Case: National Textile Corporation (Mah. North) Limited Vs. Khushalchand Bissessardas Daga

the respondent. In the books of the Company these would be shown as advances made to Messrs Harakchand Mohanlal against the cotton said to be in transit. As the cotton was not received by the Company, ultimately a large amount would be outstanding against Messrs Harakchand Mohanlal, but neither in the books of account of the Company nor in any of its other books or papers would it ever appear that the moneys advanced to messrs Harakchand Mohanlal had gone into the pockets of the respondent. No officer or member of the Company nor even a director, unless he was a privy to the fraud, could have knowledge of this type of fraud practised by the respondent. It was sought to be argued by Mr. Mehta, learned Counsel for the respondent, that the Company had knowledge of the fraud because the auditors of the Company had raised certain objections. It was also sought to be argued by Mr. Mehta that the Company had knowledge because the Manager of the Company, J.P. Dordi, had written two letters dated October 1, 1958 and May 20, 1958 respectively to the respondent. It was further contended by Mr. Mehta that when the Central Government appointed a Committee to investigate into the closure of the mills, the Central Government came to know about the respondents fraud and, therefore, the Company must be deemed to have knowledge of the fraud. None of these contentions need detain us long. The auditors objections related to the Board of Directors allowing the amount due from Messrs Harakchand Mohanlal to remain outstanding and to the failure of the Directors to take steps to recover such amount. From this it does not and cannot follow that the auditors knew that the amounts outstanding against Messrs Harakchand Mohanlal had gone into the coffers of the respondent. The theme of both the said letters of Dordi related to the black position which faced the mills by reason of paucity of funds, and in each of these two letters Dordi had made an earnest appeal to the respondent to recover the amounts due from Messrs Harakchand Mohanlal. The very fact that the auditors and the Manager wanted the Directors to recover the outstandings of Messrs Harakchand Mohanlal shows that the were not and could not be aware that these amounts had really been taken away by the respondent. The investigation which was conducted by the Central Government prior to the issue of the notification under section 18 of the Industries (Development and Regulation) Act, 1951, was for the purposes specified in section 15 of the said Act. It was not an investigation into the fraud committed by the respondent. The object of the said Act was to provide for the development and regulation of certain industries set our in the First Schedule to the said Act. As a result of the enquiry which was triggered by the closure of the mills, the Central Government came to the conclusion that the undertaking, namely the Company, was being managed in a manner highly detrimental to the scheduled industry, namely, textile industry, and the management of the Company was vested by the Central government in the Authorised Controller so that the mills could be revived. The question of the knowledge on the part of the directors of the fraud practised by the respondent is irrelevant. If they were not aware of the fraud practised by the respondent, they themselves were victims of such fraud and dupes of the respondent. If they or any of them knew of the fraud and took no steps with respect thereto, they became privy to the fraud and privy to concealing the knowledge of it from the company. The question is when was anyone in charge of the management of the Company who was not a party to the fraud came to learn about it. On June 25, 1969 all books, papers, vouchers and documents of the Company, including the books of account and the minute-books of the meeting of the Board of Directors, were seized by the police and continued to remain in the custody of the police. Thereafter on July 18, 1959 Nevatia was appointed Authorised Controller. No books of account or other relevant documents or papers were available to Nevatia, and even had they been available, all that Nevatia would have discovered from them would have been that a large amount was due to the Company from Messrs Harakchand Mohanlal. That the respondent had committed criminal breach of trust in respect of the property of the Company and for the purpose of the commission of such fraud had entered into a criminal conspiracy came to light only when a copy of the charge-sheet which was filed by the police came to the knowledge of the Authorised Controller Nevatia. The charge-sheet was filed in Court on March 7, 1960 and a copy of it was forwarded to the Company and was received on March 11, 1960 by the said Desai who after the issue of the notification under section 18-A of the Industrial (Development and Regulation) Act, was appointed by Nevatia as his Secretary. Desai thereafter forwarded the said copy of the charge-sheet, but in no event could it have been prior to March 11, 1960 when Desai himself received the said copy. The period of limitation must, therefore, be taken to have commenced on March 11, 1960. The suit having been filed on February 9, 1963 was, therefore, well within time, whether Article 120 or Article 95 applied. On this finding, the entire claim of the appellants would be in time, and in view of what we have held earlier that the appellants were entitled to continue the suit, a decree should have been passed in favour of the appellants in the sum claimed by them less a sum of Rs. 38,000 in respect of which there was no evidence and which position has been accepted by Mr. Chinoy, learned Counsel for the appellants. This appeal must, therefore, succeed.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]If they are right in this, the period of limitation would not begin to run until the Company obtained knowledge of the fraud, and it would be immaterial whether Article 95 or Article 120 applied, because in either event the suit would be in time since it was filed within three years of the date on which according to the plaint the Company acquired knowledge of the fraud. If, however, Article 36 applies, the suit would be barred by limitation, because according to the plaint the Company came to learn about the fraud of the respondent more than two years prior to the date of the suit. Turning, therefore, first to Article 36, the first condition for the applicability of Article 36 is that the malfeasance, misfeasance or nonfeasance must be independent of contract, which is not the case there as will be presently shown. Contentions similar to those taken before us were advanced before a Division Bench of this Court in (Govind Narayan Kakada v. Rangnath Gopal Rajopadhye)1, I.L.R. 1930(54) Bom. 226. In that case the liquidator of a bank filed an application under section 235 of the Indian Companies Act, 1913, to recover from the agents and directors of the bank various sums of money on the ground of breach of trust, negligence and misfeasance, resulting in loss to the bank. It was contended that the said application was barred by the law of limitation. The Division Bench held that neither Article 36 nor Article 115 nor Article 116 of the Indian Limitation Act applied and the application was governed by Article 120. Marten, C.J., disposed of the contention based upon Article 36 in these words (at pp.:"As regards Article 36, I feel no difficulty. In my judgment the present claim against the Directors for misfeasance or breach of trust is clearly not independent of contract and consequently Article 36 does not apply. In this respect, therefore, I agree with the view of the Allahabad High Court in the matter of the (Union Bank, Allahabad, Limited)2, 1925(47) All. 669, in preference to that expressed by the Lahore High Court in (Bhim Singh v. Liquidator, Union Bank of India)3, 1926(8) Lah. 167. I say this because the relations between the Bank and its Directors are in part governed by numerous Articles in the Articles of Association, including their qualification shares and remuneration, and indeed the very indemnity which they are relying in this case. In my opinion these articles constitute part, though not the whole, of a contract between the Company and its Directors."As we have seen, the respondent was not only a Director but the Managing Director of the Company. Further, he had entered into an agreement dated December 18, 1956 with the Company containing the terms and conditions of his appointment as Managing Director. Under Clause 2 of the said agreement the respondent had agreed to manage the business and affairs of the Company faithfully, diligently, honestly and to the best of his ability and power. The fraud and breaches of trust committed by the respondent cannot, therefore, be said to be independent of contract. In (India Sugar and Henneries Ltd. v. Estate of the late V. Ramalingam)4, A.I.R. 1953 Mad. 694, it was held that Article 36 contemplates an action for compensation for a wrong in the nature of a tort and that the suit to which that article would apply is a suit for compensation, but if the suit was for the recovery of a particular property or a sum of money as such, then the suit cannot fall within the scope of Article 36. The case before the Madras High Court was also the case of a director and the sole managing agent of a company who had gained for himself a pecuniary advantage by availing himself of his fiduciary character. The Court held that in view of the nature of the claim made against him, the suit was under section 88 of the Indian Trusts Act and the only article applicable to such a suit was Article 120.15. We are in respectful agreement with what was laid down in the above two cases, and in our opinion the trial Court was right in holding that Article 120 applied to the suit.The evidence led by the appellants which was not controverted by the respondent clearly establishes that fraud was committed right from the date when the said proprietary concern of Messrs Harakchand Mohanlal was formed up to the end and that the whole thing formed but one integral fraud having as its central object the embezzlement of the funds of the Company by the respondent. In a fraud so conceived, planned and systematically carried out over a period of three years, such act in linked with the other and forms part of a continuous chain and must be taken as the components of an integrated whole. In such a case it is not open to the court to pick up individual acts of fraud and apply to each the period of limitation and say that the period of limitation commenced from the date of the commission of that particular act. Here, there was no question of any initial fraud or any fraud committed to cover up such fraud. The fraud lay in Messrs Harakchand Mohanlal taking away by way of advances moneys from the Company against cotton alleged to be in transit and routing the moneys to the respondent. In the books of the Company these would be shown as advances made to Messrs Harakchand Mohanlal against the cotton said to be in transit. As the cotton was not received by the Company, ultimately a large amount would be outstanding against Messrs Harakchand Mohanlal, but neither in the books of account of the Company nor in any of its other books or papers would it ever appear that the moneys advanced to messrs Harakchand Mohanlal had gone into the pockets of the respondent. No officer or member of the Company nor even a director, unless he was a privy to the fraud, could have knowledge of this type of fraud practised by the respondent. It was sought to be argued by Mr. Mehta, learned Counsel for the respondent, that the Company had knowledge of the fraud because the auditors of the Company had raised certain objections. It was also sought to be argued by Mr. Mehta that the Company had knowledge because the Manager of the Company, J.P. Dordi, had written two letters dated October 1, 1958 and May 20, 1958 respectively to the respondent. It was further contended by Mr. Mehta that when the Central Government appointed a Committee to investigate into the closure of the mills, the Central Government came to know about the respondents fraud and, therefore, the Company must be deemed to have knowledge of the fraud. None of these contentions need detain us long. The auditors objections related to the Board of Directors allowing the amount due from Messrs Harakchand Mohanlal to remain outstanding and to the failure of the Directors to take steps to recover such amount. From this it does not and cannot follow that the auditors knew that the amounts outstanding against Messrs Harakchand Mohanlal had gone into the coffers of the respondent. The theme of both the said letters of Dordi related to the black position which faced the mills by reason of paucity of funds, and in each of these two letters Dordi had made an earnest appeal to the respondent to recover the amounts due from Messrs Harakchand Mohanlal. The very fact that the auditors and the Manager wanted the Directors to recover the outstandings of Messrs Harakchand Mohanlal shows that the were not and could not be aware that these amounts had really been taken away by the respondent. The investigation which was conducted by the Central Government prior to the issue of the notification under section 18 of the Industries (Development and Regulation) Act, 1951, was for the purposes specified in section 15 of the said Act. It was not an investigation into the fraud committed by the respondent. The object of the said Act was to provide for the development and regulation of certain industries set our in the First Schedule to the said Act. As a result of the enquiry which was triggered by the closure of the mills, the Central Government came to the conclusion that the undertaking, namely the Company, was being managed in a manner highly detrimental to the scheduled industry, namely, textile industry, and the management of the Company was vested by the Central government in the Authorised Controller so that the mills could be revived. The question of the knowledge on the part of the directors of the fraud practised by the respondent is irrelevant. If they were not aware of the fraud practised by the respondent, they themselves were victims of such fraud and dupes of the respondent. If they or any of them knew of the fraud and took no steps with respect thereto, they became privy to the fraud and privy to concealing the knowledge of it from the company. The question is when was anyone in charge of the management of the Company who was not a party to the fraud came to learn about it. On June 25, 1969 all books, papers, vouchers and documents of the Company, including the books of account and theof the meeting of the Board of Directors, were seized by the police and continued to remain in the custody of the police. Thereafter on July 18, 1959 Nevatia was appointed Authorised Controller. No books of account or other relevant documents or papers were available to Nevatia, and even had they been available, all that Nevatia would have discovered from them would have been that a large amount was due to the Company from Messrs Harakchand Mohanlal. That the respondent had committed criminal breach of trust in respect of the property of the Company and for the purpose of the commission of such fraud had entered into a criminal conspiracy came to light only when a copy of thewhich was filed by the police came to the knowledge of the Authorised Controller Nevatia. Thewas filed in Court on March 7, 1960 and a copy of it was forwarded to the Company and was received on March 11, 1960 by the said Desai who after the issue of the notification under sectionof the Industrial (Development and Regulation) Act, was appointed by Nevatia as his Secretary. Desai thereafter forwarded the said copy of thebut in no event could it have been prior to March 11, 1960 when Desai himself received the said copy. The period of limitation must, therefore, be taken to have commenced on March 11, 1960. The suit having been filed on February 9, 1963 was, therefore, well within time, whether Article 120 or Article 95 applied. On this finding, the entire claim of the appellants would be in time, and in view of what we have held earlier that the appellants were entitled to continue the suit, a decree should have been passed in favour of the appellants in the sum claimed by them less a sum of Rs. 38,000 in respect of which there was no evidence and which position has been accepted by Mr. Chinoy, learned Counsel for the appellants. This appeal must, therefore, succeed.