V.S. Ramaswamy Iyer and Ors. v. Brahmayya & Co., Official Liquidators, Hanuman Bank Ltd.

This judgment broadened the scope of liability of director in case of default. It was not the first decision to view directors as trustees in case of misfeasance but it is remarkable as it extensively scrutinized various arguments.
Estimated Reading Time: 11 minutes

Introduction

The maxim actio personalis moritur cum persona, which means a personal right of action dies with the death of a person, holds a special place in the field of law. Its application has saved several innocent representatives or legal heirs from the clutches of law. However, when it comes to company law, the interpretation of this maxim is different in different circumstances. One such exception, where representatives are in fact held responsible, was discussed in the case of V.S. Ramaswamy Iyer and Ors. Vs. Brahmayya & Co., Official Liquidators, Hanuman Bank Ltd.[1] The analysis of this judgment will also throw some light on the difference between torts and contracts.

Facts of the Case

The respondent, Hanuman Bank Ltd., was a public limited company under the Companies Act, 1913. The subscribed and paid-up capital was mentioned to be Rs. 5, 75, 000 and Rs. 4, 31,000 respectively. Dewan Bahadur Swaminatha Iyer, father of one of the present appellants, was one of the directors of the bank. He was also intimately connected with the management of the bank  According to Article 54 of the Articles of Association, the general powers of bank are vested in the directors. Article 59 provides that the actual management of the business was with the managing committee. Similarly, Article 60 states that managing committee shall have all powers of directors. The business of the bank will be conducted by managing director according to Article 64 of the Articles of Association. Swaminatha Iyer became a member of this committee on August 17, 1937. Subsequently, on 22nd March 1938, he was elected as the president of the board of directors. K.V. Krishnamurthi Iyer was the managing director of the bank. It was alleged by the liquidators that under Swaminatha Iyer’s influence the affairs of the bank were allowed to be carried on by managing director in reckless manner. Rules and regulations were disregarded making loans and advances. It was alleged that the funds of the bank were illegally utilized for purchase of coffee estates by the managing director and enriched him with vast expenses. It was all happening under garb of Swaminatha Iyer. The total loss was estimated to be about Rs. 14,08,647.

Thereafter, liquidation proceedings were initiated by liquidators (Respondents, M/s. Brahmayya, and Company) under Section 235 of the Indian Companies Act, 1913[2] against the directors and officers of the bank. They were charged with acts of misfeasance, misapplication of funds and breach of trust, etc. In the meantime, Swaminatha Iyer died on 16th August, 1959. Bound by the decision in the High Court in Peerdan Juharmal Bank Ltd.[3], which laid down that application under section 235 of the Companies Act, 1913[4] cannot be continued against the legal representatives of Swaminatha Iyer. However, the liquidators aggrieved by this decision filed an application under Section sections 45A and 45B of the Banking Companies Act, 1949[5] against the appellants. The application claimed relief against the estates for losses caused by acts of misfeasance and breach of trust of deceased Swaminatha Iyer.  The appeal was filed under clause 15 of the Letters Patent. the high Court ruled in favor of the respondents and therefore the appeal was dismissed with costs.

Contentions from both the Sides

The counsel of appellants argued the following :

a)  Cause of action mentioned in application did not survive against the appellants. It was stated that liability of the director is not contractual but tortious so the aforementioned maxim cannot be applied in the case. Reliance was placed upon the judgment by Bowen L.J. in Philips v. Homfray[6]which stated that- “the only cases in which, apart from questions of breach of contract, express or implied, a remedy for a wrongful act can be pursued against the estate of a deceased person who has done the act, appear to us to be those in which property or the proceeds or value of property, belonging to another, have been appropriated by the deceased person and added to his own estate or moneys.”[7]

b) the claim against the appellants was barred by limitation.

The respondent denied the above on these two grounds:

a) Appeal is not maintainable as the order of learned judge could not be termed as judgment under Clause 15 of the Letters Patent of High Court.

b) cause of action survived the death of Swaminatha Iyer thus the application is maintainable.

c) the claim is not barred by limitation.

Court Decision and Judgment

The learned judge, Sadasivam J., gave the order in favour of respondents. Dealing with the first issue, he concluded that cause of action survived the death of Swaminatha Iyer against the appellants. He held that the respondents had a prima facie case against the appellants on grounds of acts of misfeasance and breach of trust.

The second issue was also decided in favour of respondents. He concluded that the entire claim is not barred by limitation as the cause of action against the appellants arose only after the death of Swaminatha Iyer. Therefore, the claim was saved by Clause (i) of Section 45-O of the Banking Companies Act, 1949. Aggrieved by the order, the appellants filed an appeal before the High Court under Clause 15 of the Letters Patent Act which provides for maintainability of appeal in the High Court.

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The division bench of the High Court, P. Chandra Reddy (the then Chief Justice of the High Court), and the learned judge Sadasivam heard the matter in Ramaswamy Iyer case. Firstly, they dealt with the preliminary objection that was the order of learned judge was not a judgment to be appealed under Clause 15 of the Letters Patent. It was held that the appeal is maintainable as there was nothing to limit its scope under Section 45-N of the Banking Companies Act.[8]The words ‘order or decision’ occurring in the first part of Section 202 of the Companies Act[9], though wide, would exclude merely procedural orders or those which do not affect the rights or liabilities of parties.[10] Therefore, the High Court ruled in favor of the appellants on the first issue.[11]

The High Court thoroughly dealt with the second issue which was the main contention of the appellants by tracing the statutory evolution of the maxim actio personalis moritur cum persona. The judge firstly referred to the proviso of the Section 268 of the Indian Succession Act,1865 which stated that the all causes of action would survive against the executors and administrators except defamation, assault as defined in IPC or cases of personal relief. Then, they referred to Section 306 of Indian Succession Act (XXXIX of 1925) which was almost similar to the Act of 1865. Section 306 provided that the cause of action will survive against the executors and administrators after the death of concerned. It also provided for exceptions which were in the cases of defamation, assault or other personal injuries. The Legal Representatives’ Suits Act, 1855 allowed claims to be maintained against heirs of any deceased person for any wrong committed by him in his lifetime. After this, the High Court dealt the history of English Torts to understand their position on this point which is very limited application of the aforementioned maxim. The judges thoroughly analyzed the works of various jurists to understand the true meaning of torts and quasi-contracts. Few of them are as follows: Chitty on Contracts[12], Salmon on Jurisprudence[13], Winfield on Torts[14], James General Principles of the Law of Torts[15] and Paton: A Textbook of Jurisprudence.[16]

The High Court in Ramaswamy Iyerconcluded that the cause of action would survive against the appellants due to the reason that it was a breach of trust committed by the deceased as trustee in a fiduciary relationship with the bank. The ratio of the case can be quoted as- “There is a difference between negligence, which is tortious, and the neglect of some special duty, which a person has undertaken in regard to some specified person or a group of persons. The latter, when there is a fiduciary relationship, would amount to a breach of trust. It is only negligence, subject to exceptions, that dies with the person. In the latter, the liability of the person follows his estate, after his death. Though directors may not be express trustees, they are in the position of trustees, and their office is fiduciary.”[17] The Court referred to Section 88 of the Indian Trusts Act, 1882 which stresses on the fiduciary character of the director of a company. For this, the judges relied on Palmer’s Company Law[18], Halsbury’s Law of England[19], and Buckley on the Companies Act.[20] In Indian Courts, this same position has been followed in New Fleming Spinning & Weaving Company v. Kessowji Naik[21], Ramaswami v. Streeramulu Chetti[22] and Malik v. Thiruvengadaswami Mudaliar.[23] Not a single case was pointed out by appellants that were against the said position. Thus, the division bench decision in favor of the respondent with regard to the second issue.

Regarding the third issue, the High Court in Ramaswamy Iyer analyzed the legislative history of the Indian Companies Act, 1913, and its provisions on the issue of limitation. The judges in Ramaswamy Iyer ruled that the provisions as to limitation set out in Section 45-0 would only apply to claims by Banking Companies act which are being wound up, even in cases where proceedings started before the Act came into force in 1953. Therefore, the contention of the appellant, that the claim is barred by limitation, was held to be untenable. In regard to other claims, the matter was sent back to the lower court for further inquiry.

The appeal was dismissed with costs.

Analysis

The judges thoroughly analyzed the different aspects of the position of a director. This judgment broadened the scope of liability of director in case of default. It was not the first decision to view directors as trustees in case of misfeasance but it is remarkable as it extensively scrutinized various arguments. Only then was the scope of maxim extended to its legal heirs or representatives. It will be relevant to consider the meaning of misfeasance as mentioned in section 543 of the 1913 Act- “This section applies where the person attacked has misapplied or retained or become liable or accountable for any money or property of the company, or has been guilty of any misfeasance or breach of trust in relation to the company. By ‘misfeasance’ is meant misfeasance in the nature of a breach of trust’: It must be an act resulting in actual loss to the company. The section does not give the court power to fine a director for misconduct. It is not, moreover, applicable to a mere money claim against an officer, when there has been nothing in the nature of breach of duty by him.[24]

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Since the legislative development has already been discussed above, it will be prudent to look at judicial developments to understand the impact of this judgment. In common law, under the maxim proceedings cannot be initiated against the estate of deceased director if it were based or trespass or negligence. However, it didn’t bar equitable remedies if deceased had committed a breach of trust.[25] This position has been followed in In re City Equitable Fire Insurance Co.,[26]and Cavendish Bentinck v. Thomas Fenn.[27]

Now, coming to Indian cases, this concept of fiduciary relationship of directors was also followed by Indian courts. In New Fleming Spinning & Weaving Company v. Kessowji Naik[28], Ramaswami v. Streeamulu Chetti[29], Malik v. Thiruvengadaswami Mudaliar and another[30] and People’s Bank of Northern India Ltd. v. Des Raj[31] the same position was endorsed by the courts that for breach of trust the heirs or legal representatives can be held responsible for deceased director.

It must be noted that section 306 of the Indian Succession Act is applied only to executors or administrators and does not extend to legal heirs or representatives.[32] However, the judges distinguished the case from their earlier decision by giving a just reason that here liability was not based on mere tort but on breach of trust for which the maxim would not be applied and thus the claim would survive even after death.

However, one important feature of this judgment is that the application was filed under section 45-O of Banking Companies Act and not Section 235 of the Companies Act, 1913[33]. Therefore, it must be relied on judiciously as it is not a correct authority for cases under section 235 of the Companies Act, 1913[34].

Conclusion

This was a landmark judgment in Ramaswamy Iyer case on the applicability of the maxim under company law. It broadened the liability of the directors of the company. After its pronouncement, nobody could escape the clutches of law after misusing the capital of the company.The appellants in Ramaswamy Iyer were held responsible for the misdeeds of the deceased. for his misdeeds. The reasoning was adopted in Official Liquidators v. Sailendra Nath Sinha and Ors.[35]and Ajay Surendra Patel v. Deputy Commissioner of Income Tax[36]where the courts upheld the stance taken in the judgment to broaden the ambit of liability of directors of a company which can extend even after their death.

Some might say Ramaswamy Iyer is an unjust decision but according to the author, it is interpreting the law in such a way that defaulters cannot escape liability, and the company’s trust is also maintained in market. This becomes all the more necessary as when the law doesn’t provide a way equity steps in and gives justice to people. The number of times it has been relied on by courts is itself a symbol of its correct position regarding the law. Thus, Ramaswamy Iyer judgment is landmark because it ventures into equitable remedies for statutory wrongs.

Also read Group Of Companies Doctrine and Indian laws


[1]V.S. Ramaswamy Iyer and Ors. Vs. Brahmayya & Co., Official Liquidators, Hanuman Bank Ltd,(1966) 1 CompLJ107(Mad).

[2] Companies Act 1913, Sectio 235.

[3][1958] 28 Comp. Cas. 546.

[4]Supra 2.

[5] Banking Companies Act 1949, Sections 45A and 45B.

[6] (1883) 24 Ch. D. 439.

[7]Id, para 10.

[8]Banking Companies At 1949, Section 45-N.

[9] Companies Act 1913, Section 202.

[10]Western India Theatres Ltd. v. Ishwarbhai Somabhai Patel, [1959] 29 Comp, Cas. 133.

[11]V.S. Ramaswamy Iyer and Ors. Vs. Brahmayya & Co., Official Liquidators, Hanuman Bank Ltd,(1966) 1 CompLJ107(Mad).

[12]Volume 1, Chitty on Contracts, (33rd Edition, Sweet and Maxwell, 2019).

[13]P J Fitzergald, Salmon on Jurisprudence,(12th Edition, Sweet and Maxwell, 2016).

[14]W.V.H. Rogers, Winfield and Jolowicz on Tort, (18th Edition, Sweet and Maxwell, 2017).

[15]Philip S. James, General Principles of the Law of Torts, ( 4th Revised edition, Butterworth & Co, 1978).

[16]G.W. Paton, A Textbook of Jurisprudence,(Oxford University Press, 2007).

[17]Supra 1.

[18]Sir Francis Beaufort Palmer, Palmer’s Company Law, ( 22nd Edition, Sweet and Maxwell, 1976).

[19]Halsbury’s Law of England, (4th Indian Economy edition, Lexis Nexis, 2016).

[20]Brenda Hanningon, H W Higginson & Richard Nolan, Buckley on Companies Act, (15th Edition, Butterworts      Law, 2000).

[21]I.L.R.(1885) Bom. 373.

[22](1896) T.L.R. 19 Mad. 149.

[23][1949] 19 Comp. Cas. 311.

[24]Brenda Hanningon, H W Higginson & Richard Nolan, Buckley on Companies Act, (15th Edition, Butterworths      Law, 2000).

[25]In re Canadian Land Reclaiming & Colonizing Co. [1880] 14 Ch. D. 660.

[26] [1925] Ch. 407.

[27][1887] 12 App. Cas. 652.

[28]New Fleming Spinning & Weaving Company v. Kessowji Naik, I.L.R.(1885) Bom. 373.

[29]Ramaswami v. Streeamulu Chetti , Malik v. Thiruvengadaswami Mudaliar and another, (1896) T.L.R. 19 Mad. 149.

[30]People’s Bank of Northern India Ltd. v. Des Raj, [1949] 19 Comp. Cas. 311.

[31][1935] 5 Comp. Cas. 296.

[32]Arunachalam Chettiar v. Subramania Chettiar, AIR1958Mad142.

[33]Supra 2.

[34]Supra 2.

[35](1972)1CompLJ249(Cal),

[36](2017) 202 Comp Cas 179.

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