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Judgment
Wallace, J.—This is a connected series of four appeals arising out of a suit by the Guntur Cotton, Jute and Paper Mills Company, Limited,
against the two defendants, their former secretaries and treasurers, for a declaration that these defendants ceased to hold office from 31st March,
1918, for an injunction restraining them from interfering with the management of the Company, for correct accounts and damages for the loss
sustained by the Company by reason of their several acts of fraud and misappropriation. A preliminary judgment in the case was passed on 24th
April, 1922, and the final judgment on 4th April, 1924 Defendant No. 1 has not appealed but he was heard in his own case on the appeals by
plaintiffs. Defendant No. 2 has preferred Appeal No. 75 of 1923 against the preliminary decree and Appeal No. 237 of 1924 against the final
decree. The Company has preferred Appeal No. 215 of 1923 against the preliminary decree and Appeal No. 457 of 1924 against the final
decree.
Various matters fall to be dealt with in these appeals, the decision in which, as in the original trial, has not been assisted, but considerably
hampered by the action of the plaintiffs in not clearly realising before they came into Court and not clearly setting out in their pleadings what their
causes of action were and what remedies at law were open to them on these causes of action. It will be convenient to follow the order taken by the
lower Court in dealing with the several matters in issue in this litigation and has deal with both appeals against the preliminary decree at the same
time.
The first and most important matter relates to a mortgage of Rs. 1,23,354 over the mill property in favour of the wife of the 2nd defendant. This
was taken on 2nd January, 1918, in continuation of, and by way of security for, various loans taken at various times by the Company from her.
The lower Court has held on this matter that, though the 2nd defendant had an interest in this mortgage which conflicted with his duty to the
Company and, therefore, an interest which he should have disclosed, and though he was liable, therefore as agent for the profits he had gained and
as a trustee for any loss which the Company may have suffered, yet since no profits were gained and no loss incurred, 2nd defendant is free of any
civil liability in this suit. This decision is the main ground of attack in the plaintiffs'' appeal.
As stated the mortgage was taken in continuation of a series of previous loans. As to these loans the only statement in the plaint is in para. 10(c),
that ""defendants suspended transactions with Banks and allege that large debts were borrowed at a high rate of interest from their wives. The share
holders disputed the genuineness and good faith of those transactions and passed a special resolution on 2nd December, 1917, curtailing the
borrowing powers of the defendants which was confirmed on 30th December, 1917. These transactions are collusive and fraudulent and were
intended to benefit the defendants at the costs of the plaintiff Company and are, therefore, void."" The District Judge has considered the mortgage at
length, but nowhere discusses the loans except to come to certain conclusions thereon favourable to the defendants. Thus he points out in para. 24
that the money for these; loans was received from the lenders and paid for value, and he has no doubt that the amounts alleged had been received
from the 2nd defendants wife and had been spent for the legitimate purpose of the mill. He finds also that early in the history of the Company, on
2nd August, 1913, the Bank of Madras refused to advance more money beyond Rs. 30,000 borrowed on 7th November, 1911, at 7 per cent.
and that it was then that the defendants and their wives began to advance money to the Company. There is no attempt by the plaintiffs to prove
that the Company could have got money on easier terms in the open market or that uncalled capital was available. It is clear that the Company was
having great difficulties in getting the share-holders to meet calls for further capital. Even as early as 1907 the Directors had to begin filing suits to
compel share-holders to pay up, and something like 500 suits were filed. I am not, therefore, prepared to follow the District Judge in holding, as he
does in para. 43, that the mortgage document and its forerunners, that is, the promissory notes, for the loans were executed not in the interests of
the Company but fraudulently by the defendants to advance the interest of the 2nd defendant''s wife. The District Judge does not, as I have said,
consider these loans by themselves. He merely argues back from the mortgage to the loans, and because he finds the former fraudulent he holds
the latter must have been part of the same fraud. But that is by no means a legitimate conclusion or a proper method of arriving at a conclusion,
particularly as the Judge himself holds that at first the defendants were genuinely prosecuting the interests of the Company, that loans were
necessary, and that the full money obtained on those was spent in the interests of the Company who got the full value for their money. At the time
of argument I tried to ascertain whether at any time the shareholders had at any of the numerous annual general meetings ever challenged the loans.
It is difficult in the mass of evidence there is in this case to be absolutely certain of any point; but we have not been pointed to any evidence going
to indicate that the share-holders ever challenged these loans. The plaintiffs do not assert that the loans were unnecessary or at any unduly high rate
of interest or that the Company did not get full value for the money. The plaint mentions general meeting on 2nd December, 1917, which curtailed
the borrowing powers of the defendants. It does not appear even from the minutes of that meeting, Ex. F-4, that then these loans or the rate of
interest on them were denounced. Therefore, beyond the fact that the loans were borrowed from the wives of the 2nd defendant and 1st defendant
there is no cause for inferring fraud, and the facts that loans were necessary, that the rate of interest is not proved or found to be unduly high and
that the Company got full value for their money, seem to me to put the issue of fraud out of the question as regards the loans themselves.
Now I come to the mortgage. The plaint charge is merely a general one that it was collusive, fraudulent and unauthorised. Let us see first if it
was necessary. By 1917 the Company''s financial position was approaching a crisis. Very early in the history of the Company the Directors had to
borrow money in order to work the mill. At first they borrowed from the Bank of Madras from 1903 to 1911, but the Bank refused further loans
in 1913. Private sources, therefore, had to be tapped. These, chiefly the money of the defendants and their wives, carried on the Company till
1917. During 1915 to 1916 there was a good deal of friction and maneuvering for position between the defendants and the share-holders. The
balance sheet of 1915 was thrown out, but the balance-sheet of 1916, in which the loans settled by this mortgage were entered, was passed, Ex.
XI, dated 22nd April, 1917. It is obvious that the stage was being reached when further money would not be lent without security. The Directors
then decided to advertise for loans on the security of the mill. Advertisements were inserted in two local newspapers, and a large number of Banks
was approached for loans. These all refused--see. Ex. LXIX series. There is no suggestion that any of these proceedings were not bona fide. Thus
the Directors had come to the conclusion that money could not be provided without security on property, and had made a genuine effort"" so to
raise money outside by way of mortgage and had failed. In these circumstances it seems to me hypercritical to denounce the giving of the mortgage
over mill property to secure the loans which the 2nd defendant''s wife had already given, or to hold that the mortgage must have been tainted by
fraud simply because the mortgagee was the 2nd defendant''s wife. All the circumstances to my mind point to the fact that if the creditor had been
any one else, an outsider, the result would have been the same, namely, the mortgage over the mill property. There was in the circumstances no
other alternative. This conclusion is strengthened by the conduct of the share holders in the matter. On 26th. November, 1927, some of them sent
a notice to the Directors which was read at their meeting on 28th November, 1917, see page 579 of the printed papers protesting against the
giving of the mortgage. The Directors nevertheless by a vote of 5 to 2 resolved on the mortgage. The protesting share-holders and the dissenting
Directors had until 2nd January, 1918, when the mortgage was actually executed, time to take effective steps to prevent it and did exactly nothing
at all. It is quite clear that they did not consider that their interests were being put in any real jeopardy by the transaction. The validity and binding
character of the mortgage is now in issue in a separate suit by the mortgagee to enforce it and will be judicially decided there; but for the purposes
of this case I see no sufficient reason for holding that it was a transaction fraudulently entered into with the intention of cheating the Company.
The next question is whether the 2nd defendant, who was one of the creditors, had any interest in this mortgage which should have been
disclosed to the Directors before they decided to sanction it, and further, if so, whether the 2nd defendant is, therefore, liable to the Company on
the contract. The first point for consideration is the defendants'' contention that this objection to the mortgage was never raised in the plaint or the
pleadings or the issues and was only raised at the time of argument in the lower Court, and that in consequence no evidence was specifically
directed to this point. The only evidence on the point is contained in certain answers by certain witnesses to the question whether the Directors
knew that the 2nd defendant held a general power-of-attorney in favour of his wife. The plaint is culpably vague and merely speaks of the
mortgage transaction being unauthorised, and the word ""disclosure"" is never mentioned in the plaint or in the issues; on the other hand, in his appeal
petition 2nd defendant has not made it a ground of appeal that he was taken by surprise in the lower Court on this matter, but has merely pleaded
that the lower Court ought to have held that there was a sufficient disclosure of his interest. As the 2nd defendant has taken his stand on that
ground, then, if his interest was such as ought in law to have been disclosed, the only questions that have to be considered are, on whom did the
onus of proof lie, and whether it is proved that there was or was not a disclosure. I think, therefore, that there is not substance in this technical
objection by the defendants, although, as I shall point out later on the plaintiffs'' laxity in the pleadings fastens on them the onus of proof of non-
disclosure.
It is not disputed that 2nd defendant acted as agent of his wife in the matter of this mortgage and he was undoubtedly at the time a Director and
voted for the mortgage at the meeting of Directors who decided to grant it. The lower Court has found and it is not seriously challenged before us
that the sanction of the Directors as a body was not necessary for this mortgage. The secretaries had plenary power to enter into such mortgages if
they thought it advisable. It was not, therefore, necessary that this mortgage should go before the Directors at all, but this fact of itself, would not
absolve the 2nd defendant. If the defendants thought it advisable to have the direct sanction of the Directors then it was incumbent on them to
place candidly all the facts before the Directors, and if the 2nd defendant had an interest in the mortgage which was such an interest as he ought in
law to disclose and which he did not disclose, he cannot take shelter in the fact that he could himself have sanctioned the mortgage without going to
the Directors at all,
I shall very briefly discuss the legal question argued at length on both sides, namely, whether in the present case, non-disclosure of interest in a
contract or voting on a contract in which he is interested will render the offending Director liable in any loss to the Company which it may have
suffered in consequence, or will render the contract void or voidable. The principles which this Company required its Directors to follow in the
matter of contracts in which they might themselves have an interest are laid down in Article 99 of the Articles of Association. This article, to my
mind, implies that the Company had no objection to its Directors being interested in contracts made with the Company, or to their making profits
on such; but the nature of the interest must be disclosed and the interested Director shall not vote in the matter of the contract, or, if he does, his
vote shall not count. This article was adopted on 12th September, 1904, under the unamended Indian Companies Act in which the present Section
91(a) to (d) did not appear. In 1914 by Act XI of 1914, these sections were inserted. No alteration, however, was made in the Articles of
Association in consequence of this alteration of the law. Now businessmen must be supposed to know their own interest and the businessmen of
this Company were content not to prohibit its Directors from having an interest in contracts with the Company, provided that the interest was
disclosed, and that, if a Director votes, his vote shall not be counted. It does not appear to me that Section 91(a) or (b) adds anything to the
strictness of the terms to which the Directors had already been bound by the Company itself, except that they make a breach of the terms
punishable by a penalty; that is to say, the terms themselves are not more onerous, but the observance of them is to be enforced with more
severity. I am not prepared to hold that after the passing of Act XI of 1914, Article 99 of the Articles of Association became ultra vires because of
the amendments of the Act. These sections simply imposed a penalty for breach of an obligation already laid down by Article 99.
Does this imposition of a penalty for non-disclosure or for voting carry with it, in law the consequences, first, as regards the Company, that the
contract entered into with such a breach of obligation is void ab initio or voidable and, secondly, as regards the offending Director, is he liable for
damages to the Company if there is any loss to it on the contract, or is he liable to account for any secret profits made by him.
As regards the matter of voting on the contract, it seems to me quite clear that the mere voting cannot of itself have any effect on the contract.
Section 91(b) certainly does not say so and, in my view, cannot be held to imply so. The effect of the section is merely that the vote, if given, shall
not be counted. There is no object in saying that the effect of the vote is to render the contract illegal or voidable. Unless, therefore, the contract
would not have been accepted if the vote had not been given, the contract remains unaffected. A pertinent case on this point is Transvaal Co. v.
New Belgium, (Transvaal) Land and Development Co (1914) 2 Ch. 488 : 59 S.J. 27 : 31 T.L.R. 1 in which a contract was held to be voidable,
not because the vote was given, but because, if it had not been counted, there would not have been a quorum qualified to contract. The matter has
to be looked at from a business point of view, and if without the vote the Company would still have carried through the contract the Company has
no claim to have the contract nullified. For example, in Imperial Mercantile Credit Association v. Coleman (1871) 6 Ch. A. 558 : 40 L.J. Ch. 262 :
24 L.T. 290 : 19 W.R. 481, Hatherly, L.C., says ""I take it that even voting would not exclude the agreement"" voting, that is, after disclosure, or
when the Board is fully aware of the interest of the interested Director. As to whether voting would make an interested Director liable to account
for secret profits, in Costa Rica Ry. Co. Ltd. v. Forwood (1901) 1 Ch. 746 : 70 L.J. Ch. 385 : 49 W.R. 337 : 84 L.T. 279 : 17 T.L.R. 297 : 8
Manson 374 : 569 Rigby, L.J., appears to consider that it would: If he has such interests, he must not vote; and I take it that, if he did vote, he
would be bound by the general equity which charges a fiduciary agent with the concealed profits that he makes"". In the present case, however, it
has been found that there were not any concealed profits on the mortgage, so that I need not go further on this point.
As regards the matter of non-disclosure, with which Section 91(a) deals, the above consideration of Section 91(6) indicates that the mere fact
that the section imposes a penalty is no ground for inferring that the section prohibits the contract or makes it illegal. It is significant that, though
Section 91(d)(3) in terms distinctly says that the breach thereof renders the contract void at the option of the Company, i.e., voidable, Sections
91(a), 91(b) and 91(c) do not say so. Further, Section 91(a) contemplates that the interest may be acquired after the contract has been passed by
the Company. In such a case it seems absurd to contend that an ex post facto omission to disclose an interest acquired subsequent to the contract
will have the legal effect of rendering the contract void ab initio or voidable. This seems to me to indicate that, whatever the law may be in England,
in India the law is that a breach of Section 91(a), (b) or (c) does not ipso facto render a contract void or voidable. In interpreting sections of this
kind it is essential to see whether the object of the section is that the contract contemplated should be forbidden, and any section relied on in any
particular case will have to be considered on its own wording and meaning, in order to see whether a breach of the inhibition contained in it imports
a prohibition of the contract itself; thus it has been held in England that Section 193 of the Public Health Act (1875), Section 2(1) of the Money
Lenders Act (1900) and Section 34 of the Elementary Education Act (1870) should be interpreted as prohibiting contracts made in defiance of
these provisions: see Mellis v. Shirley Local Board (1886) 16 Q B.D. 446: 55 L.J.Q.B. 143 : 53 L.T. 810: 34 W.R. 187 : 50 J.P. 214, Whiteley
v. Barley (1888) 21 Q.B.D. 154 : 57 L.J.Q.B. 643 : 60 L.T. 86: 36 W.R. 823 : 52 J.F. 595, Victorian Daylesford Syndicate v. Dott (1905) 2
Ch. 624 : 74 L.J. Ch. 673 : 21 T.L.R. 742 : 93 L.T. 627, Bonnard v. Dott (1906) 1 Ch. 740 : 75 L.J. Ch. 446 : 94 L.T. 656 : 22 T.L.R. 399 and
Barnacle v. Clark (1900) 1 Q.B. 279 : 69 L.J.Q.B. 15 : 64 J.P. 87 : 48 W.R. 336 : 81 L.T.484. These cases, however, are clearly cases in which
the contracting party is the party liable to the penalty imposed by the section, and the design of the section, therefore, is to forbid the contract. I am
not able, for reasons already given, to spell out the existence of any such design from the wording of Section 91(a) or (b).
We have, therefore, to come back to the Articles of Association, and the law then applicable to this Company or to Companies which have an
Article of Association such as Article 99, would seem to me to be this. Non-disclosure of an interest will not per se render the contract void or
voidable at the option of the Company. Voting by an interested Director will not per se render the contract either void or voidable. But non-
disclosure, or voting, where, but for the vote, the contract would not have been sanctioned, will in all cases render the interested Director liable to
account for ''secret profits.''
What then is the nature of the interest of which the law will compel disclosure? This has been a matter of fruitful discussion and has been
defined in many cases in various ways. In Costa Rica Ry. Co Ltd. v. Forwood (1901) 1 Ch. 746 : 70 L.J. Ch. 385 : 49 W.R. 337 : 84 L.T. 279 :
17 T.L.R. 297 : 8 Manson 374 : 569 the general principle is cited from 1 Macqueen: see page 760 and may generally be summed up in the rule of
equity that the interest which a Director of a Company who stands in a fiduciary relation to the company is bound to disclose is any interest which
conflicts with his duty to the Company. Whether the interest is of such a nature or not must be a question of fact in each case and decided on a
reference to the wording of each Statute A few examples may be cited. It has been held in K.F. Nariman Vs. Municipal Corporation of Bombay,
that interest within the meaning of Section 36 of the Bombay Municipal Act (1888) shall not be merely a parental interest which a father may take
in his son''s welfare but that the interest must involve some reasonable expectation of pecuniary advantage or must at least be ""material"" that is,
presumably, bringing some substantial advantage to the party. Such advantage has been held to accrue if it took the shape of an advertisement of
the party''s goods: see In re Batten, Ex parte Milne (1889) 22 Q.B.D. 685 : 58 L.J.Q.B. 333 : 37 W.R. 499 : 6 Morrell 110 Loan of money to
carry out a contract with the Board, for the security of which the contract was assigned, is clearly a case of conflicting interest: see Hunnings v.
Williamson (1883) 11 Q.B.D. 533 : 52 L.J.Q.B. 416 : 49 L.T. 361 : 6 W.R. 267 : 48 J.P. 135 as also employment by a firm which had a contract
with the Board: see Nutton v. Wilson (1889) 22 Q.B.D. 744 : 58 L.J.Q.B. 443 : 37 W.R. 522 : 53 J.P.644. Generally then, the principle is this,
that where the interest is such that it is likely to influence the Director against the Company''s interest, likely to produce a conflict between his duty
to the Company and his duty to or interest in the other party to the contract, he is bound to disclose it. Beyond this, however, it is clear that, if the
whole body of Directors was already aware of the facts, formal disclosure is not necessary. Authority to this effect may be quoted from Imperial
Mercantile Credit Association v. Coleman (1871) 6 Ch. A. 558 : 40 L.J. Ch. 262 : 24 L.T. 290 : 19 W.R. 481 and Costa Rica Ry. Co. Ltd. v.
Forwood (1901) 1 Ch. 746 : 70 L.J. Ch. 385 : 49 W.R. 337 : 84 L.T. 279 : 17 T.L.R. 297 : 8 Manson 374 where Vaughan Williams, L.J.,
remarks: ""It seems to me that... the Company, through its Directors, was perfectly well aware that Sir A. Forwood was beneficially interested in a
contract.... That being the state of knowledge of the Company... and its Directors, I am clearly of opinion that... there was nothing in this case to
render Sir A. Forwood subject to any liability, as a Director of that Company, to account in respect of what I will shortly call ''secret profits"".
I have here no doubt that the 2nd defendant was, as agent of his wife, bound in duty to get as favourable terms for her as possible. As Director
of the Company, he was bound to get as favourable terms for it as possible. The two duties are incompatible and cannot be exercised together. It
cannot be doubted that the 2nd defendant''s duty to the Company was to disclose his agency for his wife, if not already known to the Directors,
and to refrain from voting on the mortgage, and that he would have committed a clear breach of his legal duties as Director if his interest was not
known to the Directors or if without disclosing it he voted and his vote was needed to carry the contract. On the other hand, that the body of
Directors knew that the proposed mortgagee was the 2nd defendant''s wife there can be no room for doubt. They knew the mortgage was merely
security for the previous loans and that the creditor was the 2nd defendant''s wife and it is very difficult to believe that any of them were ignorant
that the 2nd defendant was acting for his wife in this matter. Further owing to the lax way in which the pleadings have been drawn up there is no
issue on this point, and when the plaintiffs subsequently made this non-disclosure a matter of charge the onus of proving it clearly lay upon them.
They cannot allow the whole case to go through and be closed without any issue on this point, and then argue that the defendants must suffer
judgment because they have failed to discharge the onus of proof on a point of which they gave no notice to the defendants in their pleading, and
on which the defendants were not called to produce evidence. Plaintiffs cannot be allowed, so to speak, to amend their plaint and found their cause
of action on a question of pure fact not alleged in the plaint. If authority is wanted for this obvious proposition, I would cite Imperial Mercantile
Credit Association v. Coleman (1871) 6 Ch. A. 558 : 40 L.J. Ch. 262 : 24 L.T. 290 : 19 W.R. 481 where the learned Lord Chancellor remarks:
Plaintiffs were quite aware of the necessity of making out a case of concealment"" and Costa Rica Ry. Co. Ltd. v. Forwood (1901) 1 Ch. 746 : 70
L.J. Ch. 385 : 49 W.R. 337 : 84 L.T. 279 : 17 T.L.R. 297 : 8 Manson 374 : 569 where Rigby, L.J., states ""No attempt has been made to show
that Sir A. Forwood ever did what was contrary to the Railway Company''s Articles of Association"".
I am clear that the onus lay upon the plaintiffs to prove non-disclosure. I am further clear that they have not discharged it. Plaintiffs'' witness
No. 1 who was a Director at the meeting which sanctioned the mortgage and the only Director at this meeting who has been examined by the
plaintiffs was not even asked if he was then ignorant of anything which the defendants ought to have disclosed. He merely says that he did not
know that the 2nd defendant held a general power-of-attorney for his wife, but this is little to the point. The plaintiffs, as already pointed out, have
never in their pleadings asserted that the Directors were not aware of the 2nd defendant''s agency and have not examined any Director to state that
he was not aware of it. When there is no evidence that the Directors were not aware of the agency and that, therefore, formal disclosure at the
meeting was necessary, it is not open to the plaintiffs to contend that there was such an absence of disclosure as will amount to a breach of the law.
As regards the 2nd defendant''s voting on the contract, what is really prohibited, when the Board was aware of the interest of the 2nd defendant is
the counting of the vote, but even if the 2nd defendant''s vote on this mortgage be not counted, the result would have been the same, since the
voting on the mortgage was by a majority of 5 against 2.
I must here deal with an attempt in this Court by C.M.P. No. 649 of 1927 to put in fresh evidence of an undisclosed interest by the 2nd
defendant, namely, that it has been discovered by the plaintiffs after the termination of the trial in the lower Court that he was at the time of his vote
on this contract the universal legatee of his wife. I cannot see how this strengthens the plaintiffs'' case. It is doubtful if a spes successionis is an
interest which must be disclosed, but even if it were there is again not the slightest effort to assert or prove that the Directors at the meeting were
ignorant of that fact. On the facts then I am unable to hold it proved that there was any non-disclosure by the 2nd defendant of an interest which he
ought in law to have disclosed. No question, therefore, arises of his accountability for secret profits, but, as already pointed out, the lower Court
has held that he made none.
A further point has been raised by plaintiffs in connection with this mortgage. It is contended that by the resolution of the Company, dated the
2nd December, 1927, page 535, incorporated in Article 113-A of the Articles of Association the defendants'' term of office as secretaries came to
an end on 31st March, 1918. Subsequent to that date, however, they continued to discharge the duties of secretaries and treasurers and paid out
towards the discharge of the mortgage a gum of Rs. 74,000 details of which are given at page 719 of the printed documents. Plaintiffs contend that
the defendants had ceased on 31st March, 1918, to have any authority to pay out the Company''s moneys and, therefore, are bound to refund to
the Company Rs. 74,000 paid out without authority. Now in the first place this is nowhere made a matter of charge in the plaint, nor does it seem
to have been raised in the lower Court. Issue No.4 which touches this matter was raised not on the plaintiffs'' pleading but on the defendants'' plea
that the resolution of 2nd December, 1927, was invalid. This in itself is enough to repel the plaintiffs'' contention, since it rests on a point of fact on
which the defendants were never called upon to adduce evidence, namely, whether the defendants did continue with the consent and authority of
the share-holders, as secretaries and treasurers after 31st March, 1918. In the next place it is clear even from the present records that after 31st
March, 1918, the defendants did not cease to be secretaries and treasurers. The resolution of 2nd December, 1917, was followed by another at
the same meeting which contemplated that the new secretaries and treasurers would be appointed before 31st March, 1918, to take over their
office from the defendants. Such a meeting was not held although it was within the competence of the share-holders to hold it, and indeed their
own resolution contemplated their holding it if the secretaries or Directors refuse to call it. The share-holders, therefore, took no steps to appoint
officers to take over charge from and succeed the defendants in their office and it is quite clear from subsequent proceedings of the shareholders
that they continued the defendants as de facto secretaries and treasurers until finally at a meeting in December, 1918, the new secretaries and
treasurers were appointed (see page 879). The minutes of the meetings of 21st July, 1918, (page 811) of 2nd October, 2918, (page 885), at
which a lease for 1919 on which the plaintiffs rely as valid and authorised was entrusted to these secretaries and treasurers and of 19th December,
1918, (page 879) demonstrate this. In fact the resolution at the last named meeting is that ""so and so"" be joint secretaries and treasurers from this
date forward in place of the two defendants and that ""so and so"" are authorised to take possession of the mill, etc., from the former secretaries.
The plaintiffs cannot isolate one act of those de facto secretaries and treasurers and say it is unauthorised. They must, if logical, contend that all acts
done by them after 31st March, 1918, including the Lease of 1919 are unauthorised, and to that extent, as I understand their case at the bar, they
were not prepared to go. Now when the defendants were in fact authorised to continue after 31st March, 1918, the duties of secretaries and
treasurers even though the Articles of Association laid down that they were to demit office on 31st March, 1918, the Court will not be solicitous to
find that all the acts done by them after 31st March, 1918, were invalid. They were in fact ratified by the Company though the consequential
amendment was not incorporated in the Articles of Association. This part of the plaintiffs'' case, therefore, seems to me to have no substance.
Plaintiffs'' appeal on the whole matter of the mortgage fails.
The next point to consider is a charge made by the plaintiffs against the defendants in the matter of certain leases. The nature of these leases is
as follows: The lessee was to supply a fixed number of putties of raw jute for manufacture into bags and to pay a fixed sum per putty for working
expenses to the mill. The lessee took over the manufactured bags and made his profits on the sale of these. The Company made their profits on the
difference between the actual working expenses and the sum paid to the lessee for working expenses. The latter sum was determined by tender or
auction. This system was introduced by a resolution of the Directors on 23rd November, 1914, see page 185 as the previous departmental
working was found not to be profitable. The lease of 14-15 was in the name of Nalam Subramaniam, examined as P.W. No. 12, Ex. RRRR. The
plaint charge on this is that the two defendants owned a share in this lease through P. Satyanarayanamurthy, the son of the 2nd defendant and that
the profits of this lease realised in this fraudulent manner must be accounting for to the Company. Further on the footing of a breach of contract by
the Company in regard to this lease the lessee filed a suit for damages. The plaint charge continues that the defendants are not defending this suit
for the Company properly and that, therefore, they have rendered themselves liable to the Company for any damages incurred through their
negligence or fraud. Both these contentions have been practically given up before us and neither found favour with the Court below. The District
Judge has on grounds not alleged in the plaint found the defendants liable for damages. He finds that, while the defendants were not proved to have
had a share in the lease, they had, such an interest in it as they were bound to disclose and which they did not disclose. He finds farther by a
process of reasoning difficult to follow that though there is no evidence that the defendants themselves made any secret profits over the lease the
lease was owing to their fraud, on very unfavourable terms to the Company and that the Company by that fraud lost a sum of Rs. 18,000 and he,
therefore, finds the defendants liable in that sum. The first point to be dealt with in connection with this lease is to settle if there really is any proof
that the lease is tainted by fraud. That it was publicly advertised, even ""widely advertised"", according to P.W. No. 1 himself: see page 19 of the
evidence and that tenders were openly invited is clear from the evidence, and that no tender higher than that of Nalam Subramaniam was received
is found by the District Judge. I agree with him on the evidence for the reasons given by him that this was so. There is no prima facie reason,
therefore, why one should suspect the bona fides of the acceptance of the highest tender, and I do not find that the general meeting of share-
holders found fault with this lease when they were considering the balance-sheets of 1915 or 1910. Plaintiffs'' witness No. 1 himself who has been
a Director since 1915 admits that he never objected in writing to these leases. His statement that he objected orally may be discounted. The
District Judge finds mala fides merely because under a private arrangement by the lessee himself made with one of the 2nd defendant''s sons, the
figure for working expenses was taken at a higher figure than in the lease itself. The lessee apparently was to supply 4000 putties of raw jute in the
year to be worked by the mill and agreed to pay the mill Rs. 22 per putty for working expenses. The mill made a profit between that figure and
their actual working expenses. Now in the separate arrangement. Ex. TTT, between the lessee and his working partners the profits to them
obtained by sale of the manufactured gunny bags was to be calculated as if they were paying Rs. 26-8-0 per putty to the mill. Hence the Judge
concludes that an honest lessee would and ought to have tendered Rs. 26-8-0 per putty and that because he did not, the lease is tainted with fraud.
I am wholly unable to follow this reasoning.
A lessee is, of course, entitled as a business man to get his lease on the lowest possible terms which the mill will accept, and if he makes a large
profit thereon or enters into partnership with some one else on the prospect of getting larger profits for himself that is not the business of the mill.
The mill after publicly calling for tenders accepted the highest bid and the most upright of Directors could do no more. The fact that the lessee
made large profits or thought that he could make a large profit is no proof that the the lease was fraudulent. It is easy to be wise after the event and
decide that the lease at a higher figure would have given more profits to the mill. But it is admitted by the plaintiffs and accepted by the District
Judge that up till then the mill which had been working departmentally had been working at a loss and in consequence the system of leasing was
introduced (see Ex. 122). Thus no one at the time of the tenders could be at all certain whether the new system would be beneficial or not. Unless
the plaintiffs are able to establish and prove that the mill could have obtained the lease from some one else at a figure above Rs. 22, or that Nalam
Subramaniam could have been forced up to the higher figure--and there is no attempt by the plaintiffs to do this--there is, in my opinion, absolutely
no ground for holding that the lease ought to have been for a higher figure and that the failure to get a higher figure was due to some mala fides or
fraud on the part of the defendants. This conclusion becomes stronger when we remember that such a case of mala fides or fraud was never put
forward in the plaint at all. I am unable to agree with the lower Court that this lease has been shown to have been in any way tainted by fraud. In
any case the measure of damages is wrong. The Judge fixes it at 4000 (that is the number of putties) multiplied by Rs. 4-8-0 the so called secret
profits; but on his own showing, para. 48, only 2749 putties were worked so that the proper figure ought to have been 2749 multiplied by Rs. 4-
8-0.
The next point is whether the defendants had in this lease such an interest as they ought in law to have disclosed. Such an interest is permitted
to a Director by Article 99 of the ""Articles of Association"", but the nature of his interest must be disclosed. The plaint does not allege any absence
of disclosure. It is not a point taken in the plaint or in the issues, nor can I find that any evidence has been led about it. For the reasons already
given I hold that the onus lies on the plaintiffs to prove non-disclosure, and I fail to find any evidence at all. I am, therefore, unable to hold that there
was any non-disclosure, even supposing that disclosure was imposed by law. In any case I am further not convinced that the defendants had any
interest which they were bound to disclose. The lessee was the brother-in-law of Satyanarayanamurthi the son of the 2nd defendant.
Satyanarayanamurthi held a power of-attorney from the lessee in respect of it. On account of these relationship, and solely on account of these, the
District Judge holds that the 2nd defendant was clearly interested in the contract of lease, and proceeds further to hold the 1st defendant civilly
liable because ""without his help the object could not have been achieved"". I fail to follow this and the plaintiffs'' Vakil does not support these
findings. Obviously the District Judge has not found the 1st defendant had any interest in the contract which he was bound to disclose and he has
found it not proved that the 1st defendant was pecuniarily interested in the affair at all. As to the 2nd defendant, beyond his relationship there is
nothing to show any interest which he ought to have disclosed. He is admittedly divided from his son Satyanarayanamurthi and they are not on
good terms. Second defendant filed his accounts in Court and the plaintiffs had the opportunity of inspecting them. Whether they did so or not,
they have not chosen to file them. Presumably they do not support the plaintiffs'' case. The accounts of Satyanarayanamurthi were not summoned
by the plaintiffs. In the civil suit by the lessee against the Company to which the plaint alludes the whole matter has been gone into and it was held
there that defendants had no interest in this contract. There is no appeal or memorandum of objections on this point (see A.S. No. 461 of 1923)
The suggestion that the 2nd defendant got any secret profits from or had any interest in this lease was not put to any witness, not even to P.W. No.
12 himself. Even P.W. No. 13, who supplied funds for the contract: see Ex. TTT, and who is examined on behalf of the plaintiffs, makes no such
suggestion. Plaintiffs in the plaint definitely charged that the defendants owned a share in and realised profits from this lease, but the lower Court in
para. 47 definitely states ""there is no evidence in the case that the defendants actually gained personally any particular amount. It is also not
established that they made personally a pecuniary gain themselves"", and in para. 49, it says ""that... the defendants themselves owned a share... is
not established by reliable evidence.
In this Court the plaintiffs have put in a petition to admit certain Bank accounts filed in that lease suit, which accounts were filed as Ex. W-1 in
that suit, in order to prove that the 1st and 2nd defendants financed this lease. Even if we admitted these at this stage, three years after they were
filed in that suit and no sound reason is advanced why they could not have been put in earlier. I do not consider that they even show a prima facie
case that the defendants advanced the moneys. I cannot support the District Judge''s judgment and decree against the 2nd defendant on this lease
either on the grounds given by him, or on the ground that the 2nd defendant did, as a matter of fact, make any secret profits"".
No argument has been addressed to us on the lease of 1915-16. As to the lease of 1916-17 dealt with in the judgment in paras. 56 to 60, this
was publicly auctioned and wag knocked down in favour of Varadaraghaviah, brother of the 1st defendant. The plaint case was that the
defendants had shares in it. As usual the plaintiffs made no attempt to prove their plaint case and set up other counts, first, that the auction was not
fairly conducted and, secondly, that the 1st defendant had an interest in it which he did not disclose. The lower Court has repelled both points.
Before us the first point is not taken but the second is pressed, on the ground that the lessee and the 1st defendant were undivided members of a
joint family. Thus no point is pressed here as against the 2nd defendant. For the 1st defendant it is contended that he was divided from his brother
on the date of the lease because a partition suit had been filed in 1915 against himself and that brother by another brother. The evidence, as is
natural when the matter was not specifically put in issue, is meagre, and in this state of the case I am not prepared to differ from the lower Court in
its finding that it has not been proved that the 1st defendant had an interest in the lease which he was bound to disclose, while I must note, as I
have already noted on other matters, that the plaintiffs had made no attempt to prove by evidence the fact of non-disclosure. I support the finding
of the lower Court on this lease.
The lease of 1917-18 is dealt with by the Judge in paras. 51 to 55. The plaint case was that the lease was knocked down to the lessee in spite
of a higher bid by P.W. No. 13 and that the Company, therefore, lost thereby. On this question of fact the lower Court has found against the
plaintiffs and I can see no reason for differing. As against the evidence of P.W. No. 1, which seems to be hearsay, and that of P.W. No. 13, the
unsuccessful claimant, there is the evidence of P.W. No. 5 the Company''s Accountant: see Ex. LXXIII-A who says that there was no higher bid
than that of the lessee. I, therefore, agree with the lower Court in its findings about this lease.
The lease of 1918-19. This lease was put up to public auction and knocked down to L. Varadaraghaviah, the brother of the 1st defendant.
The plaint case was that the auction was not fairly held and that the Company thereby sustained a loss, and that the defendants had shares in the
contract and must make good to the Company all profits which the lessee made. That the auction was unfairly held has not been proved. It was, as
a matter of fact, held under the auspices of the District Munsif''s Court itself and was confirmed by the Court. At the time of confirmation the
Company had the opportunity of putting forward any objection they had to the confirmation. None appears to have been put forward. I agree with
the lower Court that this allegation of an unfair auction is unfounded. As to the allegation that defendants had shares in the contract, the matter was
fought out in O.S. No. 4 of 1921on the file of the District Court. The lower Court relies on the decree in that suit, but there is obviously some
confusion in that decree. The judgment in that suit (Ex. CLXIX) exonerates both the present defendants with costs as they were unnecessarily
made parties, and held that the present 2nd defendant was sub-partner of one of the sharers. That this was the decision is clear also from a note
made, by the same Judge who passed the decision, in the evidence of P.W. No. 1 in this case at page 18 of the printed evidence. The decree in
that suit, however, Ex. JJJJ, says that the share of the defendant, that is the present 2nd defendant, shall be two annas in the rupee, though it also
exonerates the 4th defendant. The mistake is in the decree since the judgment is clear that the present 2nd defendant had no share but was only a
sub-partner with a sharer. Such sub-partnership, however, would undoubtedly be an interest in the contract. The lower Court is, therefore, right in
holding that it has not been proved that the 1st defendant had any interest in the contract but that it is proved that 2nd defendant had.
Now, when the plaint had charged 2nd defendant with having a share in this lease, he did not in his written statement deny it. It is significant
that while he there denied having had any share in the profits of the leases for the years 1915, 1916 and 1917, he refrained from any similar denial
in respect of this lease. That was sufficient, to my mind, having regard to the terms of Article 99 of the Articles of Association, to throw on him in
the trial the onus of proving disclosure, and he has made no attempt to do so. He was, therefore, according to the terms of that article, rightly found
by the lower Court liable to account for his profits. His appeal on this item (Rs. 2,200-4-3) must fail.
The next point relates to an overstay by one M. Ramanujayya in the old mill premises at the expense of the plaintiff Company. The learned
Judge''s discussion on this matter is in para. 74 of his judgment, and is confined to the part played by the 1st defendant. Then suddenly he holds
both the defendants liable, without saying why he holds 2nd defendant also liable. However, this occupation of the premises gratis was clearly a
matter which the 2nd defendant ought in the interests of the Company to have looked into and put right and he cannot be absolved of negligence
which led to a loss to the Company. On the whole the lower Court''s decree on this point may be supported.
The next point is general commission. The District Judge has ordered the defendants to forfeit u/s 220 of the Indian Contract Act, their general
commission for 1915, 1916 and 1917, because of their misconduct in these years. Here again the lower Court has gone entirely outside the plaint.
The only claim in the plaint regarding withholding of commission is in para. 10(h) in which it is claimed that the defendants cannot claim commission
after 31st March, 1918, because their terms of office then came to an end. There is no claim whatever for the return of the commission earned in
the years prior to 31st March, 1918. I do not see how the decision of the lower Court on this matter can be supported. Apart from this technical
ground I have not found that the defendants have been proved to have been guilty of any misconduct in 1915 to 1917 as charged, and, therefore,
there is no ground for the withholding of the their commission.
The next point is the removal of the defendants from their office as secretaries. The defendants do not object to this provision in the decree,
and it will, therefore, stand, with an alteration of the date, hereinafter to be considered. The provision to deliver up all Company registers and
papers follows:
Some argument was put forward relative to the Judge''s having disallowed the plaintiffs'' claim that the defendants made secret profits on an oil
contract. It is sufficient to remark on this that the claim is not supported by any account, It was not difficult for the plaintiffs to have called for the
accounts of the oil Company. Second defendant produced his oil commission account book before the Court, but the plaintiffs did not choose to
rely upon it. Obviously no case for differing from the lower Court has been made out on this point.
A claim was also put forward by plaintiffs regarding the loss to the Company by the defendants not having sued Nalam Subramaniam, the
lessee for 1915-16 for not supplying 1251 putties. This was a case not put forward in the plaint, nor has it been made a ground of claim in the
lower Court, and I cannot allow it to be taken here. This disposes of the appeals against the preliminary decree.
Appeals Nos. 237 of 1924 and 457 of 1924 are against the final decree. On the preliminary decree a Commissioner was appointed to take
accounts from 1913 to 1918 excluding 1916. He took accounts up to 30th April, 1919, the date on which a Receiver was appointed to take
charge of the Company''s affairs. On his figures the District Judge has surcharged the defendants with a sum of Rs. 46,011 as interest on loans
which the defendants negotiated for the Company, not on the ground that these loans were fraudulent and intended for their own benefit or that of
their relations which was the case in the plaint but on the ground that the defendants did not disclose the interest which they had in these loans. This
figure includes interest on the loans which resulted in the mortgage already dealt with and interest on other loans not so secured. Here the objection
already taken as regards the mortgage must again be pressed, There is no hint in the plaint of this charge of non-disclosure and there is no evidence
whatever about it. The only charge in the plaint regarding this is in para. 10(c) that large debts borrowed by the defendants at a high rate of interest
from the defendants'' wives were collusive and fraudulent and intended to benefit the defendants. This charge has been repelled by the lower Court
and rightly, as the loans were used for the Company''s legitimate business, and there is no evidence whatever that the loans were not necessary for
the Company''s business or that the money could have been got at a lower rate of interest. As I have already remarked in the matter of the
mortgage, defendants were never put to the proof of non-disclosure and the plaintiffs cannot turn round and say that they have not proved what
they were not called upon to prove. I am of opinion that this surcharge cannot be sustained. It is obvious in any case that the actual figure of
interest could not be determined by the lower Court at that stage. If the mortgage is found binding on the Company in the suit upon the mortgage,
the interest on it would be payable by the Company, and, therefore, the figure of Rs. 46.011 would have to be reduced by the mortgage interest.
All that the lower Court could have done was to have given, as regards the mortgage interest, a declaratory decree that the defendants should be
surcharged for so much interest as may eventually be found binding on the Company.
The only other item is the matter of time-barred debts, which are said to have become irrecoverable owing to the negligence of the defendants.
The District Judge goes through the list furnished by the Commissioner, and finally surcharges the defendants with an amount of Rs. 4,430 on this
head. Here again, it is to be noted that the plaint case on this matter was not one of negligence and liability to account. The charge was (para. 10)
that the defendants colluded with the debtors and either did not collect the debts or compromised for lower sums for personal reasons. There is no
evidence except the fact that certain debts were barred by time, no evidence that any loss to the Company could have been prevented. Negligence
was neither averred, nor, in my opinion, proved. The question whether a particular debt is worth pursuing by suit or in execution is largely a matter
of discretion in the hands of businessmen, and it would be absurd for a Court to hold managers responsible for every unrecovered debt merely
because steps by way of execution or by way of suit were not taken. The Articles of Association No. 2l, gives the Managing Directors absolute
discretion in the matter of the recovery of debts. The District Judge''s treatment of this part of the case is, therefore, far from satisfactory. To come
to particular items, items Nos. 24, 79 and 143 were not contested by the defendants and item No. 59 is not contested to the extent of Rs. 37-10-
0 collected. Items Nos. 8, 93, 94, 92, 75, 25 103, 83 and 45 have been surcharged merely because the defendants did not take steps to recover
them from the parties or from their Pleaders. No fraud or collusion is proved in any instance. These cannot possibly be made matters of surcharge.
This concludes the discussion on the final decree appeal.
Srinivasa Ayyangar J.
These four connected appeals have arisen out of a suit instituted by a Company registered under the Indian Companies Act under the name of
the Guntur Cotton, Jute and Paper Mills Co., Ltd., Guntur. Two of the appeals are from the preliminary judgment and by the plaintiffs and the 2nd
defendant respectively, and the two others are by the same parties in respect of the final judgment.
The unfortunate litigation to which these appeals relate is a typical instance of the manner in which persons connected with the management of
limited liability Companies in this country think and behave, leading inevitably to disgust and distrust in the minds of the public with regard to all
such institutions.
The history of this Company suffices to show clearly, how, so long as the Company is not properly organised and started few people take any
real interest in it, and the moment it begins to show indications of working profitably, other persons endeavour to capture it by the manipulations of
shares and votes and when the danger of such endeavours comes to be realised by the original promoters, they in their turn become unscrupulous
and resort even to questionable methods of securing into their own hands the power, management, and assets of the Company. It is, therefore,
clear that, unless there is a decided improvement in the morale of all those connected with such institutions, the prospect of such Companies, at any
rate, in this country, is necessarily gloomy.
I have had the advantage of perusing before hand the judgment just now delivered by my learned brother in these appeals. As I have generally
agreed with him with regard to most of the matters, I regard it unnecessary to write a separate judgment of my own regarding all the matters in
controversy. In this view I propose to deal specially only with two questions, firstly, as regards the mortgage and secondly, as regards the first
lease in favour of Subramaniam.
As regards the mortgage, the first point to be observed is that the mortgagee was not made a party to the suit and the entire question has
therefore, to be discussed only as between the Company on the one part and defendants Nos. 1 and 2 on the other part. If the cause of action laid
in the plaint should be regarded as being for damages against defendants Nos. 1 and 2 for misfeasance and breach of trust and on the basis on
which the learned District Judge in the Court below proceeded it seems to be clear that no damages whatever have been proved. The lower Court
has found as a fact on the evidence adduced that all the monies that were advanced by Satyaraju, the wife of the 2nd defendant, were actually
advanced by her from her own monies and the total of such monies was Rs. 78.000. The lower Court has also arrived at the conclusion that this
sum of Rs. 78,000 at least is repayable by the Company to the 2nd defendant''s wife; and, therefore, so far as the defendants are concerned, no
more than Rs. 74,000 which is less than Rs. 78,000 having been found to have been paid to the mortgagee, it must be held that no loss had been
proved to have been sustained by the plaintiff Company. I have no hesitation in accepting these findings of fact by the learned District Judge. In
fact, no serious attempt has been made to assail those findings. If so, the position is that in respect of a mortgage on behalf of the Company
brought about by defendants Nos. 1 and 2 they have been charged with misfeasance and breach of trust and no damages have been proved, to
have been sustained by the Company. If the plaintiffs'' case had been that, in view of the suit on the mortgage by the mortgagee, not yet decided,
there was a reasonable risk of the plaintiff Company being made liable wrongfully for large sums of money for which it may not be liable and all that
the plaintiffs wanted under the preliminary decree in this suit was the declaration of an obligation on the part of defendants Nos. 1 and 2 to
indemnify and keep indemnified the plaintiff Company from liability in respect of such amounts, the case might have been different.
I should have been prepared to deal with the case on that footing had it not been for the fact that in spite of the suggestion made by me the
learned Vakils who appeared for the Company did not appear to agree to any such view or course. The Company has, no doubt, having regard to
the pleadings in this case, elected to disaffirm the mortgage and deny obligations thereunder. But having regard to the fact that that suit has not yet
been disposed of, it is impossible now to say whether the defence of the Company in that suit would or would not be successful. If it should be
successful, then assuming malfeasance and breach of trust on the part of the defendants, it is difficult to see how they could be sought to be made
liable for any amounts the liability in respect of which the Company is able successfully to resist.
In this view it, no doubt, becomes unnecessary to say anything further regarding the claim based on the mortgage; but as the question has been
raised and debated before us at considerable length, it seems to me that I might as well set out briefly my view with regard to the contentions On
the findings of the lower Court which have been accepted by us there was no fraud, misfeasance or breach of trust in respect of the loans taken for
the Company from Satyaraju. The whole amount has been credited in the Company''s books and found to have been utilised for the purposes of
the Company. The only question thus remaining with regard to these amounts is as to the rate of interest credited in favour of Satyaraju in the
account books of the Company. It is impossible to agree in this matter with the view taken by the learned District Judge in passing the final decree
in the suit. He appears to think that because these amounts of interest have been credited periodically in the name of Satyaraju loss has been
sustained to that extent by the Company. The contention on behalf of the plaintiffs was not that these amounts were actual payments nor could the
contention, having regard to the circumstances, be that the Company is, for some reason, bound by these credits in such a manner as to prevent
them from resisting the alleged liability of the Company with regard to them. I shall later on deal with the aspect of this question bearing on the
interest in the transaction of the defendants and the non-disclosure of such interest. For the present, however, and apart from any such question,
the only ground on which, even taking these credits of interest as payments actually made, they can be called into question, is that the rate of
interest stipulated for was unreasonable or excessive.
It also follows from the findings of the lower Court that it was clearly necessary for the Company to borrow monies for starting the work of the
Company. If then it was necessary for the Company to borrow and the secretaries have within their rights been borrowing as already found by the
lower Court, then, any fraud, misfeasance or breach of trust could relate only to the rate of interest, and with regard to it, there is absolutely no
allegation or proof that it was possible there and then for the secretaries to borrow any monies on the credit of the Company at this stage at a
lower rate of interest. There is not a scintilla of evidence to which our attention has been drawn to show that in the money market it would have
been possible to raise money on stipulations as to interest different to those on which the loans were taken. The truth, however, would undoubtedly
appear to be that so lon