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Union Of India Thru' The Secy, Ministry Of Finance, N.Delhi v. H.H.Saran Srivastava - COMPANY PETITION No. 105 of 2000  RD-AH 5904 (2 April 2007)
Court No. 30
COMPANY PETITION NO. 105 OF 2000
In the matter of
Kashi Nath Seth Bank Ltd Shahjahanpur
(amalgamated with State Bank of India on 1.1.1996
under the scheme prepared by Reserve Bank of India)
Union of India through the Secretary
Ministry of Finance, New Delhi- Petitioner
H.H.Saran Srivastava, son of
Shri L.B. Ram Swaroop,
Resident of 39, George Town, Allahabad
Hon. Sunil Ambwani, J.
1. Heard Shri Subodh Kumar learned counsel for petitioner-Union of India and Shri Ajeet Kumar for respondent-Shri H.H.Saran Srivastava.
2. The proceedings have been initiated under Section 45 (H) (2) of the Banking Regulation Act, 1949 read with Section 543 of Companies Act, 1956 for recovery of Rs. 7.23 lakhs along with interest from the respondent-H.H.Saran Srivastava, the Ex-Director of the Kashinath Seth Bank (amalgamated with State Bank of India w.e.f. 1.1.1996) for negligence, misfeasance and breach of trust causing mismanagement and losses to the bank leading to its winding up and amalgamated with the State Bank of India, under a scheme prepared by Reserve Bank of India w.e.f. 1.1.1996, with which the Kashinath Seth Bank Limited stood wound up.
3. Two years prior to this date, a moratorium was declared and the competent authority was directed to scrutinize the matter. It was found that the Bank had suffered losses on account of several acts of misappropriation and misfeasance by the Board of Directors of the Bank leading to filing of this Company Petition. The matter is connected with 16 other Company Petitions with regard to misfeasance by the Ex-Directors for various periods beginning from 1984 to December 1994.
4. Shri Subodh Kumar, learned counsel for Union of India states that respondent-H.H. Saran Srivastava was Director of the Bank from 22.4.1978 to 21.4.1986. He along with members of Board of Directors is jointly and severally liable to the loss of Rs. 7.23 lacs caused to the Government of India and or/to the State Bank of India due to negligence and misfeasance of the respondent, which the respondent must pay to the bank as damages along with interest @ 18% per annum.
5. In a supplementary affidavit filed in connected Company Petition No. 112 of 2000, the loss caused to the bank explained after investigations is stated as follows:-
"10-A That till 12th of September, 1993, the affairs of the Kashi Nath Seth Bank Ltd were in the hands of a Board which was being managed by the Board of Directors including Sri P.C. Seth, R.C. Seth, Ashok Kumar, Dwarka Nath, Umesh Tandon, P.K. Pandey etc.
10-B That no doubt the Board of Directors, as per their balance sheet of the financial year 1991-92 (assessment year 1992-93) have shown profit of Rs. 5,955.48. However, in the financial year 1992-93 (assessment year 1993-94) ending on 31st March, 1993, they have shown a net loss of Rs. 7, 10, 47, 252.15. At the cost of repetition it is submitted that till 31.3.1993 the affairs of the Bank were being managed by the Board of Directors including the aforesaid persons. It is also important to mention here that while preparing and tendering the balance sheet of the Bank till 31.3.1993 there is a page showing highlights of different financial years i.e. 1988-89, 1989-90, 1990-91, 1991-92 and 1992-93. A chart of the highlights is filed herewith and is being reproduced hereinafter.
(Rupee in Lakhs)
Total No. of Branches
The reserves of the amount of different financial years is too much material specially regarding financial year 1992-93 which shown minus 678.60 Lacs. The form of balance sheet further shows that the advances made by the Bank to the borrowers is 46,08,16,180.00. The said advances including present amount in dispute is approximately 8.00 crore. Copy of the entire balance sheet and annual report of financial year 1992-93 is being annexed herewith and marked as Annexure No. 1 to this company petition.
10C That, on 13th September, 1993 the Reserve Bank of India imposed certain restrictions regarding withdrawal of amount from the accounts of the Bank. The Board of Directors was suspended w.e.f. 13th September, 1993. Thereafter powers under Section 35-A of the Banking Regulation Act were invoked vide order dated 8.9.1993 which continued till 19.6.1994. During the restriction, the officers of the Reserve Bank of India found that the condition of the Bank was worse and actual loss to the Bank till 31.3.1994 was Rs. 24,08,47,285.82. To prove this fact a copy of the balance sheet and annual report dated 31.3.1994 is being annexed herewith and marked as Annexure No. 2 to this company petition. Ultimately while exercising the powers under Section 45 (2) of the Banking Regulation Act, the Government of India passed an order of Moratorium on 20.6.1994 suspending the business of the Bank. The said Moratorium continued till 19.12.1994. The Bank was again placed under the Reserve Bank of India's directions from 20.12.1994. Consequently second order of Moratorium was passed on 30.6.1995 which continued till the Bank was financially amalgamated with transferee bank.
10-D That in the year ending on 31.3.1995 (financial year 1994-95) (assessment year 1995-96), the Bank was found to be in loss of Rs. 35, 18, 82, 619.00. Copy of the Director's Report and balance sheet is being annexed herewith and marked as Annexure No. 3 to this company petition.
10-E That, the financial condition of the Bank was so worse that the transaction of the Bank was not possible and, as such, total business of the Bank was restricted for a period of about 2 years till it was amalgamated on 1.1.1996. After amalgamation of Kashi Nath Seth Bank Ltd in State Bank of India vide Gazette Notification dated 31.12.1995 effective from 1.1.1996, the business of the erstwhile Kashi Nath Seth Bank Ltd was transferred to the State Bank of India and State Bank of India started its smooth functioning as per the scheme of amalgamation. Copy of the gazette notification dated 31.12.1995 is being annexed herewith and marked as Annexure No. 4 to this company petition.
6. In the Company Petition, in paragraph no. 11 gives the details the fraudulent transactions of the bank, in which loans were sanctioned or extended with higher limits by the Board of Directors.
7. The transaction is with regard to Seth Khandsari Udyog. The cash credit (Hyp.) limit of Rs. 2 lacs and cash credit (P) limit of Rs. 2.5 lacs term loan were sanctioned to the firm. In 1982, the cash credit (Hyp) limit was enhanced from Rs. 2 lacs to Rs. 3 lacs on recommendation of Shri P.C. Seth, who was director in the bank and approved by the board of directors in a meeting dated 17.12.1982 in which the respondent participated. The enhancement of cash credit (Hyp) limit was made without appraising the credit needs of the borrowing unit. The proceedings of the board meeting dated 17.12.1982, chairman's letter dated 28.12.1982; loan application form; brief report of the borrower; and ledger extract, are annexed as evidence in support of the charge.
8. Shri Subhodh Kumar has relied upon judgments in Official Liquidator, Janhitkari Alap Bachat Rindayatri Sansthan Pvt. Ltd vs. Vishnu Kumar Pradhan and others, 2001 Camp Cases 1026 (Rajasthan); K Madhava Nayak and others vs. Popular Bank Ltd, AIR 1970 Kerala 131 and P.K. Nedungadi vs. The Malayalee Bank Ltd and others AIR 1971 SC 829 in support of his submission that even if directors have not misapplied or retained the properties and it is proved that he acted reckless manner without taking care of statutory requirement, and applying basic common sense in sanction of the amounts which could not be recovered, such director commits misfeasance, which is covered by Section 543 (2) of the Companies Act 1956. According to Shri Subodh Kumar, apart from misapplication or retainer, the misfeasance and breach of trust also refer to something which the director or the officer of company has done by which the companies properties have been wasted and company credit is improperly pledged.
9. In K.N. Srinivasa vs. Joint Official Liquidator of Nurani Union Bank Ltd and others AIR 1963 Madras 464 relied by Shri Subodh Kumar in support of his submission, the respondent had inspite of resolution passed by Board of Directors, to the effect that the advances shall not be made without sanction of Board of Directors, made huge advances without consulting other Directors. There are no such allegations in the present case. The applicant has not pleaded that the Board of Directors was not authorized to sanction these loans and advances or that there was any restriction put by the Board for giving the advances.
10. In Ghaziabad Development Authority vs. Balbir Singh, AIR 2004 SC 2141, the Supreme Court held:-
"In Official Liquidator, Supreme Bank Ltd v. P.A. Tendolkar (Dead) by LRs AIR 1973 SC 1104, the question which arose for consideration was as to whether a director having regard to the provisions of Section 235 of the Companies Act, committed acts of misfeasance. The said decision ex facie has no application in the present case. Therein, this Court was concerned with a case where the director was held to be not merely cognizant of but guilty of commission of fraud in the conduct of the business of a company even through no specific act of dishonesty was proved against him personally. The duties of a Managing Director are provided for in the Companies Act as also Articles of Association of the Company. He, thus, holds a position of trust vis-a-vis the shareholders of the company. In that case all the directors were found to have committed acts of fraud. The Court took recourse to the provisions of Section 45H of the Companies Act wherein special provisions for assessing damages against delinquent directors have been laid down. Even in England where award of exemplary or aggravated damages for insult etc. to a person has now been held to be punitive, exception has been carved out if the injury is due to 'oppressive, arbitrary or unconstitutional action by servants of the Government' (Salmond and Heuston on the Law of Torts). Misfeasance in public office is explained by Wade in his book on Administrative Law thus :
"Even where there is no ministerial duty as above, and even where no recognised tort such as trespass, nuisance, or negligence is committed, public authorities or officers may be liable in damages for malicious, deliberate or injurious wrong-doing. There is thus a tort which has been called misfeasance in public office, and which includes malicious abuse of power, deliberate maladministration, and perhaps also other unlawful acts causing injury." (p. 777).
The jurisdiction and power of the courts to indemnify a citizen for injury suffered due to abuse of power by public authorities is founded as observed by Lord Hailsham in Cassell and Co. Ltd. v. Broome (1972 AC 1027 : (1972) 1 All ER 801) on the principle that, 'an award of exemplary damages can serve a useful purpose in vindicating the strength of law'. An ordinary citizen or a common man is hardly equipped to match the might of the State or its instrumentalities. That is provided by the rule of law. It acts as a check on arbitrary and capricious exercise of power. In Rookes v. Barnard (1664 AC 1129 : (1964) 1 All ER 367, 410) it was observed by Lord Devlin, 'the servants of the government are also the servants of the people and the use of their power must always be subordinate to their duty of service'. a public functionary if he acts maliciously or oppressively and the exercise of powers results in harassment and agony then it is not an exercise of power but its abuse. No law provides protection against it. He who is responsible for it must suffer it. Compensation or damage as explained earlier may arise even when the officer discharges his duty honestly and bona fide. But when it arises due to arbitrary or capricious behaviour then it loses its individual character and assumes social significance. Harassment of a common man by public authorities is socially abhorring and legally impermissible. It may harm him personally but the injury to society is far more grievous. Crime and corruption thrive and prosper in the society due to lack of public resistance. Nothing is more damaging than the feeling of helplessness. An ordinary citizen instead of complaining and fighting succumbs to the pressure of undesirable functioning in offices instead of standing against it. Therefore the award of compensation for harassment by public authorities not only compensates the individual, satisfies him personally but helps in curing social evil. It may result in improving the work culture and help in changing the outlook. Wade in his book Administrative Law has observed that it is to the credit of public authorities that there are simply few reported English decisions on this form of malpractice, namely, misfeasance in public offices which includes malicious use of power, deliberate maladministration and perhaps also other unlawful acts causing injury. One of the reasons for this appears to be development of law which apart, from other factors succeeded in keeping a salutary check on the functioning in the Government or semi-government offices by holding the officers personally responsible for their capricious or even ultra vires action resulting in injury or loss to a citizen by awarding damages against them. Various decisions rendered from time to time have been referred to by Wade on Misfeasance by Public Authorities. We shall refer to some of them to demonstrate how necessary it is for our society. In Ashby v. White (1703) 2 Ld Raym 938 the House of Lords invoked the principle of ubi jus ibi remedium in favour of an elector who was wrongfully prevented from voting and decreed the claim of damages.The ratio of this decision has been applied and extended by English Courts in various situations. In Roncarelli v. Duplessis (1959) 16 DLR 2d 689 the Supreme Court of Canada awarded damages against the Prime Minister of Quebec personally for directing the cancellation of a restaurant-owner's liquor licene solely because the licensee provided bail on many occasions for fellow members of the sect of Jehovah's Witnesses, which was then unpopular with the authorities. It was observed that, 'what could be more malicious than to punish this licensee for having done what he had an absolute right to do in a matter utterly irrelevant to the Alcoholic Liquor Act? Malice in the proper sense is simply acting for a reason and purpose knowingly foreign to the administration, to which was added here the element of intentional punishment by what was virtually vocation outlawry. In Smith v. East Elloe Rural District Council (1956 AC 736 : (1956) 1 All ER 855)) the House of Lords held that an action for damages might proceed against the clerk of a local authority personally on the ground that he had procured the compulsory purchase of the plaintiff's property wrongfully and in bad faith. In Farrington v. Thompson (1959 UR 286) the Supreme Court of Victoria awarded damages for exercising a power the authorities knew they did not possess. a licensing Inspector and a police officer ordered the plaintiff to close his hotel and cease supplying liquor. He obeyed and filed a suit for the resultant loss. The Court observed :
"Now I take it to be perfectly clear, that if a public officer abuses his office, either by an act of omission or commission, and the consequence of that is an injury to an individual, an action may be maintained against such public officer."
11. On the other hand, Shri Arun Kumar, appearing for respondent in the connected petitions, submits that in the subject transaction, the respondent is not alleged to have gained anything personally or retained to himself for the purposes of assessing or quantifying recovery or damages by him to the bank. According to him, the directors may not have exercised prudence for sanction of loans, which may be required by law, but that by itself cannot be treated to be misfeasance or breach of trust. The misfeasance has an element criminal liability. The proceedings are quasi criminal in name which may also ultimately make respondent liable to criminal acts.
12. I have considered the facts and evidence given by the petitioner for taking action of misfeasance or breach of trust and for recovering Rs.7.23 lacs with interest @ 18% from the respondent either individual or jointly along with other directors. The respondent was director of the Bank from 22.4.1978 to 21.4.1986. There is no allegation that he was a proprietor or partner in the firm to which the loan was advanced. He may have participated in the meetings of the Board of Directors, which regularized and sanctioned the grant of further loan or credit limits. There is however absolutely no allegation that he gained anything out of these transactions, except that he should have been more careful and should have considered the viability of the loans and advances which ultimately resulted into losses to the bank. The respondent may have been a party to the collective decisions of the Board of Directors and taken bad commercial decisions but that alone cannot be taken to have led to the fall of the bank, on account of which it was wound up.
13. In all the judgments cited by the petitioner, the Directors or Chairmen were found to have misapplied and had retained the advances which ultimately led to the collapse of the bank. In the present case, the fact and evidence on record do not establish that the respondent-H.H. Saran Srivastava had misapplied, misappropriated or committed any misfeasance and breach of trust and had gained individually in participating and sanctioning advances as Director of the bank leading to the losses, which were the cause of collapse of the Bank.
14. The object of proceeding under Section 543 of the Companies Act, 1956 is to assess damages against delinquent directors. Under Section 543 (i) (b) the Court can compel then Director, Manager, Liquidator or Officer 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. In the present case pleading and the evidence do not show that respondent had in any way benefitted 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 circumstances the State Bank of India may be justified in recovering the amount from the borrower 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.
15. In the facts and circumstances the Company Petition against respondent-H.H. Saran Srivastava son of Shri L.B. Ram Swaroop is dismissed.
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