Official Liquidator, Supreme Bank Ltd. v. P.A. Tendolkar, AIR 1973 SC 1104

If a director is responsible for causing a huge loss to the company, then such a director can be held liable for the loss so incurred.
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Introduction

Directors are the means through which a company can exercise the right to function as an individual. There are plenty of precedents, wherein the courts have established that the directors are the minds of the company, and it is their duty to manage the affairs of the company, such that the benefit of the company is ensured to the maximum extent. However, a fiduciary duty is also owed by the directors to the company, such that their conduct is not detrimental to the interests of the company, and if it is so, the director can be held liable for any negligent conduct on their part. The judgment in Official Liquidator Supreme Bank Ltd. v. P.A. Tendolkar reaffirmed this position and it was held in this case that if a director is responsible for causing a huge loss to the company, then such a director can be held liable for the loss so incurred.

Facts

The Supreme Bank of India after its incorporation in the year 1939 commenced operations. However, the bank had to shut down its operations because the acts of gross mismanagement in the bank had caused a huge sum of money to be misappropriated. An application for winding up of the Supreme Bank of India was filed. A liquidator for completing the process of winding up was appointed on March 15th, 1956. As a liquidator, he filed an application for initiating proceedings of misfeasance under the provisions of the Banking Companies Act, 1949 and under Section 235 of the Indian Companies Act, 1913.

The liquidator had relied his claims on several reports made by the Reserve Bank of India and several other authorities, under the orders of the High Court. Thereby, the proceedings were initiated against the directors, the managing directors, and the other officers of the company. However, pending the delivery of judgement by the Court, two of the directors passed away, and after the death of the third director, his legal representatives were brought before the court for subsequent proceedings. The liquidator had included in the prayer all sorts of judgement that the learned judge could have thought to give in the given set of circumstances.

Issues

Whether the liability of the directors as decided by the Company Judge was appropriate or not?

Held

The Court agreed with the Company Judges and with the Division Bench when it came to deciding the liability of the directors, for the delinquent conduct they had committed. The Court agreed that the total liability of the delinquent board should be Rs. 2,50,000. However, this court averred that this liability should be paid by the directors who were alive at the time when the Company Judge passed his order. Only those directors who were alive at the time to witness the order of the Company Judge should contribute to the assets of the company. However, the court indeed set aside the order of the Division Bench in part where the Division Bench had determined the liabilities of the Managing Director, and two of the directors. The directors were held to be joint and severally liable for the repayment of the outstanding sum to be paid by the defaulters, after the respective repayment by the Managing Directors, and a considerable amount from the total had been deducted. The Court then further remanded the case back to the learned Company judge with the instructions to pass the order in likewise for the Directors of the Company.

Analysis

In Official Liquidator Supreme Bank Ltd. v. P.A. Tendolkar, by holding the delinquent group of directors accountable for their actions, the Supreme Court reiterated the importance of diligence which is to be expected from the directors of the company. The opinion of the court established the fact that if the conduct of a director is negligent in nature to such an extent, that it enables the commission of frauds and as a result of such a conduct, if heavy losses are incurred by the company, then in such a situation, the director can indeed be held accountable and liable for such losses. The directors have long been established as the hands and minds of the corporation since it is through them the company can act as an individual, which is why the same is also reflective on the conduct of the director. If the company suffers losses due to the negligent conduct of the director, then the negligent director or the board of directors, as the case may be, maybe held to be liable for the losses so incurred.

Conclusion

The Court allowed the appeal filed by the liquidator seeking punishment for the conduct of the directors of the company. The order of the Division Bench was set aside by the Apex Court, who remanded the case back to the learned company judge with certain directions regarding the nature of the punishment for the directors.

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