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The case is important as it ascertains the position and liability of directors in a company. The roles played by the directors differ in nature, and accordingly, so does the nature of the liabilities. At times, the directors may be acting as the agents of the company. In some other scenario, the directors of the company may act as trustees for the company. In both these scenarios, the liabilities of the director would be different. Therefore, it is important to ascertain the position of the director to determine the extent of his liability.
The Hanuman Bank Ltd. was incorporated as a public limited company under the Indian Companies Act of 1913. The bank underwent insolvency proceedings after its business crashed. Subsequently, to dissolve the bank, Brahmayya & Co. was appointed as the official liquidator. Dewan Bahadur, was one of the directors of the Bank who played a key role in its management until the business of the Bank crashed. The Articles of Association of the Bank vested the power of management in the directors of the Bank. However, these powers were general in nature and empowered the management committee to manage the bank. This committee held powers similar to the directors of the Bank. The liquidators in charge of the process claimed that under the control of Dewan Bahadur, the managing committee acted arbitrarily, and misapplied bank’s funds.
Charges on Dewan and subsequent legal proceedings
The liquidators charged Dewan for misapplying and misappropriating the funds of the bank. The liquidators also alleged that Dewan, and K.V. Krishnamurthi Iyer were enriching themselves with money and other assets at the expense of the funds of the bank. In total, the bank lost Rs. 14,08,647, approximately. The liquidators had initiated the proceedings under Section 235 of the Indian Companies Act, 1913 against the directors and the officers of the bank. Dewan died before the proceedings against him could conclude. The Court refrained from continuing legal proceedings against him or his legal representatives. However, the proceeding continued against the other respondents. The Court held the other members of the managing committee liable for the losses incurred by the Bank. Later, the liquidators initiated proceedings against the legal representatives of Dewan for acts of misfeasance and breach of trust.
Two primary issues arose before this court–
- Whether the cause of action against the legal representatives ended with the death of Dewan?
- Whether law limits the claim made by the liquidators?
The court ruled that law does not allow a suit against legal representatives of a deceased. Any claim arising out of such suits are untenable before a court of law. The court remanded the case back for further inquiry and dismissed the appeal in regards to the prayers made by the appellants.
The Legal Representative’s Act, 1855 does not provide for continuation of a suit against the legal representatives of a deceased party in a suit. The court also denied the applicability of Section 306 of the Indian Succession Act, 1925.
The position of the directors is indeed an important issue for the assessment of liabilities of the directors. In this case, the position of the Director of the Bank was an important aspect for consideration. The Court prevented the case against the legal representative of Dewan by interpreting Article 120. In the event of Dewan’s death Article 120 could not be applied against his legal representative because it only applied in cases where director of a company is an actual wrongdoer.