Nitu S Saini & Anr v. Meena Chawla & Co

judgment and decree dated

09.02.2011 insofar it has dismissed suit against defendants Nos.l, 3, 4 and 5, plaintiff Meena Chawla has filed RFA (OS) No.48/2011. On the other hand, defendants Nos.2 and i.e. Neet'u Saini and her husband Sunil Saini have filed RFA (OS) No.59/2011 challenging the impugned^ judgment and decree insofar it has held that defendant No.l company is not liable to make any payment to the plaintiff and that they are liable to repay the said amount.

¶20The appellants in both the above captioned appeals have challenged the findings returned by the learned Single Judge that the defendant No.l company is not liable to repay any amount to plaintiff since Board of Directors of the company had never passed a resolution as contemplated by Section 292 of the Companies Act.

¶21In support of the appeals, following submissions were advanced.on behalf of the appellants in both the appeals:- A. That the learned Single Judge failed to appreciate that a creditor dealing with a company is required by the law to be conversant with terms of the Memorandum and Articles of Association of the company and no more. If it is found that the transaction of loan into which the creditor enters with the company is not barred by the Memorandum or Articles of the Association of the company, and could be entered into on behalf of the company by the person Page12of22 negotiating for the company, the creditor is entitled to presume that ali the formalities required in connection therewithhave been compliedwith by the company. It was urged that a loan transaction where-under a company receivesthe money cannot be defeatedon the ground that a resolutioncontemplatedby Section292 of the Companies Act was not passed. Being an outsider,it was urged, thata creditordoes not know nor is he supposed to know what happens within the closed doors of a company. Reliance was placed on the decisions of the Allahabad and the Calcutta High Courts reportedas AIR 1957 All 311 Lakshmi Cotton Mills Cn ltd. Kannur i/ ix. hifp Mitts Cn IM and AIR 1967 Cal 75 ShriKishan Rathi v j^nnri^t r Co. (Pvt) Ltd & An f B. Thatthe learnedSingleJudgefailed to take note of the settledlegal position,thateven if the borrowingofaloan by the agentofacompanyis unauthorized,the companywould still be liableto pay, if it is shownthatthe money had flown mto the coffers of the company. In support of the said submission, reliance was placed upon the. decisions of ^ Allahabad and Patna High Courts reported as AIR 1957 All Cotton MUh Co iM i/ tr tut^ MlllsCo^^^na 1978 (50) CC 722 KumarKri.hn. &Ors VStateBanknfIndia&Ore respectively.

¶22The submissionsarebased upon the doctrineof indoor or internal management. What is the doctrineof indooror internal management? •; Pagel3of.22

¶23The doctrine of indoor or internal management was first enunciated by the Courts in England in the decision reported as (1856) 6 E & B 327 British Bank i/ Turquand. The facts of the said case were that Turquand was the official managerof the company.Abond underthe seal of the company, signed by two directors and the secretary, was given by the company to the Royal British Bank to securedrawingson its currentaccount. In an action based on the bond the company defended pleading that under the terms of the registereddeed of settlement,the directorshad power to borrow only such sums as had been authorizedby general resolutionof the company and since no sufficientlyspecific resolution had been passed by the company, it was not liable to make payment to the Bank. The Court of ExchequerChamber overruled the objection and held that the bond was binding on the company. The relevantportionof the said decisionreads as unden-The deed allowsthe directorsto borrowon bond such sum or sums of moneyas shall from time to ^me by a resolution passed at a general meeting of the company, be authorised to be borrowed; and the replicationshowsa resolution at a general meeting, authorising the directorsto borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlementand Act of Parliament; but bo^rmA^PH^Th'^f amountto be borrowed.That seems to me enough We may Dowtakefor grantedthatthe dPalinqc companies are not like deailngc; ^vith other partnerships, and the parties dealing with thpm !.Tii statute and thp deed of settlement. But they are not hnund tn rin mnm RFA (OS) 48/2011 &59/2011 r~ And party here on reading deed of settlement, would find, not a prohibition from borrowing but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorising that which on the face of the document appear to be legitimately done." (Emphasis Supplied)

¶24In a nutshell, the gist of the doctrine is that persons dealing with limited liability companies are not bound to enquire into their indoor management and will not be affected by irregularities of which they had no notice. This doctrine, which is based on general presumption of law, is eminently practical, for business could not be carried on if a person dealing with the company is compelled to call for the evidence that all internal regulations had been duly observed by company before entering into a transaction. But, the doctrine self limits itself in view of the , portions underlined while quoting the relevant paragraph from the decision, as reproduced in para 23 above, i.e. the non-obligation to make an inquiry would not extend to 'Statutes' and 'The Deed of Settlement' i.e. 'The Articles of Association and the Memorandum of a Company'.

¶25The doctrine of indoor management, as enunciated in Turquancfs case (supra,), has been followed by the Kerela High Court in the decision reported as AIR 1957 Ker 97 Varl<ev Souriar v. Keraieeva Banl<ina Co. Ltd.. in the following terms:- "Cominq to the alternative around, it is no doubt true that where a company is regulated bv a memorandum and articles registered in some public office, persons dealing with the comoanv . Page15 of 22 are bound to read the registered documents and to see that proposed dealing is not inconsistent therewith but thev are not bound to do more. They need not enquire into regularity of the internal proceedings what--Lord Hatherley called ' indoor" management'. See Royal British Bank v. Turquand [1856] E&B 327, Ram Buran Singh v. Mufassil Bank Ltd., AIR 1925 Ail 206(2), Dehra Dun Mussoorie Electric Tramway Co. Ltd. v. Jagmandar Das [1931] Comp Cas 227rAIR 1932 All 141, T. R. Pratt (Bombay) Ltd. v. E. D. Sassoon and Co. Ltd. [1936] 6 Comp Cas ; AIR 1936 Bom

62." {Emphasis Supplied)

¶26Applying the doctrine in the instant case we need to note sub-section 1 of Section 292 of the Companies Act and its relevant sub-clauses. It reads as under:-"S. 292 Certain powers to be exercised by Board only at meeting -(1) The Board of Directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at the meetings of the Board :-

(a) the power to make calls on shareholders in respect of money unpaid on their shares;

(b) the power to issue debentures;

(c) the power to borrow money otherwise than on debentures;

(d) power to invest funds of company;

(e) the power to make loans; Provided that Board may, -by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of that company or in the case of a branch office of the company, a principal officer of the branch office, RFA (OS) 48/2011 &59/2011 Page16 of 22 the powersspecifiedin clauses(c), (d) and (e) to the extent specified in sub-sections(2), (3) and

(4) respectively,on such conditionsas the Board may prescribe."

¶27Section 292 of the Companies Act enjoins that the board of directorsof a companyshould exercisethe power to borrow money otherwise than on debenture only by means of resolutionspassed in said regardsat the meetings of the board of directors.

¶28It IS settled legal position that every person is presumedto know the law. Acreditordealingwith company shall be presumedto know the requirementof Section 292 f • of the CompaniesAct that no directoror other officerof a' company is authorized to borrow money on behalf of the company unless the board of directorsof the company has passed a. resolution authorizing him in said regards. Such being the position,beforeadvancingloan to a companythe creditormust make necessaryenquiriesand satisfy himself that the board of directors of the company has passed a resolutionauthorizingall or any of its directorsor its agent to borrow money on behalfof the company. If he fails to do so, the doctrine of indoor managementwould not come to his rescue. The decision in Turouand^ case (supra) also recognizes that a person dealing with the companies is bound to read the statute. The doctrine of indoor management would come into play in situations where before advancing loan to the company the creditor had satisfiedhimselfthat the board of directorsof the company had passed a resolutionauthorizingthe person negotiating with him to borrow money on behalf of the company but RFA (OS) 48/2011 &59/2011 2^5 subsequently it transpires that the resolution in question was illegal due to proceduresinternalto the managementof the.company not being followed.

¶29In the instantcase, the plaintiffhas stated in her cross-examination that she did not ask the defendant No.2 to show her the resolutionpassed by the board of directorsof the defendantNo.l companyauthorizingdefendantNo.2 to borrow money on behalfof the company, before executing the agreementdated 01.08.2003statingthat she did not do so since her husband was dealing with the matter. Ramesh ^ Chawla PW-2, the husband of the plaintiff, is completely Silent on this vital aspectof the matter.The defendantNo.2 stated in her cross-examinationthat he had not seen any resolution passed by the defendant No.l company authorizingher to borrow money on behalfof the company. When questioned about such a resolution, the defendant No.6 had given most vague and evasiveanswers.

¶30From the aforesaid, it is clearly apparent that no resolution was passed by the defendant No.l company authorizingthe defendantNo.2 to borrow money on behalf ^ of the company and that the plaintiff did not make any enquiries regarding passing of such resolution by the defendant No.l company before entering into agreementdated 01.08.2003with the defendantNo.2. Such factual position when seen in the light of legal discussion contained in the foregoing paras results in the conclusion that the doctrineof indoormanagementwould not come to the rescue of the plaintiff. RFA (OS) 48/2011 &59/2011 ->4

¶31Before proceeding further, we proceed to deal with the decisions relied upon by the appellants in said regards.

¶32in Lakshmi Rattan's case (supra), respondent company had advanced a loan in sum of ^1,50,000/- to the appellant company on understanding that loan I • advanced would carry interest 1 per cent higher than the current Bank rate and would be repaid together with interest within six months. After the expiry of stipulated period of six months, the appellant company failed to repay the loan in spite of reminders sent to it and hence the suit was filed. One of the defence taken by the appellant f ' company was that it was not liable to repay no money as there was no Board resolution authorizing anybody to obtain loan on behalf of the company. Negating the plea the Court held that the doctrine of indoor management would come to the aid of the creditor of the company. A view with which we cannot concur inasmuch as the Court overlooked Section of the Companies Act and the specific exclusionary observations in Turauand's case (supra) which we have noted while laying down the rules pertaining to the doctrine of indoor management.

¶33Likewise, observations made by Calcutta High Court in Kishan Rathfs case (supra) that 'it is exactly here that the Fuii Bench of the Small Cause Court went wrong in not realizing that a bona fide creditor-stranger who lent money on a hundi or a bill of exchange has a right to assume as against the company that all requirements of the indoor management have been duly complied with, such as^ Page19of22 necessary resolutions are there on the directors book to make them regular and that directors have acted according to the procedure enjoined in their board meeting' are also in the teeth of the limited span of the doctrine of indoor management.

¶34This takes us to the second submission advanced by , the appellants.

¶35It is settled legal principle that no statutory provision should be left meaningless. (See the decision of Supreme Court reported as Makhan Sinah v State of Puniab ik\K 1964 SC 381). Furthermore, what cannot be achieved directly cannot be achieved indirectly. Thus, in the teeth of Section 292 of the Companies Act, it cannot be held that since the money was ultimately utilized by the company, it would be liable to repay the same.

¶36Thus, we agree with the reasoning of the learned Single Judge that the defendant No.l company is not liable to pay any money to the plaintiff and that the money was the personal contribution to be brought for production of the film by defendants No.2 and 6 respectively.

¶37However, the matter does not rest here. There is one important aspect of the matter which has escaped attention of the learned Single Judge.

¶38It is a principle of law that if the whole or any part of a loan taken unauthorizedly by a director or agent of the company can be traced as existing in the company's hands or as specific investments or in specific shape, the lender Page20of22 can recoverthe same by obtainingfrom the Courta 'tracing (See the decision reported as f.1932) 4 E & R R VAlexander Investment Company .

¶39In the instant case, admittedlythe amount advanced by the plaintiffpursuantto the agreementdated 01.08.2003 was credited in the accountof the defendantNo.l company and that the said amountwas utilizedby the defendantNo.l for the production of film 'Ek Kai Sansar'. This being the position, the plaintiff is entitled to recover the amount advanced by her pursuant to the agreement dated

01.08.2003by tracingher moneyto the film 'Ek Kai Sansar'.

¶40The sum and substanceof the above discussionis that in addition to the decree which the plaintiff has obtained against defendant No.2 and 6 she would be entitled to a tracing orderdeclaringthat she has a lien on the negatives as also the developedprints.ofthe film 'Ek Kai Sansar'and upon her paying the development charges to defendant No.5 she would be entitled to the custody thereof and furtherthat she can exploitthe same till she recompenses herselfas per the decreeimpugned. (

¶41The impugnedjudgmentand decreedated 09.02.2011 ; passed by the learnedSingleJudge is upheld with additions as above.

¶42The suit filed by the plaintiff is decreed, in sum of ^43,31,250/-against defendants No.2 and 6 togetherwith interestat such rate grantedby the learnedSingleJudgetill repayment.DefendantNo.S is restrainedfrom handingover RFA (OS) 48/2011 &59/2011 rr-f the negatives and the developed prints of the movie 'Ek Kai Sansar' to any third party. It is decreed that upon plaintiff paying the processing and developingcharges to defendant No.5 it would.handover the negatives and the developed prints of the movie 'Ek Kai Sansar'.to the plaintiffwho would be entitledto exploitthe same till she recoupsthe decretal amount.

¶43Partiesshall beartheirown costs in the appeal. DECEMBER 13, 2011 mm RFA (OS) 48/2011 &59/2011 (PRADEEPNANDRAJOG) JUDGE (SP.GARG) JUDGE :>

* IN THE HIGH COURT OF DELHI AT NEW DELHI % ludament Reserved On: November 25. 2011 judgment Delivered On: December 13. 2011 + RFA(OS) 59/2011 NITU SAIN! & ANR. Appellants Through: Mr.Kirti Uppal, Sr.Advocate with Mr.Puneet Bhatnagar and Ms.Richa, Advocates versus MEENA CHAWLA & CO. ....Respondents Through: Mr.D.K.Maihotra, Advocate with jvir.Rajesh Kumar Malhotra, Advocate for R-1 Mr.Ravi Gupta, Sr.Advocate with jvlr.Gaurav Gupta, Advocate for R-2 and R-4 Ivir.Suyodhan Byrapaneni, Advocate for |\/lr.G.Ramal<rishna Prasad, Advocate for R-5 CORAM: HON'BLE MR. JUSTICE PRADEEP NANDRAJOG HON'BLE MR. JUSTICE S.P. GARG PRADEEP NANDRAIOG. I. For orders see RFA(OS) No.48/2011. DECEMBER 13, 2011 nnm d (PRADEEP NANDRAJOG) JUDGE (S.P.GARG) JUDGE Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. % + SN THE HiGH COURT OF DELHI AT NEW DELHI judgment Reserved On: November 25. ?m 7 judgment Delivered On:December 13. ?m 7 RFA(OS) 48/7m 1 MEENACHAWLAADDellant Through: Mr.D.K.Malhotra,Advocatewith Mr.RajeshKumar Malhotra,Advocate versus PRISM ENTERTAINMENTPVT. LTD. &ORS. P . Through: Mr.RaviGupta,Sr.Advocatew?th ' Mr.GauravGupta, Advocate for R-l and R-4 Mr.Kirti Uppal, Sr.Adyocate with Mr.PuneetBhatnagar,Advocatefor R- 2 and R-6 Mr.SuyodhanByrapaneni, Advocate for Mr.G.RamakrishnaPrasad, Advocate for R-5 . RFAfOS) 5Q/7mi NITUSAINI&ANR. ADDellanfc; Through: Mr.KirtiUppal,Sr.Advocatewith Mr.PuneetBhatnagar and Ms.Richa Advocates versus IV1EENA CHAWLAS, CO. ResDondent^ Through: Mr.D.K.Malhotra,Advocate^th Mr.RajeshKumar Malhotra,Advocate for R-l Mr.Ravi Gupta, Sr.Advocate with Mr.GauravGupta, Advocate for R-2 and R-4 RFA (OS) 48/2011 &59/2011 . & Mr.Suyodhan Byrapaneni, Advocate for Mr.G.Ramakrishna Prasad, Advocate for R-5 CORAM: HON'BLE MR. JUSTICE PRADEEP NANDRAJOG HON'BLE MR. JUSTICE S.P. GARG PRADEEP NANDRAIQG. L 1. The above captionedappeals arise out of a judgment and decree dated 09.132.2011passed by the learned Single Judge whereunder the suit for recovery in sum of ^43,31,250/-and permanent injunction filed by Mrs.Meena Chawla, appellant in RFA(OS) No.48/2011,has been decreed against Mrs.NituS.Saini and her husband Sh.SunilSaini, the appellants in RFA(OS) No.59/2011. The suit has been dismissed against the other defendants i.e. M/s.Prism Entertainment(P) Ltd, Ritu Parna Sengupta, Anjana Dalmia and M/s.Prasad Film Laboratories. 2. For the sake of convenience,we shall be referring to the parties by their nomenclaturein the suit i.e. the plaintiff and defendants. o. Briefly stated, the facts pleaded in the plaint are that the plaintiffMeena Chawla was approachedby the Directors of the defendant No.l company M/s.Prism Entertainment Pvt. Ltd. to financea film which the companywas producing by the name 'Eai Ki Sanskar'. She agreed to advance loan in sum of ^^35,00,000/-to the defendantNo.l companyand as per agreement, she was to be returned the said sum with interest (a) 30% per annum on or before August 06, 2004. At that time, the negatives of the films were being j of 22 fo processed and were lying witii tlie defendant No.5 laboratory i.e. M/s.Prasad Film Laboratory. It was agreed that defendant No.l shall pledge the distribution, exhibition and exploitation rights of the film with the plaintiff by way of security for repaying the loan. Alleging that neither was the principal sum repaid nor any interest was paid, decree claimed against the company and defendants No.2 to 4 i.e. Nitu S.Saini, Ritu Perna Sengupta and Anjana Dalmia, describing all of them as the Directors of defendant No.l, was in sum of ^43,31,250/-. Alleging that the plaintiff apprehended collusion of defendant No.5 in delivering the prints of the film to third parties, injunction was claimed against said defendant from delivering the prints to the other defendants. Injunction was also prayed to restrain the defendants from dealing with the negatives of the film. 4. The defendants Nos.l,