Sri H. Srikanth, representing Sri v. Hariharan

Judgment

This appeal is filed by the appellant - defendant \o.2 aggrieved by the judgment and decree dated 29.12.2001 passed in O.S.lro.952 of 1993 by the leamed V Senior Civil Judge, City Civil Court, Hyderaba,l

2. The respondent No. I is the plaintiff and the rrspondent No.2 is the det-endant No. l. lhe appeal was dismissed for default al.ainst respondent No.2 - defendant No. I on 21 . 10.201 I .

3. 1'he parlies are hereinafter referred as arrayed befor: the trial court.

4. The respondent No. I - plaintiff initially filed the suit against the defendant No.2 alone for recovery of an amount of Rs.4.22,769l- under Order XXXVII Rule 2 of CPC which contemplates iummary procedure. Subsequently he impleaded the respondent No.2 - defer,dant No. I as per the orders in l.A.No. 1799 of 2000 dated 15.02.2001.

5. The plaintiff contended that the plaintiff was a regisrered firm carrying on business of supplying poultry feed under the name and rtyle of tws.sri satya Sai chemicals zLnd F'eeds represented by its proprietor Sri K.V.S.S.prasad Rao I 2 Dr.GRR, J cccz 157 2002

and the defendant was a company represented by Sri Y.Mohan Rao doing business of poultry under the name and style of M/s.Mosaic Farms Private Limited. The defendant was in need of poultry feed and approached the plaintiff and requested him to supply poultry feed for his poultry iarm. The plaintiff was having good business in the market and possessing good reputation and demanded the defendant to deposit some amount as advance. But the defendant promised to the plaintiff that payments would be made by them very promptly and requested to make regular supplies ol poultry feed to his poultry farm. The plaintiff believing the defendant made the supplies of poultry feed of specified quality and quantity since then. The defendant regularly received the material supplied by the plaintiff and became a regular customer, but never paid the bills regularly. The plaintiff raised the respective bills of the material supplied by them against the defendant to which the defendant part paid the amount every time leaving some dues in the bills. The defendant always expressed his satisfaction towards the standard, quantity and quality of the material supplied by the plaintiff and never had any complaint whatsoever against the supplies made to him. The defendant on 14.11.1991 approached the plaintiff and pleaded that his farm was in financial problems and that he could not make immediate payment of the bills and requested the plaintiff not to stop the supplies to his farm till 07.12.1991 and that he would make the payments on or before 08.12.1991 for the bills to be drawn upon him until 3 Dr.GRR, J ccca 157 2002

07.12.1991. On repeated requests and pleadings of the,lefendant, the plaintiff consented and made the requested supplies promptly iorn time to time till

07.12.1991. On 08.12.1991, the plaintiff demanded thr defendant to pay the bills drawn upon him and the due amount of Rs.11,993i, immediately. The defendant did not choose to give any response to the plrintiffs dernand. The plaintiff submitted that they contacted the defendant rurnber ol times and demanded to pay the due amount. On each occasion, the defendant merely promised to pa1' and gained time, but never cared to pay t re total due amount of Rs.4,22,7691- with interest @ 18 % per annum on tht principal amount of Rs.3,23,3461-. .A,nnoyed with the conduct of the defendanL. the plaintiff issued a notice dated 28.01.1992 demanding the defendant tc make the payment immediately. 'l'he plaintiff further averred that the def:ndant issued a reply notice admitting the supply of poultry feed by th,: plaintiff worth of Rs.3,23,346/- ar.rd that he was due to pay the money, brrt rnaliciously alleged tl.rat the plaintiflhad promised a discount of 5% and {ia,rdulently alleged that the material supplied by the plaintiff was of sub-standar( . The plaintiff being alerted by the malicious intention of the defendant, is:;ued a second notice demanding the defendant to make the payment immediately. But the defendant intended to avoid payment of bills on some pretext or other and delayed the payment of due amount to the plaintiff, as such, the plai rtifT filed the suit lor r 4 :i: Dr.GRR, J ccct 157 2002 recovery of due amount of Rs.4,22,769l- with interest @ 18 % per annum on the principal amount from the date of filing of suit till realization along with costs.

6. The defendant (the appellant herein) filed written statement calling for strict proof that the plaintiff was a registered hrm and without registration, the suit under Section 69 of the Indian Partnership Act was baned. He further contended that white describing it as a registered firm, the plaintiff stated that it was represented by its proprietor, which was incorrect and unsustainable. The cause title was erroneous and the suit was liable to be rejected on the said ground.

6.1 . The defendant further contended that his correct name was Y.S.Mohan Rao, but the plaintiff deliberately wrongly mentioned his name as Y.Mohan Rao The plaintiff described the defendant as a company by name M/s.Mosaic Farms Private Limited, but filed the suit against the defendant, who was only a Director of the Company. The defendant had no personal liability in respect of any transaction of the said M/s.Mosaic Farms Private Limited. The suit was liable to be rejected on the said ground also and prayed to decide the same as preliminary issue and to reject the plaint.

6.2. The defendant further denied and called for strict proof that the plaintiff supplied poultry feed and that he promised to make the payment promptly and contended that since no supply was mlde, he was not liable to make any 5 Dr.GRR, J ccca 157 2002 payment. lle further dcnied that he expressed his satist-action towards the standard, quantity and quality of the material supplied an.l contended that to the best of his knowledge, the bone of contention that arosrr between the plaintiff firm and the firm of M/s.Mosaic Farms Private Limited rvas that the plaintiff had supplied the poultry concentrate atteging it to conta n 35%o ol the protein, however, their oompany found that the chicks / eggs were not up to the mark and launched a detailed investigation and sent the sample;lbr test report to two different reputerl laboratories at vi.iayawada and Bengalu .u and it was revealed that the protein content in the pouttry concentrate supplie< by the plaintiff to the said company'*as only 25%o. Obviously, the plaintiff harl passed olf his goods with inferior quality and not up to the mark. The said issue when brought to the notice of the plaintiff, the plaintiff admitted the mistake ancl was initially ready to make good the [oss. The relationship between the rtaintiff and the said company broke off since then. Thereafter, the plaintiff di<l not come forward to settle the issue. The defendant further contended that the s:ttlements were made on bill to bilt basis, as such the suit was not maintainabre. as each bill was a separate cause of action. He denied that the defendant lef some amount due in each bill to be paid and contended that to the best of his knorvledge 5oz discount was allowed by rhe plaintiff on each bill as per the unders.anding and therefore the bills would represent 50% discount given by the plaintifi'and the claim on the same was neither tenable nor sustainable. The claim was made malafidely and 6 Dr.GRR, J ccca 157 2002 the defendant was not liable for payment of the said amount. He further contended that the provisions of Order )O(XVII is not attracted to the case, as the case was not based on any negotiable instrument. None of the documents filed were within the ambit of being termed as negotiable instrument and the suit was liable to be rejected on the said ground. The defendant was not liable for the suit claim or interest or costs and prayed to dismiss the suit against him 7 . Subsequently, M/s.Mosaic Farms Private Limited represented by its Director Sri Y.Mohan Rao was impleaded as defendant No.l and the appellant herein was shown as defendant No.2 in his personal capacity.

8. , On such impleadment, the defendant No.l filed written statement contending that it was not in receipt of any notice of its impleadment in the suit until the publication was seen. The defendant No. I was wrongfully added as a party to the suit belatedly, without giving any opportunity of hearing before such impleadment. The defendant No.1 was added after the period of limitation was expired. The plaintiff impleaded defendant No.l through a back door method and sought to claim amounts allegedly due to it, after the period of limitation. The framing of the suit under Order XXXUI of CPC was untenable.

8.1. The defendant No.l also contended that there was no record before it intimating about the registration of the plaintiff firm. The plaintiff claiming itself to be a registered firm in the same hreath, claimed himself to be a '1. proprietor. l-he defendant No.I company had no representative by name 7 Dr.GRR, J ccc. 157 2002 "Y.Mohan Rao" at any point of time. But the defendant No.l admitted that he was doing poultry business. The statement of the plaintitT that the defendant was a regular customer, but the bills were not paid regularly, was contradictory. The defendant No.l denied that he used to keep sore amount due to the plaintiff at all points of time. He further contended rhat the plaintiff and defendant had no mutual or cunent account amongst therr. Therefore, the claim for opening balance of Rs.l277l- was neither true nor corect. Even according to the plaintifl, the transactions were individual in nature rrnd therefore the same could not be aggregated

8.2. The delendant No.l further submitted that as J,er the understanding between the parties, the defendant was entitled to 50% di:,count on the supplies made by the plaintifl'and therefore the invoice amount in t:ach of the case would have to be dcducted by 5%o as special discount. As p:r the records of the defendant company, the requirement of the supplies shluld confirm to 35yo protein. However, on usage of the supplies of the plaintifl. it was found that the chicks / eggs were not up to the mark and did not grow to rhe required standards. when the samples of the plaintiff were tested in two di'ferent laboratories at Bengaluru and Vijayawada, the defendant company was ;hocked to know that the protein content was hardly 25o%. obviously, the ptaintiff had supplied t 8 Dr.GRR, J ccca 157 2002 below standard of quality supplies to the defendant. The same had been brought to the notice of the plaintiff. Realizing their error, the plaintiff agreed to make good the loss, however thereafter, the plaintiff failed to do so and did not settle the matter. The plaintiff himself admitted that the supplies broke off abruptly after a period pointing out to the fact that the plaintiffhad supplied sub-standard material. Therefore, after having waited for long, the plaintifl got instituted the suit malafidely.

8.3. The defendant No.1 further contended that the amount of Rs.4,22,000/- was never due as claimed and the claim for interest was also untenable. The claim of aggregating bills was not agreed upon and the same was liable to be rejected. The records would reveal that the notice of the plaintiff had been suitably replied basing on the material facts available on record and true transaction between the parties. The plaintiff having promised a discount of5% on the supplies and having promised to look into the sub-standard quality of supplies made, was now trying to make wrongful gain from the defendant and prayed to dismiss the suit against him.

9. Basing on the said pleadings, the trial court framed the issues as follows: l) Whether the plaintiff is entitled for recovery of the suit amount, as prayed for? 2) Whether the suit is barred under Section 69 of the Indian Partnership Act? 9 Dr.GRR, J ccca 157 2002 3) Whether the supplies were not up to the mark? 4) Whether the suit under Order XXXVII was maintainable'? 5) To what relicP

10. The Proprietor of the plaintiff firm by name Sri'K V.S.S.Prasad Rao was examined as PW. I . Exs.A 1 to A80 were marked on behrrll'of the plaintiff. On behalf of the defendant No.l company, one of its Dire,rtors by name Chartla Krishna was exarnined as DW. l. The defendant No.2 had not adduced any evidence. No documents were marked on behalf of the dr lendants

11. On considering the oral and documentary evidence on record, the leamed V Senior Civit Judge, City Civil Court, Hyderabad decreed the suit for Rs.4,22,7691- u,ith costs against defendants I and 2 witlr interest @ 12 %o per annum from the date of suit till realization

12. Aggrieved by the said judgment and decree dated 29.12.2001 passed in O.S.No.952 of 1993, the defendant No.2 preferred this appeal

13. Heard Sri H.Srikanth, Ieamed counsel represenr ing Sri V.Hariharan, leamed counsel for the appellant on record and Ms.N:ha Madinur, leamed counsel for the respondent - plaintiff representing Smt.M rnjari S.Ganu, leamed counsel for the respondent on record. I,x I 10 Dr.GRR, J ccca 157 2002

14. Leamed counsel for the appellant submitted that the trial court did not appreciate the principles of Company Law, wherein a Director of a Company has no personal liability to the creditors of the company. The decree passed against the appellant / defendant No.2 was contrary to the well laid principles ol Company Law, where the Director was not answerable to the company's default. Admittedly, the supplies made by the plaintiff was to the defendant No.l company, as such, the suit ought not to have been decreed against the appellant herein. The burden of proving that the suit was filed against a company registered under the lndian Companies Act would be on the plaintiff. The trial court placing the burden on the defendants to produce the Certificate of Registration, was not proper. The observation of the trial court that delendant No.2 failed to adduce any evidence was not proper, as no relief or claim can be claimed against the appellant - defendant No.2. The trial court committed an error in coming to the conclusion that the supplies were made to Y.Mohan Rao, as directed by M/s.Mosaic Farms Private Limited, which was not the case of either of the parties. The trial court erred in opining that the defendants I and 2 were one and the same, which was not tenable in law nor an issue was framed in the said regard. The trial court having accepted the evidence of DW.l that the appellant left the firm much earlier, would not have multed the appellant with any liability on the ground that he represented defendant No.l company at some point of time. The observation of the p{urt below that the defendants I and 2 \ \ 11 Dr.GRR, J ccca 157 2002 were jointly liable, was misconceived. The court belory erred in appreciating that when it was the case of the plaintiff that the plaintif'rvas a registered firm, therefore, the burden of proving that it was not a pi rtnership, was on the plaintiff. The trial court failed to observe that when def:ndant No.l was made as a party to the suit, the alleged liability against defen,lant No.2 would stand dissolved and relied upon the judgment of the Hon'bl( /\pex Court in Ram Prasad Dagduram v. Vijay Kumar Motilal Mirakhan Wala and Othersr, and of the Full Bench judgment of the High Court of ,A ndhra Pradesh in The Ongole Byragi Butt, Ongole and Others v. Inala Kannal,ya and Others2 and of the High Corrrt of Delhi in Sanuj Bathla and Others y. Manu Maheshwari and Others3.

15. Leamed counsel for the respondent on the other hand contended that alt the transactions were made through the appellant only. 'the appellant or the respondent No.2 - defendant No.l admitted receipt of go,rds. They had taken a plea that the goods were of sub-standard quality, but fai ed to prove the same. The appellant was the only one interacting with the plaintiff and assuring regarding payments. There were pleadings of malfeasance and fraud in para Nos.8,9, 10 and 1l of the plaint. The appellant was the only Director of the ,AIR I967 SC 278 ,AIR 1960 AP 98 rMANU/DE/3911i2021 '4' t' I I I I I I i l L2 Dr.GRR, J ccca 157 2002 company at that time. No evidence was adduced by the appellant to show that he resigned from the company or that the constituency of the Directors of the company was changed. The appellant failed to enter into the witness box to show that when he resigned. The trial court on rightly observing all the aspects decreed the suit against the defendants 1 and 2 jointly and prayed to dismiss the appeal.

16. Now the points for consideration in this appeal are: l) Whether the appellant - delendant No.2 can be made personally liable for the amount due by the company? 2) Whether the judgment of the trial court is in accordance with law or liable to be set aside? 3) To what result?

17. POINT No.l: Whether the appellant - defendant No.2 can be made personally liable for the amount due by the company? As seen from the wriften statement filed by the appellant - defendant No.2, he was the Director of the company by name lWs.Mosaic Farms Private Limited and also admitted that there were transactions between the plaintiffs firm and his company lWs.Mosaic Fan4s.Private Limited. He contended that he had no personal liability in respect of any transaction of the said M/s.Mosaic \'\ 13 Dr.GRR, J ccca 157 2002 Farms Private Limited. He further contended that the p.ultry feed supplied by the plaintiff firm was not of good quality. It ought to tave contained 35o/o of protein, but the feed supplied was containin g only 25,'to of protein, as such inferior quality of goods were passed off. Another cc.r.ention taken by the defendant was that the plaintiff had assured to give 50% discount on each bill, but was now claiming the same, which was not tenable. I 8. The proprieto' of the plaintiff firm was examined a: [,w. t on r g.0g.2000. The defendant No.1 was not impreaded as a party to the s rir even by the date of examination of PW. 1. only during the course of trial after I)w. l was examined in chief and documents were marked, a petition vrde I.A.No. 1799 of 2000 was filed by the plaintiff to implead lWs.Mosaic Farms private I imited as defendant No.l and the sarne ,r'as allowed on 15.02.2001. pw.l in ris cross-examination conducted by .he appellant - defendant No.2 on 12.06.2001 stated that defendant No.2 personally came to his office and oralll requested to supply poultry feed, accordingly he suppried and Mohan Rao ,rsked him to supply poultry feed to M/s.Mosaic Farms private Limited, bu ,ot signed on any guarantee form.

19. Thus, PW.l admitted that the supplies were mad,-'to defendant No.l company by name M/s.Mosaic Farms private Limited and dofendant No.2 had not signed on arry guarantee form. He also admitted that ail the bilrs were J 74 Dr.GRR, J ccc 157 2002 prepared in the name of lv4/s.Mosaic Farms. In his further cross-examination on

03.10.2001, PW.l admiued that they supptied the feed to defendant No.l company, but stated that at the request of defendant No.2, he supplied the material to defendant No.l. He further admitted that defendant No.2 had not given any letter in writing asking them to supply the feed to defendant No-l company. He admitted that defendant No.l never placed any order to them to supply the feed to them and defendant No.2 used to call them over telephone to supply feed to defendant No.l company. He admitted that he addressed letters under Exs.A I and ,,{3 addressing defendant No.2 representing defendant No. 1 .

20. One of the Directors of defendant No. I company was examined as DW. I DW.l stated that one Sai Kumari was the Managing Director of the company and he was one of the Directors of the company. He stated that defendant No.2 resigned from defendant No. I company five years ago and the feed was supplied by the plaintiff company during the tenure of defendant No.2. He denied that defendant No.2 was solely responsible for the suit transaction

21. The documents marked under Exs.Al and ,A.3 are the letters addressed by the plaintiff company to lWs.Mosaic Farms Private Limited, Vidyavanam, near Pamamr, Krishna District (the appellant herein).

22. Ex.A2 is the reply given by Y.Mohan Rao to the plaintiff company. Ex.A4 is the notice given by the counsel on behalf of the appellant Sri Y.Mohan t: 15 DT.GRR,J ccca 157 2002 Rao. All the transactions from Exs.A5 to A80, the invcices, delivery challans and receipt o1' rnaterials are in the name of defendanr No.l company - M/s.Mosaic Farms Private Limited. None of the docu nents were signed by defendant No.2: - appellant herein. These documents ra ould disclose that the invoices were issued in the name of the company, the grlods were received by the company and all the transactions were made in the riame of the company. After the amendment in the plaint including M/s.Mosaic Farms Private Limited as defendant No.l, as per the orders passed in I.A.No. l l99 of 2000 dated

15.02.2001, no amendments were rnade to the contents in the plaint. -l'here no plea in the plaint that defendants 1 and 2 were jointly liable or that they had colluded with each other. There was no pleading with rellard to malfeasance or tiaud made by the plaintiff against defendant No.2 in ris personal capacity. Without a pleading of joint liability, the trial courr grarrted the reliel against defendant No.2

23. Admittedly, the company is a separate legal entitl . The High Court of Delhi in Sanuj Bathla and Others v. Manu Maheshw:rri and Others (cited supra), while relening to its earlier judgment in Mukesh l{ans and Another v. Smt.Usha Bhasin and Others [MANU/DE/2 160120101, exrracted the relevant passages, which were also relevant to decide the present matter as follows: "10. The short question which arises for consideration in the :resent appeal is as to whether the appellants as erstwhile Directors of the ComDany, M/s. Dawson 16 Dr.GRR, J ccca 157 2002 Leasing Limited (In Liquidation) can be made liable in a suit for recovery of money when the Directors have not made thcmselves personally liable by extending any guarantee, indemnity. erc.

11. Indubitably, a company incorporated under the Companies Act, whether as a private limited company or a public [imited company, is a juristic entiry. The decisions ofthe Company are taken by the Board of Directors of a Company. The Company acts through its Board of Directors, and an individual Director cannot don the mantle ofthe Company by acting on its bchalf, unless he is so authorized to act by a special resolution passed by the Board or unless the Articles of Association so warrant. It is equally well settled that a Director of a Company though he owes a fiduciary duty to the Company, he owes no contractual duty qua third parties. There are, however. two exccptions to this rule. The first is where the Director or Directors make themselvcs personally liablc, i.e., by execution of personal guarantees, indemnities. etc. The second is where a Director induces a third party to act to his detriment by advancing a loan or money to the Company. On the third party proving such fraudulent misrepresentation, a Director may be held personally liable to the said third party. It is, however, well settled that this liability would not flow from a contract, but would flow in an action at tort, the tort being of misrepresentation and of inducing the third party to act to his detriment and to part with money.

12. This is the settled position ever sincc 1897 when the House of Lords decided the case of Salomon vs. Salomon & Co. Ltd. [1897 AC 22f, and Lord Macnaughten, observed as under: - "the company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, the s,une persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except totthe extent and in the manner provided by that Act." \ i I .l Ij I l ,*&# '?i- j a+ !ii.I t7 DT.GRR,J ccca 157 2002

13. Howev,:r. with the passage of time inroads have been mlde into the aforesaid legal principle that the company is a legal entity distinct fronr its shareholders and directors and certain exceptions have been carved out. One such inroad is commonly dcscribed as lifting or piercing of the corporat( reil. This has been succinctly put b)'the Supreme Court in Tata Enginecring rrnd Locomotive Co. Ltd. v. Statc of Bihar U964) 6 SCR 885 as follows: "24. The true [ega[ position in regard to the character of a corporation or a companv rvhich owes its incorporation to a statutory artthority, is not in doubt or dispute. The Corporation in law is equal to a r atural person and has a legal entity of its own. The entity of the Corp(,ration is entirely separatc lrom that of its shareholders; it bears its own namc and has a seal of its orln: its asscts are separate and distinct from those of its members; it can sue and he sued exclusively for its own purpose; it; creditors carnot obtain satisfaction from the assets of its members; the liability of the mcmben; or shareholders is limited to the capital ir r,ested by thetn; similarly, the creditors ol'the members have no right to the assets of the Corporalion. This position has been well established ever since the decision in the case of Salomon v, Salomon and Co. was pronou rced in 1897; and indeed. it has always been the well-recognized principle of contmon law. Howcver', in the course of time, the doctrine that the Corporation or a Company has a legal and separate entity of its own has been subjected to certain e xceptions by the application of the fiction thit the veil of the Corporation can be lifted and its face examined in substance. The doctrine of thc litiing of the veil thus marks a change in the afti.ude that law had originally adopted towards the concept of the separate en it1- or personality of the Corporation. As a result olthe impact of the compl,)xity of economic factors, judioia[ decisions have sometimes recognized exc,)ptions to the rule about thc juristic personality of the corporation. It may bt that in course of time these exceptions may grow in number and to meet the requirements of different economic problems, the theory about the p,:rsonality of the corporation may be conhned more and more." I l I 18 Dr.GRR, J ccca 157 2002

14. Similar observations were made by the Supreme Court in the case of New Horizons Ltd. v. Union oflndia: [(1995) I SCC 478] : '27 . The conclusion would not be diflerent even if the mater is approached purely from the legal standpoint. It cannot be disputed that, in law, a company is a legal entity distinct from its members. It-was so laid down by the House of Lords in 1897 in the leading case of Salomon v. Salomon & Co. Ever since this decision has been followed by the courts in England as well as in this country. But there have been inroads in the doctrine of corporate personality propounded in the said decision by statutory provisions as well as by judicial pronouncements. By the process, commonly described as "lifting the veil", the law either goes behind the corporate personality to the individual members or ignorcs thc separatc personality of each company in favor of the economic entity constituted by a group of associated companies. This course is adopted when it is found that the principle of corporate personality is too flagrantly opposcd to j ustice, convenience or the interest of the Revenue. (See : Gower's Principles of Modem Company Law,4th Edn., p.l12.) This concept, which is described as "piercing the veil" in the United States, has been thus put by Sanborn, J. in US v. Milwaukee Refrigerator Transit Co.4: 'When the notion of legal entity is used to defeat public convenience, justifu wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.,

15. The question therefore in the instant case is - can the corporate veil be lifted in the present case to reveal the identity of the person or persons behind it? The respondents in their plaint have not made out any such case to justify the piercing of the corporate veil. Therefore, this mafter is not required to be dwelt upon by this Court any longer.

16. The next question which arises for consideration is whether the appellants as Directors made themselves personally liable for the dues of the Company. Reference in this context may be made to the judgment of this court in Tristar *d 19 Dr.GRR, J ccca 157 2002 Consultants vs. Customer Services lndia Pvt. Ltd. And Anr'. Il 39 (2007) DLT 6881. f'aragraphs 28 to 30 of the said judgment, which i.re apposite, read as under:- "28. To intcrpret the law as is sought to be projected by the petitioner would mean ncgation of the concept of a company being limited b) its liability as per the mcrrorandum and articles of association of the corrpany. Other than where directors have made themselves personally liable i.c. by way of guarantee, indemnity, etc. liabitities of directors of a company, under common law- are confined to cases of malfeasance and misfeasance i.e. rvhcre the .v hare been guilty of tort towards those to whorr they owe a duty of carc i.:. discharge fiduciary obligations. Additionally, lua third parties. rvhere dircctors havc committed tort. To the third par ) . they may be pcrsonally liahlc. 29- For eramplc by making lalse representations abot t a company, a director induccs a third party to advance a loan to the comJ,any. On proofof fraudulcnt nr isrepresentation, a director may be personally liable to the third pa rty. 30- But this liability would not flow liom a confiact but'vould flow in an action at torl. 'fhe tort being of misrepresentation of induccment and causing injury to the third party having induced the third party to part with money."

17. ln the casc repofied as Space Enterprises vs. M/s. Srinivasa Enterprises Ltd. [72 (1998) DLT 666], this Court while dealing with thc liability of the Directors of a conrpany for the dishonor of cheques ofthe conrpany, in a suit filed under Order XXXVII of the Code of Civit Procedure, rrade the following observationsr: - "l L In so lar as the liability of defendant No. 2 is concerred, the effect of the registration of a company under Section 34 of the Companies Act is that it is a dis;tinct and independent person in law and is endowcd with special 7 I I I I I I r I I q 20 :1.; ]-' Dr.GR&J ccc 157 2002 rights and privileges; a person distinct from its members. Consequently, the company is enabled to contract with its shareholders also, to use common seal and acquire and hold property in its corporate name. The company is distinct from its shareholders and its directors. Neither the shareholdcrs nor the director can treat the companies assets as their own. Directors of a company are liable for misappropriation of company's lunds and other misfeasance, but not for an ordinary contractual liability of the company. The liability of the members or the shareholders or the directors is limited to the capital invested by them. So long the liability is not unlimited under Sections 322 urd 323 of the Companies Act and no special rcsolution ofthe limited company making tiability of the directors or the managing directors unlimited is alleged. The doctrine of lifting of the corporate veil could be applied in cases of tax evasion, or to circumvent tax obligation or to perpetuate fraud or trading with an enemy are concemed. It is not alleged that the director has lost the privilege of limited liability and has become directly liable to the plaintiff i.e. creditor of the company on the ground that with his knowledge the company carries on business six months after the number of its members was reduced below the legal minimum number. In absence of such a case it would be totally inappropriate and improper to say that defendant No. 2 is patently covered under Order 37 CpC.

12. There is no contract between the plaintiff and defendant No. 2. therefore, case against defendant No. 2 is not based on any contract nor there is any such liability on defendant No.2. Consequently, there is no cause of action against defendant No. 2. Since there is no cause of action against defendant No. 2, the piaint is liable to be rejected so far as defendant No. 2 is concerned."

18. In the instant case, there is admittedly no assertion jn the plaint rhat the appellants had extended any contract of guarantee or had even undertaken to make payment to the respondents of the loan amount on behalf of the company, M/s. Dawson kasing Limited. No case ofjoint and several liability is, therefore, made out and the liability, if any, is the sole liability of the Company, which is i:l r.:.::l I 27 Dr.GR&J ccca 157 2002 stated to b<, under liquidation. There is also no denial t,r the fact that the respondent No.4 himself was one of the Directors of the Conlpany and therefore part and parcel of the Company. When the decision to invite secured non- convertible rlebcntures was taken by the Board, the names of rl.rc respondent No.4 and his brother appeared in the offer document issued on beh:rll'ofthe Company. In such circumstances. merely because the respondent No.4 subsequently resigned as a Director. it is not open to the respondents to allcge that they have been deceived and defrauded.

19. It is also u'ell settled that fraud, if alleged, must be pleadr d meticulously and in detail and proved to the hilt. A mere assertion that fiaud har been committed is ncither here ror there. Preciscly and in what manner fraud has been committed is required to be delincated b1 the party alleging the same if thr plea of fraud is to bc made the basis ol'a dccrce against the other party. Bald ar,scrtions and vague allegations rvill not be countenanced by the Courts. Ru c .l of Order VI specilicalll lals down that the parliculars of the fraud alleg::d (with dates and items. if necessary)slrall be stated in the plaint.

20. To concludc. lhe instanl case is not one in which the apyrcllants could have been held jointly and sevcrally liable as Directors to pay the iLmounl invested by the respondents in thc Company. The appellants are not (r'u) alleged to be grarantors or indcmnifiers for payment of the amount due frorr the Oompany nor it is pleaded in the plaint thar the respondents had undertaken to make payment on bchalf of the, Cor.npany. As stated above, no particulars of fraud are set out, presumably lbr tlie reason that the respondent No.4 himsel tas a functional Director of the Conipany responsible for the day-today affairs,rf the Company. In such circumstances, in my considered opinion, it is the _'ompany and the Company alone upon whom the liability can be fixed at all."

24. In the present case also admittedly, there is no assertion in the plaint that the appellant delendant No.2 had extended any cont.'act of guarantee or undertook to make the payment due by the defendant No. 1 company. As such, 7, I ,j i t, 22 Dr.GRR, J ccca 157 2002 this is not a case ofjoint and several liability and the liability if any is that of the company defendant No.l alone. There was no assertion in the plaint as to any fraud was committed by the appellant - defendant No.2 and in what manner the fraud was committed to hold the appellant - defendant No.2 jointly and severally liable to pay the amounts due by the company to the plaintiff.

25. Accordingly, point No.l is answered holding that the appellant defendant No.2 cannot be made personally liable for the amount due by the company.

26. Point No.2: Whether the judgment of the trial court is in accordance with law or liable to be set aside? As the judgment of the trial court is not in accordance with the principles laid down under the Company Law, the same is liable to be set aside.

27. Point No.3: To what result? In the result, the appeal is allowed setting aside the judgment and decree dated 29.12.2001 passed in O.S.No.952 of 1993 by the leamed V Senior Civil Judge, City Civil Court, Hyderabad against the appellant - defendant No.2. 23 Dr.GRR, J ccca 157 2002 No order as to costs As a sequel, miscellaneous applications pending in this appeal, if any, shall stand closed ,TRUE COPY// To, '1. The V Senior Civil Judge, City Crvil Court, at Hyderaba( 2. One CC tc, Sri V. Harrharan, Advocate topUCl 3. One CC tc Smt lvlanjari S Ganu, Advocate [OpUC] 4. Two CD Copies Kam/PSL Sd/- K.SHYLESI JOINT REGISTRAR seS6Ko FFICER (with records, if any) HIGH COURT DATED:01 10512025 JUDGMENT+DECREE CCCA.No.157 ot 2002 ,/.:,, , \" 15 $P 20fr '\-- /)/-(-,,. , -,/,/ - ! ,/A7./' q{ 4-/ ALLOWING THE APPEAL IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD [ 3215 ] THURSDAY, THE FIRST DAY OF MAY TWO THOUSAND AND TWENTY FIVE PRESENT THE HON'BLE DR. JUSTICE G.RADHA RANI C.C.C.A.No: 157 OF 2OO2 Between: Y. Mohan Rao, S/o Venkateswara Rao, aged about 59 years, Occ:Business, R/o Vidyavanam, Near Pamarru, Krishna District 521157. ...APPELLANT/DEF.No.2 AND

1. Sri Satya Sai Chemicals & Feed Rep. by K.V.S.S.Prasad Rao, Having its Office No.5, Mithila Complex, Koti, Bank Street, Hyderabad. ...RESPONDENT/PLAINTIFF 2. M/s. Mosaic Farm Pvt Ltd. Vidyavanam, Near Pamarru, Krishna District. A.P. 521157 rep. By its Director. Dismissed for default dated 21110111 Appeal under section 96 of CPC aggrieved by the Judgment dated 29-12-2001 passed in O.S.No.952 of 1993 on the file of the Court of the V Senior Civil Judge, City Civil Court, at Hyderabad. ...RESPONDENT/DEF.No.1 This appeal coming on for hearing and upon perusing the grounds of appeal, the judgment and Decree of the Lower Court and the material papers in the case and upon hearing the arguments of Sri H. Srikanth, representing Sri V. Hariharan, Advocate for the Appellant and Ms. Neha Madinur, representing Smt. Manjari S. Ganu, Advocate for the Respondent No. 1 and None Appeared for Respondent No.2. This Court doth Order and Decree as follows:

1. That the appeal be and hereby is allowed setting as;ide the judgment and decree dared 29-12-2001 passed in o.s.No.952 of 1993 by the V senior civir, City Civil C:ourt, Hyderabad against the appellanldefen Jant No.2; and

2. That there shall be no order as to costs in this appeal. //TRUE COPY' To,

1. The V Senior Civil Judge, City Civil Court, at Hyderabac 2. Two CD Copies Kam/PSL Sd/- K.SHYLESI JOINT REGISTRAR SECTION OFFICER HIGH COURT DATED:01 10512025 DECREE CCCA.No.157 of 2002 '=1 1l.i: ,:; " _l rr. .':l- 1.. ,' o -'- 6 : 15 Sl:P 2025 t9 l)F-- ..r7 I 4z I ,,// 5 /1 ALLOWING THE APPEAL