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High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE KRISHNASWAMI NAIDU
Karnataka Films Limited - Appellant
Versus
Official Liquidator, Chitrakala Movietone Limited and Others - Respondent
Case No : Application No. 1244 of 1950 in O.P. No. 429 of 1948
Decided On : 12 December 1950
COMPANY - WINDING UP - JURISDICTION - NON-RESIDENT FOREIGN DIRECTORS - APPLICATION FOR PUBLIC EXAMINATION AND MISFEASANCE - SECTION 195 AND 235 OF THE INDIAN COMPANIES ACT - APPLICABILITY - PREFERENTIAL PAYMENT - TRUST FUND - LIABILITY OF DIRECTORS - SECTION 282B(1) OF THE INDIAN COMPANIES ACT - INTERPRETATION.
Fact of the Case:
The company which is under liquidation is an unregistered company not have been registered under the Indian Companies Act and in respect of which a winding up order has been made. The company had its head office in Colombo, and a branch of which was in Mathurai, has now been wound up. Respondents 3 to 11 who are the directors of this company are all permanent residents of Ceylon and the applicants ask for an order that these respondents who were directors of the company may be directed to submit themselves for public examination under Section 195 of the Indian Companies Act and that they may be proceeded against for misfeasance under Section 235 of the Act. There is also a further prayer that the applicant claim for payment of the deposit amount may be treated as preferential claim.
Finding of the Court:
1. The court has jurisdiction to entertain an application under Section 235 of the Indian Companies Act against non-resident foreign directors for misfeasance and breach of trust, but not under Section 195 for public examination, as it would be ineffective and inadvisable to pass such an order. 2. A deposit made by an agent of the company as security for the fulfilment of obligations under an agreement, with a provision for payment of interest, is impressed with a trust and the agent is entitled to get back the whole of the security deposit even after such company goes to liquidation. 3. The directors of the company are not liable for misfeasance or breach of trust under Section 235 of the Indian Companies Act for utilizing the deposit amount for the legitimate business of the company, as there was no dishonest intention, contravention of law, or specific direction or resolution of the company in doing so.
Issues: 1. Whether the court has jurisdiction to entertain an application under Sections 195 and 235 of the Indian Companies Act against non-resident foreign directors of an unregistered company in liquidation. 2. Whether a deposit made by an agent of the company as security for the fulfilment of obligations under an agreement, with a provision for payment of interest, is impressed with a trust. 3. Whether the directors of the company are liable for misfeasance or breach of trust under Section 235 of the Indian Companies Act for utilizing the deposit amount for the legitimate business of the company.
Ratio Decidendi: 1. The jurisdiction of the court to entertain an application under Sections 195 and 235 of the Indian Companies Act against non-resident foreign directors of an unregistered company in liquidation is governed by the principles of international law, local legislation, and the effectiveness of the order. While the court has jurisdiction to entertain an application under Section 235 for misfeasance and breach of trust, it is inadvisable to pass an order under Section 195 for public examination as it would be ineffective. 2. A deposit made by an agent of the company as security for the fulfilment of obligations under an agreement, with a provision for payment of interest, is impressed with a trust. The intention to create a trust is primarily that of the author of the trust, which must be accepted by the person in whose favour the confidence is reposed as a trustee. The subsequent conduct of the company in utilizing the fund might throw a light on whether the intention of the parties was to create a trust, but it cannot be a conclusive or a safe test in such cases. 3. The directors of the company are not liable for misfeasance or breach of trust under Section 235 of the Indian Companies Act for utilizing the deposit amount for the legitimate business of the company, as there was no dishonest intention, contravention of law, or specific direction or resolution of the company in doing so. Misfeasance under Section 235 is not misfeasance in the abstract, but misfeasance in the nature of a breach of trust resulting in a loss to the company.
Final Decision: Prayers (a) and (b) are rejected. Prayer (c). The applicants will be entitled to rank as preferential creditors, but not in preference to the claim of the second respondent against the company out of the properties mortgaged and hypothecated to the bank. No orders as to costs.
The company which is under liquidation is an unregistered company not have been registered under the Indian Companies Act and in respect of which a winding up order has been made. The company had its head office in Colombo, and a branch of which was in Mathurai, has now been wound up. Respondents 3 to 11 who are the directors of this company are all permanent residents of Ceylon and the applicants ask for an order that these respondents who were directors of the company may be directed to submit themselves for public examination under Section 195 of the Indian Companies Act and that they may be proceeded against for misfeasance under Section 235 of the Act. There is also a further prayer that the applicant claim for payment of the deposit amount may be treated as preferential claim.
The applicants entered into an agreement on 7th September, 1946, with the company and they were appointed distributor for the company's production for certain territory and a sum of Rs. 50, 000 was paid as deposit as follows : Rs. 15, 000 on 7th September, 1946, Rs. 10, 000 against delivery of copies of "Kumaraguru" and the balance of Rs. 25, 000 was to be paid or before 27th October, 1946. The grievance of the applicants is that in spite of demand the company has not refunded the deposit of Rs. 50, 000 or such other amount as would be found actually due out of the deposit, that in contravention of the terms of the agreement these monies were utilised by the company and that the directors should be made liable to pay for breach of trust or misfeasance caused by them and that they should also submit for public examination regarding their dealing and other matters concerning the company.
Apart from the merits, a preliminary objection was taken as to the jurisdiction of this court to consider an application of this nature under Sections 195 and 235 of the Indian Companies Act. It is contended that the directors who are permanent residents of Ceylon which is a foreign territory cannot be proceeded against and that no summons could be issued under Section 195 compelling them to appear and that no order can be made directing them to reimburse any loss or to make any payment for any misfeasance on their part under Section 235 of the Indian companies Act. The decision in Bishadendu Gupta v. H. Langham Reed is cited in support of this contention. In that case in respect of a company which was registered within the Province but some of whose directors were residing in England and against whom an application under Section 235 was made in order to enquire into their conduct, it was held that the High Court had no jurisdiction over persons residing in England but had jurisdiction only on persons residing in British India, though in a different Province, and that therefore an enquiry should be made only with respect to the directors residing in British India and not with respect to those residing outside British India. It was observed by Wort, Ag. C.J., as follows : "It is a principle of international law that a court shall not serve its processes on persons outside its own jurisdictions and upon persons against whom, if an order was made, the order cannot be enforced. It is expressed in these words : 'extra territorium jus decenti non paretur legis extra terrorum non obligant'".A passage from the judgment of their Lordships of the Privy Council in Gurdayal Singh v. Rajah of Faridkot is quoted. It is as follows :
"All jurisdiction is properly territorial, and extra territorium jus decenti, impune non paretur. Territorial jurisdiction attaches (with special exceptions) upon all persons either permanently or temporarily resident within the territory while they are within it; but it does not follow them after they have withdrawn from it, and when they are living in another independent country. It exits always as to land within the territory, and it may be exercised over movables within the territory and, in questions of status or succession governed by do
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