Misfeasance proceedings under the Banking Regulation Act, 1949 and the Company Act, 1956.

Subject: Banking Law.

A project work undertaken in the partial fulfillment of B.A.LL.B(Hons) 5th

semester at Dr. Ram Manohar Lohiya National Law University, Lucknow.

Acknowledgement

I have great pleasure in presenting my project on the misfeasance proceedings .This project is the result of my hardwork & perseverance during studies.

I express my felt gratitude to my Banking Law teacher Ms. Seema Siddiqui who has given me the opportunity to prepare a project,.Word fail to express my deepest gratitude to her, who encouraged me & gave valuable suggestions from time to time whenever I needed.

I must thank my Family members & friends for their constant source of corporation & practical contribution in completing this project.

Table of Contents

1.) Objective.

2.) Research Methodology.

3.) Introduction.

4.) Provisions dealing with the misfeasance proceedings under the Banking Regulation Act, 1949 and the Company Act, 1956 and the insolvency Act: Scope and meaning of misfeasance.

5.) The object behind the law.

6.) Acts and omissions by officers( s. 538 of the company act) which constitute misfeasance .

8.) The test of ascertaining misfeasance on the part of the officers.

9.) Difference in section 542 and 543 of the company Act.

10.) Who can sue and can be sued for misfeasance.

11.) Essentials of misfeasance( The test of ascertaining misfeasance on the part of the directors.)

12.) Whether the heirs or legal representative would be liable for the misfeasance?

13.) Whether misfeasance proceedings include only tortious liability and civil liability or criminal liability also?

14.) When the court may relieve the accused for misfeasance.

15.) Building a conceptual track with some recent pronouncements of the court.

16.) Conclusion and suggestions.

17.) Bibliography.

Table of cases

1.) Union of India v. S.P. Mathur [2009]89SCL6(All).

2.) Official liquidator, Dhavalgiri paper mills private limited v. Chinubhai Khilachand,(2003) 114 Comp Cas Guj.

3.)White and Osmond(Parkstone) limited, Re 1976 JBL 225.4.)Official liquidator, Supreme Bank Ltd. V. P.A. Tendulkar (1973) 1 SCC

602.5.) re, Union Bank of Allahabad, AIR 1925 All 519

6.) K. Madhava Nayak and Ors. v. Popular Bank Ltd. AIR 1970 Ker 131.

7.) Official Liquidator v. Ram Swarup (1997) 88 Com Cases 569.

8.) Westloowe Storage and distribution Ltd., Re, (2002) 2 BCLC 590 (ChD).

9.) Vishwa Pal Sharma v. Sukh Sancharak Co. Ltd. (1962) 32 Com Cases 947, 952.

10.) Chamundi Chemicals and fertilizers Ltd. v. Cherian (M.C.) (1993) 77 Com Cases 1 (Kar).

11.) Official Liquidator of Aryodaya Gng anf Mfg. Mills Ltd. v. Gulabchand Chandalia 2002 CLC 1303 (Guj).

12.) Official Liquidator v. Ramanarayan 1987) 1 ILR 362.

13.) Meenachil Ltd. v. Chacko Chacko ( 1962) 32 Com Cases 953.

14.) Official Liquidator of Dhavalgiri pare mills Ltd. v. Chinubhai Khilachand 2002 CLC 1376 (Guj).

15.) Re Anglo- Austrian Printing and Publishing Union [1895] 2 Ch 891.

16.) Hanuman Bank Ltd., In re(in liquidation), (1964) 34 Com Cases 640(Mad DB).

17.) Re, F. and C. Osler (India) Ltd. (1978) 48 Com Case 698.

19.) Ajay G. Podar v. Official Liquidator of J.S. and W.M., CA 4597 of 2008, decided on 22 July 2008).

20.) Official liquidator, Dhavalgiri paper mills private limited v. Chinubhai Khilachand,(2003) 114 Comp Cas Guj.

21.) In Re Kingston Cotton Mill(N0. 2) (1896) 2 Ch 279 (CA).

22.) Re Canadian Land Reclaiming and colonizing co. 1880) 14 Ch D 660(CA).

23.) V. Subbayya v. C. T. Machayya AIR 1942 Mad 365.

24.) M. A. Malik v. V. S. Thiruvengadaswami Mudaliar AIR 1950 Mad 208.

25.) re, Etic Ltd. 1928 Ch 861

26.) Ex parte, Pelly 1882 21 Ch D 492.

27.) Vemuri Parandhmaiah v. R. Narshimha Rao, (1950) 20 Com Cases 1

1.) Objective.

The objective of the project is to study the misfeasance proceedings under the Banking Regulation Act, 1949 and under various other laws mainly the Company Act, 1956 and the Insolvency Act, 1986 as it is not possible to have a good and meaningful discussion on the misfeasance proceedings without discussing these laws. The author will focus on some

debates such as whether the creditors, shareholders can also initiate proceedings against the directors or only the liquidator, whether the legal heirs and legal representative of the delinquents would be liable to make good the loss suffered by the company and the creditors after the death of the delinquents. The project covers the responsibilities of the directors to the company and the creditors and offers suggestions for reform and so, the project has been attempted to made from a normative prospectives.

2.) Research Methodology.

The author has used the law library, legal E-databases in the research so, the research method is doctrinal.

3.) Introduction.

The misfeasance proceedings against officers of the company are capable of covering the full range of duties owed by a director to his company and are not restricted to ethical or fiduciary duties.1There is no such distinct wrongful act known to law as “misfeasance”. The section does not create any new right or offence, but only provides a summary and cheap remedy for enforcing such rights as are otherwise enforceable by law. There are two conditions of liability under the section, i.e. an act in the nature of breach of trust, and an act which results in loss to the company.2The act may be that of commission or omission. Gross negligence on the part of a director which gives opportunity to others to misappropriate would be misfeasance.

An application under section 235, 543 of the Companies Act and Section 45-H of the Banking Regulation Act, 1949 has to be made within five years from the date of the order of winding up or of the first appointment of the liquidator3or of the alleged offence, whichever is longer. The period of five years begins to run from the date of the first appointment of the liquidator or of the alleged offence, whichever is longer. The period of five year begins to run from the date of the first appointment of the liquidator.

Sections 38-44 of the Banking Regulation Act lay down the provisions for winding up of a Company. The wounding up procedure includes prosecution of the delinquent directors and

1 Westlowe Storage and Distribution Ltd., Re,[ 2000] 2 BCL 590 Ch. D.

2 Official Liquidator v.Dr. Shailendra Nath Sinha,( 1973) 43 Comp Cas 107 Cal.

3 An administrator appointed by the court who takes control of the company, collects its assets, pays its debt and finally distributes any surplus among the members in accordance with their rights.

section 45 –F4 applies to it as was held in the case of Dr. Sailendranath Sinha v. Jasoda Adhikari 5.

The liability of the directors for misfeasance is in the nature of tort or a quasi-criminal responsibility.6 This section applies to all kinds of winding up. Besides the liquidator the creditor or contributory may also apply. The Insolvency Act, 1986 also contains the procedure for misfeasance but there is a debate as to whether the creditors, the shareholders can also initate the misfeasance proceedings against the directors or the officers of the company or only the liquidators on the behalf of the creditors and the company.

There are many other debates such as whether the heirs or the legal representatives of the delinquent directors or officers can be made liable to compensate the loss suffered by the company and the creditors or the liability also dies with the death of the delinquents. All these debates would be discussed in the project.

4.) Provisions dealing with the misfeasance proceedings under the Banking Regulation Act, 1949 and the Company Act, 1956 and the insolvency Act: Scope and meaning of misfeasance.

The company Law.

In general misfeasance means Court action initiated by a creditor, liquidator, official receiver, or stockholders (shareholders) to examine the conduct of any past or present officeholder of a firm. .If found guilty, the defendant (misfeasor) may be forced to repay or compensate the firm for misappropriated or misapplied funds or property of the firm.7 A term used in tort law to describe an act that is legal but performed improperly.8

4 45F. Documents of banking company to be evidence. —(1) Entries in the books of account or other documents of a banking company which is being wound up shall be admitted in evidence in all [legal

proceedings]; and all such entries may be proved either by the production of the books of account or other documents of the banking company containing such entries or by the production of a copy of the entries, certified by the official liquidator under his signature and stating that it is a true copy of the original entries and that such original entries are contained in the books of account or other documents of the banking company in his possession. (2) Notwithstanding anything to the contrary contained in the Indian Evidence Act, 1872 (1 of 1872), all such entries in the books of account or other documents of a banking company shall, as against the directors, 8[officers and other employees] of the banking company in respect of which the winding up order has been made 9[***], by prima facie evidence of the truth of all matters purporting to be therein recorded.

5 AIR 1962 Cal 490.

6 Vemuri Parandhmaiah v. R. Narshimha Rao, (1950) 20 Com Cases 1.

7http://www.businessdictionary.com/definition/misfeasance-proceedings.html#ixzz14DBpxk3Z retrieved on 2010- 10-02.

8 West's Encyclopedia of American Law.

This is when an officer / insolvency practitioner / manager / promoter of a company breaches the duty of care that is owed. Any one who breaches their duty is in breach of their "fiduciary duty".

The term misfeasance means breach of duty involving the company in a loss. Under section 412 when a company is in liquidation its part and present directors, promoters, managing agents and auditors are liable to make good all losses sustained by the company on account of negligence of duty or breach of trust if misfeasance proceeding are initiated against him within the prescribed time. Some of the leading decided cases in this respect are explained in many cases.

There was an appeal by one of the auditors against a judgment by Vaughan Williams by which the auditors were declared liable for the payment by the company of certain dividends out of capital. It having been decided by the court of appeal in the previous action in connection with this liquidation that the auditor of the limited company is an officer of the company and therefore liable for misfeasance proceedings. The auditor had neglected to bring to the notice of the shareholders that the assets shown in the balance of the company were over valued leading to a payment of dividends out of capital. The auditor of the company was charged of negligence for having relied upon stock sheets are prepared by the officers of the company which were designed by the manager of the company.

Considerable discussion centred round the meaning of the expression "mis-feas-ance" and the scope of liability sketched by the section. Copious references were made to the English and Indian decisions. We do not think it necessary to survey the entire gamut of these decisions. As we understand them, certain propositions appear to be well settled. Before liability can be attracted under the section it must be shown that the person proceeded against has been guilty of misapplication, retainer, misfeasance, etc., resulting in loss to the Company as a direct consequence of the act complained of. It was argued that mere non-feasance would not be included within the purview of the section . The observations in some cases seem to countenance such a view. But the view of Jessel M. R. in Ex parte, Pelly9 the views expressed in In re, Kingston Cotton Mills Co. (No. 2) 1896 Ch 279, and the decision of Maugham J. in In re, Etic Ltd. 10 modelled -- covers a breach of trust in the wide sense, including a breach of trust by negligence or something of that kind. The same view has been taken in some of the Indian decisions also. (See V. Subbayya v. C. T. Machayya11 and M. A. Malik v. V. S. Thiruvengadaswami Mudaliar 12). The facts presented here and the conclusions that we have formed, do not warrant any greater elaboration or a more detailed examination of the legal position.

Under s. 457 of the Companies Act, a liquidator has wide powers to ensure fair and equitable distribution of its assets. These powers are general in nature, and their scope and extent are well known. In addition, the Official Liquidator also has the power to compel a director or an officer to restore any wrongful benefit arising out of misfeasance in the course of winding up. Under s.

9 1882 21 Ch D 492.

10 1928 Ch 861.

11 AIR 1942 Mad 365.

12 AIR 1950 Mad 208.

543, the Liquidator can exercise this power by making an application to the Tribunal. However, that application has to be made, according to s. 543(2), within five years from the date of the order of winding up, or of the first appointment of the liquidator, or of the misfeasance, whichever is the longest. The question that arises is whether the Official Liquidator can resort to certain exclusionary provisions in the Companies Act in order to mitigate the effect of s. 543(2). 13

The principles of misfeasance have been ret rated in many cases such as in Official liquidator, Supreme Bank Ltd. V. P.A. Tendulkar14. Some of them are:

1.) There must be some nexus between the fraudulent trading or purpose and the extent of liability.

2.) The liability arises up only when the company is winding up.3.) Fraudulent trading connotes real dishonesty-according to current notions of fair trading

among commercial men, real moral blame.4.) When the fraud is committed upon single creditor in a single transaction, then this section

is not attracted.5.) A liquidator who negligently admits claims is also held liable under the section.6.) There must be specific allegation against each director or officer alongwith a

qualification of loss. Mere allegations against former directors cannot be held sufficient for maintaining an application under this section.15

Misfeasance according to James LJ in Re, Canadian Land Reclaiming and colonizing co.16

“means misfeasance in the nature of a breach of trust, that is to say, it refers to something which the officer of such company has done wrongly by misapplying or retaining in his own hands any moneys of the company, or by which the company ‘s property has been wasted, or the company’s credit improperly pledged. It must be some act resulting in some actual loss to the company.”In Re Kingston Cotton Mill(N0. 2)17Lopes LJ said“ The leaned judge in the court below held that misfeasance covered any misconduct by an officer of the company as such for which officer might have been sued apart from the section. In my judgment this is too wide. It would cover any act of negligence-any actionable wrong by an officer of a company which did not involve any misapplication of the assets of the company. The object of s. 10 of the Companies(Winding up) Act 1890) is to enable the liquidator to recover any assets of the company improperly dealt with by any officer of the company, and must be interpreted bearing that object in view. It doubtless covers any breach of duty by an officer in his capacity of officer resulting in any improper misapplication of the assets of property of the company.”

13 Ajay G. Podar v. Official Liquidator of J.S. and W.M., CA 4597 of 2008, decided on 22 July 2008).14 (1973) 1 SCC 602.

15 Official liquidator, Dhavalgiri paper mills private limited v. Chinubhai Khilachand,(2003) 114 Comp Cas Guj.

16 (1880) 14 Ch D 660(CA).

17 (1896) 2 Ch 279 (CA).

“Misfesance” means misfeasance in the nature of a breach of trust, that is to say, it refers to something by which the company’s property has been wasted. Making a false entry of realization of an amount which has resulted in loss to the company amounts to misfeasance.18

For example in the case of Re, F. and C. Osler (India) Ltd.19 it was held that where the directors willfully shut their eyes to the acts of management by the managing or whole time director of directors, abstain from making enquires and recklessly approve the acts of management, they cannot, escape liability, as their conduct, in such cases will amount to wilfull misconduct. In such cases they are guilty of misfeasance by being deliberately negligent.Undue gainMisfeasance may comprise in something which causes loss to the company or undue gain to directors or any other person.

Under the Banking Regulation Act, 1949.

Both under section 235 of the companies Act, 1913 and s 543 of the company Act, 1956 read with section 45-H of the Banking Companies Act, misfeasance proceedings have to be initiated by an application. . Section 45H of the Banking Regulation Act, 1949 deals with the misfeasance committed by the directors, managers, liquidation officers and any other person. The Section is deliberately framed to bring all the fraudulent persons to book. The object of proceeding under Section 543 of the Companies Act1956 is to is to assess damages against delinquent directors. Under Section 543(i)(B) the court can compel then Director, Manager, Liquidator or Office of the company, to repay or restore the money or the property or any part thereof respectively with interest at such rate as the court may deem fit or to contribute such sum to the asset of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the court thinks fit.

Under the insolvency Act, 1986.

If the directors breach their obligation to the company’s creditors, then, the liquidator on behalf of the company or the creditors who wishes to bring breach of duty proceedings against a director might well find help in the shape of s 212 of the Insolvency Act. It provides a liquidator20 with the right to initiate what are usually known as ‘ misfeasance proceedings’ against certain persons, including officers of the company. Over the years, the proceedings have been frequently brought by the liquidators against the directors pursuant to section 212 and its precursors. But, s 212 does not take one too far as the section does not create any new rights. For a misfeasance action to succeed under s 212, it must be founded on some action in relation to which the company could have initiated proceedings prior to winding up, namely

18 Hanuman Bank Ltd., In re(in liquidation), (1964) 34 Com Cases 640(Mad DB).

19 (1978) 48 Com Case 698.

20 As well as other possible applicants, namely, the official receiver, a creditor and a contributory.

a breach of any fiduciary or other duty in relation to the company21; so under s 212 an applicant must ‘establish actionable wrongdoing by the respondent independently of s 212’22. The role of s 212, in accordance with its legislative precursors, is essentially procedural as it provides an alternative summary procedure which is designed to facilitate recovery of assets improperly dealt with, and to enable the liquidator to obtain compensation for misconduct which had caused loss to the company.23

What happens if it is proved?

The position has to be completely restored to the situation it was prior to the act.

Contribution by the directors by way of compensation.

5.) The object behind the law.

The object of the law is to impose upon the directors three duties in order to prevent the fiduciary duty which exists between the directors and the creditors. The three duties are

i.) To avoid fraudulent trading;

ii.) Not to engage in wrongful trading;

iii.) And to take into account he interests of the ceditors when their company is in a financial difficulty.

6.) Acts and omissions by officers( s. 538 of the company act) which constitute misfeasance .

Section 538 contains a long list of offences for which officers of a company in winding up are made punishable with imprisonment and fine. Following offences are covered by the section.

i.) Failure to discover to the liquidator to the best of knowledge, fully and truly, the property of the company and how and to whom and for what consideration the company disposed of any property. This does not include disposition in the ordinary course of business.

ii.) If any officer makes any material omission in any statement relating to the affairs of the company.

iii.) After the commencement of the winding up, any officer prevents the production of any book under the winding up, but fails within one month to inform the liquidator.

7.) The test of ascertaining misfeasance on the part of the officers.

21 Re Simmons Box (Diamonds) Ltd. { 2000} BCC 275.

22 Oditah, F, ‘Misfeasance proceedings against company directors’ [1992] LMCLQ 207 at 208.

23 Re B Johnson and Co. Builders Ltd. [1955] Ch. 634.

In the case of White and Osmond(Parkstone) limited, Re24 it was held that what is manifestly wrong is if directors allow a company to incur credit at a time when the business is being carried on in such circumstances that the company will never be able to satisfy it. However, there is nothing wrong in the fact that the directors incur credit at a time when, to their knowledge, the company is not liable to meet all its liabilities as they fall due.

8.) Difference in section 542 and 543 of the company Act.

The section 542 of the company Act deals with fraudulent conduct of the directors and section 543 about the misfeasance committed by the directors and other officers of the company. The fraudulent conduct involves the element of mens rea which makes it a criminal act while misfeasance involves breach of the common law duty i.e. the duty to take care. But it is not always that misfeasance does not involve intention to defraud. All the acts of fraud come under misfeasance but all misfeasance are not necessarily fraud( malfeasance). It is practically very difficult to draw a line between misfeasance and fraud and many times they overlap. The court have decided some acts of the directors as misfeasance while the same acts have been declared as fraud in some other cases by the court. Hence, it depends upon the facts and circumstances of each case as whether a particular act is misfeasance(under s 543) or fraud( s. 542).

6.) Who can sue and can be sued for misfeasance.

The creditors, the liquidators and the contributors can sue the directors, liquidators and other officers of the company under misfeasance proceedings.

The insolvency Act, 1986 does not give the right to the creditors and shareholders to sue the directors under misfeasance proceedings on the basis of the argument that the rights of the creditors and shareholders are not directly affected by misfeasance and neither there exists any direct duty from director to the creditors and shareholders. Hence, the company can only bring a suit against the directors for the loss suffered by it and by the creditors as there exists a fiduciary duty between the director and the company. 25

While the court in some cases such as Re Anglo- Austrian Printing and Publishing Union26

has held that the creditors also have the right to initiate misfeasance proceedings against the directors pursuant to s 212(3) of the Insolvency Act, 1986.

Under the company Act and the Banking regulation Act the picture is very much clear. But the problem arises as to after the death of the delinquents whether the liability to compensate also dies or it passes on to his heirs and legal representatives. According to the sections 235

24 1976 JBL 225.

25 Sealy, L, ‘ Directors’ duties-an unnecessary gloss’ [1988] CLJ 175 at 177. Sealey points out to s 309 of the Companies Act 1985.

26 [1895] 2 Ch 891.

and 543 the liability does not pass to the heirs and legal representatives but the compensation for the loss suffered by the company and creditors can be recovered from the asset of the delinquent under some other law by filing a separate suit.

7.) Essentials of misfeasance( The test of ascertaining misfeasance on the part of the directors.)

Misfeasance may comprise in something which causes loss to the company or undue gain to directors or any other person. Errors in accounting practices cannot amount to misfeasance. The charge was leveled on the basis of the chartered accountant’s report that the directors followed erroneous accounting practices by which losses were suppressed and the value of the fixed assets were enhanced. But it was not shown by the official liquidator that by reasons of the practice any loss was caused to the company or any official liquidator that by reasons of the practice any loss was caused to the company or any gain was made by directors. The charge was dismissed and no further inquiry was allowed.

In the case of Official Liquidator of Dhavalgiri pare mills Ltd. v. Chinubhai Khilachand27it was held that material should be produced by the liquidator or the contributor to show specific acts of negligence on the part of the directors. For example when the company’s claim against some of the creditors became time –barred because the directors had no access to the books of account, this was not held to be an act of misfeasance on the part of the directors.

In the case of Meenachil Ltd. v. Chacko Chacko,28 it was held that the liquidator’s report which makes allegations that certain sums were due from certain directors and prays that the court may be pleased to take action against them, but does not give particulars, does not amount to an application under section 235 of the Companies Act, 1913.

11.) Whether the heirs or legal representative would be liable for the misfeasance?

The section provides a summary remedy to determine the amount payable by delinquent director. The section provides a speedy remedy by the misfeasance proceedings. A misfeasance can claim against the company officers is capable of covering the full range of duties owned by director to a company and is not restricted to ethical or fiduciary duties.29The misfeasance proceedings are based on the common law duty of care.30

27 2002 CLC 1376 (Guj).

28 ( 1962) 32 Com Cases 953.

29 Westloowe Storage and distribution Ltd., Re, (2002) 2 BCLC 590 (ChD).

30 Ibid.

The liability is as in tort or quasi criminal and not criminal. The widow, son, or the legal representative could not be made responsible for anything which her husband/father did as a director or in any other capacity for which he could be made liable under this section.31

In the case of Official Liquidator v. Ramanarayan,32it was held that the language of the section does not empower the liquidator to initiate the proceedings against the heirs of the deceased delinquent directors.

12.) Whether misfeasance proceedings include only tortious liability and civil liability or criminal liability also?

In the case of Official Liquidator of Aryodaya Gng anf Mfg. Mills Ltd. v. Gulabchand Chandalia33 it was held:

“ The aforesaid decisions as well as various other decisions referred to by A Ramaiya in the guide to companies act, (2001-15th edn pages 3766 to 3773) indicate that the liability which is enforced under this section is a liability in the nature of tort or a liability in the nature of quasi criminality and is founded on principle that the director who has caused loss to the company by an act which amounts to misappropriation, breach of trust, misapplication or retention should make good the loss. It provides a speedy remedy to determine the amount payable by such director. The section thus provides a speedy remedy of payment of compensation to the company by an act which amounts to misappropriation, breach of trust, misapplication or retention should make good the loss. “

In the case of Chamundi Chemicals and fertilizers Ltd. v. Cherian34 it was held that :

“The proceedings are of quasi judicial and of serious nature. They are independent of whether or not the person proceeded against may be criminally liable for any offence disclosed by the facts of the case. “

In the case of Official Liquidator v. Ram Swarup35

“ It is not necessary for the liquidator to prove any such things as criminal conduct on the part of the directors. Proceedings under the section are of civil nature and, therefore, the question of establishing mens rea does not arise.”

13.) When the court may relieve the accused for misfeasance.

31 Vishwa Pal Sharma v. Sukh Sancharak Co. Ltd. (1962) 32 Com Cases 947, 952.

32 1987) 1 ILR 362.

33 2002 CLC 1303 (Guj).

34 (M.C.) (1993) 77 Com Cases 1 (Kar).

35 (1997) 88 Com Cases 569.

Under section 633 of the Company Act, 1956 in any proceeding for negligence, default, breach of trust or misfeasance, if it appears to the court that an officer of a company may be liable for the act complained of but that (i) he has acted honestly and (ii)reasonably and (iii) having regard to the circumstances of the case, he ought fairly be excused, the court may grant relief from the liability.

The applicant must prove that these conditions exist36.Such relief may be partial or complete . It may be on certain terms or unconditional. According to s 633(2) relief may be granted only in respect of liability under the Company law, 1956 and no relief for offences under other Acts.

14.) Building a conceptual track with some recent pronouncements of the court.

i.) Union of India v. S.P. Mathur .37

In the present case pleading and the evidence do not show that respondents had in any way benefited from the subject transactions or had gained and retained any pecuniary benefits and committed breach of trust to recover any amount from him. Further, there is nothing to show that the bank had taken any steps to recover the amount in the period of ten years. In the circumstances the State Bank of India may be justified in recovering the amount from the borrowers but the directors of the Bank who had regularised these accounts, or sanctioned additional or increased loans cannot be held responsible for damages in the misfeasance proceedings.

ii.) K. Madhava Nayak and Ors. v. Popular Bank Ltd.38

In this case a Company there were manipulation in accounts by the directors. Under section 543 of Companies Act, 1956 and section 45H of Banking Companies Act, 1949 an application was filed which sought to make respondents-directors liable for misfeasance and breach of trust in relation to company. The liquidator contended that the respondents did not exercise adequate control in matter of advances of company’s funds, advanced large amount without taking adequate securities for advances and it became impossible to recover whole or substantial portion of advances . Trial Court held respondents liable for misappropriation of funds – appeal against decision of Trial Court – directors parties to falsification of bank’s accounts by making entries relating to fictitious advances – directors responsible for preparation and acceptance of false balance sheet . It was held that section 45 –H applicable to case of misapplication of bank’s funds – directors liable to repay money or property as Court decided - decree passed by Trial Court confirmed with certain modifications.

15.) Conclusion and suggestions.

36 In re, Union Bank of Allahabad, AIR 1925 All 519.

37 [2009]89SCL6(All).

38 AIR 1970 Ker 131.

The duty to take into account the interests of the creditors and the company is solely based on the common law and equitable principles. Thee are several issues in the law which are still unclear and need to be worked out such as drawing a line between fraudulent act of the directors and misfeasance as the former attracts a civil as well as criminal liability while the latter only attracts civil liability in the form of compensation.

Another controversial issue is whether only liquidators could initiate a proceeding against the delinquents or the creditors and shareholders as well.. It has been held that creditors have no right to bring out a proceeding against the directors and in the words of Morey Mc Donald, ‘ a right without a remedy is worthless. Hence, there is need of codification of the duties of the directors towards the creditors and shareholders and they should also get the right to initiate proceedings as is proposed in the Company Law Reform Bill by enlarging the scope of s 459.

The insolvency proceedings are not applicable on companies which are registered under the company Act, 1956 but the banking companies which are not registered under the Act are governed by the insolvency Act. Hence, all these drawbacks have to be removed either by a Bill such as the Company Law Reform Bill or by judicial activism

The final thing to say is that, with any principles and rules that regulate directors’ obligations to ceditors, there must be a balance. Directors must take their responsibilities seriously and, where their company is in potential financial danger, they must act prudently. However, it must be remembered that directors can only obtain so much information and advice and even if they do this, they might make wrong but honest decisions for which they must not be made liable. Consequently, the obligations imposed upon the directors must be realistic as Justice Michael Kirby, a judge of the Austrailian High Court said:

The need for effective checks upon, and appropriate standards for, company directors is obvious. The challenge before the law makers is to establish a regime which will provide these checks of the company and its officers to perform the economic functions for which the corporation was established.39

14.) Bibliography.

I.) Primary Sources1.) Statutes

8.) The Banking Regulation Act, 1949.9.) The Company Act, 1956.10.) The Insolvency Act, 1986.11.) The Code of Civil Procedure, 1908.12.) The Criminal Procedure Code.13.) The Company Law reform Bill.

2.) Cases

39 In an address to the Australian Institute of Company Directors, Tasmanian Divison, 31 March 1998 and quoted in Pascoe, J and Anderson, H’ Personal recovery actions by creditors against company directors’ (2002) Insolvency Law Journal 205 at 228.

Already mentioned in the table of cases.

II.) Secondary Sources.

1.)Booksi.) P.M. Bakshi( ed) and M.L. Tannan, the Banking Law.ii.) Avtar Singh, The Company Law, 15th edn, Eastern Book Company.iii.) Ramaiya’s guide to the Company Act, 16th edn, Wadhwa Publication,

Nagpur.iv.) Banking and Financial services Regulation, 3rd edn, Butterworths,

LexisNexis, New Delhi.

2.)Websites

i.) www. manupatra.com

ii.) www.lexisnexis.com

iii.) www.westlaw.com

iv.) www.practicallawyer.com

v.) www.legalserviceindia.com