“V.K.R.S.T Firm v.

oriental investment trust ltd 1944 mad 532”

COMPANY LAW- I SUBMISSION II

Submitted by-
1) VARTIKA RAWAL DIVISION: C PRN: 17010223124
2) ROHAN PATEL DIVISION: C PRN: 17010223038

BATCH: 2017-22
of Symbiosis Law School, NOIDA
Symbiosis International (Deemed University)

In September, 2019
Under the guidance of
Ms. Sonakshi Kumar and Mr. Rajnish Jindal

Symbiosis Law School, NOIDA

IRAC
FACTS OF THE CASE:

On 21st July 1939 the Court passed an order for the compulsory winding up of the Oriental Investment Trust,
Ltd., a company registered under the Companies Act. An undivided Chettiar family carrying on business under
the vilasam of V. K. R. S. T. claimed to rank as a creditor in the sum of Rs. 1,36,274-1-2. The Official
Liquidator disputed the validity of the claim, except to the extent of Rs. 6310-7-0. The members of the joint
family were Kasi Viswanathan, his son Manikkam, his brother Narayanan, and Narayanan's son Somasundara.
Narayanan died on 16th January 1939. Kasi Viswanathan died after the trial and the appeal has been preferred
by his son as the manager of the family. The company was incorporated on 9th September 1936 with an
authorised capital of Rs. 25,00,000 divided into 25,000 shares of Rs. 100 each. The shares actually issued
numbered 6068, and at the date of the winding up order only Rs. 25 per share had been paid by the subscribers.
The principal promoters of the company were Kasi Viswanathan and P.L.A.V.A.D. Ramanathan Chetty, who
was then a local director of the Reserve Bank of India. Kasi Viswanathan and Ramanathan were appointed the
managing directors, but from the inception of the company the management of its business was left entirely to
Ramanathan, who was also the agent of the Madras branch of the firm. A formal agreement was entered into
between the company and the managing directors under which, subject to the control of the directors they were
to have "either jointly or severally" the general conduct and management of the business and affairs of the
company and without prejudice to their general power, jointly and severally the power inter alia of buying and
selling shares and securities on behalf of the company and of borrowing Rs. 25,000 without the sanction of the
Board of Directors or Rs. 1,00,000 with the sanction of the board.

The memorandum of association sets out in unambiguous terms the objects for which the company was formed.
The objects are restricted to those expected of a company incorporated for the purpose of carrying on business
as an investment trust. Naturally power was taken to buy and sell shares, but this has erroneously been
interpreted as authority to deal in differences on the stock exchange.

It was resolved that managing director Mr.P.L.V. A. Ramanathan Chettiar be and is hereby authorised to invest
the money of the company in shares and securities and sell them when deemed necessary provided that shares
and securities beyond the value of Rupees 1,00,000 (Rupees one lakh) shall not be bought or sold except with
the permission of any other director present in Madras and it was also resolved that the Managing Director, Mr.
PL. V. A. Ramanathan Chettiar is authorised to borrow money from M/s. V. K. R. S. T. Firm as and when it is
necessary and the amount borrowed by him till date is approved.

The last statement of account before the company went into liquidation was for the period of seventeen months
ending 31st March 1939. This disclosed that Rs. 1,33,798-15-6 was due to the firm by the company and that
Ramanathan had taken Rs. 1,42,632 6-3 of the company's funds. Until the month of March 1939, neither the
directors nor the auditors had any idea that Ramanathan was helping himself to the company's moneys. This
was only discovered when he debited himself with the amounts in his personal account. When his misconduct
was brought to light he alleged that he had sufficient securities in Bombay to enable him to repay the whole of
the Rupees 1,42,632-6-3 and he undertook to deliver the securities over to the company. His co-directors still
believed in him and on 16th June 1939 they passed a resolution approving of the balance sheet, which meant
that they consented to Ramanathan being treated as having borrowed from the company the Rupees 1,42,632-6-
3. Ramanathan went to Bombay with a representative of Kasi Viswanathan to whom he was to hand over the
securities. They arrived in Bombay on 22nd June 1939 and then Ramanathan absconded. Although criminal
proceedings were instituted against him he has so far evaded arrest.
ISSUES:

Question of law answered by the court:

 Whether the firm is entitled to recover the whole of the Rs. 1,36,274-1-2. As we have already indicated,
the directors were not aware of Ramanathan's misappropriations until the month of March 1939?
 Whether the directors and auditors were justified in regarding gambling in differences as legitimate
business of the company?

RULES:

 Section 281 in The Companies Act, 2013

 The Companies Act, 2013

ANALYSIS:

ULTRA VIRES BORROWING

Borrowing by a company may be-

 Borrowing which is ultra vires the company,

 Borrowing which is intra vires the company but ultra vires the directors.

Borrowing which is ultra vires the company:

Such debts created and securities given in that respect are inoperative and void.

Example: Company is authorized to borrow only Rs.5 cr. but it borrowed via any unauthorized activity more
than Rs.5.5 cr. then this access amount is ultra vires to company.

Lender’s rights when borrowing is ultra vires :

The lender cannot sue the company for the repayment of the loan.

But the few remedies are available like:

(a) Injunction and recovery of money not spent

(b) Subrogation

(c) Identification and tracing

(d) Recovery of damages

CASE: V.K.R.S.T. firm V. Oriental Investment Trust Ltd.

Under the authority of the company, its MD borrowed large sums of money misappropriate it. The company
was held liable. Where the borrowing is within the powers of the company, the borrower will not be released
simply because its officer have applied the loan to unauthorized activities, if the lender had no knowledge of the
intended misuse.
Borrowing which is Intra Vires the company but Ultra Vires the directors

 The company may, if it wishes, in general meeting ratify such act of the directors, in which case the loan
shall become perfectly valid and binding upon the company.
 But if company decides not to ratify the director’s act then the normal principles of the agency will
protect the LENDER.
 Company can claim from the directors.
 The lender may sue the directors directly

Notice to a director will amount to notice to the company only if the director is bound to receive the same and
communicate it to the company. Thus, notice to the directors amounts to notice to the company just as notice to
the agent in the course of business amounts to notice to the principal But if an individual is a director of two
companies, thus personal knowledge is not necessarily the knowledge of both the companies unless he is under
a duty to receive the notice and to communicate it to the other. If a director commits a fraud on the company his
knowledge of such fraud cannot be attributed to the company.

The question whether the firm is entitled to recover the whole of the Rs. 1,36,274-1-2. As we have already
indicated, the directors were not aware of Ramanathan's misappropriations until the month of March
1939. The learned Judge was under the impression that Kasi Viswanathan knew more than he pretended to
know. Kasi Viswanathan did not make a good impression in the witness-box and a perusal of his evidence
shows that he fenced with the questions put to him. At the same time we cannot believe that he had any inkling
of Ramanathan's misconduct until the month of March 1939. It stands to reason that he would not have allowed
his agent to borrow from the firm these large sums of money if he had known that he was utilising them for the
payment of his own gambling transactions. In the early stages the company had earned a profit. It had appointed
a firm of qualified auditors as the auditors of the company. They had drawn up three balance sheets before 1939
and until the month of March 1939 they had been satisfied that everything was in order.

Whether the directors and auditors were justified in regarding gambling in differences as legitimate
business of the company is, of course, another matter. Obviously the gambling in differences was most
improper and this will be discussed further in the appeals relating to the charges of misfeasance which have
been preferred against certain of the directors. But in our opinion it cannot be said that Kasi Viswanathan had
any knowledge before the first half of 1939 that Ramanathan had been swindling the company. It is not disputed
that if Ramanathan had borrowed money from another firm under the authority conferred upon him by the
company the lender would not have been put on inquiry as to the application of the money and that the company
would in such circumstances be liable notwithstanding that Ramanathan had misappropriated the moneys
borrowed. Ramanathan's knowledge of the fraud which he was committing was not the knowledge of the firm
or company.

ANY OTHER JUDGEMENT ON THE QUESTION OF LAW:

In Houghton & Co. v. Nothard Lowe & Wills, Ltd (1928) A.C. 1 Lord Dunedin said:

The knowledge of a mere official like the secretary would only be the knowledge of the company if the thing of
which knowledge is predicated was a thing within the ordinary domain of the secretary's duties. But what if the
knowledge of the director is the knowledge of a director who is himself particeps criminis, that is, if the
knowledge of an infringement of the right of the company is only brought home to the man who himself was the
artificer of such infringement? Common sense suggests the answer, but authority is not wanting.
In the similar case of Thinnappa Chettiar v. Rajagopalan reported in ('44) 31 A.I.R. 1944 Mad. 536 these
appeals are dealt with in a separate judgment and questioned that has it been denied that the business done was
otherwise than that of a gambling nature. The only excuse put forward is that the directors considered that they
were entitled to do such business. At a meeting of the Board of Directors held on 10th April 1937 the following
resolutions were passed:

(1) Resolved that managing director Mr.P.L.V. A. Ramanathan Chettiar be and is hereby authorised to invest
the money of the company in shares and securities and sell them when deemed necessary provided that shares
and securities beyond the value of Rupees one lakh shall not be bought or sold except with the permission of
any other director present in Madras.

(2) Resolved that the Managing Director, Mr. PL. V. A. Ramanathan Chettiar is authorised to borrow money
from Messrs. V. K. R. S. T. Firm as and when it is necessary and the amount borrowed by him till date is
approved.

Court Decision:

The Court should exercise its discretion under Section 281, Companies Act.

The court lead to the conclusion that it would be impossible to infer that the duty, either of giving or receiving
notice, will be fulfilled where the common agent is himself guilty of fraud. It seems to me that if you assume
here that Wills was guilty of irregularity-a breach of duty in respect of these transactions - the same inference is
to be drawn as if he had been guilty of fraud. I do not know, I am sure, whether he was guilty of actual fraud;
but whether his conduct amounted to fraud or to breach of duty, I decline to hold that his knowledge of his own
fraud or of his own breach of duty is under the circumstances, the knowledge of the company.

Therefore, the company must be held to be liable unless the fact that Kasi Viswanathan was a managing director
of the company makes a difference. In our judgment it does not. He knew nothing of Ramanathan's defalcations
until all the money had been borrowed and on the authorities which we have just referred to he cannot be
imputed with knowledge, notwithstanding that he was a co-managing director of the company and the head of
the firm which employed Ramanathan as its agent. In order to succeed, the firm has to satisfy the Court that the
moneys now claimed were handed to Ramanathan as loans to the company under the authority conferred by it
on him, and, we consider that the evidence establishes this. Ramanathan had been given power to borrow from
the firm. In the firm's books the withdrawals are entered as loans to the company. In the company's books credit
is given to the firm for the amounts. As the money was withdrawn from the firm on behalf of the company
under authority given by the company the company must accept liability unless the firm had knowledge that
Ramanathan was abusing his authority, which is not the case. For these reasons we direct the Official Liquidator
to include the firm in the list of creditors for the sum of Rs. 1,36,274-1-2. As the firm has succeeded it is
entitled to the costs here and below. These will be paid out of the assets of the company. The Official Liquidator
will also get his costs out of these assets. We certify for two counsel.

CRITICAL ANALYSIS:

In the case of “V.K.R.S.T. Firm vs. Oriental Investment Trust Ltd.” The decision of the court where the court
directed the official liquidator to include the firm in the list of creditors for the sum of Rs. 1,36,274-1-2. Was a
reasoned judgment but in this there was much more to deal with. The role of the managing director Ramnathan
in the company and the powers conferred upon Mr. Ramnathan and also his role in the firm as the agent and
managing director of the company was creating a big question. The fraud was not just related to the money of
the firm but the formation and running of the company in itself was a huge scam. It was an classic example of
playing with the rules and regulations and committing an white collar crime where the company and the firm
are doing transactions of huge money between themselves whereas the key management or we can say
promoters of both the company and the firm were same persons. The nature of the company was more like a
shell company whose role was to channelize the money. Corporate Veil lifting in this case would have done
more justice and also it would have helped in curbing the future acts which are similar to this type of acts.
There in the above case the facts provide us that there was the fraud committed by Mr. Ramnathan and not the
company had knowledge of the fraud neither it was aware of the fraud but as the rule says that the creditors
were lending money to the company and not to the managing director therefore it is the duty of the company to
repay the loans and it cannot take the shield of fraud by the managing director as it is the internal matter of the
company. In this case a further step of corporate veil lifting would have done more justice by bringing out the
main essence and nature of work of the company and also the role and responsibility of the management.

CONCLUSION:

After doing the analysis of the facts, issues, rule and critically analyzing the above stated case I can say that the
court had heard both the parties and given a fair judgment which is safeguarding the interest of the creditors.
The loan was given to the company and not to the managing director therefore the company was correctly held
liable to repay the creditors.