Ravi N.Iyer v. B.Nataraj

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 25.06.2008CORAM:THE HONOURABLE MR.JUSTICE A.C.ARUMUGAPERUMAL ADITYANA.S.No.687 of 1998 1. M/s Sinhar Estate Builders(P) Ltd B-5,Gems Court, rep.by Managing Director Ravi N.Iyer 14, Khader Nawas Khan Road Chennai-600 0062. Ravi N.Iyer.. Appellants/Defendants-vs-B.Nataraj .. Respondent/PlaintiffThis appeal is filed under Section 96 of C.P.C. against theJudgment and decree of the learned VII Additional Judge, City CivilCourt, Chennai dated 2.12.1997 made in O.S.No.14562 of 1996.For appellants : : Mr.C.Seethapathy,Advocate For respondent : : Mrs.Chitra Narayanan,Advocate JUDGMENT This appeal has been directed against the decree and Judgment inO.S.No.14562 of 1996 on the file of VII Additional Judge, City CivilCourt, Chennai. The unsuccessful defendants have preferred thisappeal.2. The averments in the plaint sans irrelevant particulars run asfollows: The first defendant is a Private Limited Company registeredunder the Indian Companies Act. The second defendant is theManaging Director of the first defendant Company. The plaintiff isthe sole proprietor of Adhaye Finance And Investment. For thespecific purpose of acquiring an immovable property, the firstdefendant had borrowed a loan of Rs.6,00,000/- from the plaintiffbetween the period 23.6.1987 and 20.11.1987 as detailed below. DateBorrowed Amount23.6.1987 Rs. 50,00007.8.1987 Rs.2,75,000 22.8.1987 Rs. 25,00013.11.1987 Rs. 20,00018.11.1987 Rs. 50,00020.11.1987 Rs.1,80,000 https://hcservices.ecourts.gov.in/hcservices/ Out of the said amount of Rs.6,00,000/- borrowed from the plaintiff,the first defendant had repaid a sum of Rs.2,25,000/- ie., a sum ofRs.50,000/- on 5.4.1988 and Rs.1,75,000/- on 15.11.1988. A sum ofRs.3,75,000/- remains to be paid by the first defendant against thesaid loan. The plaintiff had 1250 equity shares each to the value ofRs.100/- in the first defendant. The first defendant had divertedthe funds of the company to other companies controlled by the seconddefendant and the second defendant had resorted to falsification ofthe accounts and under statement of income to promote the othercompanies at the cost of the first defendant. There arose a disputebetween the plaintiff and his wife Mrs.Shantha Natraj and the seconddefendant , the Managing Director of the first defendant. Mrs.Shantha Natraj, wife of the plaintiff is one of the Directors of thefirst defendant,filed a company petition before this Court forcertain relief. Subsequently, the said disputes were settled byentering into a memorandum of understanding dated 25.9.1989 betweenthe plaintiff, defendants and Mrs.Shantha Natraj, the wife of theplaintiff. In terms of the said memorandum of understanding dated25.9.1989, the second defendant issued five cheques as detailedhereunder. Cheque No. Date Amount 10420131.10.1989 Rs.2,00,000 10420231.10.1989 Rs.1,75,000 10420331.10.1989 Rs.1,20,000 10420431.10.1989 Rs.1,30,000 10420531.10.1989 Rs.1,25,000 --------------Total amount Rs.7,50,000 --------------The above said cheques were deposited with one R.Srinivasan, theMediator and the transfer forms signed by the plaintiff regardingthe transfer of the said 1250 equity shares were also handed over tothe said R.Srinivasan. In terms of the said memorandum ofunderstanding, Mrs.Shantha Natraj was given a cheque dated 31.10.1989for Rs.1,000/- as the consideration for 100 equity shares held byher. She has also handed over the resignation letter to the mediatorR.Srinivasan. On 31.10.1989, the plaintiff presented the said chequesfor encashment, the said five cheques were dishonoured by the bank on2.11.1989. After the presentation of five cheques, the plaintiffreceived a letter dated 30.10.1989 from the first defendant in theevening of 31.10.1989 admitting the insufficiency of funds in hisaccount. The plaintiff had also received another letter dated1.11.1989 from the first defendant contained untenable allegations.On 7.11.1989, the plaintiff wrote a letter demanding the payment ofRs.7,50,000/- with interest at the rate of 18% per annum on the saidamount. The reply received from the defendant is containing falseand frivolous contentions. In respect of the transfer of 1250 equityshares, the plaintiff has done everything to the effect to transferthe same in the name of the second defendant. The plaintiff isentitled to the value of the said shares being Rs.1,25,000/- andalso Rs.6,25,000/- as per the memorandum of understanding. Apart fromthat the first defendant has borrowed on various dates a total sum ofRs.25,000/- which liability he has acknowledged and issued a cheque https://hcservices.ecourts.gov.in/hcservices/ dated 31.10.1989 for Rs.25,000/-. This cheque was also dishonoured onpresentation with the bank. Defendants 1 and 2 are jointly andseverally liable for the suit amount. Hence the suit.3. Defendants 1 and 2 have filed a joint written statementcontending that the suit is not maintainable either on facts or onlaw and the same is bad for misjoinder of parties since there is nocause of action as against the second defendant and hence the suit isliable to be dismissed as against the second defendant. According tothe first defendant, the plaintiff had never lent any amount and thatthe second defendant was conducting his business inter alia as abuilder and a promoter at Bombay and on the representation made bythe plaintiff, the first defendant decided to promote the firstdefendant company to carry out specific projects in Madras. Sinceneither the plaintiff nor the second defendant wanted to block theirmonies in share capital, it was decided that the subscribed sharecapital would be Rs.5,00,000/-out of which the second defendant hasto subscribe at the first instance 50% per cent and one anotherperson, Mr.Subramanyam and the plaintiff to subscribe each 25%. SinceMr.Subramanyam backed out, it was decided that the second defendantwould subscribe to 75% of the share capital while the plaintiff wouldsubscribe to 25% of the share capital. It was also decided that eachof the promoter shareholders would bring in finance proportionate toshare capital held by them. Accordingly, the second defendant broughtin sums totalling Rs.21.75 lakhs inclusive of his subscription toshare capital and the plaintiff brought in 7.25 lakhs inclusive ofhis subscription to share capital . The understanding between theparties was that the amounts brought in addition to share capitalcould be taken out at the end of the project. Contrary to theunderstanding the plaintiff demanded part of the amount brought in byhim towards working capital and under pressure a total sum of Rs.2.25lakhs was withdrawn by him. The allegation that the plaintiff gavethe said amount by way of loan to the first defendant company isincorrect. The amounts were advanced as working capital at the timeof formation of the company to the first defendant company as agreedupon. There was no agreement to pay any interest to the said workingcapital amount. Even at the time when a part of the advances wasrefunded to the second defendant no interest was claimed or collectedby him. The allegation that the first defendant diverted the fundsof company to other companies and the second defendant had resortedto falsification of account and under statement of income to promoteother companies at the cost of the first defendant are all false anduntrue. These defendant admit that the memorandum of understandingwas entered into on 25.5.1989. The very idea of having a mediatorwith whom the cheques were left was to ensure that the terms of thememorandum of understanding were given effect to fully and thecheques were not to be handed over to the plaintiff until thesedefendants were satisfied that the terms of such understanding weregiven effect to fully. Under Clause 8 of the memorandum ofunderstanding , the plaintiff and his wife were to sign any documentthat may be needed to give effect to the understanding . On30.10.1989 when K.Subramanian, called on the plaintiff to getsignatures from his wife on certain company documents like the https://hcservices.ecourts.gov.in/hcservices/ Register of Minutes of the Board Meeting and certain other documents,the plaintiff failed to obtain such signatures and thus committedbreach of understanding and the plaintiff was therefore not entitledto collect the cheques. This fact was brought to the notice of theplaintiff by letter dated 29.11.1989 addressed to the plaintiff bythe first defendant. These defendants are not bound to take over theshares from the plaintiff and therefore are not bound to pay for thesame. The claim for Rs.25,000/- is denied because the defendants hadnot borrowed any amount much less an amount of Rs.25,000/- as allegedin the plaint. These defendants are jointly and severally liable topay any amount much less a sum of Rs.7,75,000/-. For the suit noticedated 16.6.1989 issued by the plaintiff, the defendant have sent asuitable reply dated 30.6.1989. There was no agreement to pay anyinterest. The suit is frivolous and vexatious and is liable to bedismissed with cots of the defendants.4. On the above pleadings, the learned trial Judge had framed asmany as six issues for trial. The plaintiff was examined as P.W.1,and exhibited Ex A1 to A17 were marked on the side of the plaintiff.On the side of the defendants, the defendants have examined oneS.Seshadri as D.W.1 and Exs B1 to B4 were marked.5. After meticulously scanning the evidence, both oral anddocumentary evidence and giving due deliberations to the submissionsmade by both sides, the learned trial Judge finding no material toreject the claim of the plaintiff has decreed the suit as prayed forwith cots which necessitated the defendants to approach this Court byway of this appeal.6. The following points arose for determination in this appeala) Whether D2 is jointly and severallyliable for the suit claim along with D1?b) Whether the suit is bad for misjoinder ofunnecessary party like D2?c) Whether the Judgment and decree of thelearned Trial Judge in O.S.No.14562 of 1996 1986on the file of VII Additional Judge, City CivilCourt, Chennai is liable to be set aside for thereasons stated in the memorandum of appeal?7. Heard the learned counsel appearing for the appellants as wellas the learned counsel appearing for the respondent and consideredtheir respective submissions.8. Point No.1 : Relying on Clause III to Ex A1 memorandum of understanding, thelearned counsel appearing for the appellants would contend that thefirst defendant alone is liable to pay the suit amount, if any, tothe plaintiff and that the second defendant who is the ManagingDirector of the first defendant Company is not liable for the debtincurred by the first defendant. In support of his contention, thelearned counsel appearing for the appellants would focus theattention of this Court to Section 46 of the Companies Act which https://hcservices.ecourts.gov.in/hcservices/ reads as follows:"1) Contracts on behalf of a company may be made as follows-(a) a contract which, if made between privatepersons, would by law be required to be in writingsigned by the parties to be charged therewith, maybe made on behalf of the company in writing signedby any person acting under its authority, expressor implied, and may in the same manner be variedor discharged;(b) a contract which, if made between privatepersons, would be law be valid although made byparol only and not reduced into writing, may bemade by parol on behalf of the company by anyperson acting under its authority, express orimplied, and may in the same manner be varied ordischarged.2) A contract made according to this section shallbind the Company". Section 46 of the Companies Act manifest how a contract between thetwo persons can be entered into. No where it is stated under Section46 of the Companies Act that a Managing Director who entered into acontract on behalf of the company is not liable for the debtincurred by the Company. Further the learned counsel also placed hisreliance on Section 434(1)(b)of the said Act in support of hiscontention. Section 434 (1)(b) of the Companies Act runs as follows:A company shall be deemed to be unable to pay itsdebts-(a). . . . . . . .. . . . (b) If execution or other process issued on adecree or order of any Court(or Tribunal) infavour of a creditor of the company is returnedunsatisfied in whole or in part;©. . . . . . . .Relying on a ratio decidendi in M/s Electronics Corporation of IndiaLimited-v- Secretary, Revenue Department, Government of AndhraPradesh and others(AIR 1999 Supreme Court, 1734), the learned counselfor the appellants would contend that against the first defendantCompany, a legal entity alone, the lis filed by the plaintiff ismaintainable and that the second defendant is not liable for the debtincurred by the first defendant. The short facts of the said ratiodecidendi are that the Civil Appeal No.142 of 1983 was filed by theElectronics Corporation of India Limited/appellant. According to theappellant, in the year 1963, the State of Andhra Pradesh had granteda large area of land to the Department of Atomic Energy of theCentral Government. In 1964, the Department of Atomic Energy gave220.25 acres to the appellant company. On 1st October, 1978, the first https://hcservices.ecourts.gov.in/hcservices/ defendant issued notices to the appellant company demanding for non-agricultural assessment on the said land under Andhra Pradesh NonAgricultural Lands Assessment Act 1963, for the year 1970-71 to 1973-74, demanding a sum of Rs.1,91,189.68ps and also another sum ofRs.11,98,826.32 for the period 1974-75 to 1978-79. The appellantcompany filed a writ petition in the High Court of Andhra Pradeshcontending that the said demand is against canon of justice. Theappellant's main contention is that the land belonging to Union ofIndia and the same could not, by virtue of Article 285 of theConstitution of India, be taxed by a State Legislature. The StateGovernment filed a reply to the said writ petition contending thatthe Act has been amended by Act 28 of 1974 and that thereby theappellant company had become liable to pay non agriculturalassessment upon the said land. The High Court of Andhra Pradeshdirected the appellant company to file an appeal to the appellateAuthority under the Act against the impugned demand. Against whichthe above appeal was preferred before the Honourable Apex Court.After an elaborate discussion on case law, the Honourable Apex Courtultimately held that there can be no estoppel against a statute andthat the provisions under the Andhra Pradesh Non Agricultural LandsAssessment Act(14 of 1963) as amended Act 28 of 1974) are not ultravires because Article 285 does not apply when the property that is tobe taxed is not of the Union of India but of a distinct and separatelegal entity.9. The other dictum relied on by the learned counsel for theappellants in support of his contention is The Tata Engineering andLocomotive Co., Ltd -v- State of Bihar(AIR 1965 Supreme Court 40). Inthe above said ratio-decidendi the law laid down was that theCorporations and Companies are not being Citizens cannot file apetition under Article 32 of the Indian Constitution. The relevantobservation in the said Judgment runs as follows:" The Corporation in law is equal to a naturalperson and has a legal entity of its own. Theentity of the Corporation is entirely separatefrom that of its share-holders; it bears its ownname and has a seal of its own, its assets areseparate and distinct from those of its members;it can sue and be sued exclusively for its ownpurpose; its creditors cannot obtain satisfactionfrom the assets of its members; the liability ofthe members or shareholders is limited to thecapital invested by them;similarly, the creditorsof the members have no right to the assets of theCorporation,1897 A.C.22 relied on."10.There cannot be any two opinion with regard to the above saidtwo ratio-decidenties relied on by the learned counsel appearing forthe appellants. But only thing for consideration is whether thosedictums can be applicable to the present facts of the case. Theplaintiff has filed the suit on the basis of Ex A1 memorandum ofunderstanding entered into between the plaintiff, defendants and Mrs.Shantha Natraj, the wife of the plaintiff. A careful reading of Ex https://hcservices.ecourts.gov.in/hcservices/ A1 will go to show that the said Ex A1 memorandum of understandingcame into existence only because of arriving at the consensusbetween the parties in respect of the dispute that had arisenbetween the parties in Suit Nos.377 and 376 of 1989 before this Court(Original Side). The learned counsel appearing for the appellantsrelying on Clause III to Ex A1, which reads as follows:" Sri B.Natraj and Akshaya Finance & Investmentswill be paid a sum of Rs;2,50,000/-(Rupees Twolakhs fifty thousand only) by way ofCompensation /interest and the principle amount ofRs.3,75,000/-(Rupees three lakhs seventyfivethousand only). These amounts will be paid bySinar Estate Builders Private Limited on or before31st October,1989."would contend that as per Clause III to Ex A1, first defendant aloneis liable to pay the suit amount and not the second defendant,forgetting for a moment, the subsequent Clause IV in ExA1 says thatSri Ravi N.Iyer(D2), on behalf of the company(D1) and in his capacityas Managing Director of the Company, shall deposit the cheques forthe following amounts with Mr.R.Srinivasan, residing at No.15, NorthManda Street, Srinagar Colony, Madras-15.a) Rs.2.00 Lakhs by Cheque No.104201 dated 31.10.1989 b) Rs.1.75 Lakhs by Cheque No.104202 dated 31.10.1989c) Rs.1.20 Lakhs by Cheque No.104203 dated 31.10.1989d) Rs.1.30 Lakhs by Cheque No.104204 dated 31.10.1989e) Rs.1.25 Lakhs by Cheque No.104205 dated 31.10.1989f) Rs.1,000/- by Cheque No.104206 dated 31.10.1989.Clause V reads that on realisation of the above cheques, SriR.Srinivasan shall handover all the above referred documents in hispossession to Sri Ravi N.Iyer(D2 herein).11. In the cause of action column to the plaint, the plaintiffhas categorically stated that as per the terms of the memorandum ofunderstanding dated 25.9.1989(Ex A1), the defendants had issued fivecheques to the value of Rs.7.50 lakhs and also another cheque forRs.25,000/- and subsequently, the above cheques were returned"unpaid". According to the plaintiff, the first defendant hadborrowed a sum of Rs.6,00,000/- for the purpose of acquiring animmovable property for the first defendant for the purpose ofdiverting and promoting the same and that a sum of Rs.3.75 lakhsremains to be paid. It is the further case of the plaintiff thatplaintiff had 1250 equity shares each to the value of Rs.100/- withthe first defendant besides the plaintiff's wife had 10 equityshares each to the value of Rs.100/- with the first defendant Companyand the first defendant diverted the funds of the Company to theother companies controlled by the second defendant and the seconddefendant had also resorted to falsification of accounts and understatement of income to promote the other companies at the cost of thefirst defendant. Only on that score, the above mentioned civil suitswere filed by the plaintiff against the defendants before the HighCourt and to settle the said issue Ex A1 came into existence between https://hcservices.ecourts.gov.in/hcservices/ the parties and that as per the terms of Ex A1 , the second defendanthad issued five cheques as detailed above and when those cheques werepresented in the bank, were dishonoured. Under such circumstances,the contentions of the learned counsel appearing for the appellantsthat the second defendant is not liable for the suit claim cannot besustainable. It is further pertinent to note that the seconddefendant has not entered into box before the trial Court toestablish his case. D.W.1 Seshadri, even in the cross examinationwould admit that the entire affairs of the first defendant was lookedafter only by the second defendant. Hence, I hold on point No.1 thatthe second defendant is jointly and severally liable for the suitclaim along with the first defendant.12.Point No.2:Even though there was no specific issue framed before the trial Courtas to the fact, whether the suit is bad for misjoinder of party likethe second defendant, it was contended before this Court that thesecond defendant is not a necessary party to the suit. But on aperusal of ExA1 memorandum of understanding itself, will go to showthat the second defendant has signed in the memorandum ofunderstanding only in his individual capacity,even though in thememorandum of understanding at Clause 1, it is stated that the seconddefendant is a Managing Director of Sinar Estate Builders PrivateLimited (D1), the seal of the company does not find a place below thesignature of the first defendant at page 4 of Ex A1. The plaintiffhas filed the suit only on the basis of Ex A1 memorandum ofunderstanding wherein as per Clause IV , the second defendant has todraw six cheques and to hand over the same to the Mediator ThiruR.Srinivasan. Exs A6 to A11 are the cheques drawn by the seconddefendant in favour of the plaintiff which were on presentationdishonoured by the bank. Under such circumstances, it cannot be saidthat the suit is bad for misjoinder of party ie., the seconddefendant. Point No.2 is answered accordingly.13. Point No.3:In view of my discussion and finding in the earlier paragraphs, Ihold that the decree and Judgment of the learned VII AdditionalJudge, City Civil Court, Chennai in O.S.No.14562 of 1996 need not beinterfered with for the reasons stated in the memorandum of appeal.Point No.3 is answered accordingly.14. At this juncture, the learned counsel appearing for therespondent would contend that the defendants/appellants havedeposited a sum of Rs.8,00,000/- towards the suit claim in theattachment before judgment petition before this Court and that therespondent was permitted to withdraw 50% of the said amount andbalance 50% of the amount is in fixed deposit and that the respondentmay be directed to withdraw the remaining 50% also. The request ofthe learned counsel for the respondent is acceded. https://hcservices.ecourts.gov.in/hcservices/

15. In fine, the appeal fails and the same is hereby dismissedconfirming the Decree and Judgment of the learned trial Judge inO.S.No.14562 of 1996 on the file of the VII Additional Judge, CityCivil Court, Chennai. No costs. The respondent is permitted towithdraw the balance 50% of the suit amount which is lying in thefixed deposit with accrued interest without furnishing any security.Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.sgTo1. The VII Additional Judge, City Civil Court, Chennai.2. The Registrar, City Civil Court, Chennai3. The Record Keeper, V.R.Section, High Court, Madras+ 1 CC To M/s.Chitra Narayan Advocate SR NO.32138+ 1 CC To Mr.P.R.Raman Advocate SR NO.32541 A.S.NO.687 of 1998BV {CO}TP/26.6.08.