IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE THOTTATHIL B.RADHAKRISHNAN & THE HONOURABLE MR. JUSTICE S.S.SATHEESACHANDRAN MONDAY, THE 21ST JUNE 2010 / 31ST JYAISTHA 1932 RFA.No. 298 of 2010() ------------------------------ OS.227/1997 of PRL.SUB COURT, KOTTAYAM .................... APPELLANTS (DEFENDANTS 2,4 & 5) ----------------------------------------------------- 1. THOMAS MATHEW, SANGARAMANGALATH HOUSE, EDAVAM VELIL, ERAVIPEROOR P.O., THIRUVALLA. 2. JOHN MATHEW, ATHIRA HOUSE, NO.270A, PIPELINE ROAD, THRIKKAKARA, COCHIN-682 021. 3. P.K. KOSHY, PLANTHARAYIL HOUSE, PALLIPPADU P.O., HARIPPAD, ALAPPUZHA. BY ADV. SRI.DINESH R.SHENOY RESPONDENTS (PLAINTIFF & DEFENDANTS 1, 3, 6 & 7) ------------------------------------------------------------------------------- 1. THE MALAYALA MANORAMA CO.LTD., REGISTERED OFFICE AT MANORAMA BUILDINGS, K.K.ROAD, KOTTAYAM. 2. THE SPACE AD ADVERTISING AND MARKETING PVT.LTD., REGISTERED OFFICE AT GROUND FLOOR, CRYSTAL COMPLEX, COCHIN, ERNAKULAM. 3. MRS.MARYKUTTY MATHEW, 35/2206 A, CHURCH ROAD, PALARIVATTOM, COCHIN - 682 025. 4. MRS.JAYASREE MENON, W/O.UNNI G.MENON, 261, CHANDRA NAGAR, PALGHAT. 5. UNNI G.MENON, 261, CHANDRA NAGAR, PALGHAT. R1 BY SRI.K.P.DANDAPANI, SENIOR ADVOCATE. R4 & R5 BY SRI.P.G.PARAMESWARA PANICKER, SENIOR ADVOCATE, ADV. SRI.P.GOPAL, THIS REGULAR FIRST APPEAL HAVING BEEN FINALLY HEARD ON 21/06/2010,ALONG WITH RFA NO. 330 OF 2004,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: rs. THOTTATHIL B. RADHAKRISHNAN & S.S.SATHEESACHANDRAN, JJ. ------------------------------------------------------- R.F.A. Nos. 298 OF 2010 & 330 of 2004 ------------------------------------------------------- Dated this the 21st day of June, 2010 J U D G M E N T ~~~~~~~~~~~~~ Thottathil B. Radhakrishnan, J. R.F.A.No.330/2004 is by the 6th defendant and R.F.A.No.298/2010 (initially instituted with an application to exempt from payment of court fee ) is filed by defendants 2, 4 and 5 in a suit for money. 2. The plaintiff alleged that the 1st defendant, a Private Ltd. Company, owes the plaintiff certain amounts due under a transaction relating to booking of advertisements etc. and the 7th defendant, who is the husband of the 6th defendant, had certain meetings with the plaintiff, in terms of which defendants 2 to 5, who are the Directors of the 1st defendant company, are also personally liable for the plaintiff. The defendants, who contested, disputed the liability including the alleged personal liability. R.F.A. Nos.298/2010 & 330/2004 2 3. After taking note of the evidence on record, the court below held in para 11 of the impugned judgment that going through the evidence as a whole it can be seen that apart from the versions of PWs1 and 2, there is no material to show that any meeting had taken place in December 1996 as alleged by the plaintiff and that the defendants 2 to 6 had undertaken to pay the amount personally. Considering the nature of the transaction, the court below was of the view that in all probabilities, some reliable document would have been in existence if such an undertaking was actually made. It was found that there is no documentary evidence such as Minutes of the meeting etc. to prove the meeting as alleged by the plaintiff. Accordingly, the court below concluded that the case of the plaintiff that defendants 2 to 7 personally undertook to make payment cannot be accepted. It was also notice that defendant No.7 is not a Director of the 1st defendant Company, though he is the husband of the 6th defendant, who is admittedly a Director of the 1st defendant Company. 4. With the aforesaid findings, the court below concluded under issue No.1 as follows: R.F.A. Nos.298/2010 & 330/2004 3 “Hence the defendants 1 to 6, the Company and its Directors are to be held liable for payments for the balance amount due as stated above after deducting the payment by Indian Newspaper Society. The plaintiff is entitled to realise such amount with interest due from defendants 1 to 6 and their assets. Issue found accordingly.” 5. Resultantly, the suit stands decreed for realisation of Rs.10,38,033/- from defendants 1 to 6 and all their assets with interest at 12% thereon from the date of suit till date decree and with interest of 6% from the date of decree till date of realisation. 6. In these appeals by defendants 2 to 6 the plea projected is that having found that they had not personally undertaken to make the payments, the decree passed against them merely on the ground that they were Directors of the 1st defendant Company is wholly unsustainable in law and that there is no legal principle on which such findings could stand. It is pointed out that there is no guarantee or any other legal relationship created to fasten liability on defendants 2 to 6 personally. It was also suggested by the learned R.F.A. Nos.298/2010 & 330/2004 4 senior counsel appearing for the appellant in R.F.A.No.330/2004 that the court below, presumably, proceeded as if the 1st defendant was a partnership firm and that could have been the reason why the principles applicable to private limited company and its Directors have been ignored. 7. We may refer to the celebrated work Ghosh: Company Law, which though was not published after its golden jubilee edition, was later brought out with the 13th edition as Ghosh and Chandratre's Company Law with Secretarial Practice. The learned authors have rightly noticed the concept of liability of Directors while dealing with section 5 of the Companies Act. The Company's liabilities are its own liabilities. It is stated in the aforesaid work as follows: “Limited liability is the most cardinal attribute and privilege of a company. It is that celebrated principle of Company Law which limits the liability of a shareholder of a company towards his company and also towards its creditors. On incorporation, a company acquires its own independent personality distinct from the members constituting it and becomes a legal person in the eyes of law. The members of the company R.F.A. Nos.298/2010 & 330/2004 5 are not part owners of the company or its property unlike in the case of partnership firm which does not acquire a separate legal entity distinct from its partners. Hence the members of a company are not personally liable for the company's debts either. The debts of the company are its own independent debts like the property and assets of the company, which arise its own. This proposition of law equally holds good in the case of directors of a company. Directors are regarded as agents and trustees of their company since the company, although a legal person, is not a human person and, therefore, has to act through a human agency. Directors fill the place of such a human agency and act on behalf of and for the company. The directors, being agents of the company are, therefore, not personally liable for contracts purporting to bind their company, provided, of course, contracts are made by them for and on behalf of the company. If, having requisite authority, they make a contract professedly for and on behalf of the company, then the company only is liable for it; if they have no authority to make the contract on behalf of the company, they are still not personally liable on the contract, although they may be liable for damages for breach of an implied warranty of authority. R.F.A. Nos.298/2010 & 330/2004 6 The directors who have duly acted on behalf of the company are not personally liable to the contracting party even if the company's failure to carry out the contract is due to the fault of the directors. Only in the case of a fraud, can the directors be held personally liable. A question of considerable importance invariably arises whether a company's monetary liability can be fastened to its directors and they can be called upon to discharge the company's liability, eg liability towards tax arrears or tax evaded by the company or that in respect of money owed by the company to its creditors, if the company fails to discharge such liability. Where a company fails to discharge its liability, be it by way of taxes or other statutory liabilities, or other dues, can the directors be made personally liable for such dues and accordingly proceeded with, is indeed an important question which often times arises with increasing instances of corporate enterprises failing to discharge such liabilities. As a corollary of the doctrine of corporate personality having an independent entity, neither the shareholders nor the directors of a company can be called upon to discharge the company's tax liability nor can tax arrears due from the company be recovered from the directors personally. R.F.A. Nos.298/2010 & 330/2004 7 Criminal liability of directors for company's failure to pay taxes is one thing, but recovery of the company's tax dues from them is quite another thing. This is the result of the juridical conception of a body corporate, which was established in England a century ago.” 8. With the aforesaid unsurmountable legal proposition being available in favour of the appellant, the learned senior counsel appearing in R.F.A.No.330/2004 also referred as to the commentary under Section 41 in the aforesaid work to the following effect: “A pecuniary obligation cannot be imposed upon the members over and above their statutory obligation to pay their share of contribution to the capital of the company. The doctrine of limited liability protects the members not only from the claims of creditors of the company but also from the obligations, financial or other sought to be imposed by other shareholders of the company.” 9. Having regard to the proposition of law as stated above, we notice that this is a case where it was alleged that one of the Directors had approached the plaintiff and agreed that the Directors R.F.A. Nos.298/2010 & 330/2004 8 would be personally liable. That having been found against by the court below, it was illegal to pass a decree against defendants 2 to 6 personally. No other ground of personal liability of the Directors is pleaded and proved. 10. For the aforesaid reasons, the impugned decree and judgment to the extend it is passed against the defendants 2 to 6 personally and against their assets is vacated and the suit as against defendants 2 to 7 is hereby dismissed with proportionate costs. Having regard to the fact that R.F.A.298/2010 is one instituted by the appellant therein seeking exemption of court fee, we direct that the court fee payable thereon shall be payable by the plaintiff, 1st respondent in that appeal. The benefit of this appeal will accrue to the non-appealing defendants also, however, with no order for costs in their favour. (THOTTATHIL B. RADHAKRISHNAN, JUDGE) (S.S.SATHEESACHANDRAN, JUDGE) ps