* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ RFA No.46/2002
Reserved on : 23rd September, 2008
% Date of decision: 28th November, 2008
ASHISH POLYFIBRES (BIHAR) LTD. ...Appellant
Through: Mr. K.K. Bhuchar, Adv.
versus
STATE BANK OF INDIA ...Respondent
Through: Mr. Rajiv Kapur, Adv.
CORAM :-
THE HON'BLE MR.JUSTICE PRADEEP NANDRAJOG
THE HON'BLE MR. JUSTICE J.R. MIDHA
1. Whether Reporters of Local papers may
be allowed to see the Judgment?
2. To be referred to the Reporter or not? Yes.
3. Whether the judgment should be
reported in the Digest? Yes.
J.R. MIDHA, J.
1. Appellant No.1 is a Limited Company of which
Appellants No.2 and 3 and Respondent No.2 are the Directors.
Appellant No.1 had Current Account No.CA-5527 with State
Bank of India, Nehru Place Branch. In the year 1990 entries
were being recorded by the bank pertaining to the account of
its customers by means of an escota machine.
2. On 17th May, 1990, the escota machine, due to
technical defect, made a wrong credit in the sum of
Rs.1,86,421.57 in the account of Appellant No.1. Respondent
No.1/Bank detected the aforesaid mistake on 2nd April, 1991
whereupon letters were written by the Bank to the appellants
RFANo.46/2002 Page 1 of 9
who acknowledged the liability and refunded Rs.20,000/- by
cheque and promised to pay the balance in installments, but
failed to honour the commitment and, therefore, Respondent
No.1 filed a suit for recovery before the learned District Judge.
3. The appellants appeared before the learned Trial Court
and filed a joint written statement in which they denied all the
aforesaid averments made in the plaint, except the refund of
Rs.20,000/-. Respondent No.2, who was defendant No.4, did
not appear before the learned Trial Court and was proceeded
ex parte.
4. At the trial, Respondent No.1 produced one witness,
PW-1, who proved the overdraft of Rs.1,86,721.57 created in
the account of Appellant No.1 due to wrong credit and defect
in the escota machine. The witness proved the Statement of
Account-Ex.PW-1/1, letters Ex.PW-1/C, PW-1/D and legal
notices Ex.PW-1/J and PW-1/S by the Bank to the appellants
and letters Ex.PW-1/E, PW-1/G, PW-1/H, PW-1/I, PW-1/Q
by the appellants to the Bank.
5. The appellants did not lead any evidence in defence.
6. The appellants acknowledged the liability in their
letters written to the Bank. The relevant extract of the letters
by the appellants to the Bank are as under:-
(i) Ex.PW-1/I – letter dated 3rd April, 1991 of Appellant
No.1 (signed by Appellant No.3 as its Managing
Director) to the Bank in which it was stated as under:-
RFANo.46/2002 Page 2 of 9
“We wish to inform you that our Accountant
Shri Manoj received a telephone call from
your Branch intimating that the Bank had
through inadvertence credited a sum of
Rs.1,86,421.57 in our aforesaid account.
We have informed you that our books are
with our statutory auditors at Calcutta. We
have taken up the matter to verify this
particular entry. We assure you that we will
arrange to put adequate funds, for you to
debit the principal amount to our account,
without any interest charges, in case the
above is found correct.
It may please be noted that it will take 5 to 6
weeks to carry out the above assurance. We
will request you to please wait for the said
period.
We once again assure you that the funds will
be put at your disposal in the above time in
case the entry is found to be correct.”
(ii) Ex.PW-1/H – letter dated 27th May, 1991 of Appellant
No.1 (signed by Appellant No.2 as Joint Managing
Director to the Bank) in which it was stated as under:-
“Please refer to your letter No.C&I/91/314
dated 11 May, 91.
Regarding the debit balance of
Rs.1,78,841.60 in our above mentioned
account we are hereby depositing
Rs.20,000/- (Rupees twenty thousand only)
vide Cheque No.680009 dated 27/5/91
drawn on SBI, New Guwahati. We hope to
deposit the balance in 6 equal monthly
installments.
We hope this will meet your requirement.
We will appreciate a confirmation to this
effect.”
RFANo.46/2002 Page 3 of 9
(iii) Ex.PW-1/G – letter dated 2nd December, 1991 of
Appellant No.1 (signed by Appellant No.3 as Managing
Director) in which it was stated as under:-
“We wish to acknowledge the receipt of your
letter No.C&I/91/1034 dated 11-11-1991.
We have received the statement of
accounts, sent by you, from October, 1989 to
September 28, 1991. We are going through
it.
Unfortunately, our accountant is on leave
and therefore, we have to request you to
grant us time upto 15th December, 1991,
before we can deal with the matter.
Please give us an appointment on 16th
December, 1991, to enable us to come and
discuss with you.”
(iv) Ex.PW-1/E letter dated 6th December, 1991 of
Appellant No.1 (signed by Appellant No.3 as Managing
Director) in which it is stated as under:-
“An amount of Rs.20,000/- was paid to you
vide Cheque No.680009 dated 27/5/91
drawn on State Bank of India, Gauhati. It
was duly agreed at that time that you will
favour us with your confirmation that no
interest will be charged on the alleged over
draft amount. Till date, we have not
received a confirmation from you.
We had also desired a detailed statement of
account to enable us to verify finally as to
how this over draft had taken place in the
above said account. Please send the same
to us.
On verification and after receipt of your
confirmation that interest charges will not
be payable by us we would clear the over
draft amount by monthly installments
spread over a period of 6-12 months.”
RFANo.46/2002 Page 4 of 9
7. From the evidence on record, it is clear that the
appellants clearly admitted the wrong credit of Rs.1,86,421.57
in their account and made the part payment of Rs.20,000/-
vide cheque No.680009 dated 27th May, 1991 and also agreed
to pay the balance in installments. However, the appellants
insisted that the Bank should not charge interest on the said
amount and, therefore, did not make further payment.
Needless to state, the suit was decreed against not only the
company but even its directors. Liability has been fastened
on its directors merely on account of them being the directors
of the company.
8. This appeal was filed jointly by Appellant
No.1/Company and its two Directors, namely, Appellants No.2
and 3. However, during the course of the hearing dated 18 th
April, 2007, learned counsel for the Appellants submitted that
he would confine the present appeal only to the decree
against Appellants No.2 and 3 and Respondent No.2 as the
liability was of the Company only and the Directors were not
personally liable. It was, therefore, ordered that the appeal
shall be heard only on this aspect. The relevant portion of the
order dated 18th April, 2007 is as under:-
“Appellant No.1 is a limited company
incorporated under the Companies Act, 1956.
Respondent No.1, State Bank of India, has filed
a suit against this company for recovery of
Rs.2,70,000/-. Along with the appellant No.1
company, three directors of the said company
were also impleaded as defendant Nos. 2 to 4.
By impugned judgment and decree dated
RFANo.46/2002 Page 5 of 9
15.9.2001, decree in the sum of Rs.2,70,000/-
with costs and interest @ 12% p.a. from the
date of filing of the suit till its realization has
been passed against the defendants. Though
the appeal is filed by all these defendants,
learned counsel for the appellants submits that
he would confine his appeal only to the passing
of decree against the defendant Nos. 2 to 4. His
submission is that liability was only of
the company and directors could not be made
personally liable. It is made clear that the
appeal shall be heard only on this aspect.”
9. The short question in this appeal is whether the
Appellant Nos.2 & 3 are liable in the present case.
10. The learned counsel for the appellants has submitted
that the liability was of the Company alone and the Directors
were not personally liable.
11. An amount of Rs.1,86,421.57 was wrongly credited to
the account of appellant No.1-Company on 17th May, 1990
which was detected by the Bank on 2nd April, 1991 and the
demand letter-Ex.PW-1/D was issued to the Company.
Appellant No.3 was the Managing Director and Appellant No.2
was the Joint Managing Director of the Company at that time.
The appellants made part payment of Rs.20,000/- and
promised to pay the balance, but did not honour their
commitment.
12. In the decision reported as Saurabh Exporters (M/S.)
Pvt. Ltd. Vs. Blaze Finlease & Credits Pvt. Ltd. 2006 IV
AD (DELHI) 343, a suit for recovery was filed against a
private limited company and its directors and a joint and
several decree was sought against all of them. The directors
RFANo.46/2002 Page 6 of 9
raised the similar plea. The learned Single Judge of this court
lifted the veil and passed a joint and several decree against
the company and its directors. The learned Single Judge
referred to and relied upon the judgments of Hon’ble Supreme
Court in cases of Singer India Ltd. vs Chander Mohan
Chadha & Ors. reported as (2004) 7 SCC 1 and Subra
Mukherjee & Anr. vs Bharat Coking Coal Ltd. & Ors.
reported as (2000) 3 SCC 312. It was held as under:-
“I am, thus, of the considered view that the
principles laid in the judgments referred to
aforesaid for lifting of the corporate veil are
satisfied in the present case. It has already been
observed that the concept of corporate entity
was evolved to encourage and promote trade
and commerce, but not to defraud people. The
present case is one where clearly the plaintiff is
sought to be defraud of the amount of Rs.15
lakhs under the cloak of a corporate entity of
defendant No.1 company and, thus, such a
corporate veil must be lifted especially taking in
to consideration that defendant No.1 company
was only a family arrangement of the remaining
defendants.”
13. We agree with the ratio of the above case. The
concept of corporate entity was evolved to encourage and
promote trade and commerce but not to commit illegalities or
to defraud people. Where, therefore, the corporate character
is employed for the purpose of committing illegality or for
defrauding others, the court would ignore the corporate
character and will look at the reality behind the corporate veil
so as to enable it to pass appropriate orders to do justice
RFANo.46/2002 Page 7 of 9
between the parties concerned. In the present case also
public money has been misappropriated by the appellants
who time and again promised to return the money in
installments but their intention appear to have turned
dishonest and they chose to misappropriate the money. The
examination of the appellant would reveal as to what
happened to the money and how the appellant were running
the affairs of the company. Therefore, before lifting the
corporate veil, we would like to examine appellant Nos. 2 and
3 under Section 165 of the Indian Evidence Act, 1872.
14. There is another aspect of this matter. Appellant No.3
was the Managing Director and Appellant No.2 was the Joint
Managing Director when Rs.1,86,421.57 was wrongly credited
to the account of Appellant No.1/Company and they became
aware of the said mistake upon being pointed out by the
Bank. Appellants No.2 and 3 may have misappropriated the
aforesaid amount. Whether that money was misappropriated
by Appellant No.1 or by Appellants No.2 or 3, is within their
specific knowledge. Under Section 106 of the Indian Evidence
Act, where any fact is specifically within the knowledge of a
person, the onus to prove that fact is upon him. As such, onus
to prove how the amount in question was misappropriated
was on the Appellants. Appellants No.2 and 3 did not lead any
evidence that they have not personally misappropriated the
amount in question. In the absence of any positive evidence
RFANo.46/2002 Page 8 of 9
having been led by the Appellants, an inference can be drawn
that Appellants No.2 & 3 have misappropriated the Bank’s
money and they can be held jointly and severally liable.
However, before drawing such an inference, we would like to
examine appellants No. 2 & 3 on this aspect also.
15. In view of the above, we hereby direct appellants No.
2&3 to appear before this Court on 2nd March, 2009 for
examination under Section 165 of the Indian Evidence Act,
1872. We make it clear that we are passing this order in view
of the special circumstances of the case and the public money
involved.
(J.R. MIDHA)
JUDGE
(PRADEEP NANDRAJOG)
JUDGE
28th November, 2008
s.pal
RFANo.46/2002 Page 9 of 9