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Judgment
Natarajan, J.—These petitions have been filed by one and the same Petitioner and are directed against two surcharge orders passed by the third Respondent as confirmed in appeal by the second Respondent.
The Petitioner was a Director of the Pakkam Co-operative Agricultural Bank Limited (the first Respondent) for the two terms, the first term being from 1st July 1960 to 30th June, 1963 and the second term being from 1st July, 1963 to 30th June, 1966. The object of the Bank is to grant loans to its members for agricultural purposes. During the years, 1963-64 and 1964-65 effective steps were not taken by the Board of Directors to collect the loans advanced during the years, 1962 and 1963. As the affairs of the Bank were not managed properly, an enquiry u/s 65 of the Tamil Nadu Co-operative Societies Act, 1961 (hereinafter referred to as the Act) was ordered into the affairs of the Bank. Based on the enquiry report, the Board was superseded and a Special Officer was appointed to manage the affairs of the Bank with effect from 30th April, 1966. During the inspection of the Bank by the Deputy Registrar of Co-operative Societies u/s 66 of the Act, it was noticed that but of 345 overdue loans referred for arbitration, as many as 67 arbitration cases were dismissed by the arbitrator on the ground summons could not be served on the parties as they were found to be non-existent. Consequently, a sum of Rs. 59,921 covered by the 67 loans could not be recovered. This led to the initiation of surcharge action u/s 71 of the Act. The Directors including the Petitioner were charged with willful negligence and breach of duty. The surcharge proceedings ended in two orders of surcharge being passed against the nine former Directors of the Bank including the Petitioner, the first order of surcharge being for a sum of Rs. 20,600 and the second order of surcharge being for a sum of Rs. 15,769.54 p. The surcharging officer found that benami loans had been granted to non-existent persons and the lapse had occurred due to the willful negligence or dereliction of duty by the Board of Directors.
Aggrieved by the two orders of surcharge, the Petitioner filed Civil Miscellaneous Appeal Nos. 64 of 1969 and 19 of 1971 before the Co-operative Tribunal, viz, the second Respondent. The principal contention of the Petitioner before the second Respondent was that by reason of his non-attendance for four consecutive meetings and more he had ceased to be a Director of the Bank and, therefore, he cannot be charged with dereliction of duty or willful negligence in the discharge of duty while holding the office of Directorship in the Bank and as such, no order of surcharge should have been passed against him. In support of his claim he placed reliance on the fact that he had not attended the meetings of the Board of Directors held on various dates. The defence of the Petitioner was not accepted, even though the truth of his averment about his continuous absence at the meetings of the Directors was not denied or refuted. The counter ease of the first and third Respondents, which has found acceptance with the second Respondent, was that the Petitioner had absented himself at each meeting for just and sufficient cause and, therefore, his continuous absence at four meetings of the Directors did not bring about a cessation of the Petitioner''s Directorship. It was urged by the first and third Respondents that at each one of the Directors meetings where the Petitioner was absent, there came up a subject such as advancement of loan to one or more of the relations of the Petitioner and, it was with a view to comply with by-law No. 21, which inhibited any Director being present at a Board meeting when any matter in which he was personally interested was being discussed, he had not attended the meetings. These contentions were accepted by the second Respondent because, in the opinion of the second Respondent, the following features lent support to the contentions of the first and third Respondents, namely (i) the Petitioner had been a Director for two terms, i.e. from 1st July, 1960 to 30th June, 1963 and from 1st July, 1963 to 30th June, 1966, (ii)though the Petitioner had not attended the Directors'' meetings he had signed the notice sent to him for the meetings of Directors and (iii) during his second terms of. Directorship also, he had not attended the Directors'' meetings when the loan applications of his wife and other relations came up for consideration.
Mr. K. Raghunathan learned Counsel for the Petitioner, vehemently contended that the two surcharge orders passed against the Petitioner by the third Respondent are patently illegal and the second Respondent ought not to have confirmed the orders of surcharge without taking note of the defence of the Petitioner. In his affidavit, the Petitioner has stated that though he had been elected as a Director for the period 1960-63 and 1963-66, he had not attended the Directors'' meetings held on 15th January, 1962, 12th February, 1962, 28th April, 1962, 11th, July, 1962, 24th July, 1962, 22nd August, 1962, 27th September, 1962, 2nd January, 1963, 31st January, 1963, 20th March, 1963, 3rd April, 1963, 24th April, 1963, 7th August, 1963, 13th November, 1963, 22nd November, 1963, 7th December, 1963, 12th December, 1963 and 21st December, 1963. Admittedly, it was during these meetings the loans to non-existent members are said to have been sanctioned by the Directors. As already stated, the first and third Respondents do not deny the Petitioner''s statement that he was not present at the Directors'' meetings when the loans, which have been subsequently found to be irrecoverable, were advanced to the respective Applicants. However, what is contended is that the Petitioner had justifiably abstained from attending the meetings because at each of the meetings, he absented himself, there came up for consideration a subject which related to the advancement of loan to the close relations of the Petitioner and in view of by-law No. 21, the Petitioner could not have participated in those meetings. Therefore, in essence, the contention of the first and third Respondents is that the Petitioner had not ceased to be a Director by reason of non-attendance of four consecutive meetings, and as such, he is as much responsible as the Directors for advancement of loans to fictitious, persons and causing loss to the Bank.
The contention of the first and third Respondents and the acceptance thereof by the second Respondent cannot be sustained for a variety of reasons. In the first place, there is no evidence in the case to establish the contention of the first and third Respondents that at each of the meetings the Petitioner was absent, applications by one or more of the relations of the Petitioner came up for consideration. In the surcharge orders there is no reference whatever to the Directors considering at each of the meetings one or more applications for grants of loan by the close relation of the Petitioner. Such a contention has been put forward for the first time only before the second Respondent in the course of arguments in the civil miscellaneous appeals. Even before the second Respondent, no details have been given to show that at each meeting of the Directors one or more applications of the Petitioner''s relations for grant of loan came up for consideration by the Directors. It is only in the counter-affidavit filed in this Court, a lot of information is given. But, the information is so vague and general that it will be very unsafe for any Court or Tribunal to place reliance on it and act accordingly. I may only refer to a few of the averments contained in the counter-affidavit filed by the first Respondent in Writ Petition No. 4378 of 1976:
In respect of the meeting, dated 15th January, 1962 there was a resolution wherein a loan is granted to one Doraiswami Naidu under Resolution No. 328, who is a co-son-in-law of the Petitioner''s father-in-law...Likewise, under Resolution No. 329 a loan is granted to one Doraiammal, who is none other than the Petitioner''s wife. For the meeting, dated 12th February, 1962 the Petitioner could not take part since there were discussions regarding the admission of two members, viz, Venkatarathnam and Ranganayaki, who are related to the Petitioner and under by-law No. 21, the Petitioner could not present himself, (para 5).
On 28th May 1962, under Resolution No. 318, the overdue loan Of one Munuswami Reddy (Member No. 150) for whom the Petitioner''s father-in-law stood as surety was discussed and it was referred to arbitration. The meetting, dated 11th July, 1962, discussed the loan application of one V.T. Alwar Naidu, who is the son-in-law of the Petitioner''s father-in-law''s brother (Para 6).
The meeting, dated 2nd January, 1963 is crucial in that at many as eight loans were granted to the Petitioner''s kith and kin and the Petitioner himself was granted a loan under Resolution No. 117 for Rs. 1,000 (Para 8).
In respect of the meetings, dated 20th March, 1963 and 3rd April, 1963, the Petitioner, under by-law No. 21t could not attend the meetings since, under Resolution Nos. 412 and 417 loans were sanctioned to his relative, one Ranghnayaki Ammal and also certain overdue loans of his relatives were discussed for attachment proceedings. (Para 9).
Thus, it will be seen that the averments in the counter-affidavit about several relations of the Petitioner being given loans are couched in very general terms. Wherefrom this information was obtained, there is no whisper in the counter-affidavit. No person has been examined before the third Respondent or the second Respondent to prove that the several persons referred to in the counter-affidavit were relation to the Petitioner, and, further more the Petitioner had influenced the other Directors to advance loans in their favour. It is significant to note that the surcharge orders proceeded on the basis that loans were sanctioned to non-existent persons. But, the charge against the Petitioner is not, that he was instrumental in loans being advanced to fictitious person, but that he influenced the other Directors to advance loans in favour of his relations, who admittedly were not nonexistent persons. This aspect of the matter has not at all been considered by the second Respondent.
Even assuming that the Petitioner had absented himself at each meeting of the Directors in compliance with the by-laws of the Bank, it is inconceivable the Petitioner would have absented himself for the whole meetings. From the counter-affidavit, it is seen that at each meeting, hundreds of subjects were dealt with. If the Petitioner had wanted to avoid being present at the time the subject relating to the loan applications qf his relations or himself came up for consideration, the Petitioner would have attended the meeting and would have gone out only at relevant time when the subject in which he or his relation was involved came up for consideration. Though the by law says that the Director cannot participate in any meeting in which a subject in which, he is personally interested comes up for consideration, the by-law must be construed to mean that the Director should absent himself only at the relevant time the particular subject comes up for discussion, and not that the Director is debarred from attending the entire meeting itself.
Two circumstances are put against the Petitioner to contend that he continued to be a Director. The first is that he had received notices for the Directors'' meetings without demur and, secondly, he had contested for Directorship for a second term also. As for as the first contention is concerned, merely, because the Petitioner had received the notices issued for the meetings of the Directors, that will not restore the office of Directorship lost by the Petitioner by reason of his continuous absence from four consecutive meetings of the Directors. As regards the second contention, the seeking of re-election for a second term can never be linked up with continued Directorship of the Petitioner during the earlier period. It is always open to a member of a Co-operative Bank or Society to seek election as a Director and, it is not necessary that one must have the status of a Director to stand for election.
There is, therefore, considerable force in the contention of the Petitioner that he had ceased to hold office as Director on account of his failure to attend four consecutive meetings of the Directors and in that situation, he cannot be fastened with liability for Wrong or questionable advances made by the other Directors. In fact, one circumstance which is projected against the Petitioner will really support his case rather than that of the Respondents. When the Board of Directors of the Bank was superseded and a Special Officer was appointed in charge, some of the Directors of the Bank opposed the move, but the Petitioner did not raise any protest. This attitude of the Petitioner fits in with his case that he had ceased to be a Director of the Bank rather than with the case of the Respondents that the Petitioner continued to be a Director all through.
In T.R. Ramanathan and Others and S.M.A. Habeeb Vs. The State of Madras and Another, Ramaprasada Rao J. (as he then was) has pointed out that two ingredients must be satisfied before an order of surcharge u/s 71 of the Tamil Nadu Co-operative Societies Act can be obtained, viz., (i) the concerted action of the persons concerned, which might be characterized as willful negligence on their part, should result in a loss to the Bank, and (ii) if such a link is established between the impugned act and the resultant loss to the Bank, then the Registrar, in surcharge proceedings u/s 71, has the power to direct such delinquent person or persons to contribute to the assets of the Bank by way of compensation in respect of such mis-appropriation, mis-application of funds, fraudulent retention thereof, breach of trust to the affairs of the Bank or willful negligence on their part. In the present case, there is clear evidence that there has been loss to the Bank. But, the second requirement, viz., the establishment of a link between the impugned act and the resultant loss to the Bank, as far as the Petitioner is concerned, has not been satisfied. The third Respondent has surcharged the Petitioner along with the other Directors, merely, because the Petitioner happened to be one of the Directors elected for the period 1960-63 without noticing the fact, the Petitioner had automatically ceased to be a Director by his continued absence at four consecutive meetings of the Directors. The second Respondent has placed reliance on matters not established by evidence to render a finding that notwithstanding the continued absence of the Petitioner at the Directors meetings he must be deemed to have continued in office as Director and was, therefore, as much liable as the other Directors for the loss sustained by the Bank. An order of surcharge is in the nature of a decree and unless the evidence in the case is sufficiently clear and cogent to warrant a finding that the institution had suffered on account of the willful negligence or the fraudulent action, or the breach of trust of one or more of the officers concerned, then no order of surcharge ought to be made. In any event, an order of surcharge cannot be made, on mere surmises and assumptions.
In the light of the discussion contained above, it necessarily follows that the impugned orders of surcharge have to be quashed with reference to the Petitioner. In the absence of clinching material to the contra, the second Respondent should have sustained the defence of the Petitioner that, he had ceased to be a Director of the Bank and, therefore, he cannot be proceeded against for the wrongful advances of loan made by the other Directors. The writ petitions will, therefore, stand allowed, but there will, however, be no order as to costs