Full Judgment Text
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PETITIONER:
THE OFFICIAL LIQUIDATOR
Vs.
RESPONDENT:
RAGHAVA DESIKACHAR & ORS.
DATE OF JUDGMENT23/08/1974
BENCH:
REDDY, P. JAGANMOHAN
BENCH:
REDDY, P. JAGANMOHAN
BEG, M. HAMEEDULLAH
ALAGIRISWAMI, A.
CITATION:
1974 AIR 2069 1975 SCR (1) 890
CITATOR INFO :
RF 1991 SC1654 (43)
ACT:
Code of Civil Procedure--O.41, r. 27--Scope of.
HEADNOTE:
Respondent No. 5, who was the Managing Director of a limited
company, resigned his post and in his capacity as a
shareholder filed an application in the District Court for
compulsory winding up of the company, which was ordered.
The Official Liquidator made an application before the
District Judge that as the four Directors, respondent 1 to
4, had illegally, withheld or retained certain amounts, they
became liable to refund them. Contesting this application
respondents 1 to 4 requested that they might be allowed to
cross examine respondent no. 5, which application was
rejected. On appeal the High Court set aside the order of
the District Judge and remanded the case to the City Civil
Court, Bombay to record additional evidence under Order 41
Rule 27, Code of Civil Procedure.
On appeal it was contended in this Court that the High Court
was wrong in directing additional evidence to be allowed
under this Order.
Dismissing the appeal,
HELD : The High Court rightly ordered that additional
evidence be recorded in this case. There was no
justification whatsoever for the District Court to reject
the evidence which the respondent had intended to lead or to
disallow the production of documents. [895 H; 896 A]
Under O. 41 r. 27 it is only where the Court had improperly
refused to admit evidence or where the appellate court
required additional evidence to be recorded in order to
enable it to pronounce judgment that it could make such an
order. Under cl. (b) of this rule the Court may require
additional evidence either to enable it to pronounce
judgment or when it may require additional evidence to be
recorded for any other substantial cause, [894 A-B]
Arjan Singh v. Kaetar Singh and others [1951] SCR 258, state
of U.P. V. Manbodhan Lal Srivastava, [1958] SCR 533,
Municipal Corporation for Greater Bombay v. Lala Pancham of
Bombay, [1965] SCR 542 at 548 referred to.
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JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1283 of
1967.
Appeal from the Judgment & Decree dated the 22nd March/26th
April/26th June, 1963 of the Bombay High Court in Appeal No.
38 of 1959.
V. S. Desai and S. K. Gambhir for the appellant.
S. T. Desai, Ramesh D. Divan and R. P. Kapur, for the
Respondent Nos. 1-4.
R. M. Mehta, S. K. Dholakia and R. C. Bhatia, for the
Respondent No. 5.
The Judgment of the Court was delivered by
JAGANMOHAN REDDY, -J-This appeal is by certificate against
the judgment of the High Court of Bombay varying the
judgment and decree passed against respondents 1 to 4 by the
District Judge of Jagpur on an application under s. 235 of
the Indian Companies Act 7 of 1913-hereinafter called the
Act’.
891
It appears that in or about April 1949 the Industrial &
Agricultural Engineering Company (C.P.) Ltd.-hereinafter
referred to as the Company’ was formed under the Act with
its registered office situated at Nagpur. From the date of
the Company’s incorporation till August 27, 1952 one
Shantilal Nemchand Shah respondent 5 was the Managing
Director, while respondents 1 to 4 were the Directors of the
Company. On August 27, 1952, respondent 5 resigned as
Managing Director and in his place two Directors C.V.
Krisbnamurthi respondent 2 and M. Ganpatram respondent 3
were appointed Directors. These two new Directors were the
employees and Directors of a concern known as Industrial &
Agricultural Engineering Company (Bombay) Ltd.-hereinafter
called the Bombay Company’. Respondent 4 T. K. Shamu is the
cousin of respondent 1 Raghawa Desikachar. There was also a
partnership firm consisting of respondent 1 and some others.
The office of this partnership was located in the office of
the Bombay Company. After August 27, 1952, respondent 5
having resigned the office of Managing Director was only a
shareholder and it transpired that as the Company was not
making profits, the Directors called a meeting of the
shareholders of the Company on July 29, 1954, in order to
obtain a Special Resolution for voluntary liquidation of the
Company. Even before this meeting took place, respondent 5
as share-holder of the Company filed an application on July
26, 1954 in the District Court at Nagpur against the
Company, respondents 1 to 4 and other parties praying for an
order for compulsory winding up of the Company. The
District Judge passed an order on July 13, 1955 directing
compulsory winding up of the Company and appointed one K. S.
Misra as the Official Liquidator of the said Company. The
Official Liquidator Misra made a report to the District
Court on April’ 28, 1956 asking the Court to pass an order
for the public examination of respondents 1 to 4-the
Directors of the Company. The District Judge passed the
order prayed for under s. 196 of the Act on July 7, 1956.
Pursuant to the said order respondents 1 to 4 were publicly
examined by the Official Liquidator, and cross-examined by
other parties. The Official Liquidator also asked for the
examination of respondent 5 who however was directed by the
District Judge to be present in the Court. But since the
District Judge was not in a position to know why and for
what purpose respondent 5 was to be examined he directed the
official Liquidator or Mr. Mani to make an application for
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that purpose. On June 29, 1957 the Official Liquidator
stated that he did not want to examine respondent 5. Again
on July 10, 1957 the Official Liquidator requested the Court
to examine respondent 5 and the learned Judge passed an
order on the same day directing examination of respondent 5
at 3 P.M. on that day-
892
O July 11, 1957, the Official Liquidator made an application
that as the four Directors respondents 1 to 4 had illegally
withheld or retained certain amounts specified therein they
became liable to refund or repay the amounts with costs and
with such interest as the Court deems fit. The items which
were said to- be withheld were as follows
Commission in respect of sales of General
Motors pumping sets worth about Rs. 5 lakhs at
4 per cent. to Bombay
Rs. 20,000-0-0
(2) Three percent commission on General
Motors supplied, transaction worth Rs. 12
lakhs. Rs. 36,000-0-0
(3) Commission due on other articles supp-
lied to Model Mills and Power House etc.
Rs. 30,000-0-0
(4) For stock, furniture, motor car etc.
purchased by the Bombay Company at a very low
price. The amount mentioned being the
difference between the real price and the
purchase price Rs. 30,000-0-0
(5) Improperly remitted to a sister concern
I. A. R. C. (Hyderabad) Ltd.’ Rs.
2,686-3-0
(6) Commission on the sale of’ a boiler
manufactured by Stein-Muller to M. P.
Electricity Board for Itarsi Power House
through the instrumentality of the Nagpur
Company. Rs. 1,30,000-0-0
TOTAL Rs. 2,48,686-3-0
Thereafter the Official Liquidator applied for certain
amendments to the application and for impleading respondents
1 to 4-Directors of the Company in liquidation. The
District Judge by his order dated December 7, 1967 allowed
the application and accordingly the application dated July
11, 1956 was amended. Respondents 1 to 4 by their reply
dated December 27, 1957, showed cause against the said
application of the Official Liquidator and requested that
they may be allowed to lead evidence in connection with the
charges mentioned in the application of the Official
Liquidator. They also requested that they be allowed to
cross-examine respondent 5 Managing Director of the said
Company. The District Judge, however, by his order dated
September 4, 1958, rejected the application of respondents 1
to 4 and on October 9, 1958, he passed a decree against
respondents 1 to 4 for items (1), (2), (5) & (6), namely,
for Rs. 20,000/-; Rs. 36,0001-; Rs. 2,686/3/- and Rs.
1,30,000/- with interest at 4 percent. p. a. The District
Judge further directed the Official Liquidator to furnish a
statement in respect of the amounts due on certain charges
which was accordingly furnished by him on October 23, 1958.
On October 25, 1958, the District Judge ordered respondents
1 to 4 to pay further amounts of Rs. 36,649-32 p.
893
and Rs. 21,700-75p as per the report of the Official
Liquidator. This order formed part of the decree dated
October 9, 1958.
Respondents 1 to 4 preferred an appeal to the High Court of
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Bombay which by an interlocutory judgment dated January 25,
1963 set aside the order made by the District Judge refusing
respondents 1 to 4 permission to lead evidence and
permission to cross-exemine respondent 5. Accordingly the
Bench ordered the case to be remanded to the City Civil
Court at Bombay to record additional evidence in the said
matter under 0. 41 r. 27 Code of Civil Procedure and remit
to it that evidence.
On an application dated February 11, 1963, the Bench of the
High Court by its order dated February 12, 1963, refused to
allow respondents 1 to 4 to produce certain documents which
were not produced by them at an earlier stage. Pursuant to
the aforesaid orders dated January 25, 1963 and February 12,
1963 respondents 1 to 4 led the evidence of 11 witnesses
including themselves and cross-examined respondent 5. They
also filed certain documents. No- evidence was led by the
Official Liquidator or respondent 5. After the record of the
evidence was transmitted to the High Court the Bench by its
judgment dated March 22, 1963 passed a decree against
respondents 1, 2 and 3 to pay to the Official Liquidator of
the Company a sum of Rs 11,973/12/- in respect of certain
stock-in-trade, furniture, motorcycle and motor car sold by
the said Company and a further sum of Rs. 2,686/8/3 being
part of the debt remitted by the said Company with interest
on the aforesaid amounts at 6 per cent from July 25, 1954
until payment. The remaining claim of the Official
Liquidator was set aside and the decree of the District
Court was reversed to that extent..
The first question that has been urged before us is whether
the High Court of Bombay was right in directing additional
evidence to be led by respondents 1 to 4 under 0. 41 r. 27
Code of Civil Procedure. This Court has, in several
decisions, laid down the circumstances in which an Appellate
Court will be justified in directing additional evidence to
be recorded for the disposal of the appeal. Order 41 r. 27
Code of Civil Procedure under which additional evidence
could be called for states thus :
"(1) The parties to an appeal shall not be
entitled to produce additional evidence,
whether oral or documentary, in the Appellate
Court. But if-
(a) the Court from whose decree the appeal
is preferred has refused to admit evidence
which ought to have beep. admitted,. or
(b) the Appellate Court requires any
document to be produced or any witness to be
examined to enable it to pronounce
judgment,or for any other substantial cause,
the Appellate Court may allow such evidence or
document to be produced,. or witness to be
examined.
(2) Wherever additional evidence is allow to
produced by an Appellate Court, the Court
shall record the reason for its admission."
894
It is apparent that by the terms of the above rule, it is
only where the Court has improperly refused to admit
evidence or where the Appellate Court requires additional
evidence to be recorded in order to enable it to pronounce
judgment that it can make such an order. Under 0. 41 r.
27(1) (b) the Court may require additional evidence either
to enable it to pronounce judgment or it may require
additional evidence to be recorded for any other substantial
cause, in Arjan Singh V. Kartar Singh and others(1) it was
held that the legitimate occasion for admitting additional
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evidence in appeal is when on examining the evidence as it
stands some inherent lacuna or defeat becomes apparent, not
where a discovery is made outside the Court, of fresh
evidence, and an application is made to import it. The true
test is whether the appellate court is able to pronounce
judgment on the materials before it, without taking into
consideration the additional evidence sought to be adduced.
See also State of U. P. v. Manbodhan Lal Srivastava(2) and
Municipal Corporation for Greater Bombay v. Lala Pancham of
Bombay and others(3). The learned Advocate for the
appellant, while admitting that the Appellate Court has
power to record additional evidence submits that the High
Court did not go through the evidence, nor did it apply its
mind as to whether the case was such that it could not
pronounce judgment on the materials before it without taking
into consideration the additional evidence sought to be
adduced. This argument, however, ignores the provisions of
0. 41 r. 27(1)(a) under which an Appellate Court can direct
additional evidence to be recorded if the Trial Court had
refused to allow or declined to record evidence which the
party against whom the decree had been passed was prepared
to produce before it. What we must, therefore, see is
whether the District Judge had improperly rejected the
request to record the evidence of the respondents and
consequently whether the High Court was justified in
directing additional evidence to be recorded. On a perusal
of the record we have no doubt that the District Judge had
improperly rejected the prayer of the respondents that they
should be allowed to lead evidence in connection with the
charges mentioned in the application filed by the Official
Liquidator and that they should be allowed to cross-examine
respondent 5.
The Roznama dated September 4, 1958 shows that on that day
the four respondents, namely respondents 1 to 4 represented
by Mr. Amin, and the Official Liquidator in person, appeared
before the District Judge. The order made in those
proceedings is as follows:
"Mr. Amin for the respondents wanted that the
petitioner should be put into the witness box
so as to enable him to cross-examine the
petitioner on the point of alleged
misfeasance. From the record it appears that
the petitioner was under cross-examination for
a great length of time and it is on the
material elicited in his evidence, as also on
the record otherwise available here, that the
charge of misfeasance is made. Mr. Amin’s
contention
(1) [1951] S.C.R. 258. (2) [1958] S.C.R. 533.
(3) [1965] 1 S.C.R. 542 at 548.
895
is that when the petitioner was cross-examined
by Mr. Mani, Mr. Mani represented the four
different companies and not these respondents.
This may be so, but I do not think now I
should allow another cross-examination of the
petitioner when from the record it appears
that a detailed and searching cross-
examination was made of the petitioner
Besides, there was no question of leading any
evidence, since the case was fixed for
argument from 21-1-58. The only part which
the parties had to play was to point out the
documents on which each relied for proving or
disproving the alleged misfeasance.
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I do not think it is possible for me to put
the hands of the clock behind by reverting to
the stage of leading evidence, when this
matter has been fixed for argument since 21-1-
1958. Hence the request is rejected."
The above proceedings clearly show that no opportunity was
given to respondents 1 to 4 because proceedings of January
12, 1958 show that as soon as written statement was filed on
December 30, 1957 the District Judge fixed the case for
argument. The proceedings of July 7, 1958 further show that
Mr. Amin had brought to the notice of the Official
Liquidator that he should be supplied with materials on
which the Official Liquidator would rely for the alleged
malfeasance on the part of his clients, but no materials
were furnished by the Official Liquidator. Accordingly on
the second hearing after the aforesaid application, a
petition for submitting fresh evidence and for cross-
examining respondent 5 was made but it was rejected. The
show cause notice was given by the Official Liquidator on
the basis of the public examination of respondents 1 to 4.
it is only in answer to the show cause notice that
respondents 1 to 4 could lead evidence and crossexamine
respondent 5. It may be mentioned that misfeasance action
against the Directors is a serious charge. It is a charge
of misconduct or misappropriation or breach of trust. For
this reason the application should contain a detailed
narration of the specific acts of commission and omission on
the part of each Director quantifying the loss to the
Company arising out of such acts or emissions. The burden
of proving misfeasance or nonfeasance rests on the Official
Liquidator. The Official Liquidator it may be mentioned,
merely relied upon the evidence recorded in public
examination of the Directors and on a few documents tendered
in evidence. At the stage of public examination there was
no charge of misfeasance against the Directors and they were
not in a position to know what would be the grounds that
would be alleged against them for recovering any amounts,
for the loss said to have been caused to the Company by
reason of such misfeasance. The application made by the
Official Liquidator did not give sufficient particulars
which, in our view, it should have. Once a show cause
notice was given to respondents 1 to 4 the Official
Liquidator did not lead any evidence nor rely upon any other
documents, nor did respondent 5 who was instrumental in
initiating the misfeasance case against respondents 1 to 4
lead any evidence. In our view, there was no justification
whatsoever for the District Court to reject the evidence
which
896
the respondents had intended to lead or to disallow the
production of documents other than those already produced,
and for that reason the High Court rightly ordered that
additional evidence be recorded in this case.
Now coming to the merits of the appeal. The first challenge
is to the disallowance of Rs. 1,30,000/-. This amount
represented the commission on the sale to M. P. Electricity
Board of a Stein-Muller Boiler for Itarsi Power House
through the instrumentality of the Nagpur Company. The
reason why the High Court disallowed this amount is because
the Official Liquidator failed to establish that there was
any connection with the Nagpur Company and the sale of this
Boiler to the Itarsi Power House of the M. P. Electricity
Board. On the admitted facts of the case itself this
conclusion is amply justified. It appears that there was a
partnership firm known as Industrial and Agricultural
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Engineering Company hereinafter called the I.D.D. This
partnership firm was the sole selling agent for Stein-Muller
machinery and products. On October 31,1953, the M.P.
Electricity Board agreed to purchase from the partnership a
Stein Muller Boiler for a sum of about pound, 86,000 in
respect of which there was an agreement between the I. D. D.
and the Electricity Board. The Electricity Board agreed to
pay a sum of Rs. 1,50,000 to the I. D. D. for certain,
services. Out of this sum the Official Liquidator claimcd
Rs. 1,30,000/- on the ground that it amounted to 10 percent.
of the commission which was due to the Nagpur Company from
the I.D.D. and which was wrongly withhold by the latter Com-
pany, with the acquiescence of respondent I who was one of
the partners of the I. D. D. The case of the Official
Liquidator was that Shantilal Shah then Managing Director of
the Company bad contacted the officers of the M. P.
Electricity Board and it was through his efforts that the
ultimate contract was entered upon. Accordingly a part of
the commission which the I. D. D. was claiming on behalf of
the Nagpur Company may be allowed to the Company.
The defence of respondents 1 to 4 is that the Nagpur Company
had nothing to do with the I. D. D. and that the order was
obtained by the I. D. D. partnership itself. In our view,
it is not the case of the Official Liquidator that there was
an agreement under which a part of the commission was
payable by the I. D. D. to the Nagpur Company and much less
is there any justification for our holding that respondents
1 to 4, even if there was any agreement, which on the
evidence we say there was not, had intended to with-hold the
amount. The High Court has gone into the evidence very
carefully and we do not see any reason for disagreeing with
its conclusion.
With respect to item (1), namely, commission in respect of
sales of General Motors pumping sets worth about Rs. 5 lakhs
at 4 per cent viz. Rs. 20,000/-, the foundation of the
claim is the payment made by one Premnath Transport Company
at Delhi to the Bombay Company as infringement commission,
because they had sold certain machinery of the General
Motors Ltd. in Bhopal area, the agency of which was held by
the Company, and consequently the Company agreed to give an
infringement commission of 4 per cent to the Bombay Company.
897
This amount of Rs. 20,000/- is claimed out of that amount.
It is contended that Bhopal was within the area allotted to
the Nagpur Company and, therefore, it was entitled to the
commission. This was denied by Directors. The Official
Liquidator failed to establish that the Nagpur Company was
entitled to the whole or part of the infringement commission
by reason of the fact that it was a sole selling agent of
the General Motors parts in that particular area or it had
an exclusive sub-agency from the Bombay Company. The High
Court considered that the evidence in the case was not
sufficient to establish either of these claims. We have not
been persuaded to hold otherwise.
In so far as item (2) for Rs. 36,000/- is concerned, here
again the Nagpur Company was being paid 15 per cent and 20
per cent commission in respect of machinery and spare parts
respectively by the Bombay Company which Company was
retaining 5 per cent of the commission in respect of the
orders placed by the Nagpur Company. According to the
Official Liquidator the Bombay Company was only entitled to
retain 2 per cent and consequently the Nagpur Company would
be entailed to a further 3 per cent which had been wrongly
withheld. Here again the High Court considered that there
was not sufficient evidence to sustain the claim. Shantilal
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Shah who gave evidence did not spell out the actual terms of
the agreement between the Nagpur Company and the Bombay
Company by reason of which the Bombay Company was entitled
to retain only 2 per cent and not 5 percent. It was held,
and there is nothing to establish to the contrary. Inasmuch
as the evidence of respondents 1 to 4 as Directors of the
Company was confirmed by the first minutes, the explanation
given by the respondents must be accepted. Reliance was
placed on sub-item (2) of Item 2 of the minutes of the Board
of Directors of the sister companies at which Shantilal Shah
was also present. It was agreed and accepted by all the
associates that a commission of 2 per cent on all such
imports on the c. i. f. or f. o. b. invoice value, as the
case may be, should be paid to the Bombay Office. But in so
far as sub-item V of Item III was concerned, it was
unanimously agreed that the associated offices should pay a
commission of 5 percent on their imports covered by, the
licences owned by the Bombay office.
The third item is for Rs. 30,000/- in connection with the
supplies to Model Mills and the Power House in Nagpur with
the products of the Mysore Electric Company Ltd. There was
some suggestion that the Bombay Company should reduce its
commission from 5 per cent to 2 per cent but as the High
Court pointed Out that it had absolutely no connection
whatsoever with the inter-Company transaction in respect of
goods of which agency was held by the Bombay Company. The
evidence of Shantilal Shah in this regard was considered to
be highly unsatisfactory. Apart from that Exhibit T-a
letter dated February 2, 1950 clearly showed that the
arrangement between the Nagpur Company and the Bombay
Company was to give commission at a particular rate. The
High Court extracted the relevant portion of the letter
which merits repetition, It says :
"I am glad to inform you that we have been
able to get some additional concession by way
of extra discounts from the Mysore
11-M192SupCI/75
898
Lamp Works and as intimated to you personally
during your recent visit, we shall give you a
portion of this extra commission, thus in all
25 and 2 1/2 per cent, discount on the list
price."
It is no one’s case that the commission according to this
letter was not paid, and as the Nagpur Company has received
this commission it cannot claim any additional commission.
Ins ofar as item (4) is concerned, it has reference to four
amounts, namely Rs. 7,689/12/- Rs. 2,184/-; Rs. 9,827 and
Rs. 2,100/-. Nothing has been shown as to why these claims
were not properly allowed. The appellant, however,
challenges the item for Rs. 9,827/- as not being the correct
amount. In fact the book value is Rs. 39,309/4/9. The High
Court took the difference between the book value and the
stock purchased by the Bombay Company after August 23, 1952,
since the date of resignation of Shantilal Shah.
Accordingly it took the opening stock as per the balance
sheet dated March, 31, 1953 at Rs. 53,574-4-0, The closing
stock as per audit report dated March, 13, 1953,reduced to
the extent of 7/9 was Rs. 24,092-0-0 leaving an amount of Rs
29,482-4-9. This amount was transferred to the Bombay
office and the difference between the above amounts amounted
to Rs. 9,827 /-. Shantilal Shah was questioned about this
but he did not know how it was made up of. No explanation
was also given on behalf of the Official Liquidator as to
how the item was made up of. For this reason this item was
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not allowed. Similarly no exception can be taken to the
amount of Rs. 2,100/- which was allowed because within few
months of its purchase the scooter was sold to the Delhi
Branch for only Rs. 6,001. These two items, namely Rs.
9,827/- and Rs. 2,100/- which are allowable to the
Liquidator come to Rs. 11,927 the other two items for Rs.
7,689/12/- and Rs. 2,184/- which relate to the purchases
actually made by the Bombay Company in pursuance of their
offer and in pursuance of the majority resolution of April
25, 1953 and the difference between the book value and the
purchase value of the car by the Bombay Company were also
allowed. Apart from this, item (5) for a sum of Rs.
2,686/3/- in connection with the wrongful remission to the
Hyderabad Company was also allowed. There seems to be no
dispute on this account because the whole of the amount as
claimed has been allowed.
In the result we find no reason to interfere with the
Judgment of the Bombay High Court under appeal. Accordingly
the appeal is dismissed with costs.
P.B.R.
Appeal dismissed.
899