Directors' fiduciary duty and liability for company losses, company's liability for borrowings made by directors.

Leach, C.J.

1. These three appeals arise out of proceedings instituted under Section 235, Companies Act, by the Official Liquidator of the Oriental Investment Trust Ltd., which is in the process of being wound up compulsorily under an order of this Court passed on 21st July 1939. The company was incorporated on 9th September 1936. The first directors were C. Abdul Hakim, P. V. Swanithan, V. KR. ST. Kasi Viswanathan Chettiar, S. Subbaraya Mudaliar, T. RM. T. SP. P. L. Palaniappa Chettiar and PL. VA. V. Ramanathan Chettiar. C. Abdul Hakim and P. V. Swaminathan died before the liquidation commenced and Kasi Viswanathan after the misfeasance summons had been heard. On 1st April 1937, T. S. PL. SP. Thinnappa Chettiar joined the board. Charges of misfeasance were prefer-red against Kasi Viswanathan, S. Subbaraya Mudaliar, Palaniappa, Ramanathan and Thinnappa. It was claimed that as the result of; their misconduct they were liable jointly and severally in the sum of Rs. 2,77,531-5-9. The learned Judge (Bell J.) considered that S. Subbaraya Mudaliar had not acted unreasonably and was entitled to the benefit of Section 281, Companies Act. He found that the Official Liquidator had established a charge of misfeasance against the other respondents and that the loss was to be apportioned as follows: Kasi Viswanathan and Ramanathan were to be jointly and severally liable for Rs. 1,11,909-10-0, Palaniappa for Rs. 18,651-9-8 and Thinnappa for Rs. 18,651-9-8. Appeal No. 44 of 1942 has been preferred by Thinnappa, App. No. 47 of 1942 by the legal representatives of Kasi Viswanathan and App. No. 52 by Palaniappa. Ramanathan has not appealed. He absconded on 22nd June 1939 after it has been discovered that he had misappropriated large sums be-longing to the company.

2. The principal promoters of the company were Kasi Viswanathan and Ramanathan who were appointed joint managing directors. Kasi Viswanathan was the managing member of a joint Hindu family which carried on a money-lending business under the vilasam of V. K. R. S.T. in the Madras Presidency with its Head Office at Devakottah and a branch at Madras. The firm was of considerable standing. Ramanathan was its agent in Madras. Kasi Viswanathans brother Narayanan, with whom he was joint, was in charge of the business there but there is no doubt that the management of the Madras branch was largely in the hands of Ramana-than. Ramanathan had acquired a good reputation in the Chettiar community and was its representative on the Madras Board of Directors of the Reserve Bank of India. The authorised capital of the company was Rs. 25,00,000 divided into 25000 shares of Rs. 100 each. At the time of the liquidation, only 6068 shares had been issued and they were merely paid up to theextent of Rs. 25 per share. This gave a working capital of a little over Rs. 1,50,000. The objects for which the company was formed were those of an investment trust company, but very little investment business was done. Ramanathan was allowed to control the business of the company and at once commenced gambling in differences in shares. He did this with the full knowledge and consent of his brother directors. This matter has been discussed in the judgment which we have just delivered in reported in AIR1944Mad532 and it is unnecessary to repeat all we have said there.

3. The paid up capital of the company was not sufficient for the transactions which Ramanathan was entering into on behalf of the company and he was authorised by the directors to borrow money from the V. K. R. S. T. firm. Including interest the company owed to the firm at the date of the winding up the sum of Rs. 1,36,274-1-2. The magnitude of the gambling which was indulged in is to be gathered from the fact that notwithstanding the comparatively small amount of capital available the transactions entered into during the short existence of the company aggregated in value Rs. 1,61,77,443-0-8. The value of the investments held by the company at the time