Indian States Bank Ltd. Official v. KunwarSardar Singh and Ors. AIR 1934 All 855

The above mentioned case revolves around the rules and laws of the Companies Act. It highlights the misfeasance done by people by the fraudulent use of the Indian Companies Act. The managing agents of the company misused the law for their own benefit over the public good.
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Introduction

The above mentioned case revolves around the rules and laws of the Companies Act[1]. It highlights the misfeasance done by people  by the fraudulent use of the Indian Companies Act. The managing agents of the company misused the law for their own benefit over the public good. The fake bank was the brain child of these people and it was incorporated by moulding the rules to suit their greed. The major sections under which the liability of the accused are to be determined are Section 235 and 102(2) of the Indian Companies Act. The objective of this case comment is to analyse the liability of each of the bank officials involved in the fraud investigated by the official liquidator of the bank.

The case is a notable example of how the people of the United Province were deprived of their money and how the managing agents were successful in carrying on the business of the bank by deceiving even the directors and signatories to some extent. The case will unfold who the extent of liability and the participation in the fraud.

Facts

The incorporation of the bank was the idea of three men B.S. Vidyarthi, A.B. Tandon and GopiNath Singh in the year 1929, who are the defendants. They were acquainted through each other. The scheme was that GopiNath would find men and money for the bank, Tandon would provide for the organisation and Vidyarthi would be the brains. They started the bank with two patrons where there was no evidence that they ever consented for the use of their names and similarly they had names of several persons as directors on their prospectus without any evidence of their approval. For the purpose of promoting the company they formed themselves into a partnership due to which it became a limited liability company. People enrolled in the company for employment and money was received from them in the form of security which was spent in the preliminary expenses and payment of salaries.

After that the company was incorporated and the Memorandum of Association was filed with the Registrar of Joint Stock Companies with the seven signatories but the document in itself was fraudulent since none of them had intentions to pay for the 50 preference shares offered to them. Through the efforts of GopiNath several people agreed to be the directors of the bank among them the prominent ones were Rao Bahadur Kunwar Bikram Singh, M.L.C., Capt. Rao Bahadur Lal Bhagwant Singh and Rao Bahadur KunwarSardar Singh M.L.C. The names of important people instilled confidence in people. The prospectus was then printed which stated that the authorised capital of the company was one crore rupees. The prospectus included people of authority as directors, auditors, key managerial personnel with misleading statements and speeches thus making the document completely misleading. There were other shareholders who didn’t pay a single anna for their shares except for Seth Ahmad Bhai Poonja. The minimum subscription upon which the director can proceed for allotment was fixed at the nominal value of Rs. 50,000 but this was fake.

Each and every signatory  and directors were aware that the statements in the prospectus about oversubscription of the shares and to deceive the auditors that might make an enquiry, current accounts were opened for all signatories and their accounts were debited and credited with the same amount which was due on application for the shares. The next thing to be acquired was the certificate from the Registrar, Joint Stock Companies to commence the business and for that purpose a declaration needs to be made by the officer of the company with regards to provisions of Section 101 and 102 of the Companies Act and this was not difficult for GopiNath to obtain. Though the declaration was false and there was evidence that the business has already begun even before incorporation.

The trouble began when Bhatnagar, the secretary of the company quarrelled with Vidyarathi and separated from the bank. He was suspicious of the activities of the managing agents and therefore wrote a letter to the Registrar for enquiry into the books of the company for gross irregularities but the letter was sent to the managing agents and Vidyarathi was successful in persuading the Registrar. After that many other branches were opened in Agra and Punjab. At the end of the year as is necessary to file statutory accounts and the auditors were called for the same purpose. They detailed out certain objections in the accounts in a letter to the managing partner for clarification. A meeting was called with only Rao Bahadur Govind Prasad and Seth Ahmad Bhai Poonja were the only directors present and resolutions were passed for the objections raised by the auditors and on the receipt of the minutes of the meeting the auditors were satisfied and gave a clear certificate for accounts without further objection.

The next task was to obtain more money for the bank for which the managing agents had a scheme that Rs. 100 bond should be issued at Rs. 85 payable in three years. But this effort failed and there was no other source of money to pay the extravagant overhead expenses thus there was no way of repayment and therefore the bank was closed by a resolution of voluntary winding up. An official liquidator, the plaintiff was appointed and upon the reports of the liquidator most of the defendants agreed to admit the fraudulent nature of floatation and conduct of the business. The main culprits were Vidyarathi, Tandon and GopiNath and their liability was clear. Criminal proceedings were instituted against them which was pending.

Issues

  1. Whether any charges under Section 235 of the Indian Companies Act have been made, and if so who are responsible and to what extent?
  2. Whether any promoters and directors are liable under Section 102 of the Indian Companies Act, and if so what is their liability?
  3. Whether Article 180 of the Articles of Association is invalid, if not, what will be its effect regarding each one of the defendants.

Relevant Laws

The sections given below belong to the Indian Companies Act[2].

  1. Section 101

No allotment shall be made, unless the amount (if any) fixed by the memorandum of articles and named in the prospectus as the Minimum subscription upon which the directors may proceed to allotment has been subscribed, and the sum payable on application for the amount so fixed and named or for the whole amount offered for subscription, has been paid to and received in cash by the company”.

  • Section 102(2)

If any director of a company knowingly contravenes or permits or authorizes the contravention of any of the provisions of Section 101 with respect to allotment, he shall be liable to compensate the company and the allottee respectively for any loss, damages or costs which the company or the allottee may have sustained or incurred thereby”.

  • Section 103

It is provided under this section that it was illegal for the company to commence business until every director of the company paid the application and allotment money for his share.

  • Section 235

Where, in the course of winding up a company, it appears that any person who has taken part in the formation or promotion of the company, or any past or present director, manager, or liquidator or any officer of the company has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of trust in relation to the company, the Court may, on the application of the liquidator, or of any creditor or contributory, examine into the conduct of the promoter, director, manager, liquidator or officer, and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of misapplication, retainer, misfeasance, or breach of trust as the Court thinks just”.

  • Article 180 of the Articles of Association

This Article provides that no director or officer of the company can be liable for the defaults of other directors or the loss or expense to the company through the inefficiency or deficiency of any title to property or inefficiency or deficiency of any security to, in or upon which any money of the company shall be invested, or for logs occasioned by any tortuous act of any person with whom any money shall be deposited or for loss occasioned by any error of judgment, omission, default or oversight on the part of a director or for any other loss, damage or misfortune whatever which shall happen in relation to the execution of the duties of his office or in relation thereto, unless the same happens through his own dishonesty”[3].

Judgement & Decision

The issues were decided altogether and the liabilities of the defendants according to the provisions of the sections concerned. The following people Rao Bahadur Lal Bhagwant Singh, B. Hari Saran Das, AnandSarupBhatnagai, Seth Tirbhuwan Das, and Khan SahebNawab Ali Khanwere protected under Article 180 and they were not proven guilty for any dishonest act as directors and therefore the claim of the liquidator under section 235 against them but this judgement does not affect their liability as contributories.

KunwarSardar Singh M.L.C. agreed in his statement in the Court that he was aware about the financial position of the company but made no enquiry, he also agreed for the allotment of shares without payment, he persuaded Rao Bahadur Bikram Singh M.L.C. to allow his name to be used as a director of the company, he even deceived other members of the company and kept his position as a secret that if he disclosed that he did not pay for the shares others will also not pay. He made Bikram Singh and Lal Bhagwant Singh to become directors on the same terms that they shall not pay for the shares.                                      

The allotment of shares was illegal since under Section 101 of the Companies Act since no application money was received and Sardar Singh was a member who was a party to the issue of the prospectus stating that directors had paid for their shares which was false. Therefore he was aware about all the misfeasance and irregularity in conducting of the business and without his support it would have been impossible to obtain the certificate of commencement from the Registrar. He agreed that he deceived the public and other members of the company in order to oblige his friend GopiNath.

The defendant was completely involved in the activities of the company and knew about all its whereabouts. He was the advisory to the managing agents for starting a branch at Moradabad, also he was a signatory to the false statutory report. He signed on the balance sheet which he knew was false. All of this proves that he was a party in the fake incorporation of the bank till the liquidation of the same along with three main culprits.

The next question was about the extent to which they were to be held liable. Since the four directors committed the grave acts such as:

  1. The allotment of shares by the directors without having received the minimum subscription or the money due on application for shares.
  2.  Obtaining by fraud the certificate for commencement of business
  3. Commencing business although the directors had not paid the application and allotment money due on their shares.

They are in a breach of Sections 101 and 103 and for the wilful contravention of Section 101 they are also liable to pay compensation to the company under Section 102(2). Under Section 235 also they will be held liable for illegal expenditure of the money subscribed by them for shares and they must be made to discharge their liabilities to each creditor of the company and return money to all the shareholders.

Vidyarathi, Tandon and GopiNath are jointly and severally liable and also KunwarSardar Singh since he was an ally since the beginning of this fraud. Rao Bahadur Govind Prasad was not responsible for the fraudulent floatation of the company but still he was a part of every misleading activity conducted and gave his consent he would be held jointly and severally liable for the amount of Rs.20,000 along with other defendants. A decree was passed for the four defendants after assessing the losses of the company incurred from its paid up capital, money from the customers and liquidation costs to repay along with the interest. The auditors were also included in the petition but they were offered to pay Rs. 10,000 without incurring any liability. Thus the exact sum including the cost of the proceedings were Rs. 1,23,87,101 is to be paid jointly and severally by the four defendants.

Analysis

According to my point of view after the detailed analysis of the case and all the facts the judgement given is fairly accurate and is in accordance with the provisions of the sections of the Indian Companies Act. The evidence to this decision is stated well in the facts and can be differentiated from them. Each and every activity beginning from the incorporation of the company till the liquidation is fraudulent and misleading and this has been proved above. All the names associated with the company to make the public believe in it and deceive are itself unaware about the use of their names. The business of the company had commenced even before its incorporation which itself was fake and even the directors and the members of the company were deceived by the notion that they were told not to pay for the shares allotted in return to give their names for the directors. This was completely against the Section 101 and it was done willingly. Every other thing that followed from the meeting, the printing of the prospectus containing false statements to attract the consumers, to preparing a false statutory report and including other directors too in their misfeasance to satisfying auditors by fake means everything was corrupted.

Thus the order given by Court is complementary to the liability incurred by the defendants and the cost is also correct. The decree is in consonance with today’s provisions and laws of the Companies Act. The judgement about Sardar Singh’s liability is correct since he was from the beginning involved with all the activities of the company and without his support it wouldn’t have been possible for the managing agents to conduct the business, open branches of the bank and come this far in deceiving the public and spending the money of the consumers on overhead expenses and extravagantly for other purposes.

Thus the judgement given is precise and can be a precedent for further company law related cases of frauds and misrepresentation. The director’s main aim is to protect the interests of the shareholders and investors rather this company was instituted for false transactions and to gain benefits over the customer’s hard earned money. This was a case of gaining trust of the friends and deceiving other members to oblige them by modifying and twisting the laws according to their convenience. This must be stopped and a good decision was given to further prevent any such similar fraudulent behaviour.

Conclusion

The sections applicable in the above case were logically and technically consistent with the facts and evidences that were laid out in front of the court. The court awarded the best possible decree to the defendants and provided justice to the customers of the company.

Sometimes it is easy to find the loopholes in the laws and mould them according to your needs but a citizen who abides by that law even after such issues is a true citizen of the country. The Company Act after this judgement had many amendments to make it airtight and reduce the fraudulent application of this law. Even then the judiciary is capable to provide justice and fair decisions to the petitioners with the help of honest and hardworking liquidators.

Therefore in conclusion it would be rightly said that these laws are in themselves complete and also it teaches a lesson that people who are at a higher and respectable authority must be accountable for their actions such as the auditors who must have looked carefully at the books of the company, the Registrar must not be negligent and should have taken the complaint seriously. If these people would have done their jobs properly the situation would have been different and the public would have been saved from such a big loss.

Also read Difference Between a Limited Company and a Private Limited Company


[1]The Indian Companies (Amendment) Act, 1930.

[2] The Indian Companies (Amendment) Act, 1930, No. 19 Acts of Parliament, (1930).-

[3]Indian States Bank Ltd. Official vKunwarSardar Singh AndOrs.  AIR 1934 All 855.