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Judgment
Venkatasubba Rao, J.—This is a misfeasance summons under ''section 235 of the Indian Companies Act. Certain breaches of duty are
alleged against the Directors and some other officers of the Company and the summons asks, that they may be ordered to bring into Court a sum
of about Rs. 42,000. An objection in limine is taken that the applicants have no locus standi. If they are creditors, as they allege themselves to be,
they can apply under the section to which I have referred. The question is, are they creditors of the Company and have they as such a locus standi?
The Company was started in 1878 under the name of the Madras Native Permanent Fund, Ltd., with a capital of two lakhs divided into two
thousand shares of Rs. 100 each. Each shareholder was to pay one rupee per month per share and, at the end of seven years, he was to receive
from the Company Rs. 100 and his account was then to be closed; in other words, on his paying a sum of Rs. 84, he receives Rs. 100. The
objects of the Company as stated in the Memorandum of Association were, to make advances to shareholders upon security of moveable or
Immovable property for enabling them to purchase, build and repair houses and to grant to them simple loans to a limited extent and to do such
things as are incidental to the attainment of the above objects. In 1887 a new branch was started and was called the Deposit Branch, to distinguish
it from the Loan Branch, the name adopted to designate the Company''s original activities. The capital of the Company was raised by Rs. 10,000
divided into thousand shares of Rs. 10 each and the shares newly raised were allotted to the Deposit Branch. It is stated for the respondents, that
the accounts of each branch were separately kept and that there was no mixing up of the monies or the dealings of the two Branches. This
statement is not merely borne out by such of the balance sheets as have been handed to me but is not even disputed by the applicants. While the
Loan Branch was confined to the original objects, the Deposit Branch developed into an ordinary Bank and carried on Banking business. In fact,
the operations of the Deposit Branch assumed large proportions, whereas the Loan Branch did business on a very limited scale. In the Deposit
Branch, there were deposits and advances, customers depositing monies and loans being advanced on pledges of jewels. The customers of the
Bank included both members and strangers. This went for about forty years and it was then found that the Company''s affairs were not being
conducted satisfactorily. Certain irregularities occurred, such as, loans being advanced on jewels of insufficient value. The result was, the Company
having sustained a loss, the depositors were unable to get back their monies. A liquidation petition was filed and a compulsory order was made in
May, 1927. To make clear the point that has now arisen, I may briefly refer to certain previous orders made in the course of the winding up. The
liquidators, Messrs. Fraser & Ross, treated in the list filed by them, certain 357 persons of the Loan Branch, as contributories in the liquidation.
Mr. Justice Waller observing
The Loan Branch of the Fund is, I consider, nothing but a Mutual Benefit Society, with rules resembling those of the Mylapore Hindu Permanent
Fund-vide Board of .Revenue v. Mylapore Fund ILR (1923) M. 1.
held that the 357 persons in question could not be treated as contributories. The learned Judge in effect held that there was nothing illegal in the
Company closing the accounts of the shareholders of the Loan Branch by paying each Rs. 100 at the end of seven years. The Appellate Court
reversed the order of Mr. Justice Waller holding that the payment of the share capital to the members contravened the provisions of the
Companies Act as such payment amounted to a reduction of capital forbidden by the Act. The 357 persons were accordingly declared to be
contributories. Before the Appellate Court, the question was raised, were the debts which it was sought to make these persons liable to liquidate,
debts incurred ultra vires of the Company? This question was left open and no decision was pronounced upon it. This is what the learned Judges
observe:
When these persons are called upon to contribute to the liquidation (if definite debts, it will be open to them to argue that the debts which they arc
called upon to contribute to pay are ultra vires of the powers of the Company, that is to say, are not in law debts at all.
The matter came back to the Original Side. For the contributories it was contended that the amounts which the Company made itself liable to
return were those deposited by its customers in the Deposit Branch and that the Company, in receiving such deposits, practically converted itself
into a Bank. This, it was argued going beyond the Memorandum of Association, was ultra vires of the Company. Mr. Justice Fandalai relying upon
Ashbury Carriage Co. v. Riche (1875) 7 Eng. and Ir. App. 653 accepted this contention. From his judgment I quote the two following passages:
On the best consideration I can give to the matter, I see no escape from the conclusion that the taking of deposits in the Deposit Branch from
strangers to the Company was ultra vires of the powers of the Company.
All that I. do decide and declare is that the contributories are not as such liable to contribute to the debts due to stranger depositors in the Deposit
Branch of the Fund.
Some of these depositors are the applicants in this misfeasance summons. The short question I have to decide is, are the amounts due to them
debts? In other words, are the lenders, in the eye of the, law, creditors and is the borrowing Company, debtor? This point is now well settled by
authority. Where the carrying on of a business by the Company was ultra vires it was held that the ultra vires transactions created no debt either
legal or equitable. This was held in In re Birkbeck Permanent Benefit Building Society (1912) 2 Ch. 183. The facts of that case resemble those of
the present. A Building Society carried on a Banking business altogether beyond what was authorised. Cozens-Hardy, M.R., observes that the so-
called contracts of loan, though not illegal, are void and in truth have no existence. This is treated as the doctrine as to ultra vires borrowing. The
case went up to the House of Lords and this view was affirmed, although on another point the decision of the Court of Appeal was varied.
(Sinclair v. Brougham (1914) A.C. 399.) The relation between the depositor and the Company is not that of debtor and creditor and the only
possible remedy for the person who has paid the money is one in rent and not in personal. This is a most unequivocal declaration, that ultra vires
transactions do not create the relationship of debtor and creditor. The preliminary objection, therefore, must be upheld and on this short ground the
application is dismissed.:
From this it does not follow that the lenders can, in no circumstances, recover their deposits. The very case I have cited, Sinclair v. Brougham
(1914) A.C. 399, decides what their rights are and how and to what extent they can be enforced. There are no persons other than the depositors
who have any claims to the monies in the Deposit Branch; the question of priority decided in Sinclair v. Brougham (1914) A.C. 399 does not
therefore arise in this case. The Loan Branch, as I have said, was always treated as being separate from the Deposit Branch. Some trifling amounts
are due to some unadvanced shareholders of that branch. I see no reason why they should not be paid the sums due to them from the monies to
the credit of that branch. Now, as regards the depositors to whom monies are due from the Deposit Branch, they have already, under orders of
Court, been paid sums amounting to over a lakh. These payments cannot be questioned. I may mention that some of the Directors of the Company
are also among such depositors. They have offered, at my suggestion as a matter of fair dealing, to bring back the amounts they withdrew, during
the period of one year before the commencement of the winding-up. As the other depositors have already been paid 11 annas in the rupee, these
Directors are, on this basis, bound to bring back only a sum which represents five annas of their drawings. The following table shows the amounts
that they are thus liable to bring back and I understand that they have this day paid these sums to the liquidators:
Amount of Deposit Amount to be
Name. withdrawn within one refunded at 5 as.
year before liquidation. in the rupee.
Rs. Rs. A. P.
P. Lakshminarasu Naidu .. 2,000 625 0 0
T.S. Natesa Sastri .. 1,500 468 12 0
V. Sadagopan Naidu .. 813 254 1 0
______________
Total .. 1,347 13 0
______________
Of the sum of Rs. 436 mentioned in the affidavit of the liquidators Rs. 375 represents the sum paid to them by the first 2 of the 3 Directors
named in the above table, when calls were made after the decision of the Appellate Court to which I have referred. This sum as well as the above-
mentioned sum of Rs. 1,347-13-0 together with Rs. 1,500 (vide Application No. 3485 of 1929) shall, subject to the payment of all proper costs,
be treated by the liquidators as available for distribution among the depositors of the Deposit Branch. Rs. 1,955-13-9 in the Loan Branch shall be
distributed among the unadvanced shareholders of that branch; if any balance is left over, it shall be carried forward to the Deposit Branch.
This order disposes of (1) Application No. 820 of 1930 (misfeasance summons), (2) Application No. 436 of 1930 (the liquidators'' application
as to the disposal of Rs. 2,330-13-9 said to be the assets of the Loan Branch), and (3) Application No. 3485 of 1929 regarding the disposal of
Rs. 1,500.
In the misfeasance summons, the liquidators shall take their costs which I fix at Rs. 150 and pay the applicants costs which are also fixed at Rs.
In Application No. 436 of 1930 the liquidators may take Rs. 35 as their costs.
I desire, before closing, to tell the liquidators that they must, to save further costs, take steps to have the affairs of the Company wound up as
early as possible.