, if they are powers which, according to the constitution of the company, a managing director can have.
We agree with the court below, therefore, in finding that the company is bound by the mortgage so far as company law is concerned.
The next question is whether the mortgage is void for want of previous sanction by the Local Government. Under clause 37 of the Dehra Dun-Mussoorie Tramway Order, 1921, it is laid down that "the promoter shall have power to transfer the undertaking with the assent of Government previously obtained, but not otherwise, to any person or persons or to a company." It is argued that as the Local Government did not give their previous assent to the mortgage, it is void.
The respondent replies that the defendant has never proved that the mortgage was made without the previous sanction of the Local Government, a fact which was within the defendant's special knowledge. In our opinion, there is no force in this reply. Issue No. 3 at page 20 implies that the mortgage had not been sanctioned by the Local Government. The plaintiff never alleged that such sanction had been obtained. In our opinion, the court below wrongly cast the onus upon the defendant of proving that, in fact, no sanction had been obtained for the mortgage. The plaintiff himself admits in cross-examination that so far as he is aware, no permission or sanction was taken from the Government for the execution of the mortgage deed; he did not known that any such sanction was necessary, nor did Beltie Shah ever tell him that any such sanction had been obtained. In view of the plaintiff's admissions and in view of the fact that he never alleged that sanction had been obtained and allowed the issue to be framed in such a manner as to imply the absence of sanction, we consider that it must be held that that the mortgage was executed without previous sanction by the Local Government. The question, however, remains whether the mortgage is void on that account and this raises several points for determination. The first question is whether the company was a "promoter" within the meaning of the Indian Tramways Act, 1886, and the Tramway Order of 1921 made under subsection (3) of section 6 of that Act by the Local Government. "Promoter" is defined in the Act as meaning a Local authority or person in whose favour an order has been made and includes a Local authority or person on whom the rights and liabilities conferred and imposed on the promoter by this Act and by the order and any rules made under this Act as to the construction, maintenance and use of the Tramway have devolved. Beltie Shah was undoubtedly a "promoter" and is expressly referred to as the promoter in the Tramway order. The question is whether the rights and liabilities conferred and imposed upon him have legally devolved upon the company.
It is argued for the respondent that they have not legally devolved upon the company because the Local Government did not give their previous consent to the transfer of the undertaking by Beltie Shah to the company. On the 22nd of December, 1921, an agreement was entered into between Beltie Shah and the company (Exhibit H, p. 53) whereby the company agreed to take over the benefit and liability of Beltie Shah under the Tramway order. It was argued that there was no proof of any previous sanction of this transfer and therefore, it was void and the company never became a "promoter" and was not subject to the conditions laid down in the Tramway order. By consent of parties we allowed the appellant to file further evidence on the question of the Local Government's sanction of the transfer of the undertaking by Beltie Shah to the company. It appears that on the 27th of May, 1921, Mr. Beltie Shah first submitted his formal application for permission to transfer the undertaking to a company. This application was dated before the concession had been granted to him. On the 28th of June, 1921, Mr. Beltie Shah writing to Mr. Willmott, the Chief Engineer and Secretary to Government in the Public Works Department, admits that strictly speaking, he has not yet received the concession and therefore, he will content himself with a letter from Mr. Willmott to the effect that he will have no objection to permit the transfer of the proposed concession for constructing the tramway. He further says it must be understood that this tentative permission is merely to facilitate the incorporation of the company under the Indian Companies Act. Mr. Willmott replies by a letter dated the 9th of July, 1921 :
"As regards the request made in paragraph 6 of your letter I have to say that if the provisional order becomes valid Government will have no objection to the transfer."
After the Tramway order had become absolute Mr. Beltie Shah wrote again to Mr. Willmott on the 10th of January, 1922, referring to the previous letter (saying that Government will have no objection to the transfer) and asking that official permission for the transfer shall now be given. By a letter dated the 22nd of February, 1922, the formal sanction of the Local Government to the transfer of the order, authorizing the construction of the tramway, was conveyed to Mr. Beltie Shah.
For the respondent it is argued as formal sanction for the transfer was only accorded on the 22nd of February, 1922, the transfer effected by the agreement of the 22nd December, 1921, was void since there was no previous sanction. The appellant maintains that the letter of the 9th July, 1921, intimating that Government will have no objection to the transfer is sufficient authority for the transfer. In our opinion, the appellant's contention is correct. The Tramway order merely lay down in clause 37 that the undertaking can only be transferred with the assent of Government previously obtained but does not specify any form in which such assent should be expressed. In our opinion, a demiofficial letter such as that of the 9th July, 1921, by a Secretary to Government in the P.W.D. intimating that Government will have no objection to the transfer is sufficient to convey the previous assent of Government. We take it, therefore, that the company did become a "promoter" in place of Beltie Shah.
The next question is whether the land
mortgaged formed part of the "undertaking." The land was bought by
the company on the 15th of May, 1922, for the purpose of a tramway depot.
"Undertaking" is defined as including all movable and immovable
property of the promoter suitable to and used by him for the purposes of the
tramway. The fact that the land near the railway station was
"suitable" for the purposes of the tramway can hardly be disputed. It
was obviously necessary that the tramway company should have some
administrative offices and a car shed, and a site near the railway station was
obviously suitable. It is argued, however, that at the time of the mortgage the
property was not used by the company for the purposes of the tramway. The
evidence shows that at that time some sleepers, intended for the construction
of the tramway, were stacked upon the land. In our opinion, this indicates use
of the land for the purposes of the tramway sufficient to bring it within the
definition of "undertaking." The mere fact that the land was not
acquired under the Land Acquisition Act or with the concurrence of the
Superintendent of the
The mortgage, then, was made in contravention of clause 37 of the Tramway order, as having been made without the previous assent of Government. On these facts the respondent argues that the transfer would only be voidable at the option of the Local Government and not absolutely void. The appellant maintains that the mortgage is absolutely void and, in our opinion, his contention is well-founded. The rules laid down in the Tramway order have the force of law, and in our opinion, the transfer of part of the undertaking without the previous sanction of Government must be held to be absolutely void. In the case of Gauri Shanker Balmokund v. Chinumia it was held by their Lordships of the Privy Council that a mortgage by a judgment debtor in contravention of paragraph 11 of the Third Schedule of the Code of Civil Procedure is void and not merely voidable. We may also refer to the rulings in Dipan Rai v. Ram Khilawan and Har Prasad Tiwari v. Sheo Gobind Tiwari in which the mortgage of an occupancy holding in contravention of the Agra Tenancy Act was held to be void. In our opinion, the same principles would apply to a mortgage in contravention of a clause of the Tramway order. If the mortgage is void it cannot be ratified nor can it be pleaded that the defendant is estopped from denying his competence to create the mortgage.
We hold, therefore, that the mortgage is void.
The appellants being the liquidators of the Dehra Dun Mussoorie Electric Tramway Company and all the evidence having been taken in this case, we think that instead of the plaintiffs proving their claim in the course of the liquidation proceedings they should be given a decree for money as against the liquidators. They will thus rank as unsecured creditors and will get their money is due course of liquidation.
We allow the appeal and vary the decree of the trial court by granting to the plaintiffs a simple money decree for Rs. 29,773-4-3 to be realized by them in due course of liquidation. Interest at the contractual rate will cease as from the 29th of January, 1926. If there are any surplus assets, interest at 6 per cent, per annum will be payable out of the surplus up to the date of repayment. The appellants will get half the costs of this appeal and those in the court below from the respondents. The respondents will bear their own costs.
[2003] 46 SCL 196 (Mad.)
High
Court of
v.
Besser Concrete Systems Ltd.
N.V.
Balasubramanian, J.
Section 48 of the Companies Act, 1956 - Execution of deeds - Whether it is not necessary that agreement should bear seal of company but question whether agreement is valid or not would depend upon facts of each case - Held, yes
Section 433 of the Companies Act, 1956 -
Winding up - Circumstances in which a company may be wound up - In winding up
petition, petitioner-company stated that it had placed a work order with ‘VIPL’
and paid mobilisation advance and that respondent-company stood guarantee for
VIPL for performance of work - VIPL ultimately expressed its inability to do
work due to financial crisis and requested to withdraw from contract - Certain
amounts were due from VIPL and it was stated that respondent being guarantor
was also liable to those dues - Despite statutory notice, respondent did not
pay - Very existence of performance guarantee was denied by respondent - ‘VIPL’
failed to perform its obligations under work order - Whether since copies of
various documents revealed that either at time of entering into contract by
petitioner with VIPL or at time of issue of first work order or in subsequent
agreements/letters/work order parties had not contemplated any third party
guarantee for performance of work by VIPL, defence raised by respondent was a
bona fide and substantial one - Held, yes - Whether when respondent had
established that there was a bona fide dispute as regards debt, winding up
proceeding was not a proper remedy to resolve dispute - Held, yes
The respondent-company was manufacturing and
dealing in decorating articles. The petitioner-company had placed a work order
with ‘VIPL’ for laying and paving heavy duty pavement for its container yard
and paid a mobilisation advance of Rs. 10 lakhs with a condition that the VIPL
would perform all obligations in that regard. The respondent-company stood
guarantee for the ‘VIPL’ for the due performance of the terms and conditions in
respect of the work entrusted to the ‘VIPL’. The petitioner noticed some
defects in the work and requested the VIPL to rectify the same and on its
failure to rectify same intended to take legal action against the respondent.
Thereafter, a revised design was made by the ‘VIPL’ and a revised price was
quoted and the petitioner was requested to award the contract to the VIPL and
also requested to release 75 per cent of value of pavers manufactured and held
by the VIPL on behalf of the petitioner. The petitioner considered the request
of the VIPL and issued a revised work order for Rs. 4.13 crores after getting
an indemnity bond and guarantee from the respondent in lieu of bank guarantee
for payment of mobilisation advance for the due performance of the work by the
VIPL and paid mobilisation advance of Rs. 31.33 lakhs after adjusting the
advance already paid. The petitioner also paid 75 per cent of the cost of 10
lakh pavers. Despite the above payment, the VIPL failed to perform any of its
obligations under the work order and expressed its inability to do work due to
financial crisis and requested the petitioner to withdraw from the contract.
The petitioner stated that both the respondent and the ‘VIPL’ delayed the
project schedule and the mobilisation advance was not returned by the VIPL. A
sum of Rs. 41.33 lakhs was due by way of mobilisation advance paid to VIPL and
Rs. 21.62 lakhs being the balance in pavers account after adjusting the value
of the work done and recovery by way of retention and mobilisation advance.
Since the respondent had stood as the guarantor for the ‘VIPL’ and had admitted
its liability by entering into an agreement confirming that it was holding
seven lakhs pavers in trust on behalf of the petitioner, it was stated that the
respondent was liable to pay the balance amount. It was contended that VIPL did
not pay the sum in spite of repeated letters, and, hence, the respondent was
jointly and severally liable along with VIPL to pay the amount to the extent of
Rs. 41,32,631 in view of the guarantee executed by the respondent in favour of
the petitioner for due performance of the terms and conditions of the contract
by VIPL. It was contended that even after the issuance of the statutory notice
issued by the petitioner, the respondent did not pay the amount.
On company petition, it was prayed that the
respondent-company should be wound up.
Copies of various documents revealed that
either at the time of entering into the contract by the petitioner with VIPL or
at the time of issue of the first work order or in subsequent
agreements/letters/work order, the parties had not contemplated any third party
guarantee for the performance of the work by VIPL. In the minutes of the
meeting held on 20-8-1997, there was absolutely no reference to the third party
agreement said to have been executed. In the balance sheets, it had been stated
that the company had not guaranteed any loan and there was no reference to any
guarantee at all which had been certified by the auditor in his report dated
8-10-1997. It was, therefore, clear that the respondent-company had raised a
bona fide dispute as regards the genuineness of the agreement of guarantee
dated 25-3-1997, as well as the agreement dated 1-4-1997. [Paras 20 and 21]
R, the managing director of VIPL and of the
respondent-company, was the moving figure in both the respondent-company as
well as in VIPL and in none of the earlier documents prior to 25-3-1997, was
there a reference to the performance guarantee by the respondent-company. Even
in the guarantee agreement dated 25-3-1997, there was reference to the payments
made on 26-3-1997 and on 27-3-1997, as if the payments were made on 25-3-1997.
The agreement dated 1-4-1997, also referred to the work order subsequently made
on 2-4-1997, and these were all matters for the petitioner to explain in
evidence as to how the subsequent dates were incorporated in the guarantee
agreement dated 25-3-1997, and also in the agreement dated 1-4-1997. The
balance sheet of the respondent-company also did not indicate that whether the
respondent had guaranteed for the payment of the mobilisation advance received
by VIPL. Though the petitioner had produced certain letters to indicate that
the respondent-company had participated in the execution of the work by VIPL,
those letters did not establish that the respondent had guaranteed the
repayment of mobilisation advance received by VIPL or the other company. The
respondent had stated that since R was in charge of the affairs of the
respondent-company, the notice issued by the advocate on behalf of the
petitioner was not replied to. These were all matters to be established before
the civil court during the trial of the case. The defence raised by the
respondent was a bona fide and substantial one. [
Though there could be no quarrel over the
proposition that when a third party deals with the company, it is open to the
third party to act with bona fide belief that the person who acted on behalf of
the company had a requisite authority to deal with the affairs of the company
and the resolution passed in the said company and documents executed by the
said person are legitimate and valid, but the application of the principle
would depend upon the facts of each case. The respondent-company was questioning
the existence of the agreement and the genuineness of the same and had
raised bona fide grounds leading to
suspicious circumstances surrounding the execution of the agreement and, hence,
it was not open to the petitioner to claim that on the basis of the authority
granted by the said company, ‘R’ had acted validly on behalf of the said
company. It is not necessary that the agreement should bear the seal of the
company, but the question whether the agreement is valid or not would depend
upon the facts of each case. It was no doubt true that the respondent was the
guarantor and on the failure of the principal debtor to repay the money, the
respondent would be liable to repay the money, but when the very existence of
the guarantee agreement was disputed, the petitioner should establish the
agreement in question in a civil court as a genuine one. [
The respondent had established that it had a
substantial defence and, therefore, the fact that the respondent raised the
grounds for defence for the first time in the preliminary counter affidavit did
not make any difference. When the respondent had established that there was a
bona fide dispute as regards the debt, the winding up proceeding was not a
proper remedy to resolve the dispute. It was a case where the respondent had
put forward a defence and denied the claim on bona fide grounds and the
respondent was able to point out that it had a valid defence in denying the
claim of the petitioner. Therefore, the defence of the respondent had been made
in good faith. The petitioner had not established that there was a debt due and
payable by the respondent-company. Though the petitioner had produced the
agreement of guarantee as well as the agreement dated 1-4-1997, when the
respondent denied the execution and the validity of the documents on which
reliance had been placed by the petitioner, the appropriate remedy for the
petitioner was not to approach
A.C.K. Krishnaswami v. Stressed Concrete
Constructions (P.) Ltd. [1964] 34 Comp. Cas. 6 (
Sivakumar for the Petitioner. S.K. Srinivasan for the Respondent.
N.V. Balasubramanian, J. - This company petition is filed under
sections 433(e) and 433(c) of the Companies Act, 1956, hereinafter referred to
as the Act, for winding up of the respondent-company, which was incorporated
under the provisions of the Act.
The respondent-company was established with
the objects mentioned in the memorandum of association with the authorised
share capital of Rs. 20 crores divided into two crore equity shares of Rs. 10
each. The paid up share capital of the respondent-company is Rs. 11,000. The
respondent-company is manufacturing and dealing in decorating articles such as
block wall patterns, lawn edging, landscaping blocks, etc.
2. The
case of the petitioner is that the petitioner-company has placed a work order
dated 2nd August, 1996 with Vibrant Investment & Properties Ltd.
[hereinafter referred to as (‘the VIPL’) and also referred to as ‘the said
company’) for laying and paving heavy duty pavement for 4.50 lakhs sq. ft.
using heavy duty pavers as per specifications for a total value of Rs.
5,23,87,500 for its container yard and paid a mobilisation advance of Rs. 10
lakhs with a condition that the said company would perform all obligations in
this regard. The respondent-company stood guarantee for the said company and
also executed a guarantee dated 25th July, 1997 for the due performance of the
terms and conditions in respect of the work entrusted to the said company.
Since the petitioner had noticed some defects in the work, by a letter dated
5th November, 1996, it requested the said company to rectify the defects. The
said company failed to rectify the defects and so the petitioner intended to
take legal action against the respondent for damages. Thereafter after several
discussions, a revised design was made by the said company for the work to be
done and a revised price was quoted for the total paving of the container yard
and requested the petitioner to award the contract to the said company as it
had already manufactured pavers through the respondent and kept them at the
respondent’s site and also paid the entire amount to the respondent and
requested to release 75 per cent of the value of the pavers manufactured and
held by the said company on behalf of the petitioner. The petitioner considered
the request of the said company and issued a revised work order for Rs.
4,13,30,168 after getting an indemnity bond and guarantee from the respondent
in lieu of bank guarantee for payment of mobilisation advance of Rs. 41.33
lakhs for the due performance of the work by the said company and paid
mobilisation advance of Rs. 31.33 lakhs after adjusting the advance already
paid. The petitioner-company also paid Rs. 35.12 lakhs towards 75 per cent of
the cost of 10 lakhs pavers as requested by the said company. In spite of the
above payment made by the petitioner-company, the said company failed to
perform any of its obligations under the work order and in the review meeting
held between the petitioner-company and the said company, the said company had
expressed its inability to do work due to financial crisis and requested to
withdraw from the contract. A huge stock of petitioner’s pavers lying in the
respondent-company was sold without the consent of the petitioner and the
availability of pavers was much less. The respondent-company also indicated
that the balance pavers would be despatched after reconciling the accounts of
the respondent and the said company. It is stated that both the respondent and
the said company delayed the petitioner’s project schedule and the mobilisation
advance was also not returned by the said company. A sum of Rs. 41.33 lakhs was
due by way of mobilisation advance paid to the said company and Rs. 21.62 lakhs
being the balance in pavers account after adjusting the value of the work done
and recovery by way of retention and mobilisation advance. Since the
respondent-company has stood as the guarantor for the said company and the
respondent has admitted its liability by entering into an agreement dated 1st
April, 1997, confirming that it was holding seven lakhs pavers in trust on
behalf of the petitioner, it is stated that the respondent is liable to pay the
balance amount. The said company did not pay the sum in spite of repeated
letters dated 9th August, 1997, and 10th September, 1997, and hence, the
respondent is jointly and severally liable along with the said company to pay
the amount to the extent of Rs. 41,32,631 in view of the guarantee dated 25th
March, 1997, executed by the respondent in favour of the petitioner for due
performance of the terms and conditions of the contract by the said company.
The respondent is also liable to pay Rs. 62.95 lakhs as it had agreed to
indemnify the petitioner for any loss, damage, cost etc. Even after the
issuance of the statutory notice issued by the petitioner dated 27th September,
1997, the respondent did not pay the amount. The respondent and the said company
have become commercially insolvent and unable to pay its debts. It is therefore
appropriate that the respondent-company should be wound up.
3. Notice
was ordered regarding the maintainability and the respondent has filed a
preliminary counter statement. According to the respondent, the name of the
company was changed to ‘Besser Concrete Systems Ltd.’ It is stated that the
respondent was incorporated in the year 1995 with the object of manufacturing
and marketing concrete blocks and pavers and Vibrant Investments and Properties
Ltd. (VIPL), one of the promoters of the respondent-company was enjoying a
fiduciary relationship with the respondent. It is stated that R. Ramakrishna,
the managing director of VIPL was also the managing director of the respondent-company
from 26th February, 1996 to 17th June, 1997. It is stated that the said R.
Ramakrishna was also the chairman of the Board of directors of the
respondent-company from 20th March, 1995, till 11th December, 1997. It is
stated that R. Ramakrishna continued to be a member of the Board of the
respondent-company having powers of management of the affairs of the respondent
and fiduciary control over the respondent. It is the case of the respondent
that R. Ramakrishna and his associates had abused their fiduciary relationship
with the respondent and had done several acts of misfeasance, malfeasance and
non-feasance. It is also stated that the petitioner had been applying pressure
for collecting the dues as early as in the year 1997 itself from the said R. Ramakrishna.
It is stated that the said R. Ramakrishna had entered into an ante-dated
guarantee and an agreement involving the respondent. It is stated that the
deeds of guarantee and the agreement are not genuine and they are fabricated
ones and have been perpetrated by the said R. Ramakrishna in collusion with the
petitioner for obvious purposes. It is the case of the respondent that the
respondent has supplied more pavers to VIPL than what VIPL has paid for and
that VIPL owes this respondent. It is therefore admitted that VIPL is simply
attempting to bring this respondent into the dispute collusively. It is stated
that the copies of certain documents have not been furnished to the respondent.
It is the case of the respondent that the petitioner has not furnished the
copies of all the deeds, documents, letters etc. entered into between the
petitioner and VIPL. It is stated in the agreement dated 1st April, 1997, a
reference has been made about an event which takes place subsequently on 2nd
April, 1997, namely, the amended work order and it is not a typographical
error. Reference has been made to two original work orders one on 11th July,
1996 and another on 2nd August, 1996, and the work order dated 2nd August, 1996
is subsequent and according to the respondent, it is a fabricated one. It is
further stated that the performance guarantee has been contemplated well before
the work order dated 2nd August, 1996, and the respondent also referred to
certain events stated in paragraphs V, VI, VII, VIII and IX of the counter-affidavit
to plead that R. Ramakrishna has colluded and put up only a sham fight. It is
the case of the respondent that it was not the guarantor of the said company
and the agreement in question is not enforceable against it and the petition
for winding up lacks bona fides and is liable to be dismissed.
4. The
petitioner has filed a rejoinder stating that the objections raised in the
preliminary counter-affidavit of the respondent are not sustainable. According
to the petitioner, the acts of misfeasance and malfeasance by R. Ramakrishna
are not matters of consequence of the petitioner who had bona fide commercial
transaction with the respondent-company. The averments that there was a
collusion between the petitioner and VIPL and that there is an ante-dated
agreement were also denied. The contention that the guarantee is a fabricated
one is also denied. It is therefore stated that the respondent-company as
guarantor to the said company, is liable to pay the money due by the said
company to the petitioner. It is the case of the petitioner that R. Ramakrishna
being the managing director of the respondent-company has signed the contracts,
agreements and guarantees and hence the respondent-company would be responsible
for all the actions of the said director. It is not open to the respondent to
contend that the agreement is not valid. It is therefore stated that the
respondent is liable to pay the money. As far as the copies of documents
averred in paragraph 8 of the counter affidavit are concerned, it is stated
that the documents have already been furnished to VIPL and the petitioner has
also given a list of documents having been furnished to VIPL. The other
averments contained in the preliminary counter-affidavit are denied and prayed
that the respondent-company should be wound up.
5. Mr.
Sivakumar, learned counsel appearing for the petitioner referred to the
indemnity bond executed by the respondent in favour of the petitioner,
particularly clauses 3, 16 and 17 of the agreement dated 25th March, 1997. He also
referred to the statutory notice dated 27th September, 1997 and the non-reply
to the said notice. Learned counsel referred to the letter of VIPL, wherein the
principal liability of Rs. 62.94 lakhs is admitted and he has also submitted
that R. Ramakrishna has not disputed his signature in the guarantee agreement.
He, therefore, submitted that the petitioner is invoking the guarantee. He has
also submitted that the petitioner has advanced a sum of Rs. 41.33 lakhs. He
refers to the advance payment to VIPL dated 1st April, 1997 and submitted that
the agreement has not been disputed and it is a genuine one. Further, he
submitted that R. Ramakrishna has only 20 per cent shareholding. He submitted
that R. Ramakrishna has signed the agreement. He also referred to the covenants
and submitted that at least for the dues of Rs. 41.33 lakhs there is no
dispute. He refers to the balance-sheet of the respondent-company for the year
1996-97 and refers to the director’s report. He also referred to the
balance-sheet of the company for the year 1997-98, wherein the company has
admitted that it has given guarantee. He also referred to the letter dated 16th
August, 1997, wherein it is stated that due to certain problems in the site in
respect of soil sub-base, the delivery of pavers was stopped. He also referred
to the balance-sheet for the year ended 31st March, 2000 and submitted that
though R. Ramakrishna was not the director of the company, the company has not
disputed that the pavers were sold. He also submitted that the respondent-company
has not responded to the notice and sold the pavers. He also referred to the
letter dated 25th March, 1996, and the director’s report for the year ended
31st March, 1997. He referred to the director’s report of the
respondent-company dated 1st March, 2000, wherein it has been stated that R.
Ramakrishna has resigned during that year and the company has not disputed the
guarantee. He further submitted that only in the balance-sheet for the year
ended 31st March, 2000 after the petitioner has filed the company petition, the
respondent-company has chosen to question the validity and genuineness of the
guarantee deed. He also submitted that R. Ramakrishna was a director when the
guarantee agreement was signed. He also referred to the director’s report for
the year ended 31st March, 1997 wherein the company has stated that the
respondent manufactured large quantity of unistone interlocking pavers and also
referred to the guarantee agreement and the same was accepted in the
balance-sheet of the year 1999. He referred to the Board’s resolution dated
17th August, 1996 and the resolution dated 18th September, 1996. He also
submitted that the minutes of the Board were not produced in spite of the
directions from this court. His main submission was that the respondent-company
is not a stranger and the petitioner dealt with the said company and whatever
may be internal quarrel between the managing director of the said company and
the respondent-company it will not affect the validity of the transactions insofar
as the petitioner is concerned. He submitted that prima facie the documents are
genuine and R. Ramakrishna, managing director of VIPL was also the managing
director of the respondent-company and he had interest in the transactions
between the VIPL and the petitioner-company. Learned counsel referred to
section 290 of the Companies Act and submitted that it is not open to the
respondent to say that R. Ramakrishna did not have the capacity to deal with
the transaction, and the petitioner is a bona fide third party. He referred to
a letter dated 25th March, 1996 and submitted that the letter was issued prior
to the guarantee. He also referred to the letter of intent dated 25th March,
1997 and submitted that in the letter there is a reference to the work order
dated 2nd August, 1996. He also referred to the Board’s resolution whereby R.
Ramakrishna was empowered to sign the performance guarantee to the said MAC-CWT
Distriparks Ltd., in compliance with the terms of the said work order.
Therefore, the petitioner is entitled to maintain the company petition. His
main case is that the guarantee was signed in accordance with the Board’s
resolution and in the reply to the legal notice the respondent has not disputed
that R. Ramakrishna had signed the guarantee deed and he also submitted that
during the course of pendency of the above company petition the respondent has
asked for time for settling the claim. As regards the typographical error, it
does not make any hindrance for the enforceability of the agreement.
6. On
the other hand, Mr. S.K. Srinivasan, learned counsel for the respondent
submitted that according to the petitioner, the letter of intent was dated 25th
March, 1997, the work order was dated 2nd August, 1996 and a sum of Rs. 10
lakhs was paid on 5th August, 1996 and the balance of Rs. 31.33 lakhs was paid
by two cheques one dated March 26, 1997 for a sum of Rs. 10 lakhs and another
for a sum of Rs. 21.33 lakhs by a cheque dated 27th March, 1997. He referred to
the guarantee agreement entered into on March 25,1997 wherein it is stated that
a sum of Rs. 41 lakhs was stated to have been paid in respect of the work
relating to the development construction of the container yard on the terms and
conditions of the intent letter dated 25th March, 1997. He therefore submitted
that it is impossible that a sum of Rs. 31.33 lakhs could have been paid on
25th March, 1997 and actually the amounts were stated to have been paid
subsequent to that date. He also referred to the letter of intent and submitted
that the letter does not mention anything about the guarantee. He also referred
to the work order dated 2nd August, 1996 and submitted that in the work order
it has not been stated that VIPL was required to give performance guarantee and
there is no provision for the guarantee given by the respondent. He therefore
submitted that the guarantee agreement is ante-dated. Learned counsel also
referred to the amended work order dated 2nd April, 1997 and even in the
amended work order there is no reference to the guarantee. He refers to the
letter of intend dated 25th March, 1997 and in that there is no reference about
the guarantee. He further submitted that a sum of Rs. 10 lakhs was stated to
have been paid on 26th March, 1997. In the minutes of the meeting dated 20th
August, 1997, there is no reference about the guarantee also. He further
submitted that the guarantee refers to the payment of advance on 1st April,
1997 and the subsequent event, namely, the amended work order dated 2nd April,
1997. He also referred to the two work orders dated 2nd August, 1996 and 2nd
April, 1997 wherein there is no reference about the guarantee by third party.
He also referred to the minutes dated 20th August, 1997, wherein there is no
reference about the guarantee. He also submitted that the guarantee could have
been given only for the strength and performance of the contract and also
referred to certain clauses in the guarantee agreement 25th March, 1997 and the
agreement also provides a clause for return of the mobilisation advance. He therefore
submitted that the guarantee is a fabricated one brought about by R.
Ramakrishna and there is a genuine dispute and the company petition is liable
to be dismissed. In support of his submission counsel relied on certain
decisions also.
7. I
have carefully considered the submission of learned counsel for the petitioner
and the respondent. I have already set out the facts and now, I will consider
the decisions relied on by learned counsel for the parties. Counsel for the
petitioner relied on the decision reported in Royal British Bank v. Turquand
[1843-60] All. ER. Reprint 435. The above case deals with the duties of
directors as regards the resolution duly passed by the company. The court laid
down the following proposition :
“Persons
dealing with the company were bound to make themselves acquainted with the
statute and the deed of settlement of the company, but they were not bound to
do more; a person, on reading the deed of settlement, would find, not a
prohibition against borrowing, but a person to borrow on certain conditions,
and, learning that the authority might be made complete by a resolution, he
would have a right to infer the fact of a resolution authorising that which on
the face of the document appeared to be legitimately done; and, therefore, the
company was liable whether or not a resolution had been passed.”
8. Learned
counsel for the petitioner also relied on a decision of the Calcutta High Court
in Probodh Chandra Mitra v. Road Oils (India) Ltd. AIR 1930 Cal. 782, wherein
it has been held as under (headnote) :
“An agreement
between a company and a person as banian of the company, that the latter will
advance all the necessary funds up to a certain limit and in return would have
the sole right to collect all sums due on bills to the company and repay
himself the advances so made as also his remuneration, is an instrument which
if otherwise binding creates an equitable charge on the company’s outstandings
for the amount due to the person. Such agreement need not be under company’s
seal. It is enough if it is in writing and even if such agreement is required
to be under seal by the articles of association of the company, if it is
affixed with the seal irregularly, the irregularity does not affect the binding
character of the agreement :
When a document
is intended and required to be under seal, a mere defect in respect of the seal
does not make the document for all purposes bad and if the court is satisfied
that the parties intended and had power to create the charge, incumbrance or a
transfer it will give effect to the intention notwithstanding any mistake in or
a failure of the attempt to effect it. If further the document is acted upon by
the company, the obligation it embodies will be enforced.
When an
agreement on behalf of a company is entered into with a stranger by one of the
directors, then if it was possible under the articles of association for
authority of all the directors to be delegated to one and the stranger is aware
of no facts to the contrary the agreement will bind the company irrespective of
whether such delegation of power has taken place or not.”
9. Learned
counsel for the petitioner also relied on a decision of the Allahabad High
Court reported in Ram Buran Singh v. Mufassil Bank Ltd. AIR 1925 All. 206,
wherein the court has held as under (headnote) :
“A company is
bound by its dealings with strangers, who act bona fide with the company; a
company is liable for all acts done by its directors, even though unauthorised
by it provided such acts are within the apparent authority of the directors and
not ultra vires. Persons dealing bona fide with a managing director are
entitled to assume that he has all such powers as he purports to exercise if
there are powers which, according to the constitution of the company, a
managing director can have. All persons dealing with a company must ascertain
the limitation imposed by the articles of association, but they are not bound
to draw any direct or obvious inferences from the provisions they find there,
nor is there any obligation cast upon them to see that such directors are
properly appointed or that they have acted exactly in accordance with the
manner prescribed therein. The articles of association of the company define
the power of directors as between themselves and the company, and unless there
is anything in those articles limiting the powers of the Board of directors in
carrying on the ordinary business of the corporation a third party who deals
with the directors or with the managers acting under those powers however
irregularly, is protected if he acts in good faith in his dealing with them.”
10. Learned
counsel for the petitioner also referred to the decision in Goodwill India Ltd.
v. P.S.B. Paper Mills (P.) Ltd. AIR 1996 P&H 60, wherein the court held
that the company has not disputed the liability on any prior occasion, i.e.,
prior to the filing of the written statement and the plea set up for the first
time in the written statement was held to be an afterthought and the defence
raised by the company was held to be not a bona fide one.
11. Learned
counsel also referred to the decision of the Division Bench of this court
reported in Deva Sugars Ltd. v. Sicom Ltd. [1997] 89 Comp. Cas. 504 (Mad.),
wherein the guarantors liability was dealt with and the court has held as under
(headnote) :
“. . . Even
though the appellant-company was termed as guarantor in the guarantee document,
it was also mentioned therein that it would be treated as principal debtor.
Further, the loan granted was not in dispute and the execution of the guarantee
document was also not in dispute. The demands made by the corporation for the
amount due including the statutory notice was not in dispute. Further, even
though the statutory notice was addressed to the principal debtor, a specific
demand was made even against the guarantor, specifically saying that the
contents would be treated as statutory notice under section 434 of the
Companies Act against the guarantor also. Despite the statutory notice,
admittedly, there was no reply by the appellant guarantor. Nor had any payment
been made subsequent to the statutory notice. In the circumstances, it was
clear that the appellant-company was unable to pay its debts.” (p. 505)
12. Learned
counsel for the petitioner also relied on the decision of the Calcutta High Court
in Wastinghouse Saxby Farmer Ltd., In re. [1982] 52 Comp. Cas. 479. The court
laid down the law as under :
“A winding up
petition was filed by a creditor after failure and neglect by a company to pay
the claim of the creditor for the price of goods sold, delivered and accepted
by the debtor-company without any objection. From the winding up petition and
its annexures prima facie no dispute appeared as to the contract for, and the
supply of the goods at any stage. For the first time, the debtor-company
admitting the liability to pay some of the bills alleged with respect to some
others that on enquiry and scrutiny in the office of the respondent-company it
came to the knowledge of the company that in collusion and conspiracy with some
employees of the company the petitioner had committed fraud upon the company in
delivering indigenous materials although the contract was for sale of foreign
made materials and also inflating the amounts of the said bills and showing
therein larger quantities of goods than had actually been delivered :
‘Held, that
the dispute sought to be raised by the company appeared to be not only absurd
and highly improbable and if it was encouraged in the winding up petition it
would be disastrous and open the floodgate of fraud and collusion as a defence
which companies could set up to defeat the bona fide claims of petitioning
creditors. In the facts and on the records, the dispute was defamatory and
injurious to the business reputation of traders and merchants’.” (p. 479)
13. Learned
counsel for the petitioner referred to the decision of the Calcutta High Court
reported in Bangasri Ice & Cold Storage Ltd. v. Kali Charan Banerjee AIR
1962 Cal. 613, wherein, the court while construing the words “unable to pay
debt” in section 433 of the Companies Act, 1956, has held as under :
“Under
sections 433(e) and 434(1)(a) before a company could be sent to liquidation, it
must be ‘unable to pay its debts’. This presupposes that there exists a debt
and the company is unable to pay it. Prima facie this must relate to the
solvency of the company. So far as the creditor is concerned, who cannot obtain
payment of his debts, he is entitled, as between himself and the company ex
debito justitiae to an order for winding up, if he brings his case within the
Act. But he must first of all establish that there is a debt owing and
secondly, must satisfy the court that the company is unable to pay the same.
Where notice
is given and the company after the requisite period neglects to pay a debt,
then there arises under section 434 a presumption of inability to pay. But here
again, the words used are ‘neglects to pay’. In either case, that is to say,
under section 433 or section 434, if the debt is disputed bona fide, then in
that case there is neither inability nor negligence to pay. It will not do for
a creditor merely to put forward a claim. The company may not accept it or may
dispute either its factum or validity. Where there is a genuine dispute of this
description, it cannot be resolved by having recourse to winding up proceeding.
But, just as it will not do for a creditor merely to put forward a claim, it
will not do for the company to deny a claim recklessly. If the denial of the
dispute is neither bona fide nor reasonable, then the court does not lose its power
of granting relief by passing a winding up order.” (p. 613)
14. Learned
counsel for the petitioner also relied on a decision reported in S. Kantilal
& Co. (P.) Ltd. v. Rajaram Bandekar (Sirigao) Mines (P.) Ltd. [1993] 76
Comp. Cas. 800, wherein, the Bombay High Court has held as under :
“In a winding up petition, the principles on
which the company court acts are first that the defence of the company is in
good faith and one of the substance, secondly, that the defence is likely to
succeed in point of law and, thirdly, that the company adduces prima facie
proof of the facts on which the defence depends.” (p. 800)
15. On the
other hand, Mr. S.K. Srinivasan, learned counsel for the respondent relied upon
the following decisions :
Ram Kishan v. Kanwar Papers (P.)
Ltd. [1990] 69 Comp. Cas. 209 (HP).
T. Srinivasa v. Flemming (India)
Apotheke (P.) Ltd. [1990] 68 Comp. Cas. 506 (Kar.).
Rishi Pal Gupta v. S.J. Knitting
Finishing Mills (P.) Ltd. [1998] 93 Comp. Cas. 849 (Delhi).
B. Viswanathan v. Seshasayee Paper
& Boards Ltd. [1992] 73 Comp. Cas. 136 (Mad.).
Malhotra Steel Syndicate v. Punjab
Chemi-Plants Ltd. [1989] 65 Comp. Cas. 546 (P&H).
P.S. Tirumalai Iyengar v. Official
Liquidator, Srinivasa Mills Ltd. [1961] 31 Comp. Cas 561 (Mad.).
Shaw (John) & Sons. (Salford)
Ltd. v. Peter Shaw & John Shaw [1935] 5 Comp. Cas. 369 (CA).
Rajasthan Spinning & Weaving
Mills Ltd. v. Textool Co. Ltd. [1971] 41 Comp. Cas 66 (Mad.).
C.A. Galiakotwala & Co. (P.)
Ltd., In re. [1984] 55 Comp. Cas. 746 (Bom.).
Amalgamated Commercial Traders
(P.) Ltd. v. A.C.K. Krishnaswami [1965] 35 Comp. Cas 456 (SC).
Steel Equipment & Construction
Co. (P.) Ltd., In re. [1968] 38 Comp. Cas. 82 (Cal.).
A.C.K. Krishnaswami v. Stressed
Concrete Constructions (P.) Ltd. [1964] 34 Comp. Cas. 6 (Mad.).
Focus Advertising (P.) Ltd. v.
Ahoora Blocks (P.) Ltd. [1975] 45 Comp. Cas. 534 (Bom.).
Transplanters (Holding Co.) Ltd.,
In re. [1958] 1 WLR 822/[1958] 2 All. ER 711 (Ch.D).
East Kajoria Collieries (P.) Ltd.,
In re. [1965] 35 Comp. Cas 180 (Cal.).
Jamiraddin v. Khadejanessa Bibi
AIR 1929 Cal. 685.
Smt. Keerat Kaur v. Patiala Exhibition (P.)
Ltd. [1991] 6 CLA 2 (Punj. & Har.)/[1991] 70 Comp. Cas. 728 (P&H).
S.P. Chengalvaraya Naidu v.
Jagannath [1994] 1 SCC 1.
Official Liquidator, Supreme Bank
Ltd. v. P.A. Tendolker [1973] 43 Comp. Cas. 382 (SC).
Nawab Singh v. Daljit Singh AIR
1936 All. 401.
Babu Lal Rukmanand v. Official
Liquidator [1968] 1 Comp. LJ 1/[1969] 39 Comp. Cas. 670 (Raj.).
Selangor United Rubber Estates
Ltd. v. Cradock (No. 3) [1969] 39 Comp. Cas. 485 (Ch.D).
And submitted that where there is a serious
dispute as to the fact the party must be referred to the civil court. According
to him, the debt is in bona fide dispute and the defence put forward is a
substantial one and hence the court will not order winding up of the
respondent-company. I am of the view that it is not necessary to burden this
judgment by quoting the decisions relied on by learned counsel for the
respondent, as the principles are very clear.
16. In
February 1996, VIPL submitted a quotation, as seen from the ‘list of dates’
filed by learned counsel for the petitioner and also submitted its offer for
laying and paving heavy duty pavement using heavy duty pavers before the
petitioner. Though the petitioner-company has referred to the letter of VIPL of
February 1996, and another letter dated 29th February, 1996 in the list of
dates, the petitioner has neither referred to the same in the petition, nor
produced the same before the court. The petitioner also referred to the letter
of VIPL, dated 25th March, 1996 in the ‘list of dates’ and the letter was
dealing with the laying of interlocking pavers in Madras, and the letter also
refers to certain conversation regarding the paving project. Another letter
dated 8th May, 1996 from the respondent to one Dr. V.V.S. Rao, New Delhi, was
also relied upon to show that the respondent-company has sought for certain
opinion from Dr. V.V.S. Rao regarding the performance of the pavers. The letter
was signed by B. Hari Srinivasa, General Manager of the respondent-company. The
petitioner also referred to the letters sent by Mask B. Hogan, Vice-President
of Engineering, National Concrete Masonry Association of Ramakrishna of the
respondent-company regarding the work of laying the pavers. The petitioner also
referred to the letter of intent issued to VIPL, dated 26th June, 1996, but
that letter was not produced before the court. The petitioner has also referred
to the letter dated 25th July, 1996, of VIPL and that letter is also not
available before the court. All these documents are referred to in the list of
dates filed by the petitioner, but they are not referred to in the petition.
17. The
next document is the work order dated 2nd August, 1996, issued by the
petitioner to VIPL for laying pavers. In the work order dated 2nd August, 1996,
there is a mentioned that VIPL should give a clear performance guarantee and it
is significant to notice that there is no reference to a third party guarantee
in the work order dated 2nd August, 1996. It is stated that on 5th August,
1996, a sum of Rs. 10 lakhs was paid by the petitioner to VIPLs and it is not
necessary to refer to the unsatisfactory work done by VIPL. The petitioner
refers to the minutes of the meeting held on 26th November, 1996. It is seen in
the said minutes of the meeting, the general manager of the respondent-company
had participated and in the minutes there is also no reference to the third
party guarantee. It is stated that on 21st March, 1997, VIPL submitted a
revised proposal and that letter is also not produced before the court. On 25th
March, 1997, the petitioner has issued a letter of intent for the development
of the container yard and in that letter also there is no reference to the
third party guarantee. On 27th March, 1997, VIPLs executed three contracts,
namely, workmenship guarantee, performance of contract and advance payment for
pavers. It is also stated that on 26th March, 1997, and 27th March, 1997, the
petitioner had paid to VIPL a total sum of Rs. 41.33 lakhs including a sum of
Rs. 7 lakhs earlier paid on 10th July, 1996. On 25th March, 1997, it is alleged
that the guarantee agreement was executed by the respondent in favour of the
petitioner for the performance of the obligation. In clause 2 of the agreement
dated 25th March, 1997, it is stated that the petitioner has paid advance to
VIPL of a sum of Rs. 41.33 lakhs in respect of the work relating to the
development and construction of the container yard on the basis of the letter
of intent dated 25th March, 1997.
18. It
is relevant to mention here that even according to the petitioner’s own
admission, the amounts were paid on two dates, on 26th March, 1997, the sum of
Rs. 10 lakhs was paid and another sum of Rs. 21.33 lakhs was paid by way of
cheque dated 27th March, 1997. On 1st April, 1997, VIPL executed three
agreements, one of them was advance payment for pavers to procure and lay
pavers. The agreement says that VIPLs had manufactured ten lakh pavers and also
agreed not to sell and dispose of the same. It is not clear whether the pavers
were actually manufactured by the respondent. In this agreement the respondent
was not a party. It is also relevant to notice here that on 1st April, 1997,
the respondent is said to have executed an agreement in favour of the
petitioner confirming that pavers not less than ten lakhs have been produced
exclusively in part performance of the respondent’s obligation for the total
quantity of pavers to be procured by VIPLs to lay pavers at the site of the
petitioner. It is relevant to notice here that in the agreement dated 1st
April, 1997, there is a reference to a subsequent work order dated 2nd April,
1997, in more than one place. A fresh work order was issued on 2nd April, 1997
by the petitioner in favour of VIPL and in this work order also there is no
reference to the third party guarantee. Though the petitioner has referred to
the advance payment made on 2nd April, 1997 in the letters dated 17th June,
1997, 19th June, 1997, 4th July, 1997 and 16th July, 1997, the copies of those
letters and the minutes were not produced before the court. The petitioner
referred to the letter dated 11th August, 1997, wherein VIPL addressed the
petitioner regarding the discussion held on 8th August, 1997 in the chambers of
the managing director of the respondent-company, authorising the petitioner to
release the payment to the respondent for the despatch of the pavers. The
petitioner also referred to the letter dated 16th August, 1997, from the
respondent regarding the restructure of the Board of directors of the respondent-company,
assuring for the continued commitment to the customers in respect of past
orders.
19. The
next document that is referred to is the minutes of the meeting held on 20th
August, 1997, wherein it is stated that R. Ramakrishna has informed that the
reimbursement would be made, and assured for return of the mobilisation
advance. In the minutes of the meeting held on 20th August, 1997, though a
reference was made about the manufacture of balance pavers for continuous
supply of pavers, which are to be supplied to the petitioner, there is no
reference to any third party guarantee also. The petitioner addressed a letter
to VIPL dated 10th September, 1997, to settle the account, but here also there
is no reference to the guarantee. The petitioner also referred to the letters
dated 18th September, 1997, and 16th December, 1997 of VIPL to the petitioner
wherein there is a reference to the return of the mobilisation advance, and the
letters also show that continuous supply of pavers would be ensured in future.
20. A
close study of the copies of various documents reveals that either at the time
of entering into the contract by the petitioner with VIPL or at the time of
issue of the first work order on 2nd August, 1996, the parties have not
contemplated any third party guarantee for the performance of the work of VIPL.
In the letter of intent issued on 25th March, 1997, by the petitioner in favour
of VIPL, there is no reference to third party guarantee. It is also relevant to
notice that in the agreement executed on 1st April, 1997 under the caption
‘advance payment for pavers’ there is also no reference to the third party
guarantee and in the agreement also the respondent-company was not a party.
Another significant aspect is that in the work order issued on 2nd April, 1997,
by the petitioner in favour of VIPL there is no reference to the third party
agreement. In the guarantee agreement executed on 25th March, 1997, the
respondent refers to the payments made subsequent to the agreement, namely,
26th March, 1997, and 27th March, 1997, as if the payments were made even on
the date of the agreement. I have carefully gone through the terms of the
agreement and in my view it is not necessary to express any opinion on that,
but, it is ex facie clear that the terms of the agreement relate to the supply
of heavy duty pavers to the petitioner’s company. Another significant aspect is
that in the agreement said to have been executed by the respondent on 1st
April, 1997, there is a reference to the work order dated 2nd April, 1997 and
in the minutes of the meeting held on 20th August, 1997, there is absolutely no
reference to the third party agreement said to have been executed on 25th
March, 1997. So also, in the mobilisation advance agreement executed on 27th
March, 1997 by VIPL there is also no reference to the third party agreement
said to have been executed by the respondent.
21. Another
aspect that has to be taken into consideration is that in the letter dated 16th
July, 1997 of VIPL, there is also no reference to the guarantee agreement at
all. Though in some of the letters particularly, the letters dated 25th March,
1996 and 8th May, 1996 and in the minutes dated 26th November, 1996, it is
stated that the respondent has participated in the execution of the work of
VIPL, the letters do not establish that the participation of the respondent was
by way of third party guarantee. As far as the letter dated 16th July, 1997,
issued by the respondent is concerned, the letter only provides assurance for
the supply of pavers. As regards the letter dated 11th August, 1997 of VIPL, it
also deals only with the supply of pavers by the respondent-company. Insofar as
the minutes of the meeting held on 20th August, 1997 are concerned, it is
significant to notice that nothing has been mentioned about the guarantee
agreement said to have been executed on 25th March, 1997 and in the letter
dated 10th September, 1997, issued by the petitioner to VIPL, a copy of which
was marked to the respondent, there is also no reference to the guarantee
executed on 25th March, 1997. In the balance sheet of the respondent-company
for the year 1997, it is seen that R. Ramakrishna was the chairman and director
of the respondent-company. In the statement pursuant to section 173(2) of the
Companies Act, it has been stated that there is a restructure of the
respondent-company and it is also stated that the company has manufactured
large quantity of pavers. It is also stated that efforts are made to dispose of
them to the other customers. So it is clear that R. Ramakrishna was the
chairman and director of the respondent-company on 5th December, 1997 and in
the balance sheet it has been stated that the company has not guaranteed any
loan and there is no reference to any guarantee at all and it has been certified
by the auditor in his report dated 8th October, 1997. The next balance-sheet is
for the year ended 1997-98, which was signed in June 1999, during which period
R. Ramakrishna was not a director of the respondent-company. There is a
reference to the guarantee regarding the satisfactory performance of the
pavers, but there is no reference to guarantee for the repayment of the advance
received by VIPL. It is significant to notice that while in the earlier balance
sheet there is no reference made about the agreement, the next balance sheet is
for the year 1998-99 and R. Ramakrishna has resigned from the Board of
directors and in that balance-sheet also the respondent-company has referred to
the satisfactory performance of the pavers, but there is no reference to the
repayment of the mobilisation advance. It is relevant to notice here that R.
Ramakrishna has resigned during that year. The next balance sheet is for the
year ended 31st March, 2000, and the respondent-company has taken a definite
stand regarding the genuineness of the guarantee deed. I am of the view that
there is a genuine dispute about the deed of guarantee. The preliminary counter
affidavit was filed by the respondent on 8th September, 2000, and the
director’s report was signed on 22nd November, 2000. It is therefore, clear
from the reading of various documents that the respondent-company has raised a
bona fide dispute as regards the genuineness of the agreement of guarantee
dated 25th March, 1997, as well as the agreement dated 1st April, 1997.
22. It
is important to notice that R. Ramakrishna was the moving figure in both the
respondent-company as well as in VIPL and in none of the earlier documents
prior to 25th March, 1997, is there a reference to the performance guarantee by
the respondent-company. I find that even in the guarantee agreement dated 25th
March, 1997, there is reference to the payments made on 26th March, 1997, and
on 27th March, 1997, as if the payments were made on 25th March, 1997. The
agreement dated 1st April, 1997, also refers to the work order subsequently
made on 2nd April, 1997, and these are all matters for the petitioner to
explain in evidence as to how the subsequent dates are incorporated in the
guarantee agreement dated 25th March, 1997, and also in the agreement dated 1st
April, 1997. The balance sheet of the respondent-company also does not indicate
that whether the respondent had guaranteed for the payment of the mobilisation
advance received by VIPL. In my view it is not necessary to express any opinion
on the genuineness of the guarantee agreement dated 25th March, 1997, as well
as the agreement dated 1st April, 1997. Though the petitioner has produced
certain letters to indicate that the respondent-company has participated in the
execution of the work by VIPL, those letters do not establish the respondent
has guaranteed the repayment of mobilisation advance received by VIPL or the
other company. The respondent has stated that since R. Ramakrishna was in
charge of the affairs of the respondent-company, the notice issued by the
advocate on behalf of the petitioner was not replied to. As already indicated
by me, these are all matters to be established before the civil court during
the trial of the case. I am of the view that the defence raised by the
respondent is a bona fide and substantial one.
23. Though
there can be no quarrel over the proposition that when a third party deals with
the company, it is open to the third party to act with bona fide belief that
the person who acted on behalf of the company had a requisite authority to deal
with the affairs of the company and the resolution passed in the said company
and documents executed by the said person are legitimate and valid, but, the
application of the principle would depend upon the facts of each case. In my view,
the respondent-company is questioning the existence of the agreement and the
genuineness of the same and has raised bona fide grounds leading to suspicious
circumstances surrounding the execution of the agreement and hence, it is not
open to the petitioner to claim that on the basis of the authority granted by
the said company, R. Ramakrishna has acted validly on behalf of the said
company. It is not necessary that the agreement should bear the seal of the
company, but the question whether the agreement is valid or not would depend
upon the facts of each case. It is no doubt true that if the respondent was the
guarantor and on the failure of the principal debtor to repay the money, the
respondent would be liable to repay the money, but when the very existence of
the guarantee agreement is disputed, I am of the view that the petitioner
should establish the agreement in question in a civil court as a genuine one.
24. One another
contention raised by Mr. Sivakumar, learned counsel for the petitioner is that
the respondent took several adjournments to compromise the matter and belatedly
the preliminary counter affidavit has been filed with objection. Learned
counsel for the respondent has stated that the respondent has given in the
counter affidavit the reasons for not giving a reply to the statutory notice
and when the respondent has established a prima facie case that the debt is
disputed, the mere fact that the respondent has taken some adjournments earlier
during the preliminary stage is not material. I am of the view that the
respondent has established that it has a substantial defence and therefore the
fact that the respondent raised the grounds for defence for the first time in
the preliminary counter affidavit does not make any difference. When the respondent
has established that there is a bona fide dispute as regards the debt, in my
view, the winding up proceedings is not a proper remedy to resolve the dispute.
It is a case where the respondent has put forward a defence and denied the
claim on bona fide grounds and the respondent is able to point out that it has
a valid defence in denying the claim of the petitioner. I therefore, hold that
the defence of the respondent has been made in good faith. I hold that the
petitioner has not established that there is a debt due and payable by the
respondent-company. Though the petitioner has produced the agreement of
guarantee as well as the agreement dated 1st April, 1997, when the respondent
denies the execution and the validity of the documents on which reliance has
been placed by the petitioner, I am of the view that the appropriate remedy for
the petitioner is not to approach this court. In this view of the matter, the
company petition is dismissed. No costs.
[1967] 37 COMP. CAS. 463 (MAD)
V.
Sakthi Talkies
(Dindigul) Ltd.
M
ANANTANARAYANAN, OFFG.C.J.
AND
RAMAKRISHNAN, JJ.
APPEAL
NO,367 OF 1960
JANUARY
6, 1966
JUDGMENT
M.
ANANTANARAYANAN, OFFG. C. J.
- The appellant is the plaintiff in a suit for recovery of an amount of Rs.
24,865.59 from the first defendant, Sakthi Talkies Limited, Dindigul, alleged
to be due on a promissory note executed by the eight directors of the first
defendant company in favour of the plaintiff in 1953. The simple facts of the
action, as stated in the plaint, were that the properties of the plaint
schedule belonged to the plaintiff and the second defendant, and that the
plaintiff sold the land to the first defendant firm for the construction of a
cinema theatre for an amount of Rs. 37, 500. Out of this amount, an amount of
Rs. 20, 093-0-6 was due, and the eight directors of the first defendant firm
jointly executed the suit negotiable instrument in favour of the plaintiff for that
sum.
The action
could be viewed as a suit simpliciter upon a promissory note, and also as one
to enforce the vendor's lien in respect of the unpaid purchase money, for the
plaintiff specifically prayed for a charge on the property, and for the sale of
the site in realisation of the claim, under section 55(4) of the Transfer of
Property Act. The second defendant was impleaded as a party entitled, along
with the plaintiff, to a moiety of the amount.
We are now
concerned with the defences on which this claim was resisted by the first
defendant firm, particularly in the additional written statement of that firm.
These defences could be tersely set forth as follows. The plaintiff and second
defendant were partners of a firm of managing agents of the first defendant
company and the plaintiff was also one of the directors of the firm. There was
mismanagement by the managing agents and the plaintiff was in the advantageous
position of the possession of the account books, without a proper audit having
been accomplished. It is conceded that the directors were anxious to purchase
the site for the construction of the theatre, and there are resolutions both of
the general body and the board of directors, approving that proposal.
It was then
found that, according to the plaintiff, he had taken a sum of Rs. 17,406-15-6
from the funds; it is alleged that several directors felt that much larger sums
might have been taken by the plaintiff, and might be due from him. But this sum
of Rs. 17,406 odd was tentatively accepted, as the amount due from the
plaintiff and the promissory note for the balance was executed as alleged in
the plaint in the wake of the sale deed. The defence is that the consideration
of Rs. 20,093-0-6 on the promissory note was not a figure arrived at, on a
proper settlement of accounts between the parties, and that, unless such a
settlement is made, the plaintiff cannot enforce the claim. There are also
certain other technical defences, which we shall note a little later.
The learned
subordinate judge, after referring to the evidence at some length, has
dismissed the suit with costs of the first defendant. His reasons are (1) that
the managing agents (Plaintiff and second defendant ) had played a fraud upon
the company, and that the suit promissory note was not enforceable for that
reason. The proper remedy of the plaintiff was to file a suit for rendition of
accounts. (2) The plaintiff cannot claim a charge under section 55 of the
Transfer of Property Act, because his claim is really of the character of a book
debt and not one for unpaid purchase money. (3) The promissory note has not
been executed with the seal of the company affixed, and the directors were not
duly authorised by the company to enter into the agreement; hence, it is within
the mischief of section 90 of the Indian Companies Act. (4) In any event, the
plaintiff was one of the directors, and he could not have been a valid party to
the resolutions which led to the purchase under section 91B of the Companies
Act.
Learned
counsel for the appellant (Sri Thyagarajan) has stressed before as the simple
argument that, upon none of the grounds adverted to by the learned subordinate
judge, could the claim possibly have been dismissed. Learned counsel points
out, and rightly, in our view, that such a claim, viewed as an action to
enforce the unpaid purchase money with a charge on the property, cannot be
raised on the mere ground that there were other transactions inter se, which
might necessarily involve a proceeding for rendition of accounts, for further
final elucidation. Even a suit on a negotiable instrument, viewing this action
as much, cannot be resisted on any of these grounds. It is not as if the first
defendant came forward with a counterclaim, in this very suit, or denied either
the execution of the promissory note, or the consideration as shown thereunder.
Learned counsel for the first defendant (Sri Desikan) is conscious that the
reasoning of the learned judge on this aspect of the matter may not be
sustainable. He has therefore sought to argue that the pleadings and the
evidence ought to be interpreted in a different way, viz., as affording a basis
for bringing the defence within the third proviso to section 92 of the Indian
Evidence Act. In other words, we must spell out some antecedent agreement
between the parties, not directly repugnant to the terms of the sale deed or of
the promissory note, to the effect that the claim for the unpaid purchase
money, or the claim in the promissory not in which it is embodied, will not be
enforceable until accounts are finally rendered between the parties.
Unfortunately
for the first defendant, we are quite unable to find any basis for such a point
of view, either in the pleadings, or in the evidence of D.W.I, the director,
who has given evidence on behalf of the first defendant company. All that the
evidence of D.W.I amounts to, at the highest, is that accounts were not finally
looked into, when the suit transaction occurred and that there was some
understanding that accounts should be ultimately settled between the parties.
There was also a general impression, apparently in the minds of the other
directors excluding the plaintiff, that the managing agents (plaintiff and
second defendant) had mismanaged the affairs, and that some acts of misfeasance
could be attributable to the plaintiff. All this is very wide of the mark, when
we are considering the existence of any specific evidence based on the third
proviso to section 92. As learned counsel for the appellant points out, the
mere execution of a promissory note by a purchaser does not extinguish the
statutory vendor's lien available to a seller, and does not estop him from an
action on such lien. The relevant authorities were noticed by Kailasam J. in
Dhanikachala Pillai v. Raghava Reddiar A.I.R. 1962 Mad. 423. and the learned
judge has cited and followed the earlier decisions of this court to the same
effect in Krishnaswami Mudaliar v. Vijayaraghava Pillai A.I.R. 1939 Mad. 590.
Somu Achari v. Singara Achari A.I.R. 1954 Mad. 407. as well as in Karuppiah
Pillai v. Hari Rao 4. (4) (1910) 21 M.L.J. 849; 11 I.C. 890.
The technical
arguments based upon certain sections of the Companies Act, VII of 1913, appear
to be totally without foundation. Actually, the learned judge appears to have
misconceived the scope of section 90 of that Act, which has nothing to do with
the execution of a promissory note by the directors of a company for any sum
representing unpaid purchase money upon a transaction of sale in favour of the
company. The relevant provision would be section 89 of the same Act, and it is
indisputable that all the other directors except the plaintiff were parties to
the document. The seal of the company was not required, and that does not
invalidate the transaction. Again, section 91B has no application to the present
facts. Even if the plaintiff, as a director, had voted in the passing of the
resolution, which is denied, the only legal consequence of that would be that
his vote has to be excluded from consideration: vide Narayandas Shreeram Somani
v. Sangli Bank Ltd. [1965] 35 Comp. Cas. 596 (S.C.). Under section 91B(2) he
may be liable to penal action for infringement of the company law, but that has
nothing whatever to do with the validity of the resolutions themselves. We must
add that there is absolutely nothing, either in the promissory note or in the
sale deed, to show that ex facie the amount for which the promissory note was
executed was not due to the plaintiff as unpaid purchase money. Actually, even
such a plea in defence would be in direct contradiction of the principle of
section 92 of the Indian Evidence Act.
For these
reasons, we are of the view that the dismissal of the suit by the learned
subordinate judge was quite unjustified and that, on the merits, the suit has
to be decreed in favour of the plaintiff (appellant). But, in consideration of
the background of facts, as appearing in evidence and accepted by the learned
judge, we think that, in equity, a direction should issue that our present
decree on the suit claim will not be enforceable in execution for a period of
three months from this date. It is open to the first defendant company to
resort to any appropriate legal action as deemed fit, subject to the law of
limitation to enforce the liability of the plaintiff, as claimed in the
additional written statement, to render proper accounts, in respect of a much
larger some said to be due from the plaintiff. If such proceedings are
instituted, the first defendant company may certainly seek all such
interlocutory reliefs therein as advised. But, subject to this direction, the
appeal has clearly to be allowed, and the suit to be decreed, and we reverse
the decree of the learned subordinate judge, and give judgment accordingly,
with costs throughout.