Peninsular Locomotive Co., Ltd. vs H. Langham Reed and Others

Wort, J.—This is an application by the Official Liquidator of the Peninsular Locomotive Co., Ltd., u/s 235, Companies Act, for compensation for damages suffered by the Company by the payment of the sum of 6000 during the winding up which payment was void u/s 227 of the Act and which was a misfeasance or breach of trust and a sum which the directors became "liable" to re-pay to the Company within the meaning of Section 235. The defence of the director against whom the summons has been taken out is that he was not guilty of any misfeasance or breach of trust nor liable to re-pay the sum and that in any event he having acted honestly and reasonably he ought fairly to be excused u/s 281. Further the application is barred by limitation.

The Peninsular Locomotive Company was incorporated in the year 1921 for the purpose of the manufacture of locomotive engines. The Company was started in pursuance of a policy of the Government of India at that time, for encouraging the manufacture of locomotives in India. However, after it became manifest that the business of the nature for which the Company was incorporated was not forth-coming, the Company engaged for a time in the manufacture of railway wagons, and it is said that a profit of two or three lakhs of rupees was made during the short time this wagon business lasted. Ultimately Government purchased the works of the Company for twenty lakhs of rupees. This was on 14th July 1927, and on 21st May 1928, by a resolution of the Board a sum of six lakhs of the capital was returned to the shareholders by payment of Rs. 20 per share. The authorized capital, it should have been stated, was 60 lakhs of rupees, and the issued capital 28 lakhs of rupees in shares of Rs. 100 each. Of the 28 lakhs of rupees Messrs. Kerr Stuart & Co. Ltd. the Managing Agents, held Rs. 11,50,000, Mr. Langham Reed, the Chairman of the Board, Rupees 8,52,200, Sir George Buchanan of the directors Rs. 15,000, Mr. T. Gordon, director, Rs. 22,500, Mr.F.E. Dinshaw Rs. 5,00,000 on behalf of himself but principally as nominee for the Maharaja of Gwalior, and the balance by persons in India and England who were either friends or employees of Messrs. Kerr Stuart &Co., Ltd. It was a private Company with 22 share holders in all. No application was made to me in this case to order pleadings nor to take evidence orally, which might have been done, but the facts do not seem to be seriously disputed and sufficiently appear from those letters and documents which have been exhibited in the case annexed to the various affidavits.

The registered office of the Company up till 6th December 1921 was in Bombay but after that date was transferred to Jamshedpur in the jurisdiction of this Court. On 10th January 1930 Mr. F.E. Dinshaw, who had resigned from the Board in 1927, filed a petition in the High Court at Bombay to wind up the Company. The registered office having been removed to this Province, the petition was withdrawn and on 5th June 1930, a petition was filed in this Court. On 30th June 1930 the winding up order was made and a liquidator was eventually appointed although the order for winding up bore date 3rd July 1930. On 13th March 1931, the orders were set aside owing to irregularities as regards advertisement of the petition, but on 11th May 1931 after due advertisement a winding up order was made on the ground that the company had ceased to do business and the substratum of the company had gone. This sum of 6000 was paid on or about 20th June 1930 and it is not disputed that the payment was made after the commencement of the winding up and therefore was void under Sub-section 2 of Section 227, Companies Act. This Court declined to validate the disposition on l3th September 1932, an application having been made by the liquidator to the Court for certain directions in the winding up. The facts relating to the payment of 6000 are as follows: In 1927 it appears that the directors, the chairman of whom was Mr. Langham Reed, considered the advisability of purchasing the works of Calmoni Engineering Co., Ltd., and negotiations appear to have been commenced through Messrs. Kerr, Stuart & Co. Ltd., who were the Managing Agents of the Peninsular Locomotive Company, and a company known as Low & Co., Ltd., who represented the debenture holders of the Indian Company, the Calamoni Engineering Co., Ltd. (in liquidation). A meeting of the Board of Directors appears to have taken place in Bombay on 15th July 1927; the minute of that meeting is annexed to the liquidator''s affidavit and marked Ex- H. There were present Sir Fazulbhoy Carrimbhoy, Sir Purshotamdas Thakurdas, Mr. F.E. Dinshaw and Mr. Manu Subedar, the respondent. It is convenient to state here that at times material to this application the directors were Mr. Langham Reed, Sir George Buchanan, Mr. Charles T. Gordon and Mr. Manu Subedar of whom Mr. Subedar alone was living in India (Bombay). It was agreed that a cable should be sent to the chairman in London to this effect:

Calmoni Engineering Company Mr. F.E. Dinshaw says no time to consult Gwalior Darbar. If Gwalior Darbar does not support, Gwalior Darbar will have to be returned money proportionately. Subject to this directors agree to purchase Calmoni Engineering Company.

Mr. Langham Reed cabled to Manu Subedar (the respondent) on 21st July to the effect that they had agreed to purchase the Calmoni Engineering Works and paid 10 per cent, deposit for an option to complete in ten weeks. It is by no means certain what happened in the meantime. But on 21st May 1928 Mr. Subedar cabled to Mr. Reed:

Calmoni Engineering Works. Board of Directors are opposed to purchase at any price. Much prefer reasonable settlement without our taking over works,

Mr. Langham Reed cabled on 23rd July:

Calmoni Engineering Works. Regret Board''s decision. Kerr, Stuart & Co., will probably make arrangements to purchase themselves.

Kerr Stuart & Co. and Low & Co. were in London. There was another Board meeting on 31st May 1928 of the Indian directors the minute of which stated that with regard to the cable of 25th May the directors had considered the offer of Messrs. Low & Co. to reduce the price of the Calmoni Engineering Works from Rs. 2,50,000. But in view of difficulties in organizing a large foundry business on a remunerative basis owing to the breakdown of Messrs. Tata Iron and Steel Co., Ltd., the Directors had stated that they could not entertain any offer involving taking over the works of the company. Mr. Manu Subedar was authorized to send a cable to this effect. In 1927 it appears that two sums had been paid by the Directors to Low & Co. Ltd, with regard to this option, one of �500 and the other of �2125. Now we come to the year 1929. Mr. Subedar informed Mr. Langham Reed on 1st October by cable that Mr. Dinshaw who had by that time resigned from the Board was preparing a petition to the Court for winding up the company. He (Mr. Subedar) asked for instructions and the chairman of the directors in London cabled to Mr. Subedar that "winding up proceedings will be very prejudicial to the company". Mr. Subedar on 3rd October 1929 wrote to Mr. Langham Reed in London discussing the threatened winding up proceedings pointing out that if the petition was filed it could have to be filed in the High Court of Bihar and at the same time discussing the possible points which could be put forward as a defence to Mr. Dinshaw''s petition. He also asked for authority from the Directors in London for the necessary power to defend the proceedings in the High Court. This matter was mentioned again on 27th December 1929 when Mr. Subedar wrote to Mr. Langham Reed. Then we come to the year 1930 in which on 11th January a cable was sent by Mr. Langham Reed to Mr. Subedar to the effect that the representatives of the debenture-holders of the Calmoni Engineering Company were prepared to sell their property for �6000 cash and �10,000 two years six per cent. debentures", On 13th Mr. Subedar cabled in reply that owing to the unsettled conditions he would much prefer to make a further payment to extend the option to purchase the Calmoni Works.

It was on 10th January that a petition was filed in the Bombay High Court and notices were served on the company on the 21st of that month. Mr. Reed informed Mr. Subedar that they had extended the option to purchase Calmoni Works to 20th June at the same price, but �10,000 remaining on six per cent debentures. The Chairman of Low & Co. wrote to Kerr, Stuart & Co., the Managing Agents of the Peninsular Locomotive Company, on 20th January 1930. This letter stated the terms of the option granted to the Peninsular Locomotive Company. He acknowledged the receipt of �1500 giving the company the option to be exercised within five months to purchase all the works, buildings, plant, machinery, tools etc., for �14,625. On the exercise of the option a further payment was to be made of �4625 and it is this �4625 which is the major portion of �6000 claimed in this application. I revert for a moment to the payments of �500 and �2125 in June and July of 1927. It is a little difficult to understand exactly what those payments were. The respondent in his affidavit refers to them as "paid in view of an intended purchase of the said factory". Whether the �1500 was a further sum paid for the extension of the option does not appear. The terms set out in the letter of the 20th January would appear to indicate that the �1500 was the first payment in connexion with the option. However, no particular point arises with regard to this, and indeed the summons before me deals only with the later payment of �4625 and the balance of the �6000 the details of which will be mentioned in a moment. On 22nd January 1930 Mr. Subedar cabled to Mr. Langham Reed to the effect that Mr. Dinshaw had presented a petition in Court and that he wanted authority to defend the proceedings.

A further letter dated 25th January 1930 clearly discloses that of which there can be no possible doubt, if it is at all material, that Mr. Subedar and the directors were well, aware of the action of Mr. Dinshaw in presenting a petition to wind up the company. Mr. Dinshaw in his letter of 25th January showed some anxiety as regards the purchase of the Calmoni Works and he was fearful lest the winding up proceedings in Court should disclose the intention of the directors as regards this purchase. And it is clear that Mr. Subedar was of the opinion that one of the grounds upon which they should resist the petition of Mr. Dinshaw was that the company was under contract for the purchase of the Calmoni Works. He points out during the course of that letter that the Calmoni Works was not a saleable asset although a valuable asset to the Peninsular Locomotive Company. He further points out that they were in a dilemma, if they put forward in their affidavit by way of defence to the petition for winding up, that they were under contract to purchase the Calmoni Works, it would prevent their taking advantage of any legal flaws to get out of this contract. A power of attorney was sent by the directors on 7th February to Mr. Subedar. On 18th June 1930 Mr. Subedar cabled to Mr. Langham Reed to the effect that he understood that Mr. Dinshaw had filed a petition for compulsory liquidation. The words were, "understand that Mr. Dinshaw filed a petition compulsory liquidation". There was a suggestion by Sir Sultan Ahmed who appears on behalf of Mr. Subedar that it had not been proved that Mr. Subedar had knowledge of the winding up petition. That he had is in my opinion too clear to be discussed. We now come to an important point. On 18th June 1930 there was a cable from Mr. Langham Reed which I propose to set out in full:

Board Penloco Thursday next to complete purchase Calmoni and lay down future programme. Please instruct P & O Bank to credit by cable Penloco London �6000. All outstanding matters will be immediately dealt with.

The position was this. There was a banking account in London and there was also a banking account in Bombay, and I do not think it is disputed that whereas the London banking account was not in funds the Bombay banking account was, and it was for this reason that a cable was sent by Mr. Langham Reed asking Mr. Subedar to transfer money from the Bombay account to the London account. We have in Ex. G. to the liquidator''s affidavit, a minute dated 19th June 1930 of a Board meeting held at 5 Board Street Place, London. Of the directors there were present Mr. Langham Reed, Sir George Buchanan and Mr. C.T. Gordon. The Secretary was there, the balance sheet of the year 1929 was submitted for the approval of the Board; it was approved and signed by the directors and he was instructed to post it to Mr. Subedar. It was resolved to complete the purchase of the Calmoni Works and to pay the balance of the cash consideration of �4625 to Messrs. James Low & Co. at once. It was resolved that the members of the Board should accept �250, the Chairman �500 for their services to date. It was agreed that the following cheques were to be drawn and signed: �4625 for the purchase of Calmoni Works, �500 for Mr. Langham Reed''s fees, �1250 each for Sir George Buchanan and C.T. Gordon (Directors'' fee), �100 for the Secretary, �20 for Mr. Bignal for services rendered and �20 for petty cash.

These sums make up �6000 which is claimed by this summons. Mr. Langham Reed cabled to Mr. Subedar on 20th June to the effect that it was decided to complete the purchase of Calmoni Works and that the balance had been paid. I would have stated that on 20th June Mr. Subedar cabled: "As per your telegram have telegraphed to-day �6000". The payment was made by the London Board sending a cheque under cover of a letter dated 21st June 1930, Ex. M, to the liquidator''s affidavit. It is not disputed that the payment was made possible by Mr. Manu Subedar''s transferring money from the Bombay account to the London account. On 21st June the Secretary of the Company in India wrote to Mr. Lovelock and Lewes, Liquidators of the Calmoni Works, informing them that as the Board in England had informed the writer by a telegram that the balance of the purchase money had been paid, they had arranged for the Locomotive Company to take possession on 30th June 1930. On 23rd June Mr. Subedar received a letter from the Secretary in London informing him of a Board meeting held on 19th June in London. The draft balance sheet was enclosed with that letter. Apparently Mr. Subedar was to prepare the report and it was suggested that the report should Contain the following statement:

During the year no active operations have been carried on by the Company. Negotiations have been carried on by the Company with the Government of India with a view to obtaining some satisfactory compensation in respect of the loss of possible locomotive orders, but no arrangement which would be satisfactory to the Company has yet been arrived at. During the year an option on the General Engineering Works of the Calmoni Company has been obtained on favourable terms with a view to the Company being able to carry on a manufacturing business should a favourable opportunity occur.

I refer to this suggestion made by the English Board in order to show exactly what the position was at this date. There was further correspondence with which we are not concerned. A letter written by the Solicitors representing the Company to the Official Liquidator on 20th March 1931 sets out briefly the details of negotiations regarding the purchase of the Calmoni Engineering Works. It was on those facts that the liquidator made application to this Court for a summons u/s 235 of the Act. When this matter came before me on the application for the issue of a misfeasance summons, the question of the jurisdiction of this Court arose, and it was held that although this Court had jurisdiction over the directors in India it had no jurisdiction to issue process in England and therefore on the London directors. In answer to the case made by the liquidators Mr. Manu Subedar contended in his affidavit that this Court had no jurisdiction over him as he was not a resident within the Province, but this point has not been pressed before me at the hearing; indeed Sir Sultan Ahmed appearing on behalf of Mr. Manu Subedar does not deny that this Court has jurisdiction over Mr. Subedar in this matter. It is the contention of Mr. Manu Subedar that in transferring �6000 to the London account on 20th June 1930 he was acting under the instructions of the English Board, and was therefore in no way responsible for the payment of the sum of �4625. It is also contended that even if he be taken to have been responsible for the payment, in fact there was no liability u/s 235 of the Act. In development of that argument it is contended that it was neither a misfeasance nor a breach of trust; that the sum was paid in the ordinary course of business; that the payment was not one for which the directors would be liable; that Section 235 created no liability unless it could be shown otherwise that the payment was a breach of trust, and that a payment such as that contemplated by Section 227 was not within Section 235 of the Act.

As regards the question of fact I have no doubt. It is true that Mr. Subedar did not actually sign the cheque for �4625 or the other items which made up the balance of �6000; but it is clear that he was acting in agreement with the other directors and was (apart from matters of detail) at one with the policy of the English Board. And although from the facts and physical circumstances of the case it was impossible for Mr. Subedar to sign the London cheque, it is not by any means possible to hold that Mr. Subedar had no connection with the payment. But for the transfer of the money from Bombay to London it would appear that the payment would have been impossible. This in my opinion can be gathered from the fact that the English Board requested Mr. Subedar to transfer the money. Nor do I think that the liability of Mr. Subedar rests alone on the fact of his having transmitted the money from Bombay to London. The fact referred to is the clearest evidence of his agreement with the policy of the London directors, and evidence of that whether got from the proof of his having transferred money from the Bombay account to the London account, or from other facts in the case is sufficient to establish his liability. But it is said by Sir Sultan Ahmed that Mr. Subedar could do nothing but to obey the instructions of the Board. It is however, impossible to look upon Mr. Subedar as anything other than what he was, namely, a director, and therefore entitled to express his views as regards the policy of the Company. What would have been the position had Mr. Subedar protested and declined to agree to the payment, but at the same time transferred the sum of money to the London account, it is difficult to say.

In my judgment it is impossible to look upon Mr. Subedar other than as being responsible equally with the other directors for the payment of this, sum. On the rather limited question of Mr. Subedar''s attitude in this matter, reference might be made to the decision in Joint Stock Discount Co. v. Brown (1869) 8 Eq 381. There a payment had been made by the Company with regard to a transaction which was ultra vires, and Brown, one of the directors, was said to have protested; nevertheless he was held responsible There is nothing in this case to suggest that Mr. Subedar had in any way disagreed with his fellow directors and, even if the transmission of the money from Bombay to London is looked upon as a mere ministerial act, I find it impossible to excuse Mr. Subedar on that account. As regards the legal position it is impossible to contend that this transaction was in any way valid. My brother Fazl Ali has already held in an application by the liquidator for a direction u/s 183, Companies Act, that the payment cannot be validated u/s 227 of the Act. Chitty, J. in Re Neath Harbour Smelting and Rolling Works (1887) 56 LT 727 held that by the operation of Sections 153 and 165, Companies Act, then in force in England (these sections are equivalent to Sections 227 and 283 of the Indian Companies Act) the directors were liable for the sums paid not in the ordinary course of business but after the commencement of the winding up. The authority of this case has never been questioned and is relied upon in such authoritative textbooks as the late Lord Wrenbury''s (Lord Justice, Buckley''s) Book on Company Law. But it is contended by Sir Sultan Ahmed that in that case the payment was a breach of trust apart from the section which made the disposition of the property of the Company after the winding up void.

I can hardly concede this argument, however, as it quite clearly appears from the very commencement of the judgment of the learned Judge who decided that case, that the liquidator was endeavouring to take advantage of Section 153, equivalent to our Section 227, and it was on that point that he rested his case. Chitty, J. decided that he was entitled so to do. I can only assume therefore that it was necessary in the circumstances to take advantage of that section. There may be no direct authority expressly holding, however, that the disposition of the Company''s property by the directors during the winding up is of itself a breach of trust. It must, however, be decided on first principles and, as was pointed out in Neath Harbour case, Re Neath Harbour Smelting and Rolling Works (1887) 56 LT 727 if the directors make such a payment, they do so at their peril, and, excepting those cases in which it would be held that the payment was necessary for the winding up or for the carrying on of the business of the Company pending the hearing of the winding up petition, the directors must be aware that there is always a risk of such payments being void under the section. It is impossible to excuse the directors on account of lack of knowledge. They, above all, must have known what were necessary payments, and they also must be assumed to have known that having entered into a contract which had not been completed before the winding up, the persons with whom they were contracting were entitled only to prove in the winding up for damages: see In re Wiltshire Iron Co., Ex parte Pearson (1868) 3 Ch A 443. In the sense therefore that the directors were aware that they were making an unauthorized payment, they were disposing of the property of the Company wrongfully and therefore guilty of a breach of trust. There is another aspect of the case. From the letter to which I have referred (if from no other fact) it is seen that from 1927 at least the Company was doing no business, the substratum of the Company had gone, as was held by this Court in deciding the application to wind up the Company; there was no hope of their ever doing the business for which they were incorporated. That the Company was incorporated for the purpose of building railway locomotives we have seen. Clause 3 of the Memorandum is wide in its terms and I suppose, had the intention of the promoters been to carry on any one of the many businesses therein described, other than locomotive building, and had any of these trades been carried on from the incorporation of the Company, it would have been difficult if not impossible to say that the Company was acting beyond its powers. But here locomotive building was the purpose of the Company as I have said, and that can be gathered from the name of the Company and the Memorandum must be construed:

General words (in the Memorandum) which construed literally, include anything must be limited by their context and the name of the company may also be important in construing the clauses which define the objects if these are not clear and unambiguous in themselves (Buckley''s Company Law, Edn. 11, p. 5, and the authorities therein referred to).

Although Article 3 of the Memorandum of Association might authorise them to carry on the business of heavy engineering, in which the Calmoni Engineering Co., Ltd., was engaged before that Company was wound up, there is nothing in the Memorandum of Association which would entitle the Locomotive Company to purchase the Calmoni Engineering Works. Such omnibus clauses as Sub-clause (2l) of Clause 3 in the Memorandum of Association would not entitle them to make this purchase and indeed it is not suggested by Sir Sultan Ahmed that any such power is to be got from the Memorandum of Association. There are innumerable authorities to that effect. In Masonic General Life Assurance Co. v. Sharpe (1892) 1 Ch 154, which was a case of payment of dividends or interest out of capital, Lindley, L.J., in holding such payment to be ultra vires said:

As soon as the conclusion is arrived at that the Company''s money has been applied by the directors for purposes which the Company cannot sanction, it follows that the directors are liable to replace the money however honestly they may have acted.

As it will be seen, the learned Lord Justice used these words ''which the Company cannot sanction''. It has not been contended in this case before me that the Company could sanction the �4625. The assets of the Company are entrusted to the directors to be applied to certain defined objects and they are responsible as for a breach of trust if they apply them to other objects. I am quoting for the moment from Buckley''s (Lord Wrenbury''s) Company Act, Edn. 11, p. 732 on this point. But with regard to objects which are intra vires: see British Seamless Paper Box Co. (1881) 17 Ch D 467. The position of directors has been discussed in a large number of cases and although their position differs from that of trustees in some respects, yet to the extent of their being entrusted with the monies of the Company, they are trustees: see Ramskill v. Edwards (1885) 31 Ch D 100. I am not unmindful of the case In re Forest of Dean Coal Mining Co. (1879) 10 Ch D 450 and Sir George Jessel''s observations with regard to directors. But that case differs to a very considerable degree from the present and relates to the liabilities of the directors on their failure to get in sums due to the Company. It is not disputed incidentally that directors are jointly and severally liable for breach of trust: In re Carriage Co-operative Supply Association (1884) 27 Ch D 322.

It was strongly urged by Sir Sultan Ahmed that as the respondent was not acting dishonestly he was not liable. I am pleased to be able to observe that the liquidator has withdrawn the allegations of dishonesty and fraud, indeed the only course open to him, as there was no evidence whatever of anything of the kind. But the absence of dishonesty and fraud does not assist the respondent as will be seen from the decision in (1892) 1 Ch 165 There was at one time thought to be something in the nature of a conflict between the decision to which I have just referred and the decisions of Vaughan Williams, J., (as he then was) in two cases, In re New Mashonaland Exploration Co. (1892) 3 Ch 577 and In re Kingston Cotton Mill Co. (No. 2) (1896) 1 Ch 331. But in the former case it was held that the payment of money (the granting of a loan) was intra vires of the Company and that the directors had exercised their discretion and judgment and were therefore not liable. Again in In re Kingston Cotton Mill Co. (No. 2) (1896) 1 Ch 331 the director accepted (and reasonably so) the certificate of the Manager as to stock in trade. During the course of the judgment the learned Judge in that case observed at p. 345:

I should have thought that he might safely be treated as the paid manager and agent of the Company and might well be held not to be responsible for the misapplication of the funds of the Company unless he, through want of care or fraud, misapplied those funds. If it is said that if his responsibility were thus defined he would not be responsible if by the direction of the shareholders, he applied the funds to a purpose which the Company could not authorize because it was a purpose ultra vires, my answer would be that, if he did so without carelessness or fraud he ought not to be held liable, and that if he did so knowing that the purpose was ultra vires or carelessly he ought to be held responsible not because he is a trustee, but because the ownership of the Company is limited, i.e. is limited to the application of the funds to the statutory purposes and his duty to the Company as manager is not knowingly or carelessly to apply the funds to a purpose ultra vires of the Company, even though he may have the authority of the shareholders, for a Company does not seem to me, in regard to questions of ultra vires, to be an aggregate of the shareholders, but a substantive legal entity.

The Lord Justice later observed:

There is, however, a considerable bulk of authority to show that the directors are trustees for the Company of such funds as are committed to their control in such sense that they will be liable for a misapplication of the funds which is ultra vires of the Company, independently of any proof of fraud or actionable negligence by the directors and then referring to a number of authorities which established the liability of the directors the learned Judge observes:

But in no one of those cases can I find that the directors were held liable unless the payments were made either with actual knowledge that the funds of the company were being misappropriated or with knowledge of the facts that established the misappropriation.

"Misappropriation" is a hard word, but what was being referred to by the learned Judge was the application of the funds to purposes beyond the powers of the company, as the case before him (as Lord Justice Buckley observes in his book) was a case of an application right in law if the state of facts which he honestly believed to exist did in fact exist, but which turned out to be wrong. There is no question in this case of any misapprehension or lack of a correct appreciation of the true position on the part of the director or directors. Indeed the directors were in full possession of all the facts and it must be assumed that they knew the law.. The position therefore in my judgment is that the director is liable to repay the sum of �4625 or a part thereof as compensation for loss sustained by the company. Had the other directors been before me I should have been in a position to determine the question of the liability as regards the balance of �6000, expended for the purposes to which I have already referred in the earlier part of my judgment. To what extent they were entitled to pay the directors fees and sums for the remuneration of the Secretary, etc., is a matter with which I am hardly able to deal on the evidence before me. It is true that in requesting to transfer �6000 it was clearly indicated by the London Board that this sum was being paid. Apart from the bare fact of transferring the �6000 there is no evidence that Mr. Subedar took any part in this payment. I am well aware that the same argument has been advanced with regard to the �4625, but in that case there is clear evidence that Mr. Manu Subedar was acting in concert with the other directors. In any event I should find myself in some difficulty in holding Mr. Manu Subedar liable for the balance. Sir Sultan Ahmed also relied upon the indemnity clause of the Articles of Association, Article 137, which is as follows:

Each and every Director, Auditor, Managing agent, Secretary, Treasurer and every member, Manager, Assistant or employee of any company being agents of the company and every ex-office and alternate director of the company, and every other officer or servant of the company and their respective heirs, executors and administrators of each and every such director and other person as aforesaid, shall be indemnified out of the funds of the company against all claims, liabilities, losses, costs, charges and expenses that may at any time be made against or incurred by him respectively in the discharge of his duties or in the conduct of the company''s business, except such as are incurred by his own wilful neglect or default, and no director or other such person as aforesaid shall be liable for any act or omission committed by any other director or person as aforesaid or by reason of any loss accruing to the company in relation to any transaction into which the company may enter or upon any ground whatever other than his own wilful neglect or default.

In my judgment this clause has no application. It is a clause indemnifying the director

against claims, liabilities, losses, costs, charges and expenses that may at any time be made against or incurred by him respectively in the discharge of his duties or in the conduct of the company''s business, except such as are incurred by his own wilful neglect or default.

The words of this clause are explicit and point to liabilities incurred in discharge of the director''s duties. That together with the exception that there is no indemnity where the liability has been incurred by wilful neglect or default clearly indicates that this clause has no application to payment of funds for purposes which are ultra vires of the company. In the course of the argument Sir Sultan Ahmed agreed that this clause does not apply to the facts of this case. There are two other matters, one of limitation and the other the question whether relief should be granted to Mr. Subedar u/s 281 of the Act. As regards the question of limitation Sir Sultan Ahmed contended that Article 36 and not Article 120, Lim. Act, applied. This argument was not developed although in the course of the argument by the learned advocate on behalf of the liquidator it was contended that neither Articles 36, 115 nor 116 applied. The authorities were not analysed by the advocates, and there is a difference of opinion in India with regard to the matter. This question appears to be one of very considerable importance and it was for that reason primarily that I took time to consider my decision in the case as a whole. In Govind Narayan v. Rangnath Gopal AIR 1930 Bom 572 the Court held that Article 120 applied.

In Mahbub Ali Khan Vs. Chiddan and Another, it was also held that Article 120 applied. I prefer to follow the reasoning in these cases than that adopted by the Lahore High Court in Bank of Multan, Ltd. v. Hukum Chand AIR 1923 Lah 58 which was mentioned by Sir Sultan Ahmed in support of his argument. The first point was whether the liability of the directors u/s 235, Companies Act, was a liability independent of contract. The directors as I have already shown are in a limited manner trustees. Their liabilities are liabilities which depend upon their position as directors. Their position as directors is governed by the Articles of Association and generally by the written constitution of the company. The articles are a part only of the contract however as was pointed out in the Bombay case to which I have just referred. There is ample support for this view in Molineaux v. London, Birmingham and Manchester Insurance Co. (1902) 2 KB 689 where Cozens Hardy, L.J. states that where a director accepts an appointment as such, he "must be held to have contracted with the company that he will, etc." The recent case in In re City Equitable Fire Insurance Co., Ltd; (1925) Ch 407 in the Court of Appeal at p. 520 also supports this view. There Warrington, L.J., in dealing with the position of the auditors and referring to one of the Articles of Association (Art. 150), made this statement:

In the first place, I think that that article, as the learned Judge has held expressly in the case of the directors and impliedly if not expressly in the case of the auditors, does in such a case as the present form part of the contract between the company and the auditors.

The liability which I have held has been established here is a liability which arises from a breach of duty to deal with the property of the Company in accordance with its constitution and in accordance with the law and therefore, I find it impossible to hold that it is a liability which arises independent of contract. Article 116 is an article applicable to registered contracts and so long as it is held that a contract is partly in writing and partly not in writing, it cannot be said that article applies. Again so long as the articles are held to be part of the contract Article 115 does not apply as that article deals with contracts not in writing. Again Article 115 deals with a contract not in writing registered, and so long as either registration is present or writing is present that article cannot apply. There has been some discussion and difference of opinion in the Indian High Courts as to whether registration mentioned in these articles is a registration referable to the Registration Act or otherwise. In Govind Narayan v. Rangnath Gopal AIR 1930 Bom 572 Sir Amberson Marten, C.J., took the view that "registered" within the meaning of Articles 115 and 116 was not confined to documents registered under the Registration Act, preferring the view expressed by Sir John Wallis in Ripon Press and Sugar Mill Co. Bellary, Ltd., v. Venkatarama Chetty AIR 1919 Mad 646 to the view of the Full Bench of the same Court in Venkata Gurunadha Rama Seshayya v. Tripuri Sundari Cotton Press, Bezwada AIR 1926 Mad 615. However, it is unnecessary for me in this case to decide whether the word "registered" is confined to registration under the Indian Registration Act, as I have already held in conformity with English decisions that the contract by which the directors are governed is a contract partly in writing and partly not in writing. Articles 115 and 116 deal with contracts exclusively in writing or not in writing. These articles therefore in my judgment did not apply. We are thrown back to the provisions of Article 120, Lim. Act, which gives a period of six years and in this case brings the application of the Liquidator well within time and obviates the necessity of a discussion of the question of the date from which limitation runs--a question which has been discussed with different results in a number of cases in the Indian High Courts. I hold therefore that the application is not barred by limitation.

The only other question raised by the defence is whether the director should be relieved either wholly or partly from his liability and ought fairly to be excused for negligence and breach of trust u/s 281, Companies Act. I know of no authority which would entitle me to hold that in circumstances such as the present although Mr. Subedar acted honestly, he ought fairly to be excused. A decision of Astbury, J., in the Chancery Division in England in In re Claridge''s Patent Asphalt Co, Ltd. (1921) 1 Ch 543 is often relied upon as showing that Section 281, which is similar'' to Section 279, Company''s Consolidation Act in England of 1908, applies to acts ultra vires. But in that case the directors had acted reasonably as they had taken the best advice in the circumstances as in In re Allsop (1914) 1 Ch 1 and had acted on that advice although erroneous. The directors in this case cannot be said to have been misled and it can hardly be said that the directors in making this payment did not act deliberately, but as I have already held they must have known or must be assumed to have known that their act was ultra vires. Mr. Subedar''s letter of 25th January 1930 throws some light upon his view of the payment. It indicates that he was desirous of using the fact that they had entered into this contract as a defence to the petition of Mr. Dinshaw to wind up the company and at the same time to have the way open to retire from the contract if possible. It is impossible in my judgment to find any circumstances which would entitle me to grant relief u/s 281.

As it is a question of damages, the only remaining point is the amount. The total amount claimed by the Liquidator is �6000. I have already decided that in the circumstances Mr. Subedar cannot be held liable for �1375, the balance of the �6000. There remains therefore the sum of �4625. Had all the directors been before me I should have found it difficult to reduce in any way the claim made by the liquidator. But so far as Mr. Manu Subedar is concerned, he is one of a body of four directors and, although liable with the rest jointly and severally, it is a mere accident that the Court cannot impose liability on the whole body of directors. I hold in the circumstances that it would be right and proper to hold Mr. Subedar liable for one quarter of the sum of �4625, reducing thus the total liability under my power u/s 281. The sum will be payable at the rate of 1/6 to the rupee. The Official Liquidator is entitled to costs which I assess at Rs. 500.